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

Good morning, everyone. Thank you for joining the investor call for Saturn's Q2 Financial and Operations Update. My name is Grant MacKenzie. I'm the new Chief Legal Officer of the company, and I'll moderate this webcast. We'll start the presentation with a presentation from management, and following that, we'll address any of your questions or comments. Please feel free to submit questions and comments through the Q&A button. Joining us today from the management team are John Jeffrey, Chief Executive Officer; Scott Sanborn, Chief Financial Officer; Justin Kaufmann, Chief Development Officer; and myself. I will now hand the conference over to John to speak to our results.

Hello and thank you all for joining us live today to report on a historic quarter for Saturn Oil. Q2 was the first full quarter of corporate production and cash flows post that Ridgeback acquisition. That resulted in record highs in terms of production, EBITDA, cash flow and free cash flow. As is typical in Western Canada due to the breakup, the second quarter is the slowest period for drilling and oilfield development. Following the Ridgeback acquisition, Saturn took advantage of this time to focus on the critical tasks of integrating our financial, IT and management systems. However, most importantly, we took this time to integrate all staff into 1 effective team under that Saturn banner. As expected, this was no small task to accomplish, but we are delighted to report to our stakeholders that these tasks are now largely completed. And now with integration behind us and the rally in oil price, we shift our focus to the continued development of our deep inventory in the combined Ridgeback and Saturn drilling locations. We currently have 2 drill rigs drilling full time, 1 in Alberta and 1 in Saskatchewan, and we expect to continue that for the remainder of the year. In an effort to take advantage of the rallying commodity price, we are planning to fire up a third rig in the Oxbow field. We've had excellent drilling results to date, both in Q1 and early results on our Q2 program, which Justin will outline coming up. Another important objective of the Ridgeback acquisition was to achieve meaningful synergies, which we are currently estimating to reach about $10 million per year in reduced operating and administrative costs. Our goal is to continuously review costs to see where further savings can be made. Operating and transport cost per BOE in the second quarter were 18% lower year-over-year, and we hope that trend continues looking out to next year. As fantastic as Q2 was for Saturn, we were held back by the tragic wildfires that affected Central and Northern Alberta. We are thankful to report that our employees' homes and communities are currently out of danger, and Saturn has resumed 100% of the production outages that were incurred. And we've had no significant damage to our production facilities. Unfortunately, the wildfires continue throughout many parts of Western Canada. However, they are now far from Saturn's operations. We hope and pray for the safety of those communities still affected. We estimate that the production impacts from wildfires amounted to about 2,300 BOE per day of lost production in the quarter. It's a small concession that a disproportionate amount of the shut-in production we experienced was natural gas, which receives a much lower price than our light oil or even our NGL produced. So it was a limited impact to our cash flows in the quarter. I'll now hand the webcast over to Justin Kaufmann, our Chief Development Officer, for an overview of Q2 drilling and our plans for the rest of the year. Justin?

