Saturn Oil & Gas Inc. (OILSF) Q2 FY2025 Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Welcome to Saturn's Second Quarter 2025 Results Conference Call. [Operator Instructions] The conference is being recorded. [Operator Instructions] I will now turn the meeting over to Ms. Cindy Gray, Vice President, Investor Relations. Please go ahead, Cindy.

Thank you, operator. Good morning, everyone, and thank you for joining us for Saturn's Second Quarter 2025 Earnings Conference Call. Please note that our financial statements, MD&A and press release have been filed on SEDAR+ and are available on Saturn's website. Some of the statements on today's call may contain forward-looking information, references to non-IFRS and other financial measures, and as such, listeners are encouraged to review the disclaimers outlined in our most recent MD&A. Listeners are also cautioned not to place undue reliance on these forward-looking statements since a number of factors could cause the actual future results to differ materially from the targets and expectations expressed. The company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, unless expressly required by applicable securities law. For further information on risk factors, please see the company's AIF filed on SEDAR+ and on our website. Also note, all amounts today are Canadian dollars unless otherwise stated. Today's call will include comments from John Jeffrey, Saturn's CEO; Grant Mackenzie, our Chief Legal Officer; and Scott Sanborn, our CFO. Over to you, John.

Thank you, Cindy, and good morning, everyone. We appreciate you joining us today. I am pleased to provide an update on Saturn's second quarter in which we once again delivered results that met or beat our guidance. For the third consecutive quarter, production was above the high end of our guidance range at just over 40,400 BOE a day, while operating costs were under the low end of our guidance. We also surpassed analyst forecast across numerous measures in the quarter, including adjusted funds flow of $109 million and record free funds flow of $93 million. However, the standout number in this quarter is our net debt, which was at $695 million at June 30th, a reduction of nearly $120 million over the prior quarter. This exceeds the $100 million net debt reduction that we forecasted during the first quarter's earnings conference call and also came in lower than consensus expectations. As a result, our net debt to annualized adjusted EBITDA fell to 1.3x at quarter end. Saturn continues to prioritize net debt reduction as one of the components of our blueprint strategy. This is demonstrated by an opportunistic open market purchase of our senior secured notes when they traded below par during Q2 and supplemented with the scheduled 2.5% quarterly principal repayments made on the notes. In April, the company purchased USD 16.3 million face value notes of our senior notes in the open market, which represented an additional full quarter payment. This equals CAD 20 million of hard debt reduction. At the end of June, we completed the scheduled 2.5% debt amortized payment. These principal repayments, combined with our strong quarterly free cash flow and the impact of a stronger Canadian dollar, all contributed to our significant debt reduction in Q2. With the second quarter being the lowest capital expenditure period due to spring breakup, we generated record free funds flow during the quarter. The nature of our oil-weighted mid-life cycle asset base means we can pivot if needed and shift capital quickly and seamlessly. All of Saturn Drilling's locations are adjacent to offsetting production where we have existing infrastructure and operations. This allows us to ramp activity up or down very quickly. Our well licensing, surface prep and drilling cycle times are very short. In some areas, we can even go from licensing to bring on volume in a matter of weeks. In light of this, we prudently took some extra time during Q2 to monitor commodity prices and the broader economic environment before starting to execute our Q3 capital program in mid-July. Another component of our blueprint strategy is to identify M&A opportunities to acquire low-cost, high-quality barrels that bolster Saturn's footprint in areas where we already have established operations. We aim to transact on assets that can be acquired for 2x cash flow or less or value that approximates the asset's PDP. This allows us to enhance the upside by capturing synergies, reducing costs and optimizing the performance of the assets. During the quarter, we closed a $5 million corporate tuck-in acquisition in Southeast Saskatchewan, which is complementary to our existing operations, provides drilling locations and future upside and is estimated to contribute over 100% of the purchase price to the cash flow of the company over the next 12 to 18 months. Whether small or large, our strategy is to acquire and integrate these assets that have rapid paybacks and identify opportunities for enhancements. We'll continue to look for complementary packages that can further enhance Saturn's portfolio and drive ongoing value creation. With a discount market valuation relative to our net asset value, the company has continued to allocate free funds flow to the purchase of Saturn stock through the normal course issue bid or the NCIB, and we launched our inaugural substantial issuer bid or the SIB in early June. Buying back our own shares reflects our view that Saturn's barrels are the highest quality and most undervalued available in the marketplace today. Throughout the quarter, we continued to maximize daily purchases under the NCIB, which resulted in Saturn returning $3.3 million to shareholders and canceling around 2 million common shares. Since Saturn's share price steadily increased following the SIB announcement, including a few days trading above the $2.15 offer price, we've only seen 1.6 million shares tendered out of a total of 7 million shares offered, returning $3.5 million to shareholders. The SIB proved beneficial to all shareholders. Since its announcement, our market cap has increased by over $100 million with significant expansion of our trading liquidity. Under both the SIB and the NCIB, Saturn has bought back over 11.2 million shares for cancellation since August of 2024, returning approximately $24 million to shareholders and further enhancing our per share metrics. Over the past several quarters, Saturn has maintained a steady, stable execution of our strategy. We continue to fulfill our promise that the market remains disciplined and optimistic and transparent. This approach, coupled with the strong performance of our asset base and innovations from our team, provide an ideal blueprint for creating lasting value for our shareholders. I'll now pass it over to Grant to talk through a few development highlights in the quarter.

