Saturn Oil & Gas Inc. (SOIL) Earnings Call Transcript & Summary

All right. I think we can get started now. Thank you for joining us. Saturn Oil & Gas' Third Quarter -- Fourth Quarter 2022 Shareholder Webcast for the Financial and Operation Results. I'm John Jeffrey, CEO. And with me is Scott Sanborn, our CFO; and Justin Kaufmann, our Chief Development Officer. We'll present an updated presentation and then afterwards, we'll be happy to answer your questions and take your comments. First, I want to thank our shareholders and supporters for joining us today to discuss Saturn's 2022 year-end financial and operational results. As a subsequent event to year-end, we will touch on the Ridgeback acquisition we closed at the end of last month. We welcome your questions. So feel free to post them during the presentation, and we hope to get to them all at the end. 2022 was a very active year for Saturn. On the drilling side, the company completed 57 horizontal wells with 100% success rate. Now to put that in context, that is more wells than Saturn has drilled in its history. The program was led by Justin Kaufmann, our Chief Development Officer, and he will get into more details about it shortly. Saturn also remained active on securing accretive acquisitions. Last year, we closed on 2 attractive asset purchases, both in the Viking formation in West Central Saskatchewan. These acquisitions made for a sharp increase in our light oil production, but they both also came with an impressive development location. Much of the drilling we undertook in the back half of 2022, was performed, the vast acreage acquired in these acquisitions. I'm very pleased to highlight Saturn reached record production levels in Q4 of 2022 of over 12,500 BOE a day. This matches or slightly exceeds guidance we set out in May of 2022 and is an achievement that we relied heavily upon -- and is an achievement that we relied heavily upon the success of our technical team's active drilling program. The record Q4 production last year represents a 72% year-over-year increase from the average production in Q4 of 2021. Scott Sanborn, Saturn's CFO will go over all the great details of last year's financial performance. But I will just key on 1 -- I'll highlight one key metric right now. In Q4 of last year, we posted adjusted funds flow of $0.85 per basic share. This represents over a double from $0.39 in Q4 the year before, a strong indication that we're increasing the Saturn value that we aim to achieve year-over-year. As exciting as 2022 was, we expect 2023 to be even more exciting. We kicked off 2023 with the January announcement of the action of the private oil and gas company, Ridgeback Resources. We closed the deal on February 28 and effectively increased Saturn's production by 140%. This is a real game changer for Saturn and established us as a mid-cap producer. The Ridgeback acquisition checked every box for what we were looking for in an acquisition. It was light-oil focused, high netback production, high working interest and operatorship, deep inventory of derisked drilling inventory that will allow Saturn to keep production flat for well over a decade. And almost as importantly, meaningfully impactful synergies, specifically in our Southeast assets with overlapping production that will help us lower our cost per BOE. The Ridgeback acquisition was a natural fit with our core development in Southeast Saskatchewan, increasing that business unit's production by over 70%. There's also ideal opportunity for us to add a third core development area with expansion to Alberta, largely in the Cardium asset base. And most importantly, these assets were acquired -- a more important thing than that, the assets -- the physical assets we required was the technical team that came across with it. And we welcomed all those people into the Saturn family. Going forward, Saturn has tremendously talented technical and business team of professionals, terrific asset base with extensive running room for long-term development that establishes a substantial free cash flow generation platform. 2020 year was -- 2022 was a banner year, but I'm even more excited about 2023. I'll now turn it over to Justin Kaufmann for an overview of the 2022 operations. Justin?