Thanks, John. Q2 was a light period for oilfield activity with the associated seasonal breakups and road bans. Saturn drilled a net 3.4 wells in the quarter, including 2 operated Spearfish wells on our Oxbow asset in Southeast Saskatchewan. This was an extremely exciting program as we drilled our first-ever wells in the Spearfish formation. This reservoir contains approximately 40 booked locations and the potential for secondary recovery. We are very encouraged by the initial production results of the Spearfish wells and have currently now drilled and brought on to production 6 of these wells with 100% success rate. We look forward to reporting a 30 days average production of these wells when the data is available. It should be great news. We are well underway in which should be Saturn's largest annual capital expenditure budget in our corporate history. In Alberta, we are drilling extended reach horizontal wells in our Lochend property, targeting Cardium light oil. We recently completed a 1.5-mile well in this reservoir and are currently on the second well of this program, which is a 3-mile well. This will be the longest well in the company's history, with the potential to bring on above-average type curve production due to the virgin reservoir it is accessing. These locations were some of the top prospects from the Ridgeback inventory of light oil targets. For the remainder of the year, we will continue to drill Cardium prospects in Central Alberta, including a third Lochend Cardium well, 4 Kaybob Montney wells and 2 West Pembina Cardium wells. That will keep 1 rig efficiently busy in Alberta, with initial field estimates also have our program on this rig coming in under budget so far. Saturn also expects to keep the rig busy through 2023 in Southeastern Saskatchewan, focused on Mississippian aged light oil targets as well as drilling a number of Bakken locations. A new drilling technique has found great initial success in the Bakken with open-hole multilateral wells. In these wells a single vertical well produces from 6 to 8 horizontal legs, drilled conventionally and unstimulated. Offsetting producers to our Bakken have already had great success with this drill pattern, which was initially made popular from development in the Clearwater play. Open-hole multilateral wells have the potential to increase estimated ultimate recoveries of light oil and enhancing development economics of the Bakken. If successful, on the extensive undeveloped land Saturn holds in the Bakken play, there could be well over 100 new locations for future development that are currently not booked. Saturn has extensive infrastructure in this area and an operated gas plant. So we eagerly await getting this program underway this fall. I will now pass the webcast over to Scott for a financial overview of the quarter.

Thanks, Justin. Very excited to get this quarter out. It highlights the multiple company records we had this period, including production volumes, commodity sales, EBITDA, cash flow and debt repayment despite the impact of the Alberta wildfires, which I'll touch on later. In addition, it shows a full quarter of operational results following our Ridgeback acquisition, which we closed on February 28, and a graduation to the Toronto Stock Exchange. Saturn's second quarter production set a record, averaging 26,000 BOE per day, up from approximately 18,000 BOE per day in the first quarter. Increased production volumes coupled with average WTI prices of USD 73.75 per barrel led to record petroleum natural gas sales of $176 million. On the cash flow front, the company realized record EBITDA of $93 million, record adjusted funds flow of $67 million or $0.48 per share, and spent $13.8 million in development capital, drilling 7 gross or 3.4 net wells to realize record free cash flow of $53 million, of which $51 million was used towards debt repayment. Specifically, the company made $50.7 million in principal repayments on our senior term loan, exiting the quarter with net debt of $510 million, resulting in net debt-to-annualized quarterly adjusted funds flow of 1.9x which the company expects to decrease as payments are continued into the third and fourth quarter. Moving to liquidity. As I mentioned last quarter, the company was successful in obtaining a $30 million unsecured demand letter of credit facility with a syndicate of Canadian banks. This quarter, we converted our $21 million cash deposit with Saskatchewan Ministry of Energy & Resources into a demand letter of credit supported by this facility, thereby releasing the cash back to Saturn and increasing our liquidity without increasing our debt balance. Corporately, this quarter the company successfully graduated to the Toronto Stock Exchange up from the Venture, thereby providing greater access to institutional capital and displaying its maturing status in the intermediate E&P space. Forward-looking, it provides optionality such as additional analyst coverage and eligibility to be included in certain index funds, which we believe will drive the share price. Related to the capital structure of the company, we reduced the perceived overhang in our stock with the expiry of certain listed warrants together with additional listed warrants expiring post quarter on July 7 for a total reduction to dilutive instruments of approximately 30.5 million shares or roughly 16% of pre-expiry fully diluted instruments outstanding. The impact of the provincial wildfires had a severe impact on many of our employees and local residents in the surrounding communities. Saturn thanks our employees affected for their diligent work on the ground despite these challenges. The estimated curtailed production caused by the fires was approximately 2,300 BOE per day in the quarter or approximately 500 BOE to 600 BOE per day on an annualized basis. We do carry full business interruption insurance for instances like this and are diligently working with the underwriters on next steps to recoup any losses. At this time, Saturn has resumed full operations and ascertained that all owned infrastructure to have little or no associated damage. With that, I'll turn it over to Grant with any questions on the quarter.

