Citing SilverBow Resources Inc.'s (SBOW:NYSE) organic production growth, long-term leverage to natural gas upside, large acreage footprint spanning both oil and gas, and discounted valuation, Roth MKM analyst Leo Mariani maintained his Buy rating on the stock in a March 13 research note.
"We expect shares of SBOW to have a positive reaction vs. peers today," Mariani wrote.
Mariani also noted that Kimmeridge Energy Management had previously sent SBOW's Board of Directors an offer to merge its gas-producing assets in the South Texas Eagle Ford with SilverBow. This would be for around US$34 per share.
The proposal involves Kimmeridge adding US$500 million of new capital into the combined company, resulting in Kimmeridge owning approximately 69% of the entity, which would remain publicly listed.
Mariani noted that this merged entity would be able to produce around 900 MMcfepd (mainly gas) as of July 1, 2024.
A set agreement is intended to be made by April 26, 2024
Potential Synergies and Dividend Plan
"Kimmeridge believes there are US$40 million of synergies and wants the combined company to pay a 5% dividend in 2025," Mariani wrote, stating that about 12% would derive from general and administrative expenses, 50-62% would be from operational synergies, and the rest from financing synergies.
The proposal also includes a combined US$1.70 per share dividend for the company in 2024, representing a 5% yield based on the US$34 per share combination price.
"The dividend would be supplemented with opportunistic share buybacks," Mariani commented.
Industry Positioning and LNG Market Access
Mariani noted that Kimmeridge expects the combined company to be a consolidator in the Eagle Ford and a buyer of choice for assets in the play.
The analyst also notes that Kimmeridge believes the combined company's direct access to Gulf Coast LNG markets by the end of 2028 will improve its market positioning.
Valuation and Price Target
With this, Mariani gave SilverBown a US$41 price target. However, Mariani cited lower-than-expected commodity prices and failure to execute on production targets as potential impediments to the price target.
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Disclosures for Roth MKM, SilverBow Resources Inc., March 13, 2024
Regulation Analyst Certification ("Reg AC"): The research analyst primarily responsible for the content of this report certifies the following under Reg AC: I hereby certify that all views expressed in this report accurately reflect my personal views about the subject company or companies and its or their securities. I also certify that no part of my compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report.
Disclosures: The price target and rating history for EOG Resources, Inc. prior to February 1, 2023 reflect MKM’s published opinion prior to the acquisition of MKM Partners, LLC by Roth Capital Partners, LLC. The price target and rating history for Magnolia Oil & Gas Corp. prior to February 1, 2023 reflect MKM’s published opinion prior to the acquisition of MKM Partners, LLC by Roth Capital Partners, LLC. The price target and rating history for Murphy Oil Corp. prior to February 1, 2023 reflect MKM’s published opinion prior to the acquisition of MKM Partners, LLC by Roth Capital Partners, LLC. The price target and rating history for SM Energy Company prior to February 1, 2023 reflect MKM’s published opinion prior to the acquisition of MKM Partners, LLC by Roth Capital Partners, LLC.
ROTH Capital Partners, LLC expects to receive or intends to seek compensation for investment banking or other business relationships with the covered companies mentioned in this report in the next three months. The material, information and facts discussed in this report other than the information regarding ROTH Capital Partners, LLC and its affiliates, are from sources believed to be reliable, but are in no way guaranteed to be complete or accurate. This report should not be used as a complete analysis of the company, industry or security discussed in the report. Additional information is available upon request. This is not, however, an offer or solicitation of the securities discussed. Any opinions or estimates in this report are subject to change without notice. An investment in the stock may involve risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. Additionally, an investment in the stock may involve a high degree of risk and may not be suitable for all investors. No part of this report may be reproduced in any form without the express written permission of ROTH. Copyright 2024. Member: FINRA/SIPC.
