SilverBow Resources (SBOW) Company Presentation at EnerCom Denver 2023

Good morning everyone, pleasure to be here today. Always wonderful to get to Denver in August for this event, especially in light of the run of 100-plus days in Houston, so a nice reprieve. Really glad to be here this morning on the heels of our announcement yesterday of a large acquisition that we made, so want to walk you through that acquisition, something that's really exciting for us and really, we think, takes the company to another level. So yeah, yesterday we announced that we're acquiring Chesapeake's remaining South Texas assets for a purchase price of $700 million. This will mark the eighth transaction that we've done over the last two years and will be our largest transaction to date. Upon closing the transaction, SilverBow will become the largest pure public Eagle Ford operator, so something that we're very proud of and really gets us to a meaningful scale. The company post-closing will have over 90,000 Boe of production per day. That production mix will be 50% liquids, 50% gas, so we've gotten to a long-term stated goal of a 50-50 commodity mix. Over the next 12 months, we're targeting an EBITDA run rate of $900 million with line of sight to a billion dollars of EBITDA. The transaction will increase our acreage from the 180,000 that Clark mentioned up to 225,000 acres. We'll have over a thousand drilling locations that gives us a substantial runway of growth in the years to come. And then finally, this transaction is going to really position us well to generate significant free cash flow almost immediately. 2024 will see significant free cash flow, and by our estimates, we'll have the highest free cash flow yield of any of our peers. So with that as an introduction, let me hop into some more of the details of the deal.

Shown on the map in blue are the Chesapeake assets. They reside in Webb County and Dimmit County in the western part of the play, really in the liquids-rich part of the play. The industrial logic of the deal makes a lot of sense for us. You can see that it's just west of and north of existing operations, and it adds significant scale for us to really make us a more operationally efficient organization. Mention the purchase price of $700 million. Kind of walk you through the financing on it. It's an all-cash transaction, no equity involved. $50 million of the $700 is actually a deferred payment to Chesapeake due in 12 months. $350 million of it is coming through an upsize of our second lien that we have with EIG. We're taking that second lien from $150 million up to $500 million. And then the remaining balance of the transaction will be funded on a draw from our RBL, which that RBL is going from $775 million to $1.2 billion. Also, there's a $50 million contingent payment based upon oil prices over the next 12 months. At an oil price over $75 average for that 12-month period, Chesapeake will receive another $25 million of consideration, and then that increases to $50 if oil is over $80. So really a structure that was a win-win for both the seller and the buyer.

In terms of scale, it's really going to increase the company across a number of operating metrics by nearly 50%. The transaction comes with 32,000 Boe a day of production at close or during the fourth quarter. That production mix is a third gas, a third oil, and a third NGL. Pro forma, the company will produce in the fourth quarter over 25,000 barrels a day of oil, 15,000 barrels a day of NGLs, and over 300 million a day of gas. The position comes with 42,000 net acres, the gross blocks closer to 60,000, so a very nice large contiguous block that just has a ton of efficiencies associated with it and has existing infrastructure all built out. We believe there's over 300 high rate of return drilling locations that we've identified. Two-thirds of those locations are Austin Chalk, one-third are Eagle Ford. Finally, we feel like the asset has just over $850 million of PDP PV10, making an attractive buy for us with a purchase price of the $700 million. So essentially getting the asset at a discount for PDP and getting what we believe is some high-quality inventory at no location cost. All combined, the company post-close will have a PDP PV10 value of $2.3 billion, so again getting to some critical scale.

Why this deal? It's something that we've been pursuing for quite a long period of time. We've been very patient, persistent around it. I've actually been in discussions well almost a year on the deal. But really, you see it laid out here, the transaction checks all the boxes for us. It's a strategic fit, very sound from an industrial logic standpoint, and creates a very efficient scale for us. It's creative on all financial metrics. We expect that for 2024, our free cash flow per share is going to increase 80%. Mentioned the inventory expands our high rate of return inventory. It gives us really substantial runway to grow the company organically in the years to come. With the increased scale comes capital efficiencies as well as real strong margins. We see our EBITDA margins increasing to 78% post the transaction, which will be peer-leading. And finally, we see that through the incremental scale, we'll need to add minimal G&A, so our already very efficient G&A platform is going to become even that much more efficient. From a balance sheet standpoint, we see the deal being leverage neutral post-close, maybe a little uptick right at close, but actually by end of year with substantial free cash flow coming in, being a tick down on leverage, and then it keeps us on track to hit our one times leverage target by the end of 2024.