Thanks, John. In the second quarter, Saturn's volumes averaged 40,417 BOE per day, which is above our quarterly guidance and higher than our analyst expectations, reflects our ongoing well outperformance and our type curves. This strong performance is exemplified by the results date of our [indiscernible] . It is a 2-mile, 8-leg open hole multilateral, that was among the top 3 best-performing Saskatchewan liquids wells in May. In addition, 3 of Saturn's Lochend and Extended Reach Horizontal Cardium wells ranked in the top 15 wells in the Alberta Cardium. Since those wells are fully cleaned up, we're seeing reverse declines with production volumes increasing out to 30 days. One of these wells was Canada's longest Cardium well ever drilled over 7,570 meters, which successfully utilized an innovative hybrid completion technique that the Saturn team know. We intend to apply this hybrid completion technique in our other areas, including our Kaybob Montney, where we are drilling the first ever 3-mile lateral in the area. Being able to drill longer laterals while still maintaining the ability to effectively stimulate tow is key for improving well recoveries and generating strong economics that can compete for capital with our high-return conventional Saskatchewan assets. We are also very excited about the progress made in the company's first Viewfield Bakken waterflood project at Creelman, where we have just commenced water injection. We're modeling an estimated 12 to 18 months in order to pressure up the reservoir before we start to see results, with the offset providing pressure support for new Bakken development wells that we're planning in 2026. The Creelman waterflood project includes a new water source well, area infrastructure and 5 injector conversions to date. This is the first stage of a larger multiyear waterflood program over the greater retail area, targeting the flattening of the decline curve to support a material increase in the ultimate oil recovery of future reserves. Investing in waterflood projects today can meaningfully improve our long-term sustainability by increasing recoverable volumes and boosting reserve values. To use simple math, if Saturn had a field of 100 million barrels of oil in place and we increased the recovery factor of the field from 6% to 20%, it would represent an incremental 14 million producable barrels. Applying our Q2 '25 netback of $36 per BOE translates into an incremental cash flow of over $500 million. This magnitude of impact from waterflood provides significant and lasting shareholder benefit and value creation. With that, I'll hand things over to Scott for an overview of our financial results.

Thanks, Grant, and good morning, everybody. Saturn posted another robust quarter with cash flow of $109 million or $0.56 per share, record free funds flow of $93 million or $0.48 per share against the backdrop of an 11% decline in WTI prices quarter-over-quarter and the Canadian dollar strengthening relative to the U.S. dollar. Our operating netback per BOE was $35.84 after derivatives, supported by lower operating costs of $18.28 per BOE and reduced royalty expenses of $7.68 per BOE. Operating expenses per BOE have remained below our guidance range of $20 to $2.60 per BOE in 2025, although we anticipate OpEx will trend closer to guidance in the latter half of the year as capital expenditures increase. Saturn exited the quarter with $695 million of net debt comprised of USD 569 million principal outstanding on our senior notes and an adjusted working capital surplus of [indiscernible] million, inclusive of approximately $49 million in cash. The leverage ratio now sits at 1.3x net debt to annualized adjusted EBITDA, down from 1.4x at year-end 2024. As John mentioned, we were able to accelerate debt reduction in Q2 with an open market purchase of USD 16.3 million equating to approximately CAD 20 million of our senior notes when they traded down as low as 86 relative to par. The significant equity and bond market volatility caused by tariff uncertainty presented an attractive opportunity to purchase our bonds at a discount. Management also participated purchasing approximately $900,000 of our senior notes, providing another signal of our belief in Saturn's future potential and inherent value. Our Q2 CapEx of approximately [indiscernible] million was at the low end of the quarterly guidance range, reflecting limited activity during spring breakup and driving free funds flow will provide the company with minimal flexibility around future capital allocation decisions. Saturn's liquidity was further enhanced with the renewal of our credit facility in the quarter. With our renewal, we added an uncommitted $100 million accordion feature to our existing $150 million facility, allowing for the expansion up to $250 million in total. As a result, inclusive of cash on hand, we have up to $300 million in total liquidity. Looking out to Q3, we are expecting capital expenditures to range between $80 million and $90 million with average volumes between 37,000 and 38,000 BOE per day. This reflects the minimal capital spend in Q2, along with the delayed start of our Q3 capital program as we prudently elected to monitor market conditions given commodity price volatility. Thanks again to everyone for joining us today, and I'll hand over the operator to commence the Q&A.

