Kimmeridge Energy Management wants three seats on SilverBow Resources’ board and to remove one member, according to a regulatory filing, as the investment firm agitates for more control of the E&P. Kimmeridge is looking for a way to come up with a reliable 267 MMcf/d to complete its own LNG-supply deal.
Gas-weighted SilverBow operates wholly in South Texas in the Eagle Ford Shale and Austin Chalk and averages 476 MMcf/d.
Investment firm Kimmeridge, which owns 12.9% of SilverBow’s shares, also operates in South Texas via its gas-weighted Kimmeridge Texas Gas (KTG), producing 202.5 MMcf/d.
KTG is part of Kimmeridge’s plan to participate in LNG, according to its past statements, that includes having a deal “in principle” with an export plant in development.
SilverBow’s board shot back on March 1 that Kimmeridge has a “hidden self-serving agenda.”
"We believe the launch of this proxy fight is a next step in [Kimmeridge’s] nearly two-year effort … to force a merger with KTG on terms unfavorable to SilverBow and its shareholders,” the board wrote to investors.
The nominees
Kimmeridge plans to bring its board nominations to SilverBow’s annual meeting this spring. It did not provide an explanation in its filing with the Securities and Exchange Commission.
Ben Dell, the firm’s co-founder, told Hart Energy on March 1, “We have no comments at this point.”
Its nominees are E&P asset-turnaround veteran Doug Brooks; Carrie M. Fox, a Civitas Resources board member and CFO of DrilTek; and Katherine L. Minyard, an investment analyst formerly on the Ovintiv board.
Kimmeridge is also asking to remove SilverBow board member Christopher O. Majeske, who has held the position since 2016 and was a director at Strategic Value Partners, which currently owns 1.5% of SilverBow shares.
SVP gained its initial position, 36.6%, in 2016 in the post-Chapter 11 conversion of SilverBow predecessor Swift Energy’s debt into stock. Swift was renamed SilverBow in 2017.
The board consists of nine members, including CEO Sean Woolverton, and all longtime oil and gas executives except for Majeske.
Among them are Marc Rowland, who was Chesapeake Energy’s CFO and was a founder of private-investment firm IOG Capital; Ellen DeSanctis, ConocoPhillips retired senior vice president; and Kathleen McAllister, who was president and CEO of international deepwater rig operator Transocean.
When asked by a securities analyst about the proxy “situation,” Woolverton said in a Feb. 29 earnings call, “I'll tell you that we really want to focus our call today on just the strong performance that we exhibited in 2023 and our outlook for 2024.”
Kimmeridge wants gas
KTG, formed from Laredo Energy Operating in 2022, produced 202.5 MMcf/d of gas and 2,620 bbl/d of oil and condensate in December, according to the Texas Railroad Commission (RRC) data. (Privately held Laredo Energy is not related to the publicly held Laredo Energy, now known as Vital Energy.)
The gas production is primarily from Webb County, Texas, in the Eagle Ford’s gas fairway and from the Laredo property that includes Benavides family land and minerals, according to the RRC.
Kimmeridge followed the deal with adding BlackBrush Oil & Gas oil production in Karnes, La Salle and McMullen counties, according to the RRC.
But KTG’s gas production isn’t enough to consummate an LNG agreement Kimmeridge signed “in principle” in August. In the deal, Kimmeridge will supply 2 million tonnes per annum (mtpa) —267 MMcf/d— for 20 years to Cameron, Louisiana, LNG plant developer Commonwealth LNG.
Separately, Kimmeridge invested in the LNG facility. The amount was not disclosed.
The 1.2 Bcf/d plant is among those already approved by the Federal Energy Regulatory Commission. Although not yet under construction, the plan is not affected by the White House’s current “pause” on issuing additional LNG permits.
Kimmeridge’s 267 MMcf/d would be about 22% of the Commonwealth facility’s expected 9.3 mtpa capacity.
Typically, E&Ps’ deals for assured gas supply to LNG facilities are more than 500% covered by current and projected production, such as assuring 200 MMcf/d for 20 years when existing production is at least 1 Bcf/d.
KTG’s existing production is less than the amount Kimmeridge aims to supply Commonwealth.
Kimmeridge reported in October that KTG planned to buy an additional 30,000 Eagle Ford acres, adding 65 MMcf/d. Also, it reported that KTG plans to produce more than 500 MMcfe/d net in 2026.
