Q1 2024 SilverBow Resources Inc Earnings Call

Participants

Jeff Magids; Vice President of Finance and Investor Relations; SilverBow Resources Inc

Sean Woolverton; Chief Executive Officer, Director; SilverBow Resources Inc

Christopher Abundis; Chief Financial Officer, Executive Vice President, General Counsel; SilverBow Resources Inc

Tim Rezvan; Analyst; KeyBanc Capital Markets Inc.

Charles Meade; Analyst; Johnson Rice & Company

Leo Mariani; Analyst; Roth MKM

Kevin MacCurdy; Analyst; Pickering Energy Partners

Paul Diamond; Analyst; Citi

Donovan Schafer; Analyst; Northland Securities

Presentation

Operator

Good day and welcome to the SilverBow Resources First Quarter 2024 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, please press star one.
Again. We ask that you limit your questions to one and one follow-up. So we are able to take as many questions as possible for Operator assistance throughout the call, please press star zero. And finally, I would like to advise all participants that this call is being recorded. Thank you. I'd now like to welcome Jeff nuggets, Vice President of Finance and Investor Relations, to begin the conference over to you.

Jeff Magids

Thanks, operator, and good morning, everyone. Welcome to our first quarter 2024 conference call. With me on the call today are Sean Will Oberton, our CEO, Steve Adam, our COO, and Chris abundance, our CFO. Yesterday, we posted a new presentation to our website, and we'll refer to it during this call.
Please note that we may make references to certain non-GAAP financial measures, which are reconciled to their closest GAAP measure in the earnings press release. Our discussion today may include forward-looking statements, which are subject to risks and uncertainties, many of which are beyond our control. These risks and uncertainties are described more fully in our documents on file with the SEC, which are also available on our website. As a reminder, please limit your time during Q&A to one question one follow-up. This will allow us to get more of your questions in this one.
With that, I will now turn the call over to Sean.

