Riposte Capital Thinks SilverBow Is Worth 35% More, Held Down by Management’s Poison Pill

In a bold move to drive positive change at SilverBow Resources (US:SBOW), activist investor Riposte Capital issued a letter on Wednesday to the company’s board in a 13D filing, outlining a series of demands aimed at unlocking and maximizing SBOW stock’s value.

The hedge fund, which holds a 7.5% stake in SilverBow, is calling for a strategic review of all options, including a potential sale of the company. In addition, Riposte Capital is pushing for the removal of SilverBow’s recent poison pill defense move and a shift in focus towards profitability and shareholder returns.

The letter, which was made public after the Houston, Texas  independent exploration and production company’s repeated refusal to take action, highlights Riposte’s concerns about the corporate governance practices. The activist investor argues that the adoption of a poison pill, designed to fend off hostile takeovers, has weighed on SilverBow’s valuation and discouraged potential suitors from making attractive offers.

SilverBow’s share price is down 9.4% in the last six months. Peer Permian Resources (US:PR) is up 12.5% in the same period.

Chairman Dumps Shares

The Fintel platform revealed that insider activity in the stock has been very weak in 2023 with one insider selling shares in May.

SBOW’s chairman Marcus Rowland in May reported the sale of 8,000 shares in a trade worth just under $200,000. The shares were sold at $24.21 each and reduced Rowland’s total holding down to only 19,386.

The reduction in share count ownership by the chairman is usually seen as a negative catalyst for the stock.

It is usually a good sign when corporate insiders buy shares in their own company, believing in the outlook and future of the organization. When we see only sales from insiders, it makes us question whether they really do care about the long-term share price performance.

Sees Higher Value

Riposte Capital sees significant potential in SilverBow, valuing the company between $34 and $36 per share based on comparisons to industry peers. This valuation is well above Wednesday’s closing share price of $26.11, implying potential upside of 35% if the proposed changes are implemented.

However, the activist investor acknowledges that the recent trend of low-to-no premium deals in the energy sector could pose a challenge to achieving a higher price through a sale.

Management Scores

When analyzing management’s performance for ourselves at Fintel using the financial metrics and ratios page for SBOW, it was quickly apparent that management has boosted its ROE in recent quarters while other performance indicators are painting quite another picture.

While ROE performance is something that can easily be manipulated by managers with the use of balance sheet tricks, CROIC and OCROIC help illustrate the underlying performance on a quarter-by-quarter basis.

What this revealed to us is that operational performance has actually deteriorated in 2023 after peaking in mid-2022.

Cash Flow Focus

In addition to urging the elimination of the poison pill, Riposte Capital recommends that SilverBow reduce drilling activity, refrain from making acquisitions, and focus on generating free cash flows to improve its attractiveness for potential suitors.

The hedge fund also emphasizes the need to align management incentives and compensation with the interests of shareholders, highlighting the current misalignment that exists due to production-focused strategies and compensation structures.

While Riposte Capital’s demands are not entirely surprising, given their previous cordial conversations with SilverBow’s management, the hedge fund emphasizes that meaningful actions are required to position the company for success, either as an independent entity or as an attractive acquisition target.

Activist investors like Riposte Capital can play a crucial role in effecting positive change within companies. By leveraging their significant stakes in target companies, they can challenge existing management strategies and advocate for measures that enhance shareholder value.

In the case of SilverBow Resources, Riposte Capital’s activism has shown a spotlight on the corporate governance issues that have been raised, the need for strategic reviews, and the importance of aligning incentives with shareholder interests.

This article originally appeared on Fintel