Thanks, John. 2022 was a real test of our technical team as we took on an ambitious 57 well drilling program. We are ecstatic of achieving 100% success rate. But I will point out to our shareholders, this is a function of the low-risk profile of the development projects that we undertake as a company. We are very pleased with the results of the drilling program, especially in terms of the average initial production rate of our new wells. We typically guide to about 70 barrels a day on these types of wells, for the first 30 days of peak production. Our new horizontal wells at 2022 averaged 84 barrels per day. This amounts to about a 20% increase of our original guided production target. We focused much of the recent drilling on derisked areas, and we have been following up on our prior successes, as such, some of our best results have come from the most recently drilled wells. In Q4 of 2022, Saturn drilled 16 horizontal wells, 9 Viking and 7 Mississippian. Through most of the year, Saturn had around 2 rigs continuously, 1 in Oxbow Saskatchewan and 1 of the Viking assets in West Central Saskatchewan. Having the critical mass to continuously running drill program allows us to have operating efficiencies and this was a factor in the success of the 2022 drill program. This has been a benefit of Saturn's recent growth to be able to run a robust and efficient drill program. In Southeast Sask, we drilled 25 horizontal wells of which are now online as producers. 5 of these were redrills that had little to no production. In these 5 wells, our technical team identified prospective reservoirs that were missed in the initial drilling. We were 5 for 5 in turning these old wells into new producers, which we are extremely excited about. The advantage of these redrills is by using an existing wellbore. The overall drilling cost reduced by about 50%. And -- but the production comes online at about 75% of the new wells. So there's definitely a positive wedge to be gained there. We estimate that Saturn has over regional candidates, and will be active in 2023 to continue to develop these types of wells. The Viking program was particularly successful in 2022. We drilled 32 wells with an average initial production rates over 30% above guidance levels. As we continue to outperform in the Viking asset, we directed increased capital towards this area in 2022. Of the 32 wells, 27 of them were picked up from the Viking acquisition in July. So the acquisition is already paying off on the development side. Saturn did step out in the Southeast in Plato in the Viking after interpreting the local seismic, we drilled 2 wells. Both of these wells came out with production over 100 barrels a day. In the near term, this pool extension opens up 25 to 50 drilling locations on 6 contingent sections, which previously had zero reserves attributed to it. Two weeks ago, Saturn released the results of 2022 year-end reserve evaluation. The total proved and probable reserves amounted to 63 million barrels of oil equivalent, with 95% of that made up of oil and natural gas liquids. This is up 24% year-over-year. In relation to Saturn's Q4 2022 production, our book reserves imply a 14-year reserve life index. So as you can see, a very deep inventory of sustainable production. Our successful drilling program and attractive acquisition metrics were also reflected and Saturn is finding a development and acquisition costs. Our 2-year average SG&A cost per total proven plus probable reserves are approximately $13 per BOE. This is a very attractive cost for new reserves in context to the average operating netback Saturn has enjoyed over the last 2 years, at approximately $60 per BOE after royalties and operating costs status. This implies a recycle ratio of over 4.5x, indicating very economic conditions of new reserves. The NPV of the future net reserves of the PDP, using a 10% discount was $791 million, implying a PDP net asset value per basic Saturn share of $6.92, including the future development of total of proven plus probable reserves, sorry, amounts to a basic share 2P asset value of $12.88. Two weeks, we also announced the 2022 year-end reserves of the Ridgeback Resources acquisition, which had a PDP of $883 million, a discounted at 10%, which more than doubles the NPV value of Saturn on a pro forma basis. The Ridgeback acquisition is also with over 500 drilling locations, with the addition of these locations and our current unbooked locations, we have over 1,700 new drills, which is extremely exciting because that provides us with over 20 years of sustainable light oil assets to continue to dwell. In Q1, Saturn drilled 13 net horizontal wells in its Oxbow and Viking assets. And again, we achieved 100% success rates. We have IP30s from 2 of these wells. They are the 1121 and 922 Frobisher wells in Southeast Sask and came online at 150 barrels a day, which is pretty exciting as this approximately doubles the expected IP30 rates. As further production data comes available, we will have an operations update for shareholders. After breakup, we look forward to getting back to field and expect to have up to 4 active drilling rigs. I will now hand it over to Scott to talk about our financial details of the fourth quarter and year-end 2022.

