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SilverBow resources (New York Stock Exchange: SBOW) achieved production expectations in the first quarter of 2023, including delivering relatively strong oil production. However, it deals with higher production costs, which has resulted in more cost guidance for the full year.
This increases SilverBow’s Projected cash will burn to about $41 million in the current sector as it tries to increase oil production by more than 30% from Q4 2022 levels.
I now value SilverBow at about $33 per share because of its higher costs and greater cash burn compared to when I looked in March. SilverBow still looks like it has plenty of upside, but it will need to manage its debt carefully, with credit facility utilization expected to reach 75% at the end of the year.
Results for the first quarter 2023
SilverBow’s results for the first quarter of 2023 largely met expectations. SilverBow averaged 304 MMCFE per Today in production during the first quarter of 2023, near the middle of the guidance range for the quarter. Oil production ended up at 11,362 barrels per day, which was close to the high end of the guidance range. SilverBow ended up repeating his directive for the entire year for the production.
On the other hand, SilverBow’s costs are a bit higher than expected. SilverBow’s total production expenses ended at $1.54 per Mcfe for the quarter, compared to its forecast of $1.40 to $1.53 per Mcfe.
SilverBow now expects total production expenditures to average approximately $1.50 per Mcfe through 2023 at the midpoint of updated guidance. This compares to $1.32 per Mcfe based on the original guidance midpoint.
Updated 2023 forecast
SilverBow continues to expect average production of approximately 335 million cubic feet per day through 2023, with production expected to continue to increase in the second half of the year.
The current sector price is now around $73 to $74 for WTI and $2.60 for Henry Hub natural gas. At these commodity prices, SilverBow is expected to generate $684 million in revenue after hedging operations.
SilverBow reported (as of late April) that it has hedged 72% of its production for the rest of 2023, including 91% of its natural gas production, 48% of its oil production, and 42% of its LNG production. Therefore, SilverBow’s 2023 financial results will be significantly affected by changes in oil prices.
| He writes | units | dollars / unit | Million dollars |
| oil (drums) | 5,246,875 | $70.25 | $369 |
| NGLs (drums) | 2,974,750 | $20.65 | $61 |
| natural gas [MCF] | 73,000,000 | $2.20 | $161 |
| hedge value | $93 | ||
| Total revenue | $684 |
As mentioned earlier, SilverBow is now projecting higher production expenses in 2023. This results in a projection that it will end up with a cash burn of $41 million through 2023.
| Million dollars | |
| Rental operating expenses | $92 |
| transportation and processing | $50 |
| Non-income taxes | $41 |
| G&A cash | $20 |
| cash interest | $60 |
| Capital expenditures | $462 |
| Total expenses | $725 |
SilverBow’s cash burn is largely due to its attempts to significantly increase production (particularly for oil) in 2023. Depending on the current sector, it could end up with a reinvestment rate of 96%, while leverage is expected to be 1.5x by the end of the year. 2023.
debt situation
With no changes in working capital, SilverBow will finish 2023 with about $732 million in net debt now. This will include $582 million in credit facilities. SilverBow currently has a borrowing base of $775 million for that credit facility, so there will be about 75% utilization at the end of 2023 if its borrowing base doesn’t change.
SilverBow will need to be careful to ensure that it maintains sufficient borrowing capacity under its credit facilities, otherwise it may have to reduce development capital expenditures and/or raise capital.
Estimated evaluation
I am now using $75 WTI Oil and $3.75 NYMEX Gas as long term commodity prices. At these prices, I value SilverBow at about $33 a share (at the end of 2023). That’s several dollars lower than my previous estimate of SilverBow’s value given an uptick in cash burn in 2023 as well as its revised guidance on production costs.
Conclusion
SilverBow remains on track to increase its oil production by more than 30% in 2023 compared to the fourth quarter of 2022. It has delivered oil production towards the high end of its guidance range for the first quarter of 2023.
SilverBow is also dealing with rising costs, which has led it to revise its cost guidance upwards for the year. As a result of the increased costs, I now expect SilverBow to end up with a cash burn of $41 million in 2023 as it is spent on increasing oil production.
SilverBow’s debt has not yet reached critical levels, although leverage and credit facility utilization are slightly above ideal. Thus SilverBow will need to be careful about managing its debt.
SilverBow has a reasonable amount of upside at an estimated value of about $33 per share if it can manage its debt without offering shares.
