SilverBow Resources' $700 Million Acquisition: A Game-Changer in the Energy Sector

Small Caps 3 replies 0 votes 50 views Tags:  Acquisition AnalysisAsset ValuationEnergy InvestmentsFinancial StrategyOil and Gas Industry

I wanted to share some exciting news in the world of energy investments. SilverBow Resources, Inc. (NYSE: SBOW) has just made a big move, acquiring Chesapeake Energy's remaining Eagle Ford assets for a cool $700 million in cash. Now, let me break this down for you in simpler terms.

So, why is this acquisition such a big deal? Well, first of all, it's expected to give SilverBow's production a massive 50% boost. That's a significant increase in their output. But, of course, there's more to the story.

The acquisition is being financed through a combination of second-lien debt and credit facility borrowings. Basically, they're taking on some additional debt to make this happen. As a result, their net debt is expected to be around $1.3 billion by the end of 2023. That's a hefty sum, no doubt.

Now, let's talk numbers. The transaction price is split into two parts: $650 million in cash at the deal's closing and another $50 million due on the first anniversary of the closing date. Additionally, there's a potential $50 million in payments based on WTI oil prices during the year following the deal close. If oil prices cooperate, SilverBow will pay Chesapeake accordingly.

Speaking of oil prices, it's important to note that the 2024 WTI strip is currently at $77.70 per barrel, which bodes well for SilverBow's future prospects.

But here's a little twist: the effective date of the transaction is February 1, 2023, which means SilverBow could end up paying a lower initial payment at the deal close, possibly around $550 million, after purchase price adjustments. This, however, comes with a bit of uncertainty due to expected near-term development spending.

Now, let's get back to the financing part. SilverBow is making this happen with second-lien debt and credit facility borrowings. They're upping their second-lien notes by $350 million, taking it from $150 million to $500 million, with the maturity date extended to December 2028. The credit facility lender commitments are also going up from $775 million to $1.2 billion.

However, there's a catch. SilverBow has variable-rate debt with rather high interest rates, including a hefty 13+% on its second-lien notes. This means the initial $650 million payment could increase its interest costs by $73 million per year before any debt paydown through free cash flow. If the initial payment ends up being around $550 million, the interest costs would still go up by around $64 million per year initially. Ouch!

Now, let's dive a bit into the assets. The acquired properties include approximately 42,000 net acres and 540 wells in the condensate-rich area of the Eagle Ford. According to Chesapeake, these assets averaged 29,000 BOEPD (with 60% liquids) in Q2 2023 production. SilverBow, on the other hand, expects production to hit 31,000 to 33,000 BOEPD (with the same 60% liquids) in Q4 2023.

So, what's the deal with those liquids? It seems they contain a fair amount of NGLs (Natural Gas Liquids). Roughly speaking, the production mix might be around 33% oil, 27% NGLs, and 40% natural gas. Interesting, right? Now, here's the kicker: Chesapeake's Eagle Ford NGLs in Q2 2023 only fetched 31% of its realized price for Eagle Ford oil. That's something to keep in mind.

The assets generated around $50 million in EBITDAX in Q2 2023, but SilverBow is expecting that number to jump significantly in the next 12 months, reaching around $300 million. That's a whopping 50% increase compared to the annualized Q2 2023 EBITDAX.

Why the increase? Well, it's due to higher production levels and improved commodity prices. About 40% of the production is natural gas, and the NYMEX gas strip for the October 2023 to September 2024 period looks promising, sitting at roughly $3.60 compared to $2.10 in Q2 2023. Prices for oil and NGLs also appear to be on the rise.

SilverBow also expects these assets to churn out over $140 million in free cash flow during that 12-month period. After considering the increased interest costs, this might translate to approximately $70 million in additional free cash flow. Before this acquisition, I had projected SilverBow to generate close to $70 million in free cash flow in the second half of 2023, so this deal could be a game-changer.

SilverBow is touting that it's acquired 300 gross drilling locations, including at least 200 that can deliver a 40+% Internal Rate of Return (IRR) at $70 oil and $3.50 gas. That's a solid investment.

Now, for the big question: what's SilverBow's estimated value after all this action? Well, I've crunched the numbers, and I believe it's sitting at $40 per share in a long-term scenario with $75 WTI oil and $3.75 NYMEX gas. That's a couple of dollars higher than my previous estimate. But, and it's a big but, SilverBow's risk factor has also gone up due to the increased leverage and interest costs.

In fact, if commodity prices take a dip, SilverBow might end up with around $1.3 billion in net debt by the end of 2023, which would be around 1.4x to 1.5x annualized proforma EBITDAX, including its hedges. Not the most comfortable position to be in, I must say.

But here's the silver lining: SilverBow is determined to reduce its leverage to around 1.0x by the end of 2024 and plans to hedge the majority of its acquired PDP volumes over the next few years to minimize risk.

In conclusion, SilverBow has made a bold move with this $700 million acquisition of Eagle Ford assets. Production is set to soar, and free cash flow is on the rise. However, it's also taken on a substantial amount of debt, which adds a layer of risk.

Forgot Password?
Don't have an account? Sign up