Activist Kimmeridge Discloses 14.7% Silverbow Stake With Options To Unlock Value

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Discusses the 13D filing, activist commentary and other company analysis

Houston based oil & gas company SilverBow Resources Inc (NYSE:SBOW) received a 13D filing from activist investor Kimmeridge Energy Management Company LLC on Friday afternoon disclosing a 14.7% stake in the company, which rose from 12.1% previously.

Kimmeridge Energy Management is an alternative asset manager that focuses exclusively on the energy sector with the intention of accelerating carbon neutrality by developing environmentally responsible, low-cost energy assets.

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Kimmeridge Believes Silverbow's Shares Are Undervalued

The asset manager in the filing initially stated that they made the 13D filing because they believe shares are undervalued and represent an attractive investment opportunity and comes after the stock lost more than -45% of its value over the last month.

Kimmeridge stated that they intend to continue to seek engagement with SBOW’s Board for a range of operational and strategic matters including the company’s:

  • Operations
  • Management
  • Organizational documents
  • Board composition
  • Ownership
  • Capital or corporate structure
  • Dividend policy
  • Strategy plans

Kimmeridge also noted that they wish to communicate with other shareholders or third parties that include potential acquirers, service providers and financing sources for the company.

The bottom line is that the fund manager believes there are strategic opportunities that can be pursued to maximise shareholder value through the use of asset or corporate consolidation.

Kimmerdige has been amassing the current stake in the company for quite some time with the most recent sizable accumulation occurring between the 8th to the 11th of July where the fund accumulated ~578,000 shares between $27.40 and $30.05 per share.

Following the accumulation of shares by Kimmeridge, on the 20th of September, SilverBow management adopted a limited-duration stockholder rights plan effective immediately which would act as a “poison pill”.  The plan intends to protect SilverBow from any single stockholder from gaining control of the company without paying a premium. The rights will be exercisable at $160.

Fintel’s insider accumulation score of 76.16 is bullish on the company based on the company ranking in the top 5% of 14,554 screened stocks. This number is calculated by including the net number of insiders buying and the total shares bought as a percentage of the float over the last 90 days.

SBOW has actually had 2 net insiders who have sold stock over the previous 90 days consisting of one fund purchasing stock, one fund selling stock and two company directors selling stock.

Directors Gabriel Ellisor and Charles Wampler took the opportunity to trim their position of shares in the trading window post results that occurred over August.

Strategic Value Partners LLC was the selling fund in the past 90 days who reduced their total share count to 4.1 million or around 18.5% total ownership of the float.

The company last released a financial update to shareholders in early August when providing their second quarter update. The company grew oil & gas revenues by 160% over the year to $182.6 million.

The groups adjusted EBITDA rose from $42.8 million to $85.4 million, boosted by higher oil prices over 2022. 

SilverBow Resources

However SBOW’s free cash flow was negative at -$2.7 million, falling from $7.4 million in the prior year. The free cash flow was constrained by significant increases in Capex over the year from $26.2 million to $74.5 million.

The group's leverage ratio ended the quarter at 1.42x with management targeting a leverage ratio of about 1.0x by the end of 2022.

SilverBow expects to grow production by 30% over 202 and 2023 which they believe will result in the free cash flow yield exceeding 25% in 2023.

The chart to the right from Fintel’s financial metrics page for SBOW shows revenue and profitability by the energy producer over the last 5 years with the share price.

Following the result, Neal Dingmann from Truist Securities highlighted to investors that he believes the company could focus exclusively on gas if materially higher prices hold out. Dignmann noted that shares continue to trade at a deep discount to peers which he believes may prompt action from one of the largest holders. The firm remained ‘buy’ rated on the stock with a $62 price target.

Dingmann’s prediction came true with Kimmeridge pushing for action in the latest notice.

Also in September, firm KeyBanc Capital Markets initiated coverage on the stock with an ‘overweight’ recommendation and $58 target price. 

On average, SBOW has a consensus ‘buy’ rating and $75 average price target across the street.

Article by Ben Ward, Fintel