The other thing that through the financing structure that we're achieving here is we're significantly increasing our liquidity. Currently we sit at about $200 million of liquidity. By end of year, we'll be in the $400 to $500 million range for liquidity, so very value and very enhancing to our balance sheet across the board. Finally, I'll kind of before I move to the next slide, this is really the type of deal that you look for. It's a really great asset. It has substantial infrastructure already in place, a nice base of production, and great inventory in front of it, run by a great operator, but just wasn't strategic in their strategic purview. We believe we can come in and for us it'll become a key asset, and so we'll just show that much more attention to the asset and really look to develop it at probably an accelerated pace.

A little bit more around the box-checking theme. We put out a number of long-term goals in our corporate presentation a while back, and kind of those are listed in the top tables here on each of these colors. And what this deal is doing for us is really checking the box on all those long-term goals, and what it's doing on top of that is in a single transaction, so we get there in an accelerated pace. In terms of growth, the company's been growing at about a 20% annual clip since 2020, both through the drill bit and through acquisitions. We can see a line of sight to maintaining that 20% clip for years to come. We set a goal for ourselves back in 2019 when we were 90% natural gas that we felt getting to a more balanced commodity mix just builds in more optionality to a company, especially if you can do it in a single basin like the Eagle Ford. And with this transaction, we're getting there to a 50-50 gas-liquids mix, and we're doing that both from a production standpoint and an inventory standpoint. From a corporate efficiency standpoint, you can see the EBITDA margins that I quoted as well as the free cash flow yield that we're expecting from the transaction. And also already talked to it, but it's worth reiterating the free cash flow that we're going to generate from this allows us to delever on a very accelerated pace. And then finally, maybe just one other thing that we do that we call out here is through the negotiation on the second lien, we extended the maturity of that out through 2028 and made it a very optional piece of paper as well, and I'll cover that in a little bit more detail here in a few slides.

Walk you through a little bit of where we've been and where we're going with this deal. Obviously scale is critical in the E&P space. It provides for improved cost of capital, improved operational efficiencies, and scale is critical to attract investors as well, especially on the equity side. Mentioned our target EBITDA run rate that we list here over the next 12 months pushing $900 million. Essentially that's a six-fold increase from where we were at the end of 2020, so we've been growing at a very good clip. You can see in the lower right-hand corner what it means for us in terms of in-basin production. Mentioned that will be the largest public company focused only in the Eagle Ford. We'll move up to number one in that definition, and we'll end up as being the fourth largest public company in terms of production in the Eagle Ford post the transaction, so getting to a material scale.

Finally, mention this and you can kind of see all the acquisitions that we've done. The blue being Chesapeake, the crosshatch being other deals that we've done over the last couple of years. We're really building a strong position in the western part of the play. We've also started to build a position in the eastern part of the play with about a 20,000 acre block in the east. But out west, we're about 200,000 acres post this deal, and we feel like there's still a ton of runway in terms of further consolidation to occur, particularly in the western part of the play, which is really our backyard and we understand very well. Thank you.

So what are our plans post-close for the company? Obviously you can see here what we think of our inventory and what those break-evens are currently. The company's running two rigs. Both of those rigs are focused on oil right now. With the optionality that we have within the inventory to shift that to gas as we see fit. Post the deal, we envision running three to four rigs. That'll occur as we get into 2024. We'll continue to be judicious on how we allocate our capital. We're always a returns-first organization, not necessarily product. We envisioned probably in a $3.50 to $4 world running one to two rigs on our gas properties, and in a $70 to $75 world running two rigs on our oil properties. On this Chesapeake asset, we'll probably run one to two rigs on the asset as well, so all total will be running four rigs in the company at any given time next year. In terms of our inventory life, for us we drill about 30 wells per year per rig, so running three rigs, 90 wells a year with over a thousand locations gives you the 10-plus years of inventory. We're running four rigs, that breaks it down probably into the seven to eight year range. And you can see from the slide we have over 700 locations that actually have break-evens of less than $3 and $60 oil, so just a lot of good runway in front of us to grow organically. But our track record's been grow through M&A as well, so we're going to continue to play both of those avenues.

We wanted to put this slide in. It's a slide that's kind of been a core slide for us in our corporate presentation for a while, just to show the strength of our asset base. We're one of the only companies, probably the only company in Eagle Ford that kind of spans the entire basin, and we play in all the commodity windows and feel like this slide calls out the strength of that asset base. Listed here are projects that we've drilled over the last probably 12 to 18 months, listed by wells per pad, lists the 30-day average IP for that pad. I think what I really like about this slide though, it calls out the unique opportunity that our company has in that I think we're probably the only company that within a single basin can drill 20 million a day gas wells or we can drill 1,500 barrel a day oil wells, and we can do that very efficiently. Give you an example, as we came to the end of 2022, we had our two rigs drilling down in Webb County in and around the red one and two numbers. Gas prices fell precipitously at the end of the year in early January. It didn't take us but 30 days to reposition those rigs up and around the five and six on the green, and we didn't miss a beat. It's just a neat, unique aspect of our asset base that we can move capital around very efficiently. To really give you the benefit of this asset, another example is just from a revenue standpoint. Last year our revenue was 66% from gas, 33% from liquids. In the second quarter of this year, it was 75% from liquids, 25% from gas. So just gives us more hedge against volatile swings in commodity prices.