Thanks, Justin. Yes, Q4 2022 was a record quarter on a number of fronts. Record quarterly average production at approximately 12,500 BOE per day, an increase of 72% year-over-year. Revenue at $112 million, up 108% year-over-year and adjusted funds flow of $50.7 million, an increase of over 400% from the same period in 2021. These are all new record highs for Saturn as we have been growing production in this period of high oil prices. More importantly, Saturn is setting new records on a per share basis. As John mentioned previously, in Q4, Saturn reached -- in Q4 '22 Saturn reached $0.85 in adjusted funds fall up from $0.69 in the third quarter of 2022, an increase year-over-year of 118% from $0.39 in Q4 '21. Saturn's financial performance was bolstered by increased oil prices in 2022 with WTI per barrel averaging USD 94 or USD 68 in 2021, and the strength of the U.S. dollar has helped not just Saturn, but all Canadian oil producers. Another important driver of the increased cash flow have been improving our overall netback profile. Average royalties decreased to 12.8% in 2022 compared to 15.4% in '21. Average net operating costs decreased 9% to $24.67 per BOE in '22 compared to $27.22 BOE in '21. Average realized loss on derivatives decreased 42% in Q4 over Q4. As a result, operating netback, net of derivatives, increased 70% from $43.82 per BOE compared to $25.71 per BOE in '21. Saturn exited the fourth quarter with approximately $220 million net debt, realizing a net debt to quarterly annualized adjusted funds flow of 1.1x and repaid over $60 million throughout 2022. As John mentioned, we'll be looking to moderate production growth in the near term and maximize free cash flow for -- rather debt repayment. This concludes the formal part of the investor webcast, and we will now move on to the question period. It looks like there are a few Q&As queued up. So we will go through those and management will be happy to answer those for you.

Thank you very much, Scott. Any questions we're putting out?

We do. So first one, Saturn has operated exclusively in Saskatchewan to date, does the company have the technical expertise to expand its operations into Alberta?

Yes. Saskatchewan has been a fantastic place for us to start and grow. We were able to successfully grow at over 10,000 barrels a day. I think just that for the company to go to the next level, we needed to move a little deeper in the basin. And in order for us to do that, that's one of the things that made this Ridgeback acquisition so appealing, is that they had a very strong technical team that complemented ours very, very well. So I think those 2 teams together, we are more than capable to excel in all of the basins which we currently operate. The biggest 3 is Southeast Saskatchewan, the Viking and West Central Saskatchewan, now the Cardium in Central Alberta. So we've been evaluating opportunities in Alberta for about 1.5 years now, and the suite of light oil assets that Ridgeback offered in conjunction with the team that we're able to get to come across with it. That's really made that stand out for us. So that's one of the things we're very excited about, and I'm definitely confident in our team's ability to continue to outperform expectations.

Yes, John, maybe I can add, while we did review and map the different areas of Alberta and the Cardium, it has been very impressive to see the technical team out of the previous Ridgeback, what they've been able to bring to the table. You got to remember that in the previous 30 wells that Ridgeback did drill, they exceeded tight curve. So a really strong technical team, and we have essentially integrated them with Saturn team, and we are excited for the second half of this year to start drilling up those in locations.

Yes. And that's a great point. Thanks, Justin.

Thanks for that. Second question, Saturn has increased its debt levels with the recent Ridgeback acquisition. How many years does this push out a target date to be debt-free? I'll take that one. Part of our strategy is to buy low-priced assets with the free cash flow that the company has with additional equity financings and additional abilities on a corporate level. When you combine an asset, in this case, for less than 2x run rate cash flow, the asset can pay back it's period in a very short amount of time. So while Saturn did increase its debt levels in the Ridgeback acquisition, we have extended our time to be 0 net debt by about 1 year. So right now, the current facility will be net debt free by close to Q4 2025 with the actual principal payments due well into Q1 2026. Third question has come through. Did Ridgeback sell because they had no development opportunities left?

