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

Hello, and thank you all for joining the investor call for Saturn Oil's Q3 Financial and Operational Update. My name is Kevin Smith, Vice President, Corporate Development, and I'll be your moderator for this webcast. We'll start with a brief presentation from management and following that, we'll address any of your questions or comments. [Operator Instructions] Joining us today is John Jeffrey, Chief Executive Officer; Scott Sanborn, Chief Financial Officer; Justin Kaufmann, Chief Development Officer; and Grant MacKenzie, our Chief Legal Officer. I'll now hand the webcast over to our CEO, John Jeffrey. [ technical difficulty ]

Can you hear me now, Kevin?

Yes, there you are, John. We can hear you.

Excellent. Hey, sorry about that. Suffering some technical issues this morning. Well hello, and thank you for joining us today. Saturn achieved a milestone in Q3, realizing for the first time ever, $100 million of adjusted EBITDA in the quarter. It's a goal we've had our eye on for a while and with a real team effort, it's an accomplishment we are all very proud of. Supporting this achievement, Saturn posted record production levels in the third quarter at just over 26,260 barrels or BOE a day, which is right in line, actually a little ahead of where we were hoping to be at that time in the year. Our financial results were aided by improved global oil prices with benchmark WTI oil price averaging just over $82 a barrel, up from $73.75 in the previous quarter. And the U.S. dollar has remained strong. So Saturn, in fact, all of Canadian producers are enjoying stronger sales price at the wellhead. So Saturn received just over CAD 105 per barrel of oil sold in the third quarter. Canadian natural gas prices remained weak. Saturn received in Q3 just about $17 a barrel of oil equivalent for its natural gas sales. This is where strong -- this is where Saturn's strong oil weighting to a higher margin definitely helps out. Saturn being over 82% liquids has one of the highest liquid weightings of all the conventional oil and gas producers. And because of that, we have one of the highest netbacks of all of our peers as well. Also supporting high Q3 netbacks with Saturn achieving our lowest operating and transport cost per BOE in the last 2 years. Post consolidation after the acquisition of Ridgeback Resources, our operations team has done a terrific job in lowering our cost structure and enhancing Saturn's profitability. We're committed to making further field efficiencies so I believe there will be even more cost cutting in the coming quarters. In summary, the third quarter was an excellent example of the robust and sustainable cash flow generation that Saturn is capable of with our assets and within our current pricing environment. And sustaining our production levels has been helped with a successful drilling program. In Q3, we realized fantastic results of the new Spearfish drilling program with that just being part of a larger campaign that Justin Kaufmann will get into next. Our drilling and completion budget in Q3 of $26 million was more than that of the entire first half of the year. As oil prices have been trending upward recently, Saturn is ramping up development activities for the second half of Q3. Q4 is shaping up to be one of our most active quarters ever for drilling. Despite the increased capital spend in Q3, over 50% of our cash flow was directed towards debt repayment, which Scott will elaborate on -- covering up when he gets into the details of the balance sheet. But now I'll turn it over to Justin Kauffmann, our Chief Development Officer, with more details of our field operations. Justin?

