SilverBow Resources stock: $100 million cash flow positive in 2022 (NYSE: SBOW)
SilverBow Resources (SBOW) may be able to generate approximately $124 million in cash flow positive in 2022 at $100 WTI oil and $5 NYMEX gas despite hedging that could result in $128 million in realized losses at these raw material prices.
Overall, SilverBow appears to be good value at its current stock price, even if gas and oil prices drop significantly after 2022. If SilverBow is able to generate that $124 million of positive cash flow in 2022 , I would estimate its value at $37 per share in a longer-term environment of WTI oil at $70 and NYMEX gas at $3.50.
Notes on the fourth quarter 2021 results
SilverBow recorded earnings per diluted share of $7.12 in the fourth quarter of 2021. This was partly due to a gain of $28.9 million ($1.86 per diluted share) on commodity derivatives in course of the quarter.
The reason for this gain (based on mark-to-market accounting) is that natural gas futures were lower at the end of Q4 2021 compared to the end of Q3 2021, so hedges of SilverBow (for future periods) weren’t as heavy in the red by the end of 2021. Considering the large upward movement in futures prices since the end of 2021, SilverBow is likely to register a massive loss on commodity derivatives in the first quarter of 2022.
I, however, prefer to ignore the effect of gains/losses on future commodity derivatives on the current quarter’s results, as large swings in the value of these hedges can mask what really happened in the quarter. Measures such as free cash flow are better suited to assess current results.
In the fourth quarter of 2021, SilverBow’s total production was at the upper end of its guidance range, while its oil and NGL production was well above its guidance range. SilverBow’s capital expenditures for 2021 also came in slightly above its guidance range, at $131 million, compared to a guidance range of $115-130 million.
Overall, SilverBow’s performance during the fourth quarter of 2021 was positive, both in terms of production and cash flow. It reported $52.9 million ($3.30 per diluted share) of free cash flow in the quarter despite paying $41.1 million in derivative cash settlements.
2022 outlook at $100 oil and $5.00 gas
SilverBow forecasts average production of approximately 245 MMcfe per day in 2022, with 77% of this production being natural gas, 13% oil and 10% NGLs.
At $100 WTI oil and $5 Henry Hub gas in 2022 (near the current band), SilverBow is expected to generate $582 million in oil and gas revenue before hedges.
SilverBow’s hedges for 2022 have an estimated negative value of $128 million at these commodity prices. SilverBow has hedged approximately 65% of its natural gas production, 60% of its oil production and 48% of its NGL production for 2022.
|Type||Units||$/unit||millions of dollars|
|Natural gas [MCF]||68,437,500||$4.90||$335|
Source: Author’s work
SilverBow has a capital expenditure budget of approximately $190 million in 2022, which represents the majority of its cash costs.
This results in an estimate that SilverBow can generate $124 million of positive cash flow in 2022 at $100 of WTI oil and $5 of Henry Hub natural gas.
|millions of dollars|
|Rental operating expenses||$42|
|Transportation and processing||$27|
|Taxes other than income||$35|
|G&A in cash||$16|
Source: Author’s work
Debt situation and assessment
SilverBow ended 2021 with net debt of $376 million and could reduce its net debt to around $252 million by the end of 2022 thanks to the positive cash flow it generates during the year.
SilverBow has yet to complete its $40 million stock distribution program in the market, so if it completes it, it could end up with around $240 million in net debt by the end of 2022.
I increased the estimated value of SilverBow to around $37 per share in a long-term scenario (after 2022) of WTI oil at $70 and NYMEX gas at $3.50. The increase in the valuation estimate is partly due to the strong potential for near-term cash flow (over $100 million in 2022).
SilverBow’s estimated value changes approximately $5 per share for every $0.25 change in long-term natural gas prices (combined with a $5 change in long-term oil prices).
Strong near-term commodity prices could allow SilverBow to generate $124 million of positive cash flow in 2022. It is in good shape on its debt side, with its junior notes maturing pushed back to 2026 and its borrowing base on the credit facility increased to $460 million.
I estimate the value of SilverBow at around $37 per share in a long-term scenario of WTI oil at $70 and NYMEX gas at $3.50. This valuation is also close to the estimated PV-10 of SilverBow’s PDP reserves using SEC prices (realized prices of $3.75 natural gas and $63.98 oil).