SilverBow Resources Mails Letter To Shareholders

Author: Benzinga Newsdesk | May 06, 2024 07:19am

Dear Fellow Shareholders,

SilverBow Resources recently released outstanding first quarter financial and operating results, demonstrating the merits of our business strategy and the value that is being delivered by our prior acquisitions.

Our performance in the market is directly attributable to a proven strategy, strong management and an experienced Board of Directors. Despite our outperformance, Kimmeridge Energy Management Company, LLC ("Kimmeridge") continues its self-serving quest to take control of SilverBow and force a dilutive, value-destructive combination with Kimmeridge Texas Gas ("KTG").

We recommend our shareholders vote to continue our strong momentum and path to further value creation.

To protect the value of your investment, use the WHITE proxy card to vote "FOR" all SilverBow director nominees: Gabriel L. Ellisor, Kathleen McAllister and Charles W. Wampler.

SilverBow is Building Momentum and Delivering Value

Our year-to-date highlights:

• Delivered first quarter results ahead of consensus expectations, with record quarterly EBITDA of $200 million,1 free cash flow of $56 million1 (more than 100% above consensus), lower than expected capital investments of $109 million (20% below consensus) and ongoing efficiency gains in well productivity and cycle times.
• Strengthened our capital structure, reducing debt by $178 million2 since November 2023, paying down 15% of SilverBow's debt in five months; leverage3 today stands at 1.35x. Since late 2023, at the closing of our South Texas acquisition, we have reduced leverage and doubled liquidity.
• Increased full year 2024 outlook, with a 36% increase in expected free cash flow. FY24 production raised 5% related to higher well productivity and faster cycle times.
• Continued capital efficiency gains through our peer-leading cost structure and margin profile. SilverBow's EBITDA margin1 is 12% higher than peers. This is a result of operating expenses that are more than 40% lower than peers and cash G&A4 that is more than 70% lower than peers.
• Enhanced our already deep inventory through operational excellence, adding 100 refracs and 30 U-shaped wells, as well as adding liquids-rich locations through a land swap.

Third party energy research analysts recognize SilverBow's value proposition5:

• Northland Capital Markets (May 3, 2024): "In our view, SBOW shareholders will be better off staying the course and waiting for a recovery in natural gas prices to reveal the truly phenomenal quality of the Eagle Ford as an asset, and SBOW's position, in particular, within that. We would take advantage of the significant discount to intrinsic value to accumulate shares."
• KeyBanc Capital Markets (May 1, 2024): "Ahead of a shareholder meeting on May 21, and ahead of a likely opinion on director changes from Glass Lewis and ISS in the next few days, SilverBow released a strong print that shows both field execution on its oily Eagle Ford Shale acreage and financial execution with its debt reduction efforts."
• Johnson Rice & Company (May 1, 2024): "We expect SBOW shares to be strong in the wake of this classic ‘beat and guide up' quarterly report. In a bigger context, we continue to like SBOW for the value it offers as well as the optionality the company has across hydrocarbon windows in the Eagle Ford."

SilverBow's Acquisitions Are Delivering Value

Under the direction of our highly experienced Board, SilverBow has executed a successful M&A strategy since 2021. Over the last four years, we have successfully executed and integrated eight value-enhancing acquisitions, improving our portfolio by:

• Increasing our scale and asset durability, providing critical capital allocation flexibility
• Adding high-quality inventory, allowing us to continually high-grade our portfolio and invest in our highest return opportunities
• Doubling our percentage of oil/liquids production and adding balance to our commodity mix
• Capturing capital efficiency gains through our proven operating practices

These accretive acquisitions today represent approximately 75% of our YE23 proved developed reserves PV-10 and more than 95% of YE23 proved undeveloped reserves PV-10. Moreover, 96% of our top quartile undeveloped net locations originate from acquired assets, with 99% of our 2024 drilling and completion capital expenditures dedicated to these high-performing investments, highlighting our effective integration and resource allocation. Assets are clearly better under SilverBow's ownership. Through operation of these assets, we have improved their value by approximately 64% in aggregate.6 Our results have been noticed by the market. SilverBow has delivered 484% in total shareholder returns since 2021, significantly outperforming the XOP's 180%.7

Our Board has Deep Industry and M&A Expertise

With track records of financial, operational and M&A expertise, our directors have led extensive careers as top executives at blue-chip, large- and mega-cap energy companies. SilverBow's Board has an average tenure of over 30 years in the oil and gas industry and an average of over 35 total years of professional experience. Collectively, our directors also bring deep M&A experience at SilverBow and elsewhere, having executed over 250 deals valued at more than $270 billion in the aggregate. All nine of SilverBow's directors have served at C-suite or senior executive levels at E&P or oilfield services companies, including five as CEO, three as COO, four as CFO, and one as chief diversity and inclusion officer. Additionally, all nine have had board experience at other public companies, including, but not limited to, at E&P, oilfield services or midstream companies.