Sean Woolverton

Good morning, everyone. As you can see from our results, SilverBow is off to a very strong start in 2024. We continue to prove the merits of our long-term business strategy and build on our effective track record of creating value for shareholders. Our call today will cover three primary topics. First, our year-to-date results, which are ahead of plan. Early this year, we optimized our 2024 operating plans, capitalizing on our diversified portfolio to reduce investments in dry gas and focus on our profitable liquids development. Our goal was to maximize free cash flow and rapidly strengthen our balance sheet. Our plan is working today, we are raising our full year free cash flow estimate and lowering our year-end leverage ratio target to 1.25 times. More importantly, we now have line of sight to reach our targets of one times leverage next year.
Second, we continue to see capital efficiency gains across our operations, delivering some significant operational achievements over the last few months which we see as sustainable.
Finally, we continue to strengthen our portfolio and recently completed the final stage of a multiyear effort to assemble a 25,000 acre position in the liquids window of the Eagleford. And we did this with no new capital. This is one of the less contiguous undeveloped areas of scale in the basin, and we are excited about the high margin liquids exposure, it adds to our portfolio. Listen, we are executing very well and it's apparent that our focus is squarely on running the company and adding value for our owners. I recognize that there are likely questions related to our ongoing proxy contest, but I do not want to it distracts from our good news today.
Before Q&A, I will make a few points about the governance changes we are proposing and remind you how important your vote is at our upcoming annual meeting.
Let's get started with a look at the first quarter. We beat across the board this quarter. All the results are covered in our materials, but I will briefly hit the highlights. We generated $56 million in free cash flow much higher than expected in our original forecast, primarily due to continued gains in capital efficiencies and strong production and product pricing. We are seeing strong well productivity from our recent pad developments and the success of our refrac program. This has provided us with even more confidence in our forecast today, we increased our expectations for full year 2024 production as well as our outlook for free cash flow. Importantly, capital investments in the quarter were lower than planned, and our team continues to exercise capital discipline while finding creative and safe ways to lower cash operating costs and enhanced margins. Our expectations for full year capital investments are unchanged. Said another way. We are offsetting faster cycle times with continued capital efficiency gains. As I have shared previously, our commitment to strengthening our balance sheet is unwavering and strong production and higher free free cash flow has allowed for rapid debt repayment. Since closing the South Texas acquisition, we have repaid $178 million in absolute debt. This represents a 15% debt paydown in just five months. Overall, our leverage ratio has recovered to the same level it was prior to the South Texas acquisition. This is further proof that we are following through when we say strengthening our balance sheet is a top priority, we expect to exit the year at approximately 1.25 times to reach our goal of less than one times leverage in 2025.
Turning our attention to our operational performance.
There are three achievements I would like to highlight. First, we have known for some time that re-frac had the potential to provide considerable upside value to us across our asset base as many of our legacy wells were completed with less than optimal completions when compared to today's standards, we initiated our refrac program this quarter and the initial results clearly show that re stimulating existing wells with larger jobs and tighter cluster spacing can materially enhance well productivity in our deck.
We have a slide summarizing our results. Key takeaways these wells reach payout in less than 10 months. We have more than 100 refrac opportunities across our portfolio and we are moving additional re-fracs into this year's program. We see our refrac program as a capital-efficient way to maximize volumes while providing flexibility in a time of strong oil prices.
Nick, we recently drilled our first Horseshoe well in the Austin Chalk The well had a lateral length of nearly 9,000 feet. It was drilled in place of two less than optimal shorter laterals. The well reduced total D&C costs by 25% and improved cycle times by 15% when compared to drilling two wells. Now that we have proven our ability to drill Horseshoe wells, we can use this advanced technology across our asset base to enhance returns and capture incremental resource. We have identified more than 30 additional Horseshoe wells to unlock value and what would have been stranded acreage.
Third, let's talk about some recent success on our South Texas acquisition. Please take a look at slide 12 where we show just how far we are outperforming the previous operator. We are completing a 10 well pad to develop four stacked horizons and expect to have initial production late this quarter. In just a few short months, our enhancements have decreased gross drilling costs, drilling days and cost per foot across the Upper Eagle Ford, lower Eagle Ford and Austin Chalk. Early results here combined with what we've delivered on previous acquisitions, further demonstrate assets are better and silver both hands and clearly show the operational excellence and capital efficiency our team can bring to an asset.
Let's now shift gears and talk about how our strategy is creating value through acquisitions as we build a scale and durable portfolio. Our latest accomplishment is a three year effort encompassing contributions from our technical business development in land teams through a series of transactions culminating in our recent land trade, we have assembled a contiguous 25,000 acre position across La Salle and McMullen counties in the liquids window of the Eagleford. Our subsurface teams specifically targeted this area because of its high rock quality and a lack of modern-day completions. In addition, many of the legacy wells were drilled out of zone. Importantly, over the last 12 months, we brought online six wells in the area which have delivered rates of return greater than 100% with productivity far exceeding our expected type curve with an estimated 150 long-lateral locations to develop in the area. We see this as a powerful liquids lever support in our diversified portfolio.
Before we go to Q&A, let me address our upcoming annual meeting and the importance of your vote, I firmly believe today's results speak for themselves. Our strategy to create value is working. Furthermore, we are proposing governance changes that we feel are in the interest of shareholders. We are asking for your vote to declassify our Board adopt a majority voting standard and eliminate supermajority vote requirements. We continue to strengthen our Board through ongoing refreshment. Recently, we appointed Lee Jordan as a new highly qualified qualified director with a demonstrated track record in international and domestic LNG markets. Natural gas trading business development and most recently as Chief Diversity Officer at Chevron. Lee is an excellent addition to our Board and represents the fourth new director to join our Board since January 2023 through multiple communications with you over the past few weeks, we've clearly laid out our extensive engagement with Cambridge over the last two plus years. There is more than enough material for you to review, but make no mistake, their end game is to force a very dilutive transaction with Cambridge, Texas Gas. I would encourage you to take the time to read through our materials and get educated on the facts. Our vote for your vote for our skilled Board and new governance enhancements is a vote for truth and transparency. We welcome a dialogue with any shareholder, please reach out to vote with the Board for on the white proxy card cards.
In closing, I am proud of our team and their relentless pursuit of safely executing our strategy and establishing SilverBow as the operator of choice in South Texas, we sit in an enviable position today. We have scalable scale and durability built through a history of doing smart transactions and have it have demonstrated our ability to unlock significant value behind acquisitions. Our assets provide us with flexibility and how we allocate capital today to deliver strong results. We are not reliant on near term acquisitions to enhance our inventory. Our capital structure is strong and getting stronger with our increased outlook for free cash flow. We now expect to achieve our leverage target of less than one times in 2025. Most importantly, we are executing a business plan that has proved proven to create value, and we are confident that we will close the significant value gap we see in our equity today, and we look forward to reporting on our progress as we continue to focus on creating value for all SilverBow shareholders.
Operator, we are now ready to address questions.

Question and Answer Session

Operator

At this time, I would like to remind everyone in order to ask a question, please press star followed by the number one on your telephone keypad and that we ask you limit your questions to one and one follow-up. So we able to take as many questions as possible and your first question comes from the line of Tim Rezvan from KeyBanc. Your line is open.

Tim Rezvan

Good morning, folks. Thanks for taking my question. I'll stick with ops here. Some of my first question, the trade you did kind of core up that La Salle and McMullen acreage. You talked about 10 to 12 additional wells planned for this year. Are those wells you're not drilling elsewhere and understand how this trade maybe changed here, your drilling plans for the year. And then it's just a follow up on. Was there any production that came with that trade that impacted the production guide for the year?

