SilverBow Resources (NYSE:SBOW) reported strong Q2 2023 results, performing well on both production and cost measures. It also made favorable changes to its operating cost and capex guidance for the full year.
This results in a projected $68 million in free cash flow during 2H 2023, bringing SilverBow’s projected full year free cash flow to slightly above $30 million. While this is limited free cash flow, SilverBow is growing production and this full-year free cash flow projection is over $70 million, improved from when I looked at it in May.
I now estimate SilverBow’s value to be $38 per share in a long-term $75 WTI oil and $3.75 NYMEX gas environment.
Q2 2023 Results
SilverBow’s production results for Q2 were pretty good. It averaged 330 MMCFE per day in production (23% oil, 13% NGLs and 64% natural gas) during Q2 2023. This was towards the high-end of its guidance for 317 to 332 MMCFE per day in average Q2 2023 production. As well, SilverBow’s oil production ended up averaging approximately 12,500 barrels per day during Q2, above its guidance range for 11,900 to 12,300 barrels per day of oil production during the quarter.
SilverBow’s cost performance was also strong during Q2 2023. It was expecting combined lease operating expenses and transportation and processing expenses to average between $1.09 to $1.17 per Mcfe for the quarter. SilverBow’s actual results for those items ended up at $1.06 per Mcfe, while its cash G&A and production taxes were also slightly better than guidance.
Despite the positive production and cost performance (and also $30 million in realized hedging settlements), SilverBow still ended up with negative $23 million in free cash flow in Q2 2023, after generating negative $14 million in free cash flow in Q1 2023.
Guidance Changes
SilverBow’s full-year production guidance for 2023 remains unchanged, but it improved its cost guidance for the year after making a negative revision to its cost guidance with its Q1 2023 report.
SilverBow’s guidance around operating costs per Mcfe went down by $0.05 with its most recent guidance update, although those costs are still $0.06 per Mcfe higher than its original guidance.
| Guidance Midpoints | Original | Q1 2023 | Q2 2023 |
| Lease Operating Expenses ($/Mcfe) | $0.73 | $0.75 | $0.71 |
| Transportation & Processing ($/Mcfe) | $0.32 | $0.41 | $0.40 |
| Production Taxes (% Of Revenue) | 5.5% | 7.0% | 7.0% |
| Cash G&A (net $ Millions) | $17.5 | $19.5 | $19.0 |
SilverBow also reduced its capex guidance to a range of $400 million to $425 million, down from initial expectations for $450 million to $475 million in capex. It attributes this reduction to improved efficiency, cost savings and being ahead of schedule.
2H 2023 Outlook
Based on its full year guidance, SilverBow may average around 353 MMCFE per day in production during the second half of the year, along with a higher 28% to 29% oil cut.
At current 2H 2023 strip prices (including slightly over $80 WTI oil), SilverBow is projected to generate $404 million in oil and gas revenues after hedges.
| Type | Units | $/Unit | $ Million |
| Oil (Barrels) | 3,086,875 | $78.00 | $241 |
| NGLs (Barrels) | 1,667,500 | $21.00 | $35 |
| Natural Gas [MCF] | 36,500,000 | $2.55 | $93 |
| Hedge Value | $36 | ||
| Total Revenue | $404 |
With SilverBow’s updated capex budget, it is now projected to generate $68 million in free cash flow over the second half of the year, which should result in it generating slightly over $30 million in free cash flow for the full year.
Interest costs are a significant expense for SilverBow with its credit facility having an interest rate of 8.48% at the end of Q2 2023, and its second-lien notes having a 12.75% interest rate at that time.
| $ Million | |
| Lease Operating Expense | $46 |
| Transportation & Processing | $26 |
| Taxes Other Than Income | $26 |
| Cash G&A | $9 |
| Cash Interest | $34 |
| Capital Expenditures | $195 |
| Total Expenses | $336 |
Notes On Valuation
I have increased SilverBow’s estimated value to approximately $38 per share at long-term $75 WTI oil and $3.75 NYMEX gas. This is higher than my previous $33 per share valuation estimated due to the improved 2023 free cash flow projections, reduced capex budget (with no change to production guidance) and lowered operating cost expectations (compared to its guidance from its Q1 2023 earnings report).
Conclusion
SilverBow reported strong Q2 2023 results, with production (particularly oil) coming in better than expected, while SilverBow’s operating costs were lower than expected.
SilverBow also reduced its full-year capex budget by $50 million while keeping its production guidance unchanged. This should help SilverBow generate close to $70 million in free cash flow in the second half of the year, bringing its free cash flow up to approximately $30 million for the full year.
While that may not seem like much free cash flow, SilverBow is growing production and it is also an improvement on the negative $41 million free cash flow that I had projected for it before.
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