Select Companies Where Our Directors Have Held Key Roles

Chevron	ARCO	Texaco	ConocoPhillips	Burlington Resources
Baker Hughes	Chesapeake Energy	Berry Petroleum	Three Rivers	Petrohawk Energy
Ascent Resources	El Paso	Sentinel Peak Resources	Samson Resources	EOG Resources
Transocean Partners	FTS International		BNP Paribas

You can learn more about our directors at www.FutureOfSilverBow.com/board. Notably, our directors up for election this year each bring the right expertise to advance our strategy and oversee M&A:

• Gabriel L. Ellisor: A private equity / investment banking executive who has executed multiple transactions including serving as CFO during the well-received sale of Three Rivers Operating Company to Concho Resources
• Kathleen McAllister: A former CEO / CFO of Transocean Partners LLC, where she led the IPO of the company and its acquisition by Transocean Ltd., among other capital markets and M&A experience
• Charles W. Wampler: One of the top operational executives in the sector with operating roles at Resource Rock Exploration II (Chairman, CEO and President), Lewis Energy (COO), Aspect Holdings (COO) and EOG Resources

By contrast, Kimmeridge's nominees are self-interested and conflicted, with close ties to or history with Kimmeridge, and lack the blue-chip industry experience of SilverBow's nominees. In fact, Kimmeridge's nominees have significantly less experience, on average, than SilverBow's, and one has no E&P experience at all:

• Carrie Fox has no public senior executive experience and less than 15 years of E&P sector experience
• Douglas Brooks has a mixed track record, overseeing shareholder value destruction during director and executive tenures at a number of companies, with an average TSR underperformance of approximately (60%)
• Katherine Minyard has zero experience working for an oil and gas company and has no public senior executive experience, in the oil and gas industry or otherwise

Kimmeridge's Campaign Seeks to Force SilverBow Shareholders to Bail Out KTG

Kimmeridge's proposal to combine KTG with SilverBow undervalued SilverBow while substantially overvaluing its own KTG assets, and relied on a high-risk bet on a near-term return to expensive gas in a period of historic low gas prices. Our Board relied on its deep M&A experience when it rejected the highly dilutive KTG proposal – while Kimmeridge is pushing candidates who are far less experienced so they can rubber stamp a value-destructive combination with KTG. SilverBow published our analysis of the proposal and KTG in our April 22, 2024 shareholder letter, also available at www.FutureOfSilverBow.com.

This is solely about value. If their proposal or any other future proposal created appropriate value for all shareholders, then SilverBow's Board has shown it will transact. This is why we agreed on terms for an all-cash sale to Kimmeridge in winter 2023, which they failed to deliver on when they were unable to secure financing. Kimmeridge's own data on KTG demonstrates:

• The value of KTG's Laredo asset is less than half of what they paid for it – Kimmeridge purchased Laredo Energy (now part of KTG) for $825 million and its YE23 proved reserve PV-10 value is $371 million despite a year of outspend on the asset
• Kimmeridge's proposal would have been massively dilutive to SilverBow shareholders across all per share operating cash flow and free cash flow metrics in both 2024 and 2025 – (29%-26%) dilutive on a FY24 cash flow per share (CFPS)8 basis; (138%) dilutive on a FY24 free cash flow per share (FCFPS) basis; (23%) dilutive on FY25 CFPS9 basis; (34%) dilutive on a FY25 FCFPS10 basis

We have a clear track record of delivering value for shareholders. Proxy advisory firms including Institutional Shareholder Services (ISS) and Glass Lewis assess companies' performance using 1, 3 and 5-year TSR benchmarks. On the other hand, Kimmeridge uses cherry-picked timeframes to paint a misleading view. There is no denying our outperformance over the relevant timeframes11:

1 Year:  SBOW: 41%  XOP: 31%

3 Year:  SBOW: 197%  XOP: 96%

5 Year:  SBOW: 74%  XOP: 44%

USE THE WHITE PROXY CARD AND VOTE "FOR" SILVERBOW'S HIGHLY QUALIFIED, INDEPENDENT DIRECTOR NOMINEES

• Gabriel L. Ellisor;
• Kathleen McAllister; and
• Charles W. Wampler

Thank you for your investment in SilverBow.

Sincerely,

The SilverBow Board of Directors

Posted In: SBOW