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Silverbow Board Battle Could Move South Texas Outlook

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A board battle underway between SilverBow Resources (SBOW) and Kimmeridge Texas Gas (KTG) could impact the production outlook for South Texas, including volumes for Kinder Morgan (KMI) on its Texas Intrastate system.

On March 17, Kimmeridge sent an open letter to fellow shareholders of SBOW proposing a $2.1B merger. Silverbow rejected that offer at the end of March, saying it “substantially undervalues” the company. SBOW also rejected three board nominees proposed by Kimmeridge, its largest shareholder.

STX maptdn 4.9

In the materials sent to investors, Kimmeridge proposes to move the producer’s strategy more heavily toward natural gas. For 2024, SBOW currently projects ouput at 54% gas and 46% liquids. Kimmeridge proposes to move the  SBOW-KTG combination to a production ratio of 70% gas and 30% liquids by 2025.

As shown in the table, SBOW’s latest guidance for 2024 estimates a 50% increase in production vs the 2023 average, from 356 MMcfe/d to 536 MMcfe/d. KTG estimates SBOW’s production will increase another 11% in 2025, reaching 593 MMcfe/d. Merging the 2025 production outlooks for KTG and SBOW brings pro forma 2025 production to 1,075 MMcfe/d, with a 70% weighting toward natural gas.

EDA believes the gas-focused strategy proposed by Kimmeridge is an effort to capture growth from LNG demand coming online. Kimmeridge is an investor in Commonwealth LNG and has signed a 20-year LNG offtake commitment with the project for 2 million tons per annum.

To help support this commitment, KTG has signed a multi-year transportation agreement with Kinder Morgan Texas Pipeline (KMTP). KMI has been consistently allocating Capex to Texas intrastate projects, most recently spending $231MM on the Eagle Ford Transportation project.

Following completion of its Eagle Ford Transportation project in November ‘23, KMI announced two more Texas intrastate projects that are expected to come online in 2H24 and contribute $16MM in 2025 EBDA. More information on these projects are available in the KMI Financial Blueprint.

If KTG and SBOW can strike a deal, KMI could see an uplift from increased utilization of its Texas Intrastate pipelines, as more gas would need to move from the Eagle Ford to Gulf Coast export markets. EDA believes gathering systems owned by StarTex Field Services, Navarro Midstream, and Howard Energy Partners would also see increased CombinedCo dry gas production. – Zach Krause Tickers: KMI, SBOW.


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