Christopher Abundis

Yes. Hey, Tim, I appreciate the question. And yes, we're really excited about it. In terms of production. I think there was about 500 Mcf a day that was divested of in the trade and then the rest of it was all on acreage. I would tell you that, you know, this is a great example of how you have a larger portfolio and you can take advantage of it to unlock value. This Bock in its entirety, we paid no dollars to acquire 150 locations in terms of activity. What we're really excited about is the two wells we drilled last year, the four wells we brought on this year and those four wells this year are actually responsible for some of the that upward tick that we put into our production guidance. And what we're doing is reallocating capital from other parts of the capital plan to this area. So it's not additive to the capital plan. It just gives us more optionality to shift capital to higher rate of return projects.

Tim Rezvan

Okay. Okay. So those wells, they're wells you're not drilling elsewhere this year?

Sean Woolverton

Correct.

Tim Rezvan

Okay. Okay. I appreciate that. Yes, we look forward to the updates there. And then as a follow-up, either either for you or for Chris, on hedges, the company's checking, the balance sheet, you're on the cusp of getting kind of leverage to that one times goal. And I know that there's potential options with the high-yield market out there and farther down the line, just thinking about cash returns, I thought we would might see you are layer layering in some more hedges with the strip having kind of moves like like it did. So how do you think about hedging as you kind of get closer to the finish line on the deleveraging initiatives?

Christopher Abundis

Yes. No, no appreciated. We during the quarter and since the last time we spoke to everyone, we did layer on some incremental hedges at topping off some oil this year at the second half of the year when it was above 80% and then putting some hedges on in '25, we're essentially 75% hedged for '24, and we're about feel with 75% of that gas, 67% of the oil in the next year.
We have a pretty strong hedge book as well, consistent with what we've done in the past. As we start to move closer towards '25, we'll be opportunistic to start layering in more hedges as the plan for '25 becomes more clear. And typically by the time, like we know where we're at this year by the time we get into the drilling program for 2025, I'm sure we'll be at two-thirds hedged or higher I think, to your point, and it's one that as we delever the balance sheet, we'll start to have more flexibility in not the hedging as much. But for now, we're committed to a pretty conservative conservative hedge program. Think you raise a good point in terms of the accelerated debt paydown, giving us optionality. One of the things we did with our second lien is we have an amortization structure to it. So we're all able to pay some of that absolute second lien down throughout the year, which will essentially move debt to a cheaper cost of debt in the RBL, but it also allows us to think about starting to explore the high yield market and where we're at as a company who with the transactions that we did last year with the South Texas acquisition that really positioned us from a size and scale standpoint, a commodity mix and a balance sheet that puts us in a good position to access the public market. So obviously, that market's hot and it's something that we're keeping a close eye on as we go forward.

Tim Rezvan

Okay. Appreciate those comments. If I could just sneak one last one in your guidance, you gave some you gave some comments on the refracs here to be blunt. Refracs have been sort of a mixed bag for the industry over the last sort of 8 to 10 years and down comments generally here from shale is that you get a stout initial rate and then massive declines and you talked about 10 months payback. What gives you confidence on that? And can you talk about just what the cost is for these refracs? And that's all I have. Thank you.

Sean Woolverton

Yes. Thanks, Tim. As you know, your comment around re-fracs historically and imaging of 8 to 10 years and my 35 years in the business, I've seen probably two or three generations of reefer re-fracs come and go. And to your point, exactly, oftentimes you'll you'll see production ramp and then come right back down would tell you that we've been probably a little cautious in jumping into re-fracs. We watched a number of the larger operators in the basin to perform them. Conoco's had a very aggressive program. Devon I know has been out talking to the market about the refracs over in the Eagle Ford over the last couple of years.
So we did our first two. I learned a lot from what the those operators have done. Essentially we're going back into the meaning in a brand new liner and starting over in terms of the completion, why we have competences. We've got the long-term production from other operators that have done it over the last couple of years using similar techniques there that they used on ours. And then we've got 60 plus days of 45 to 60 days of production thus far, and production is actually holding fairly steady. One of the things what we are doing is right from the start hitting it with artificial lift to make sure that we don't have that fall off. I think of mistake, many operators make as they implement the capital program and then let the fall the well fall off so we're being very proactive on lift.

Tim Rezvan

Thank you.

Sean Woolverton

Operator, we'll take our next question.

Operator

Your next question comes from the line of Charles Meade of Johnson Rice. Your line is open.

Charles Meade

Morning, Sean, to you and the whole Sylvo team there. And I wonder if we could go back to the slide 9, and you've talked quite a bit about assembling this position but I would want to talk about the the well designs. So that graph you have on the on the upper right, and I recognize it's early days, but that's a huge uplift in productivity. So the question is, can you talk about what the deltas are of these four wells that you're graphing there? Our with respect to targeting either between different zones or even inside zone and up and different approaches to the the completion design?