[Operator Instructions] The first question comes from Adam Gill with Ventum.

Great job on the quarter. A couple of questions for you. First off, OpEx performance has been pretty solid since closing the Flat Lake, Battrum acquisition in Q2 last year. Is there much more room for reduction? Or are we getting kind of to the optimization of the OpEx structure within the current company?

Well, with more size and scale, we're able to grow, utilize the infrastructure advantage we have in a lot of our core areas. That being said, we're pretty comfortable sticking with our guidance of around $20 a barrel. We've been coming in significantly below that lately. We're pretty confident that we can continue to find efficiencies and trim, but I'm not sure you're going to see as big a step changes as you have. But we're quite comfortable in our ability to meet or deliver in excess of the $20 a barrel that we've guided towards.

Okay. Great. And then just on production, you have been outperforming over the last couple of quarters here. Any thoughts on potential to reduce CapEx and still hit guidance? Or is the preference to keep CapEx where it is and have volumes come in higher than expected?

So we're pretty happy to be flexible in the context of the market. If we see oil appear in the 70s, I think that will be an encouraging sign for us to continue to drill. Somewhere in the 60s or even low 60s, we might alter that a little bit. We do have that cushion, which is great because we have seen such strong performance from our wells. So really, we just want to be reactive to the market. So I think we're just going to continue to monitor it, and we'll add or subtract capital kind of depending on what the market forces are giving us here.

Okay. Great. And last question for me. Through Q2 and Q3, you've been buying back shares, did the SIB and also accelerated debt repayment. How are you weighing the 2 in terms of allocating free cash flow into the back half of the year?

Yes. It's -- basically, we're just trying to balance opportunities in front of us. So when we've seen our bonds dip a little bit on their trading face value, we were able -- then that would like to step in and purchase them again, we did that last block at an average of $0.87 on the dollar, which we really liked. Obviously, then we did the SIP given that we were trading below $2. But even here, we're trading now at $2.60, still well below our NAV, our PDP now almost half. So there's still be value in the stock, still looking if we have excess cash flow to retire as much debt as we can. So balancing all things and seeing what pricing comes in at and seeing what opportunity costs there are in the market. We did that small tuck-in acquisition of that company that we announced. Even that will return over 100% return in the next 12 months. So just trying to balance all the different uses of capital, but definitely monitoring everything from buybacks to debt retirement to tuck-in acquisitions.

The next question comes from Jamie Somerville with ROTH Canada.

If it isn't too commercially sensitive, can you provide some thoughts on the service industry cost trends and the competitive landscape for those services coming out of spring breakup and how you're managing your relationships there? You're stressing your flexibility on spending. So I imagine you're not fully contracted and committed to spending your 2025 budget. But it's always an art in terms of how you manage those relationships. And I'm particularly interested to know if you're seeing any differences between Saskatchewan and Alberta in terms of cost trends.

Yes. I think that's a great question. So what we are seeing is I guess on the first point, we are very flexible, so we don't -- so if we see oil prices collapse within a week or 2, we can completely shut down an entire capital program. We felt that was the right move. We do not have drilling commitments and most of our land does not face expiry. So we have that flexibility that a lot of companies don't have. And again, most of our assets are relatively short turnaround, short life cycles and get them online. Most of our fields again in a few weeks, we can get production online. So it's not like a lot of the deeper basin guys where they have 6 to 9 months pads that they have to drill. But what we are seeing because of some of the softness in oil price, we are seeing prices come in a bit. We went to tender here in the start of the second quarter, we are seeing service companies get more aggressive with their pricing. Now most services on the drilling capital side are relatively fungible between Alberta and Saskatchewan. In Saskatchewan, moreover, when you're seeing more of the operating cost services, you are seeing that are a little less fungible. You're seeing some prices there come in a little better. But in terms of drilling completions, lots of that equipment can move relatively easily between the 2 provinces. That being said, we are seeing prices come in a bit, which helps. And I think that's just a reflection of everyone's kind of pulled back on their capital a bit. And I think everyone is just reacting to the uncertainty in the market. So we are seeing some prices come in, I don't know, [indiscernible] manager, what are we seeing 3% to 4% to 5% reduction?