Really for me, this is the slide that I wanted to spend the most time on. It really is the focus of this transaction for us. Shown on the slide is Webb and Dimmit counties, and outlined in red are two of what we think are the two of the preeminent plays in the U.S. right now, some of the best economics that are being drilled in the U.S. The red polygon outlines EOG's Dorado play, and the green outline defines what we'll call SM's liquids chalk play. Take you back a little bit, give you a little bit of history of SilverBow's presence in these plays. We drilled our first chalk well down in the Dorado trend in January of '21. It actually sits right on the border of Mexico. That well today still resides in our top 10 wells of remaining PV10 value after nearly three years of production. It's just an incredible well. Around that time was when EOG started to disclose the Dorado play in their position in the play. Also around that time, probably 20, 30 miles north of the green outline of the SM chalk play, we drilled our first oil chalk well. That didn't get a lot of fanfare, and there was a reason for it. We drilled a shallow chalk well, had just a boatload of oil in the core, we drilled it and it was just low pressure, just didn't move a lot of oil. Probably came in at about 300 barrels a day and died off fairly quick. So those two early wells gave us a good feel for the opportunity set, kind of the boundaries of what it's like to be in the core of the play and what it's like to be on the outside. What we really wanted to do at that point is figure out how to get a liquids asset in the SM chalk area. We pushed hard back in probably '21, late '21, early '22. Chevron was selling their position that's shown with the Lewis logo there in the green play. We didn't win that, but that just enticed us more to stay focused on getting a position here. All the green sticks and red sticks fast forward to today are all the Austin Chalk wells that have been drilled out here. You can see that Chesapeake has drilled some but not near the amount that SM has drilled just on the western boundary of the block. So where we sit today is we have 60,000 acres in the Western Eagle Ford chalk play, 40,000 in the liquids play, 20,000 in the gas play, being the only public company that has a position in both of these phenomenal plays. And we're just really excited that we have 300 locations to drill here, a couple hundred in the liquids play, 100 in the gas play, and it just really sets us up well as we move forward.

Talk a little bit about how we financed it, a couple more check marks here. We financed it again in an all-cash transaction. You can see what it means for us in terms of some of the metrics. We view that we're buying the asset at a 2.3 times next 12-month valuation. What we like about the deal is Chesapeake's bringing on 16 wells right now as we speak, so we'll take control of the property as production's ramping, and so that'll give us some increased EBITDA going into the asset early. And then we plan to have a drilling rig out here probably early part of next year and possibly two, and so really excited about what it does for us from an EBITDA standpoint and the value we got here. And then you can see what it means to us from a cash flow per share basis as well as a free cash flow per share basis, a pretty big uptick from the standalone company to the pro forma company. And then in terms of the balance sheet, you can see where we're sitting right now. We're sitting in that 1.5 range, probably see that post-close at the end of the year, and then ramping down quickly to one times lever by the end of 2024. So really excited about that. Of course, having kind of debt financed this, we're going to want to take some of the risk off the table. We're actually actively hedging into the deal right now as we speak, and at commodity prices that are actually at levels higher than when we underwrote the deal at. So we're going to protect the first three years of the transaction with a pretty good hedging profile that we list here on the slide.

So I'll wrap up, summarize the merits of the deal and why we think SilverBow is a really compelling investment opportunity. First, this gives significant scale, which is critical for the reasons I mentioned previously, but really takes us to a line of sight of a hundred thousand Boe a day and a billion dollars of EBITDA, which those two numbers were something that we had on our target list a long time ago. 20% growth rate, we still see that. We're a little bit different. There's a few of us in the space that are focusing on growth versus shareholder returns. That's going to continue to be our MO. We see that with this transaction, we're going to continue to be able to grow at a 20% clip for several years in front of us. Deep inventory, combined with the pro forma or with the standalone company's assets, so we're just really pleased with the inventory that we're building here. The balance sheet, we put some flexibility into it. Mentioned the second lien structure is actually such that it's callable after one year, and so we're going to be able to continue to look for best cost of capital and just give us a lot of optionality as we move forward to look for opportunities to grow through M&A or through the drill bit. And so yeah, I'll leave you with this takeaway, and you can see it on the two charts on the right. We just think that SilverBow screens at a meaningful discount relative to our peers. I mean, despite being up 45% year-to-date on our stock price, being one of the top performers in the space, we still think there's a lot of room to run, that we still trade at a discount. We think that this deal really puts us on the map with a lot of investors as we move forward. And it's been a pleasure to be with you this morning and kind of roll this really exciting deal out to you. Thank you.