Sean Woolverton

Yes. Yes, you bet. This is an area that saw deal activity. I think probably in that 2010, 2014 timeframe and part of the position was owned by Pioneer back then the trade that we did was controlled by a large operator that hasn't done much in the area for quite a bit of time. And then the other position was a smaller operator, and you don't just to clarify on it. We put the position together through two acquisitions again paid nothing for the inventory. And then the last piece was a trade historically from a drilling perspective, lateral shorter, as you really saw during that timeframe and most of the time wells were probably drilled in zone anywhere from about 50% to 75%. When we do our look back on the drilling, we're probably in zone 98%-plus so that's a big part of it is keeping the bit in the wellbore in what's the most high quality rock. From a completion standpoint, you almost can look at the re-fracs the numbers that we provide on slide 10 to get a sense of how these wells were originally fracked. Many of them had cluster spacing of 50 feet to 100 feet and pretty big, significant stage spacing. We had proppant intensities probably in the EUR1,200 per foot or less. So that would get us into the area. You know, one thing that we're doing is we've actually started our third and fourth re-frac for the year in those two happened to fall on this block of acreage. So it kind of speaks to how we kind of keyed in here.

Charles Meade

Got it. And then my second, my second, I'm sorry, were you done there, Sean, I am Yes, I'll take that question up, but you have my second question is about the this proxy fight you have with Cambridge near front from the outside. Looking in one of the ways, one of the obvious things that has worked and continues to work in the E&P space right now is increased scale and that your increased scale. As you know, there's lower financing costs. There's more investors that you can look at you know, there's a number of things that are benefits to increase scale, and that's one of the most kind of obvious. We have potential benefits of a combination with Cambridge Texas Gas. But what are the what is what's on the other side of the seesaw that makes this not a an attractive but not an attractive prospect for silver ROE and it its shareholders in your eyes?

Sean Woolverton

Yes. No, appreciate the questions. Yes, maybe I'll start with, hey, listen, after probably two plus years of discussions with Kim Rejean and through analysis with our financial and legal advisers looking at this would have been the third time we've engaged with them. We're confident that the deal they proposed was not a good deal for our shareholders. It was clear. They significantly underestimated the value of SilverBow and simultaneously substantially over evaluated their value on KTG.
What I'd say is we've repeatedly demonstrated our willingness to discuss potential combinations with any and all parties. And I think we have a compelling path to accelerate our value recognition for the benefit of all of our shareholders.
You know, I mentioned this in my comments, we have an enviable asset base and a base in the basin in this basin. We'd agree with you.
We're big believers in scale and this basin is rapidly consolidating. We regularly entertain discussions with interested parties, and I'm not going to discuss any specific discussions, but I can tell you that our Board understands its fiduciary duties to do what's best in what's in the best interest of all of our shareholders and our Board and management's interests are aligned with shareholders.
So I'll kind of say that maybe I'll maybe I'll continue on a little bit. We are firm believers in the merits of consolidation and the market is rewarding companies, like you said, that of the key ingredients to deliver sustainable value through all cycles. And we've kind of outlined what we have and what we would present in terms of that opportunity, the scale we have, the asset quality, the free cash flow generation in our last two quarters, we've demonstrated that significant free cash flow that this asset base has and we have a balance sheet that I think good would work well in any combination. So we feel like today we checked nearly all the boxes to earn a premium valuation. Listen, we really transformed our asset base and distributors that demonstrated our ability to capture value, adding deals to create the scale I mentioned. And at the same time, we're executing capital discipline to ensure we generate free cash flow. We're committed to having less than 75% reinvestment rate in order to maintain that strong strong balance sheet. So I guess I'll just say Sure. I think we have the right strategy and we'll continue to evaluate, and I'll say this loud and clear any and all paths to deliver value for our shareholders.

Charles Meade

That's helpful elaboration. Thank you, Sean.

Sean Woolverton

Thank you.

Operator

Your next question comes from the line of Leo Mariani from roof. Mkm. Your line is open.

Leo Mariani

Yes, I was hoping you could touch on maybe just elaborate a little bit on sort of the plan to close the value gap. Obviously, you just kind of spoke about scale being important and critical in the sector and that you're open to the right types of consolidation. But apart from sort of consolidating with another entity. What do you kind of see as kind of the pivotal things the Company can do trying to close the value gap in its shares Yes.