That is absolutely not the case. Ridgeback was previously owned by 2 private equity groups, who had a long investment that they had essentially over the last 7 years. This is the first time since they've owned the asset where oil has been consistently above $60, $65 that is. So they took this opportunity to take some money off the table. But one of the most attractive aspects, we like it with the Ridgeback asset, was all the upside that came with it. There is 10 to 15 years of booked locations, not even including some of the unbooked locations. So fair to say that Ridgeback has a lot of meat left on the bone. I can add -- we see over 300 locations just in the Cardium, which will now be a third core area for Saturn, along with the Viking and Southeast Sask. It's an extremely good fit. We look at it comparable to how we developed our Viking flight. So we believe that we will be very successful at the produces in that play. Also, there's the light oil Bakken in Southeast Saskatchewan, offsetting our Mississippian assets and they're drilling those wells with a new technique, drilling 6 to 8 leg multi-well -- sorry, multi-conventional horizontal wells, where previously the Bakken wells were stimulated with frac. Now they're open hole completing them, similar to how they completed the Clearwater, and offsetting producers have had production rates up to over 225 barrels a day, which is twice of what you'd see on a frac Bakken. So this is extremely exciting. We have a big land base there. It's all on -- most of it is on fee land. So there's very low royalties and there is potential for an initial 5 years of drilling inventory of a few thousand barrels a day. So we're really excited to drill 3 wells on that asset in 2023 and potentially grow it to more in future.

Yes. And I think the big thing here is the reserve report speaks for itself, and it's very much in line with the strategy we've seen. Again, the 2 Viking acquisitions we did last year, lots of drilling was done there in the last half of last year. Those results, again, came on almost double of what guidance was. So in picking up low-risk assets with lots of meat left on the bone, 10-plus years drilling inventory. That's always been our strategy. And that's definitely what we you have seen us execute again here today with the Ridgeback one so. So very excited about the upside that we see there. The same as we've seen, again, in the Viking and the original Oxbow deal we did back in June of 2021 as well. So pretty consistently steady in the acquisitions we look for, and the running room that we identify, when we're looking at acquisitions. So I appreciate that feedback, JK, and what else you have for us, Scott?

A question come through Patrick. How are you thinking about capital allocation between M&A and drilling?

Yes. I think for now, where you're going to see us focus on is debt repayment. And because the way that our debt is structured where there's 50% amort in the first year. Most of our -- in fact all of our free cash flow is going to go towards debt repayment and maintenance capital. So our plan is to really stay flat for the next 12 months by retiring and then using that excess free cash flow to retire about 50% of our debt in the next 12 to 14 months. So that's where you're going to see most of our attention going towards now. If we were able to pick up a few small packages of land that's offsetting us, but I don't think any of our cash flow from operations is going to go towards any acquisitions, at least not in the near term.

Thanks, John. And it's something you'd like to touch on as well, comment here. Clarify adjusted fund flow per share for '22 was higher than ending 2022 share price. Talk about the valuation a little bit.

Yes. No, really proud of the cash flow generated, especially on a per share basis. And I think, again, it's -- we struggle to keep using the word transformational around here. But we've had a few really good acquisitions that keeps kind of remaking what Saturn is. So when you look at Q3 of last year, for example, $0.70 per share, adjusted funds flow, then jumping up to $0.85, we expect to be even higher looking into Q1 and Q2 of this year with this latest acquisition. So for us, it's difficult to make the market react. All we can do is attribute more value per share. And I think that's what you're seeing us continue to do here is increase the cash flow per share, and we're hoping that, hopefully, at this level and at this scale, you start to see a bit of momentum pick up and you realize, yes, we shouldn't be trading at less than our annualized adjusted funds flow per share. So we're hoping that all these movements, again, becoming more of a mid-cap producer, continually putting up a successful quarter, beating our guidance and expectations. If we can get a little luck with the continued rally of oil here, and then some more investment. Looking back into this section, I think more and more investors and stakeholders are going to realize the gem that is Saturn and the value that we've created and hopefully, we can see a substantial rally of our share price into '23.

That's great. Thanks, John.

Looks like that's it for questions. So if there's nothing else that will be the conclusion of our Fourth Quarter Investor Webcast. Thank you, everybody, for your time, and we will see you next year.

Thank you.

Thank you.