I think that's well within the realm of possibility there. They're definitely willing to work with us. That's something that we've been very strategic about how we plan and schedule our development is to try and make us an operator that they like to work with because we try to bring in rigs and keep them working pretty full time. So that helps us with some of our leverage in terms of getting decent prices. But yes, we're certainly not expecting an increase from what we would have seen in Q4 and Q1.

The next question comes from [indiscernible] Capital.

Good job on the quarter. Given how well the wells are performing, how much more evidence do you need before you get credit for a better type curve?

Well, I mean, type curves are being adjusted every year. So they're constantly being moved up and down. For example, if you look at our Viking, you noticed that 3 years ago, we were 40% to 50% above type curve. Last year, we were 20% and -- 2 years ago, we were 20%; last year, we were about 5%. That's not that our wells are getting worse, that the type curve just keeps getting adjusted up. The performance is relatively similar across those 3 years. So within the margin, they are always being adjusted up and down kind of given the locations and given the offset peers. Doug, do you have any comment on type curve?

Again, something we got to be mindful of, too. There's nothing certainly in this business in terms of deliverability. We do have a bit of risk built into some of those curves as well, which should play out kind of the average over the course of a longer period of time. So while we do see some good outperformance, we are cognizant of that and are certainly strategizing towards delivering wells that meet or exceed our type curve. But some of that too is making sure that we can be pragmatic about what we promise to the market in terms of the deliverability of these wells. So we are continually looking at that. We do make continual changes to our type curves and look at each drill individually on what our expectations are for that drill, but that's kind of our approach to type curves.

[indiscernible] where you look, there might be sandbag, but that's all right. No, that's one thing we always want to deliver underpromise, overdeliver. But as [indiscernible] , our type curves do adjust up when we do consistently come in over. But that's to say we don't want to overpromise at all. So, so far, we've been a combination of lucky and good. But to date, we're pretty happy with the direction of our type curves creeping up and our consistent ability to come in over those still.

Got it. Your guidance for CapEx for the third quarter, how does it track versus your full year CapEx guidance? I think it was $300 million.

In Q3, it will certainly be -- Q3, right? Q3 will certainly be one of our more intense quarters in terms of activity. We are planning to drill 21 wells over the course of the quarter here. I mean, again, that's strategically important to us. It is also the cheapest time of year to drill wells as you don't have to heat fluids. It's a little easier. People work a little quicker when it's warmer outside. So getting around, it's just generally drier building [indiscernible] Is cheaper. So you'll see us definitely have a pretty strong quarter in terms of our activity. Yes, those 21 wells that we plan to drill over the course of the quarter there would indicate that.

Yes. Our CapEx is always weighted heaviest in Q3. Second in Q4, third in Q1 and almost nothing in Q2 as we've just seen. So the inverse of that is always true with your free cash flow as well. So if you look at Q3 and Q4, those are going to be your lowest free cash flow quarters. Q2 will be your strongest followed by Q1. So that just given the drilling season, given breakup here in Canada and the fields that we drill. So I think a lot of people have to keep in mind. I know in the past, we've got questions, especially after Q3 and Q4 saying, hey, where is all this free cash flow. And now in Q2, they're seeing all of the free cash flow and we don't want people to think that they can annualize that over the year either. So there is a seasonality to this and that our capital and free cash flow [indiscernible].

There's also a piece of the flexibility that we offer with the wells that we target. I think we can be a lot more selective about when we do this to take advantage of that seasonality with the market, whereas you're drilling [indiscernible] big pads, you have to just be steady and continue and you can't stop operations for weather.

Right. But following the logic that you just mentioned, 3Q being the highest CapEx quarter, your guidance is $80 million to $90 million. So if I just extrapolate and it's a rough math, but if I extrapolate that, I think you'll end up less than $300 million.

Between that and Q4, I believe we're on track to land somewhere around that $290 million range. Again, with our guidance number, I think we guided to $305 million, we are seeing some prices come in again, that 3% to 5% better. So we are looking -- we are internally guiding to spend a little less than the original guidance number, again that's given some of the cost savings that we have to be. So right now, I think we're still on track to go that $290 million, $295 million range.