Sean Woolverton

No, I appreciate that. The question, Leo, you know, scale is definitely a criteria that investors are looking for. We feel like the transactions that we've done over the last two years have put us into a new level of scale and obviously it has attracted interest in the company for that reason. But it's important to also have a demonstrated inventory of high quality drilling locations and for us even adding to that high rate of return re-fracs now, so purchasers that are looking for deep inventory and public investors are as well and they want to see scale that you have run rate over a long period of time. I think we're showing that I think our low margins or low cost platform is another ingredient that investors are looking for. So where do we go now?
I think it's we were very disciplined in how we've grown to this scale.
We primarily Neo leveraged Neil debt to do that. And we're now aggressively showing the cash flow capabilities of the Company and paying down that debt rapidly. And when I say we use debt, we've really never been over 1.5 times leverage over the last couple of years. And we've taken the Company from 2.5 times levered at the start of all these acquisitions. So I think what the market wants to see a demonstration on the scale quarter was a record EBITDA quarter. So at $200 million for the quarter, we now have a run rate of $800 million annual and we're paying down debt quickly. We're on track to get to one times that just with no re-rating in the market, just our conversion of debt. It equity should start to attracting investors. And I think we have other levers to pull in front of us our cost of capital. I think the scale of the company, we can start to look at the cheaper forms of cost of capital. And then last but not least, the ingredients that Neil, we're going to look at as we get the balance sheet below one times as a shareholder return program. We think we put all that together and we think that people should investors should really be looking at the Company and looking at some of our peers in see the upside here.

Leo Mariani

Okay. No, that's helpful for sure. And I guess I was hoping you could also maybe just discuss in a little bit more detail on the confidence of the company to kind of come out and raise the production guidance after kind of on the, you know, one quarter here with kind of three quarters of last year. Could you maybe just talk about the key things that are allowing you to raise the guidance this year?

Sean Woolverton

Yes. It's something that it's always a great position to be in, right? It's the base is performing well. We have a very active team that's ensuring that we're minimizing the decline of the base. So that's where it starts.
And then it's looking at the capital program. And I think we put a series of slides in the deck and maybe I'll reference a couple of them, but we continue to drill and complete faster.
Slide 13, a great demonstration of that. And I'll tell you where we're just really crushing. It is on the completion side, our completion team is now probably getting 80%, 75% to 80% efficiencies, meaning that we're pumping 18 to 19 hours a day or so that accelerated timeframe to bring wells on, brings more production into the year. But like I mentioned in my comments, it's also at a lower cost because of those efficiencies. So it just gives us more capital to work with. So base capital efficiency then well performance. You know, we've got a couple of slides, slide 19 and 17 in the slide deck that show the wells that we've brought on this year that are significantly exceeding our historical well performance or I shouldn't say our historical well performance, but operators that have positions we've acquired from other operators and we point out the production and we've already talked a little bit about it on the block, the 25,000 acre block, and we're way outperforming there. Those wells through April now have just really exceeded the expectations in our central Oriental area that we acquired from Sundance that we've had great performance that's shown on slide 17 and in the eastern extension, that was a great deal. We did where we put the deal a private operator together with the position and from Conoco to consolidate that block, we call it eastern extension. We brought on some great wells there. And you can see how we're outperforming the historical performance. So base capital well performance, we throw in re-fracs and we have capital savings that we're demonstrating from the capital program that are going to allow us to put more refracs into the year. We think we'll probably do eight to 10 of those a year. So we'll do more of them as capital becomes available. If the team continues to save capital quarter quarter over quarter, that will free us up. I'll just say we'll remain committed, though, to only a 75% reinvestment rate so a lot of detail there, but hopefully gives you at how Darden how we view our line of sight and confidence on the forecast.

Leo Mariani

Yes, that's very helpful for sure. And then just on governance, you spoke to that in terms of some of the changes that you're making, at least you're planning to make here. What's kind of the team's current thinking on the poison pill that's in place.

Sean Woolverton

You know, the point of sale is something that hopefully you through all the information that's been put out there. It gives investors some clarity on why it's there. And we've got a shareholder that is trying to really force and I found an asset on to our shareholders that there have significant value destruction around. So we were you know, I've been asked this question quite a bit over the last couple of years. This proxy fight has allowed a lot of the hopefully information around why it's out there. I get to give clarity to shareholders. It continues to be, you know something what I guess I'll say the Board will always evaluate what's in best interest for our shareholders, and that will continue to do that. I'll probably close with saying the poison pill is due to expire the day after our upcoming shareholder meeting.
Okay. I'll throw one more at the hub on that front, you do what we've heard from the activist investor is that the poison pills in place to keep management entrenched in that we wouldn't do a deal around it. It's been the exact opposite with the pill in place. We negotiated a deal. We'll almost to the finish line with that activist investor and they didn't close so I think that's proof that the appeal is restricting management or Board from doing the deal. In fact, that Broughton brought a deal to the table.
So maybe I'll close with that

Leo Mariani

Thanks for all the color, Jeff.

Sean Woolverton

Appreciate that question.

