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SilverBow Resources (NYSE:SBOW) was expected to grow production to approximately 410 MMCFE per day in 2023, which was a large amount of growth compared to its Q3 2022 actual production of 299 MMCFE per day and its projected Q4 2022 production of 322 MMCFE per day.
Weaker natural gas prices may lead to SilverBow trimming its capex budget from the $450 million to $550 million range that it was expecting though, and thus also reducing its production growth during 2023. SilverBow was targeting a re-investment rate of under 75% for 2023, and at current strip its re-investment rate is modeled to be around 80% with a $500 million capex budget.
If it keeps its $500 million capex budget, SilverBow is now expected to generate around $84 million in positive cash flow in 2023 at current strip compared to nearly $200 million when I looked at in early November. However, I still believe that SilverBow could be worth over $50 per share in a long-term $70 WTI oil and $4 gas scenario.
Revised 2023 Outlook
SilverBow previously mentioned plans to increase its production to around 410 MMCFE per day in 2023, which would be a 37% increase in its total production.
At current 2023 strip of nearly $80 WTI oil and $3.60 Henry Hub gas, SilverBow is now projected to generate $846 million in revenues after hedges. SilverBow’s hedges have an estimated value of $19 million for 2023, primarily driven by its natural gas swaps.
SilverBow does have natural gas hedges covering around 65% of its projected 2023 production, but the majority of those hedges are collars that have neutral value at current strip prices.
| Type | Units | $/Unit | $ Million |
| Oil (Barrels) | 5,292,500 | $79.50 | $421 |
| NGLs (Barrels) | 2,774,000 | $26.00 | $72 |
| Natural Gas [MCF] | 101,251,000 | $3.30 | $334 |
| Hedge Value | $19 | ||
| Total Revenue | $846 |
This leads to a projection that SilverBow can generate $84 million in positive cash flow in 2023 at current strip if it sticks with its prior plans for approximately $500 million capex.
| $ Million | |
| Lease Operating Expense + Workovers | $97 |
| Transportation & Processing | $51 |
| Taxes Other Than Income | $50 |
| Cash G&A | $19 |
| Cash Interest | $45 |
| Capital Expenditures | $500 |
| Total Expenses | $762 |
SilverBow still can generate some positive cash flow in 2023 at current strip prices while growing production by around 25% to 30% from Q4 2022 levels.
Potential Changes To Capital Plan
SilverBow mentioned before that its tentative 2023 development plan ($500 million capex resulting in 410 MMCFE per day in production) was dependent on keeping its re-investment rate below 75% and its leverage ratio between 0.5x and 1.0x.
Based on current strip, it appears that SilverBow’s re-investment rate for 2023 would be approximately 80%, while its year-end 2023 leverage would end up slightly below 1.0x with this development plan. SilverBow’s year-end 2023 net would be approximately $615 million in this scenario.
SilverBow may thus trim some of its capex budget for 2023 so that it brings its re-investment rate below 75%. Given the relative near-term weakness in natural gas prices, it may modify its plans to spend less capex on gas-weighted development.
SilverBow may also now delay plans to add a third rig, which was planned for 2H 2023 for its liquids-weighted Karnes trough assets. It indicated that its 2023 capex would end up closer to $550 million if it added that third rig during the second half of the year.
SilverBow should be able to reduce its re-investment rate below 75% if it trimmed its capital expenditure budget to around $450 million though.
Notes On Valuation
SilverBow’s estimated value has been negatively affected by the reduced near-term cash flow expectations (due to lower natural gas prices) along with the potential for slower production growth.
Despite that, I estimate that SilverBow is still worth around $52 per share in a long-term (after 2023) $70 WTI oil and $4 Henry Hub natural gas scenario. SilverBow still appears capable of generating approximately $3.75 per share in positive cash flow in 2023 while growing production by 25% to 30% from Q4 2022 levels. At $70 WTI oil and $4 Henry Hub gas (along with 410 MMCFE per day in production), it may be able to generate $10+ per share in positive cash flow while keeping production flat.
Conclusion
SilverBow may end up changing its 2023 development plans a bit in response to lower natural gas prices. However, if it keeps its previous plans, it could still generate some ($84 million) positive cash flow while growing production significantly from Q4 2022 levels.
SilverBow’s leverage would still end up slightly under 1.0x by the end of 2023 at current strip prices, and I believe that it could be worth close to double its current price in a long-term $70 WTI oil and $4 gas scenario. It needs to prove that it can efficiently grow production and then start paying down more of its debt.
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