For context, about of CapEx is spent in the first half of the year. The residual will be spent in the second half. So all in, that approximate $300 million, consistent with guidance, no changes.

Got it. And out of the cost outperformance in second quarter, how much of that from a dollar per BOE perspective came from carbon tax -- carbon tax waiver?

Say the carbon tax savings we've seen are on the Saskatchewan side. So far, we haven't seen it come through on the Alberta side. Again, how do you really quantify the savings to our service companies. So in part, there's a bit of a slowdown and a bit less money being drilled. So that obviously causes some of our providers to get a little more aggressive with their pricing that a lot of our costs from carbon tax will be flow-through costs from fuel and other things like that. So it is hard to exactly quantify. I would say we are looking at somewhere in that $15 million to $20 million a year range savings from carbon tax and the balance being from using our size and scale and that infrastructure advantage we have in our core areas. So between those 2 things, we are fairly positive and we'll be able to continue to beat on the operating cost side.

And how much visibility do you have on that? Is that -- is the carbon tax waived forever? Is there a deadline?

Yes. Saskatchewan [indiscernible] Came out and they have eliminated that carbon tax out of the province. Now I'm not sure if that eventually gets reversed, but in the current form and the current guidelines from the government that it is being eliminated in all forms and what we are seeing here should be permanent, barring any other geopolitical changes to the province or the federal government.

The next question comes from Michael Book with Athena Capital Markets.

Just a quick question from my side. How should investors view the company's appetite for acquisitions given the current debt load with $300 million in liquidity and your equity currency up 24% month to date?

Yes. Again, over the last 4 years, we looked at 140 different acquisitions. It really has to be the exact one to fit. It has to be accretive. It has to be able to help us achieve our deleveraging over the next few years. It has to be something that we know that we can increase production and value on all the while, how we've been able to buy all of our acquisitions are the metrics we generally use 2x cash flow, less than PDP on strip. So there's a number of things that we look for before going after an acquisition, which is -- what makes some of these smaller ones very appealing to us. You've seen us do Brazeau Down acquisition last year as well as a couple of smaller ones this year and last year. And I think that is what we're going to be more focused on the smaller tuck-ins that although might not be material in the aggregate, we were increasing drilling locations. We're able to get it in our core areas. So again, it's a constant battle of, are our dollars better off retiring debt? Are we better off to buy shares? Or can we do a small tuck-in acquisition that is accretive at the end of the day. So we are constantly balancing all of those aspects. Why we were kind of so aggressive here in the last quarter or 2 is we did find ourselves with upwards of $100 million of cash not really a productive asset for us. So if we can use that to retire debt, buyback some shares and look for those right tuck-in acquisitions, that would be something we continue to do to balance liquidity and balance the opportunities that we find in the market.

Do you have a bias right now in terms of using more leverage on the acquisition versus your equity capital? Or is it case by case?

Well, we think our shares are highly undervalued. I think a lot of the response that you're seeing in the market on the other side is also because of our rapid deleveraging. So we're pretty happy with both of those things being true. I think the shareholders want to see that leverage continue to come down, which is great. And I also think that until we can get our share price a lot closer or if not in excess of our PDP NAV, which should be around that $5 a share. I think at that point, we'd be a lot more comfortable issuing shares. I think that would more appropriately represent the value that we see. However, in the meantime, you're continuing to pay down debt. But if we do, do an acquisition, does it solve for is our debt materially lower in the next few years than otherwise would be. So these are some of the things we look for before pursuing an acquisition or buybacks or other distributions of cash.

Last question from my side. Are you seeing better deals in certain areas of your 3 core areas?

No. No, we're not actually. In fact, quite the opposite. We've seen some assets. I think we've said this publicly before. We looked at an asset in Southeast Saskatchewan with quite a number of synergies with it. In fact, we looked at -- we submitted a price somewhere in that 2x range, 2.5, and it went for 5. So I think there is some additional dollars creeping in. U.S. private equity seems to be backing a couple of management teams now, which is probably a good thing. More interest, more capital coming back to the space just means our asset base that we currently have is worth that much more. But we are seeing asset prices creeping up in some of our core areas. But again, that's a great thing for the industry, and that's a great thing overall. And again, the assets that we have just become that much more valuable in the marketplace. But yes, we've definitely seen asset prices creep up over the last 12 to 18 months. Yes.

Since there are no more questions, this concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.