In an election year battle for control of SilverBow Resources, a publicly traded oil and gas company operating in South Texas’ Eagle Ford shale, shareholders, including rival operator Kimmeridge Energy Management, are at odds over the company’s value enhancement strategy. Kimmeridge has proposed a merger and new board members, highlighting concerns about SilverBow’s debt position and dividend policy. The clash stems from leveraged acquisitions in recent years and a drop in gas prices since 2022, with SilverBow making significant changes to its production mix and funding acquisitions with debt.
SilverBow’s shift towards oil and natural gas liquids has resulted in higher margins and the ability to drill for oil during periods of low gas prices. While funding with debt offers a leveraged return opportunity for shareholders, excessive debt can be risky and impact equity value. Kimmeridge has criticized SilverBow for taking on too much debt, offering to inject cash to pay it down in a now abandoned merger proposal. SilverBow’s management believes its acquisitions will generate high margins and cash flow to accelerate debt repayment and eventually reach a targeted debt ratio by 2025, while Kimmeridge argues for quicker de-leveraging to boost stock price.
Dividends have become a significant trend in the oil and gas industry, with companies like SilverBow facing pressure to pay dividends to enhance shareholder returns. While most publicly traded peers pay dividends, SilverBow does not, impacting its valuation metrics and lagging behind industry norms. Kimmeridge has proposed a dividend in its merger proposal, but adding a dividend is not a guarantee of a value boost, as seen with Comstock Resources suspending its dividend and experiencing stock price increases. SilverBow’s shift towards liquids has boosted cash flow despite not paying dividends.
The market has shown skepticism towards SilverBow’s acquisition strategy, with the company’s valuation metrics trailing industry peers. While de-leveraging to industry norms could potentially boost equity value, it may take over a year to see results. Kimmeridge is pushing for immediate policy changes to increase stock price, while SilverBow’s management believes their strategy is working based on strong cash flow and positive results in 2024. Management is wary of Kimmeridge’s intentions, suspecting a dilutive transaction with Kimmeridge Texas Gas. Both sides aim for a higher stock price, with the decision ultimately in the hands of shareholders. Time will tell which path leads to better value for SilverBow.