Thanks, Scott, John and Justin. We have a few questions here. The first one, maybe just because, Scott, you're freshest, we'll hand to you. What's the current corporate liability rating? And do you expect the need for that LC to change at all?

Yes. Thanks for the question, Grant. Currently, post acquisition, we have about a 4.0 LMR/LLR split between 2 provinces. And as I mentioned, we did convert that cash deposit to an LC. So we are currently working with a problem in Saskatchewan for a possible refund on that, which we have met the requirements to do so. So we expect that to come through prior to year-end. The LC will be canceled, and that will free up additional room on the eligibility and availability on our credit facility.

Can you also comment on current debt balance?

Sure. Yes. By the end of the month, by the end of August, we will have approximately $500 million, $507 million to be specific, bringing our total year-to-date debt repayments to approximately $115 million.

Maybe over to Justin on some ops. What's the timing, Justin, related to operating on the Spearfish wells you mentioned and any production updates, please?

Yes. We started drilling the Spearfish wells around mid-June. So we completed the -- successfully completed the first 6 wells, completed drilling near the end of July. Production started to be brought online starting mid-July and the last wells first week of August. So we should have those IP30 rates by beginning of September. And yes, that's it. Yes. So beginning of September, IP30 rates.

Perfect. Now how is this drill program stacking up to your prior year's programs that you've been undertaking?

Well, 2022 was a very successful year. As people remember, we drilled those 32 Viking wells that came on about close to 40% above type curve. But these wells are exceeding those production rates on a peak production average. So while we don't have IP30 yet, we can see what those current production on a daily basis is. So we're going to be really excited to announce those results. So best 6 group wells drilled as a company so far.

Thanks, Justin. One more, just a question from the floor with respect to current production. Do you have an update, I guess, what current production is?

Current production is around 26,500 barrels.

There's a couple of questions respecting guidance and specifically with impact of the wildfires and kind of pricing we saw in the first half of the year. John, would you have any comments on any revisions to guidance or any discussion on guidance?

Yes, absolutely. So again, that's a good point. Due to the wildfires, we did see -- plus a lower oil price in that first half of the year -- it has caused us to delay the capital. So now that we've pushed it back a little bit into the back half of the year, we are working on revising guidance. We hope to have that out shortly, within the next few weeks. But that's why we're starting to pick up. So we started later in the season than we had hoped, but that's why you're seeing us pick up that third rig in Oxbow, to try and catch up on some of those drilling programs. That is going to lower the overall average for the year, and we will look to get capital updated guidance out, again, hopefully, in the next few weeks.

And John, can you confirm if there's any ongoing effects from the wildfires?

So no ongoing effects as far as we're concerned, all of our infrastructure and tied-in partners are now unaffected, and we continue to operate as usual out there.

Thank you. Scott, one more question. There's just -- any anticipated end-of-year net debt levels? Do we have an idea of where those will sit?

Yes. As John mentioned, we're currently looking in the amended capital, timing of everything. So that will be released in the upcoming weeks along with updated guidance.

Excellent. Yes. I think that's everything that I see. Barring anything further, I would thank everyone on the panel for attending. And -- oh, so there's one more question, just with respect to the integration of Ridgeback and the impact that will have on our quarterly G&A. Scott, would you have any commentary on that?

Yes -- I saw the question come through, Grant -- this quarter it is a little bit higher, and that does have certain transition costs on it. So the question is, will it be this high every quarter? No, it will not. This has $1 million or $2 million in there related to that. So on a total basis, we expect it to be in that $20 million range. So this quarter's a little bit higher, but it will come down in the upcoming quarters.

I believe that's everything we see on the questions from the attendees. So again, I thank the panelists for joining and I believe that's everything for this Q2 update. Thank you, everyone, for your participation.

Thanks for joining. Thank you, Grant.

Thanks, everybody.

Thank you.