Operator

Your next question comes from the line of Kevin McCarthy from Pickering Energy Partners. Your line is open.

Kevin MacCurdy

Hey, good morning. Just looking at the 2Q guide, it looks like oil production is kind of flattish after growing significantly in the first quarter. And then the full year guide implies more growth. Just kind of curious how that activity plays into that trajectory? And is there any effect from the activity restrictions on the Chesapeake acreage?

Sean Woolverton

Hey, Kevin, good morning again. Let me maybe walk you through some of it. You know, we came into the quarter brought on a third rig in the early part of the first quarter brought on I think was it, Jeff, 12 wells in the quarter. But in February, we moved two of the rigs onto a 10 well pad on the Chesapeake asset as of as you might expect, yes, the tail turn for second quarter is lower as we complete that 10 well pad. So for the second quarter, we're anticipating bringing on seven tail tails for the quarter. So 2Q will be the low and we're moving in and starting to frac that 10 well pad as we speak. We think about that these are long laterals. We have well over 500 stages that we're going to frac there. So and with all the frac efficiencies that the team will probably exceed expectations again, right now, we're scheduled to bring that pad on late in 2Q, but maybe we can continue with efficiencies, pull it up a little bit, but 2Q will definitely be kind of the low and tails in 3Q or ramp is in 4Q kind of flattens out, we will drop down to two rigs in the second half of the year. So that's why you start to see the 4Q kind of flat in and lift layer out the only lever we have to pull and I mentioned to Dan on the question from Leo, is we have some refracs that we could we could do more of those if we want to if we have CapEx that becomes available.

Kevin MacCurdy

Great. And on, there's obviously a lot of attention around the shareholder vote, and you've been pretty clear about your views on the valuation, the KTGIKTG. asset.
I'm just kind of curious, I mean, you've kind of touched on this on your view on M&A and the other transactions you've done, but what kind of scale do you foresee being able to add from M&A just, you know, instead of the KTGS., I feel I'm probably I won't speak to any specific layer or maybe target.

Sean Woolverton

There would tell you, I think everyone knows who knows this. We've been the most aggressive acquirer in the basin with eight deals done over the last couple of years, and there's still plenty to do so as you look at consolidation in the basin, I think there's plenty of opportunities. We're very diligent around what those are deals must look like. We've been very vocal around our criteria. It needs to have industrial logic. It needs to deepen our inventory, compete for capital immediately. One of the things that we struggled with with the KTG. proposal is we haven't been drilling gas down in Webb County or limited amounts further the past two years, it just doesn't compete for capital in a two 50 world. In fact, I think KTG. may be one of the only companies down there. Drilling, others have all pulled the rigs out. So you'll have to have inventory that competes for capital and it has to be accretive to our shareholders. So those are the type of deals we were looking for and what I'll tell you is, hey, we recognize that scale's important for either the public investor or for companies looking to act to do acquisitions, and we're open to consolidate. We're open to be a buyer and open to be a seller. So I think the Eagle Ford has a great, great future in front of it. Other basins get consolidated this one should be the next basin up in Orlando.

Kevin MacCurdy

Great. Thank you for the answers. Yes.

Operator

Your next question comes from the line of Paul Young from Citi.

Paul Diamond

Your line is open and good morning and thanks for taking my call homes. A quick one I wanted to touch on slide 13 on the operational plan for the rest of the year, how much of I guess, further improvement in some of these metrics? Are you all expecting or is it a kind of run rate from here?

Sean Woolverton

It's a good question, Paul, and I keep thinking that, hey, can you get any more efficient yield on the completion side?
We're down to trying to find a five, 10 minute slot. So when you're fracking 40 hours a day, you do have a time where you have the fuel engine back up and running tools in the hole that we're getting down to, where can we get more efficient? And I'll tell you all that the completion efficiency, we haven't changed our our design in terms of going to smaller stage design. With fact, we'll continue to enhance it.
So completions, the team always surprises drilling.
I think, you know, with the scale that we have, we continue to get larger. You build the balance sheet. The inventory allows us to do larger pads that generate some efficiency from a drilling standpoint, just being on larger pads. We still think probably optimal for us right now is in that four to six wells range, but there could be efficiencies there. And then having know, just again, the opportunity to go to a different oh new inventory, be it gas or oil that we can always and we've proven to be very effective on allocating capital to the right returns. So there's kind of my thoughts.
One area that we could add some efficiency gains on is just leveraging the existing infrastructure scale that we have. A lot of the assets that we've acquired had infrastructure already there, and we're going back in over the top of them. We're doing that significantly where we're drilling Austin Chalk wells over the top of the Eagleford. So that had some cycle time efficiencies where you don't have to go back in and build pads, roads and put in new pipe. So maybe a combination of a lot of things. It's getting it harder and harder, but we'll keep on on grinding it.

