Riposte Capital Calls on SilverBow Resources to Take Decisive Action to Unlock Shareholder Value as Company Share Price Trades at 40% Discount to Peers
Retain an independent financial advisor to review strategic options including a sale
Remove value-destructive poison pill and shift antiquated focus from production to profitability
Overhaul management incentivization and compensation structure to be aligned with the interests of shareholders
Riposte was compelled to publicly share the letter following the Company's repeated refusal to take simple and decisive actions to unlock shareholder value, including the removal of the industry's only poison pill, which has been widely criticized by the investment community. Notably, the Company unilaterally extended its poison pill immediately after its most recent annual meeting, affording shareholders no rationale for the action and no opportunity to vote on the matter.
SilverBow Resources, Inc.
920 Memorial City Way, Suite 850
Attention: Board of Directors
Dear Sean and Members of the Board,
As one of the largest shareholders in SilverBow Resources, Inc. ("SilverBow" or the "Company" or "you"), owning (directly and through convertible swaps) approximately
Riposte Capital, its clients and/or its affiliates (collectively, "Riposte" or "us" or "we") have invested in SilverBow based on our belief that, if properly managed (from a financial, operational and governance perspective), the Company has the ability to be a cash-generative and profitable business – which would ultimately deliver significant value to shareholders. SilverBow has a small, but well-situated asset base across key parts of the Eagle Ford's gas and oil windows, with close proximity to the Gulf Coast markets. We believe you are also well situated to have flexibility to pivot between oil and gas, giving you the opportunity to optimize returns by reacting to varying market conditions.
A fair value for SilverBow today, based on peer multiples, should be in the range of
In the view of Riposte, the principal impediment to realizing SilverBow's potential is your ongoing shareholder rights plan (the "Pill"). Your Pill prevents any investor from owning more than
It is clear to us that you are afraid that shareholders would not support the Pill, just as many of them voted against re-electing your slate of Directors. Cumulatively, the Pill plus a staggered Board of Directors plus an inability of shareholders to even call for a Special Meeting of Shareholders may help the management team sleep soundly, but it does not evidence good corporate governance or consider the best interest of the Company's shareholders. Above all, the poison pill prevents shareholders from exercising their right to participate in the strategic decision-making process of the Company.
Your action at the annual meeting was not about advancing the best interests of the Company. We believe the action intentionally sought to take SilverBow out of the acquisition game and eliminate market interest in the Company. Despite a wave of logical consolidation across similarly situated companies in your space, coupled with challenges faced by sub-scale platforms such as SilverBow, it is obvious that the Company doesn't want potential acquirers even looking your way.
Compounding your self-inflicted challenges, SilverBow still operates an antiquated E&P business model that has proven itself to be value destructive for shareholders. While the industry now stresses profitability and alignment with shareholders' interests, SilverBow emphasizes production solely for production's sake. We would be left wondering why the Company would employ this obsolete strategy, but the reasoning is plain to see – your CEO's compensation, which exceeds
The current strategy determined by the Board of Directors and management has siloed SilverBow and backed the Company into a corner. The Company has limited opportunity to build a sustainable E&P platform without further acquisitions, and even there you are highly disadvantaged given the Company's lack of scale and financial profile. SilverBow's depressed share price precludes the use of stock as a currency. It would be irresponsible to issue new equity at the current valuation, and your balance sheet affords limited flexibility to add further debt. Likewise, your prospects for creating shareholder value on a stand-alone basis are limited by modest free cash flow, a relatively illiquid float, and an inability to even initiate a stock buyback program due to restrictions in your credit agreements.
As a result, SilverBow's stock price is languishing and meaningfully underperforming relevant indices and peers. It is widely recognized that SilverBow trades lower than its peer set on an earnings or production basis. The Company's share price is down more than
As significant and constructive shareholders, who recognize the strong value of your assets across an important basin, we encourage management and the Board of Directors to act decisively through the following actions:
- Adopt a governance model that would make the Company attractive to prospective shareholders. The first step should be to immediately remove the Pill.
- Retain an independent financial advisor to review strategic options for the business including actively soliciting potential acquirers.
- Pivot the Company's focus from production volume alone to profitability – and return cash to shareholders via a dividend. This would most efficiently be achieved, in the near term, by laying down one of SilverBow's rigs, which would generate hundreds of millions of dollars in free cash flow.
- Overhaul the management incentivization and compensation structure to be aligned with the interests of shareholders.
Our observations and recommendations should not come as any surprise to you. While our conversations to date have been cordial and you have said the right things, you have not taken the actions that are necessary to best position SilverBow for success, either on a stand-alone basis or as a potential acquisition target that could receive a full and fair valuation.
We look forward to your response.
Sincerely,
/s/ Khaled Beydoun
Riposte Capital
About Riposte Capital
Riposte Capital is an SEC Registered Investment Advisor based in
Riposte Contact:
Jeremy Goodman
Head of Business Development
+44 (0) 7788 567 913
jg@ripostecapital.com
Media Contact:
Ross Lovern
Kekst CNC
212.521.4800
ross.lovern@kekstcnc.com
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