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SilverBow Resources (NYSE:SBOW) is initiated Thursday with a Buy rating and $40 price target at Mizuho, saying the stock trades at a discount to peers on net asset value and various multiples while on the path toward debt reduction.
Changes to key governance practices, either on the company’s own initiative or prompted by shareholder activism, would help close the valuation gap to peers, Mizuho’s Nitin Kumar said.
“Some investors have criticized management’s decision to grow scale through acquisitions and volume growth while taking on higher financial leverage and maintaining protectionist governance practices,” Kumar wrote. “While acknowledging these risks, we see a small-cap operator with ~10 years of inventory across the Eagle Ford, the ability to optimize capital allocation for commodity prices, organic FCF at the futures strip in 2024 that is protected to some degree by hedges, and a discounted valuation vs. peers.”
Kumar said while “cash returns” is not an appropriate goal for a small-cap shale producer, SilverBow (SBOW) is on a path of accelerating financial deleveraging and increased scale, which likely will drive higher valuation multiples faster.