Paul Diamond

Understood. Thanks for the clarity. And just one quick follow-up on the refrac opportunity, 100 plus potential potential targets on how should we think about the economics of those Mr. a run rate basis? Should we expect or are you expecting similar kind of a decreased cluster spacing, proppant intensity is like how much it is that opportunity versus a well-by-well kind of what works best?

Sean Woolverton

Yes, no, great question.
I mean, obviously, we've done two thus far. We've looked at other operators to see how their wells perform to to kind of put a new risk percentage on consistent performance. We'll see if we can prove that up. But we're seeing a pretty high performance from well to well, you do run into risks around mechanical issues going back into wells, but in talking with other operators, they're seeing a high percentage there. So I think it's probably 75%, 80%-plus in terms of mechanical as well as well.
Performance would tell you the 100 inventory. The 100 refracs we've identified We've looked thus far mainly on our oil assets. We've yet to look at our gas assets and what's really good didn't know I keep on saying this is all of these re-fracs, our own assets that we've acquired, the one that we really need to tear into is the Chesapeake asset. Those new areas a big chunk of those wells were done in the 12 to 16 range kind of where they were just going in. And we're doing the same design again and again, and again. So we're really excited about pulling the onion back there.
Some more and what's always great when you do acquisitions is when you unlock even more value on them, what you paid for.

Paul Diamond

Understood. Thanks for the clarity.

Sean Woolverton

Yes, thanks, Paul. Appreciate you. Have a good day.

Operator

As a reminder, if you wish to ask a question, please press star one and your next question comes from the line of Jonathan shaver of Northland Capital. Your line is open.

Donovan Schafer

So thanks for taking the questions and congratulations on the quarter. I have to admit I feel like on and gone a little crazy here and pulling their hair out. So I know you don't want to dwell on the Cambridge stuff too much, and this is my own view and by Yes, they don't seem to be like particularly good actors with respect to sincerely having interest for the rest of shareholders beyond their own 12% ownership you put out a detailed Chronicle of all of the interactions that you've had with them with dates and kind of like a journal or a log, if you will, and you've shared that I think goes part of a response letter issued at one point, and that was included as like an appendix. And I think all of that was filed with the SEC.
So you know, by my impression is that is the type of thing that you would not put out there publicly. If you weren't prepared to back it in a court of law and provide the evidence in hours, whatever and so forth. And they haven't come at you as like a defamation lawsuit or something like that. So it doesn't appear to be the case that they can test it and that chronicle on its own seems pretty damning in my view in terms of your at least have you in terms of evidence or at least, you know, just generally indications of these guys are not really people, you know, a lot of us would necessarily want to do business. So my question is, am I right on that, that chronicle that you put out in that appendix, is that something that you guys stand behind?
You know, hypothetically in a court of law and because in my view that's kind of all you would need to make your point here on. But just could you could you answer that?

Sean Woolverton

Yes. Yes. No, I appreciate the your thoughts or thoughts there. You know, a core value for our company is to really work with all stakeholders from our employees, our service providers that we partner with our mineral owners and our shareholders. And I would tell you something that we really pride ourselves on and we've received this feedback is, hey, we're honest and transparent company, and we view that's how you do business, and it's really driven a lot of our success. So our focus is we want to stay really driven around adding value in engaging with all stakeholders and good faith in that we can stand on that and we think we can that's the way to deal with this type of situation and stay focused on what you do and what you believe and the results will speak for themselves soon. We think this quarter should more than demonstrate to investors the strength of the Company. So I appreciate that question and comments.

Donovan Schafer

Okay. And then turning to scale. So I do appreciate the point with respect to scale. And so I'm not couponing and discounting that, but it is it's not a it's not a it's not a perfect straight line in a linear relationship, right? Like you hit these sort of and step changes or inflection points where you're so small, you can't even keep a rig running on a continuous basis or any of like the first threshold is hitting that point. And yes, hypothetically, someday, maybe there's like a threshold where companies so big it can validate or justify moving upstream or downstream and having a refinery or sounds like these do these big step changes. But it's not this continuous linear thing. And here we've got, you know, you said your own words, the completion teams really crushing it. So it sounds like you've got, you know, the scale for bargaining to get fantastic crews and teams and to keep them in your base and then to keep them busy all those good things. And so, you know, again, like a 10x scale benefit, like if you were acquired by an ExxonMobil or something?
Yes, they can squeeze other things out of it.
But is there is there anything I'm missing in terms of is there some scale benefit like an uptick that would just be sort of right around the quarter that, you know, if you guys were only 50% bigger, whatever size you'd get with someone like Cambridge like that. There's just some, you know, Zeatin genuinely saying that would be unlocked by that or is it at this size and scale going from one increment to the next? Does it really makes such a difference.