Separately, KTG signed a multi-year deal with Kinder Morgan to ship its Eagle Ford gas, connecting it to LNG plants along the coast.
Kimmeridge’s Dell said in the announcement that the deals are part of “KTG's ambitions of becoming fully integrated from source to sink.”
Kimmeridge itself, he added, “has always sought to be a pioneer in the energy space, first with the ideation and implementation of a new E&P business model, followed by the formation of Civitas Resources … and now as we build a leading international LNG platform.”
SilverBow’s got gas
SilverBow produced 476 MMcf/d in December, with 80% of it coming from Webb County, according to RRC data. Its December oil and condensate production was 38,427 bbl/d, primarily from Live Oak, Dimmit and DeWitt counties.
It bolted on 42,000 net South Texas acres in October from Chesapeake in the condensate-rich windows of Webb and Dimmit that included 540 producing wells.
The board reported March 1 that it and Kimmeridge discussed a combination with KTG during the past two years. “However, Kimmeridge to date has failed to provide—or demonstrate an ability to consummate—a credible and actionable proposal.”
The conversations began in July 2022 when KTG was formed. But Kimmeridge “abandoned the transaction [in February of 2023] after they were unable to secure the requisite financing—despite their written proposal expressly stating that there were no financing contingencies,” the SilverBow board told shareholders.
It added that Kimmeridge asked SilverBow in June 2022 to “not compete in Laredo Energy’s competitive sales process, stating that once Kimmeridge acquires the assets the companies can merge.”
SilverBow ignored the request and continued bidding for the Laredo property.
In the March 1 filing, the board also questioned Kimmeridge’s SEC disclosures, reporting that it accumulated SilverBow shares “as a passive investor while having negotiations with SilverBow about a potential transaction, and they did not file a Schedule 13D until after SilverBow adopted a shareholder rights plan.”
It added that it met again with Kimmeridge this past month to discuss a merger. “Once again, they failed to provide a proposal delivering shareholders with fair value for SilverBow’s assets and certainty of financing.
“We believe Kimmeridge is more focused on pursuing tactics to effect a transaction that is unfair to SilverBow shareholders ….”
Also in those discussions, the board offered to consider a Kimmeridge nominee, it added, as well as noting that it was already looking at governance changes, including canceling a poison pill provision limiting the percentage of stock an investor can own.
But “Kimmeridge summarily rejected our proposal in favor of their stated intention to gain majority control of the SilverBow board by the 2025 annual meeting.”
The ‘poison pill’
Additional investment firms in the stock include Riposte Capital (9.7%), BlackRock Inc. (5.9%) and State Street (4.15%), according to the SEC.
Among Riposte’s shares are 506,000 it bought in December at an average of $28.92 each, totaling $14.6 million. The firm’s first SilverBow disclosure was in June 2023, when its position reached 5.2%.
Riposte founder Khaled Beydoun wrote with the June filing that SilverBow’s portfolio is “small, but well situated” to the Gulf Coast and consists of a mix of oil-weighted and gas-weighted assets to drill depending on the market for each.
The stock price was $26 at the time. Beydoun described that as a 40% discount to other E&Ps and the EV/EBITDA multiple was “a mere 1.9x.”
The poison pill SilverBow adopted in 2022 to fend against a takeover “prevents any investor from owning more than 15% of SilverBow's common stock, has isolated the Company and continues to destroy value,” Beydoun added.
It was supposed to expire before the spring of 2023, but “you unilaterally extended it. You provided no rationale for the decision and, most importantly, no opportunity for shareholders to vote on the matter.”
Leo Mariani, an analyst with Roth MKM who asked Woolverton in the earnings call Feb. 29 about the Kimmeridge bid, wrote earlier in February, “We don't think SilverBow is opposed to a sale, but it would like to improve its valuation first.”
SilverBow’s market cap Feb. 29 was $724 million, while the shares were $28.10, according to Fidelity. The trailing-12-month price to earnings ratio was 2.34; price to book, 0.69; profit margin, 86.33%; debt-to-capital, 48.53%; and annual revenue, $652 million.
Its recent-quarter production was 72,100 boe/d, SilverBow reported Feb. 28.
Kimmeridge’s year-end 2023 holdings also included California Resources, which is buying Aera Energy; Chesapeake Energy and Southwestern Energy, which are merging; Enerplus Corp., which is merging into Chord Energy and which Kimmeridge’s SilverBow board nominee Brooks formerly led; and Civitas Resources.