SilverBow Resources, an oil and gas company operating in South Texas’ Eagle Ford shale, is facing a conflict with some of its shareholders, particularly Kimmeridge Energy Management. Kimmeridge has proposed a merger and is now suggesting new board members in a proxy battle, questioning SilverBow’s value enhancement strategy. The disagreement stems partly from SilverBow’s leveraged acquisitions in recent years and the drop in gas prices, prompting different ideas on debt position and dividend policy from management and Kimmeridge.
Since 2021, SilverBow has made acquisitions, shifting its production mix towards oil and liquids and funding mainly with debt. This move has proven beneficial as oil and natural gas liquids have higher margins than gas currently, leading to a significant increase in EBITDA margin. The company’s strategic shift provides flexibility to drill for oil and liquids during periods of low gas prices, offering a leveraged return opportunity for shareholders. However, concerns about SilverBow’s history of high debt levels following the 2014 oil price collapse raise questions about the potential risks of excessive debt for shareholder equity value.
Kimmeridge has criticized SilverBow for its high debt level and proposed injecting cash to pay it down in a merger proposal that has since been withdrawn. Management believes that the value and optionality gained from acquisitions will lead to high margins and cash flow to accelerate debt repayment while maintaining a target debt ratio by the end of 2025. Kimmeridge’s viewpoint suggests that de-leveraging more quickly could boost the stock price faster, potentially through selling equity or assets. The discussion highlights the ongoing debate between immediate value creation and long-term strategy.
Dividends have been a significant trend in the oil and gas industry, with many companies opting to pay dividends to shareholders. SilverBow currently does not pay a dividend, unlike most of its publicly traded peers. Kimmeridge has emphasized the importance of dividends, proposing one in their merger offer. However, the impact of adding a dividend on stock value remains uncertain, as seen in the case of Comstock Resources, which suspended its dividend but saw an increase in stock price. SilverBow’s focus on liquids has bolstered cash flow, positioning the company differently from gas-heavy producers.
The market has shown skepticism towards SilverBow’s acquisition strategy, resulting in valuation metrics that lag behind industry peers. While the company’s shift towards liquids and strong cash flow performance in 2024 supports management’s strategy, concerns about valuation multiples remain. Both sides, SilverBow’s management and Kimmeridge, are seeking a higher stock price but differ in their approaches. Management highlights current results and cash flow as evidence of a successful strategy, while Kimmeridge aims for policy changes now to drive immediate shareholder value. The ultimate decision on the best path forward will depend on what shareholders decide amidst the ongoing proxy battle.