Sean Woolverton

Yes. No, great. Great question. But I think it is the whole argument of did you do just scale for the sake of scale, and I think that's a dangerous approach to pursue as a company has to be very thoughtful and diligent around doing transactions. You don't want to do transactions that are destructive to your balance sheet. We've said all along that, hey, if we do a deal and we use leverage to do it, we'll have a leverage in and around 1.5 times, and we'll only go to that level, if you it show clear line of sight of bringing that leverage down. And that's what we did with the Chesapeake transaction. We got to one six for maybe 30 days and with in a quarter brought it down to click. So you got to think about, hey, the way you do scaling is important. You got to protect the balance sheet. It's got to bring you don't want to pay. What we really loved about our deals is we don't pay for it and for locations, we look at some of the deals that are out there and some that have been proposed and people are wanting to own $2 million to $4 million a location or people are paying two to $4 million a location for wells that you will drill for six, seven, eight years that you're waiting for higher commodity prices. That's just destructive to a balance sheet to do that. So we've never paid for locations, which we think is imperative when you scale and it just has to improve margins and reduce costs.
So those are the criteria that we have.
I think if you do the right scaling to your point, it starts to see that uplift. And there's a clear trend that investors want scale and or bigger companies to looking to acquire one scale but the criteria I took through on an acquisition, really successful companies employ that same same thought process. So And listen, we're going to continue to stay focused. We continue to be open to scale and big cheerleaders of scaling in the Eagle Ford. And we think SilverBow will play an active role in that as we move forward.

Donovan Schafer

Okay. And then if I can squeeze. Just one more question in a round. The idea the notion of sort of valuation gap as a point of focus. So and with public markets and the way the stocks are valued. There are sort of the things you can control and the things that you can't control. And yes, I have seen and I think a lot of us on this call, we've all seen cases in the past where focusing on the quote unquote, closing a valuation gap as a point of focus turned out to be the wrong thing. Maybe something could be done for optics on the Whiting acquisition of Kodiak or merger as Kodiak comes to mind, I mean that that was as far as I can tell just so that they could say, hey, we are the largest producer in the Bakken, so they could leapfrog Continental and just get that like almost almost literally just for a headline because they were at a discount to Continental. And so it's like, look, if we get the headline that says we're the biggest Bakken producer, we're going to get that multiple thousands of disaster So my question is, you know, is the depressed valuation that is high. Gas prices are low right now. And you've got the hedging and everything, which is great. But the Eagleford of all basins, the Eagle Ford is somewhere that is just such a beast and to really shine, I mean, just the wrong quantity of energy, they can come out of these wells that only gets economically reflected when gas prices are better.
That's like us. There's a sleeping giant component there. And so but you don't have control, right like these valuation things and all that might change or just come around when natural gas prices come back. And so the question is, is it even do you think, honestly, sort of in your heart of hearts of the sea and maybe this is a sensitive question, but is it is it even right or fair? And let's say, is it fair to long term shareholders to shareholders you are looking past just a couple of quarters. Is it fair to then to view thinking about like, quote unquote valuation cap right now at this moment in time?

Sean Woolverton

Yes, here. I think that's what you know. A lot of investors are looking for, right that opportunity to invest in equity, a company that has a clear long-term strategy to add value and we talk through on today's call some of the key metrics of getting there in attracting more investors to the stock. I think SilverBow is on that customer on a totally totally different trajectory. We have a ton of momentum behind us. I think you raise an excellent point, though, you know, short-term investors investors that focus on 30 day type numbers, 60 day type numbers and how things trade over a short period of time, they're probably not seeing the bigger picture. We like to point to, hey, what have we shown in value creation over the long term.
On slide 5 of our presentation, we lay out what our one year return is relative to our peers. Our three year return, our five year return and that's what long-term investors recognize is, hey, if you're doing a building the right company, putting the right assets in place, having the right people to execute on those assets in a real strong financial position. Investors will come and recognize that value.
So that's where we're focused on. And maybe I'll close and just say that, hey, any SilverBow is the largest public pure play operator in the Eagleford and so attention on the Eagleford, we really wanted some of what you have. Probably what we're doing right now is a drawing attention to it.
That's great. Any further combinations that we do will even make a bigger pure pub up pure play Eagle Ford if we chose to go that route. So yes, anyway, I appreciate all your questions, Dan,

Operator

there are no further questions at this time, so I'd like to hand the call back over to Sean.

Sean Woolverton

Thank you, Gavin, and I appreciate everyone's interest in the Company. And hopefully you'll take away from this call that the company had a really great quarter and we hope have a ton of momentum, and we look forward to sharing more information with you. And like I said in my comments, we're always available. Please reach out if you have any questions that you'd like for us to address.
Appreciate it.

Operator

Because that does conclude our conference for today. Thank you for participating. You may now disconnect.