Thank you, John. As John mentioned, Q3 was a busy period for Saturn where we drilled 18 gross wells with drilling activity in each of Saturn's core areas. Southeast Saskatchewan was the most active business unit, where we drilled 12 wells. In the third quarter, we completed the final 4 wells of a 6-well Spearfish program initiated in Q2. Half of the Spearfish wells were drilled using dual horizontal laterals and were amongst the best producers of the group. The outperformance of the Spearfish drilling program has generated some of the strongest capital efficiencies we've seen across our asset base to date. This is a new formation for Saturn's development and its success opens the way for future drilling and reaffirm the multi-zone development opportunity in Southeast Saskatchewan. Saturn went on to drill 3 Frobisher wells, which were highlighted by the 14-18 Wilmar well that had initial daily production averaging over 150 barrels a day in the first 30 days. This is essentially twice what we type curve for that well, which was an outstanding result. The 14-18 well was also a dual leg horizontal. With keeping the capital cost down, we expect this, again, to be one of the most capital efficient wells we drilled this year. And due to its success, we plan on completing a 3D seismic program on this section before the end of the year, which could delineate another 6 to 7 wells. The Southeast Saskatchewan rig finished the third quarter by drilling 5 Bakken horizontal wells in the Viewfield area. Again, these were Saturn's first-ever Bakken wells drilled. They were completed as monobores to help improve the capital efficiency. This technique is used instead of landing intermediate casing at the heel, which saves on rig time and casing costs. The initial production testing looks great, and we are confident that the wells will exceed our type curve expectations. Again, this gives the company great confidence in future development of this field where we currently hold over 250 book locations. We look forward to reporting all the production results for the new book Frobisher and Bakken wells we have on the IP30 data in the coming weeks so shareholders should expect that in late November. The third quarter also marks Saturn's first-ever Alberta drilling campaign across the assets acquired in the Ridgeback purchase. Saturn drilled 3 operated Cardium wells in the Lochend area of Central Alberta. These wells were also completed successfully and were recently brought onto production. As many of you are aware, producers are pushing their well development to longer lengths to reduce service costs and increase capital efficiencies. There has been over 5,000 horizontal wells drilled in the Cardium and our 12-2 well that we just recently drilled was the fourth longest ever with a measured depth of 6,818 meters. So hats off to our drilling and completions team on that feat. The Alberta rig then finished the quarter drilling the first of a 4-well pad targeting light oil in the Kaybob area of Northern Alberta, targeting the Montney formation. At this time, drilling completions is now finished, and we expect the 4-well pad to come online in the next 2 weeks. In summary, Q3 was a busy period, but definitely one of the most encouraging quarters of development we've ever experienced with reference to setting up future year success. Saturn has become even more active here in the fourth quarter, including contracting a third rig that is now drilling additional light oil Viking targets in West Central Saskatchewan. This is the first time Saturn has ever had 3 drilling rigs in the field, and we are excited for the increased pace of development. In Southeast Saskatchewan, we are now focused on drilling Bakken light oil wells in the Viewfield area through to year-end. Two of these Bakken wells are planned as open-hole multilateral wells. For these unstimulated multilaterals, we intend to drill up to 8 legs in each well in an effort to significantly increase the well's recovery of light oil in place. We are following the lead of industry competitors that recently had some great success in this field with this new drilling technique in the Viewfield area. This program is important for Saturn because if successful, the new drilling pattern has the potential to lock over 100 new locations of future development. While the late year activity for the 3 drilling rigs will not have a meaningful impact to our 2023 annual results, we expect the increased activity to contribute to meeting our December target of 27,000 barrels a day and setting a solid foundation for the start of 2024. I will now pass the webcast over to Scott Sanborn, our Chief Financial Officer, for a financial overview of the quarter.

Thanks, Justin. This quarter was the most successful in Saturn's history from a cash flow perspective. It highlights successful drilling program in the first half of the year, our production resumption following the impact of the Alberta wildfires in the second quarter, strong oil prices and favorable foreign exchange rates positively impacting our U.S.-based realized price per barrel. In addition, it outlays the many company records we had in this period, including production volumes, commodity sales, EBITDA and cash flow. Saturn's record production for the third quarter exceeded 26,000 BOE per day, up from just under 26,000 in the second quarter. Increased production volumes, coupled with average WTI prices exceeding $82 per barrel, up from $74 per barrel led to record petroleum natural gas sales of $201 million, resulting in pre-hedge net operating income of $124 million or $51.38 per BOE, positively displaying our reduced operating and transport costs of $21.47 per BOE, down from $23.73 in the second quarter. The company realized record EBITDA, over $100 million, up from $93 million in the second quarter; record adjusted funds flow of $76 million or $0.55 per share, up from $67 million or $0.48 per share in Q2; spent $35 million in development capital to realize record free cash flow of $41 million. In the quarter, Saturn repaid $51 million in debt at December 30, with net debt to cash flow of 1.5x on an annualized basis, down from 1.9x in Q2. During the quarter, Saturn has positive capital -- working capital surplus of $28 million with cash on hand exceeding $42 million. Total development capital expenditures totaled $35 million in the quarter with the company drilling 18 or 15.3 net wells, 12 in Southeast Sask, as Justin mentioned, 2 in West Central, 3 in Central Alberta and 1 in North America. Total capital was comprised of $26 million in the quarter in drilling and completions, $6 million in facilities with the balance in land and acquisition cost and capital SG&A. With that, I'll turn it over to any questions.

Great. Yes, there's a few questions lining up here in the Q&A. And so I will launch into the first one here. Is your current debt payment schedule supported by 2024 strip pricing? And do you have the flexibility with CapEx reduction or less aggressive repayment terms?

Yes. So I think it really depends on what the oil market is looking like at the time. So definitely, with the current strip pricing, we can satisfy 100% of our debt obligations for the next 3 years. In fact, in any pricing scenario with the robust hedge book that we carry, we can satisfy 100% of our debt repayment. So by doing so, what we've aimed to do there is really take commodity risk off the table. And basically, and then our reaction to the sales price of what we're seeing for WTI is that will dictate how much money that goes against -- goes towards our capital program. So whereas most companies, they kind of commit capital to the drilling program first and the balance goes towards debt, our prioritization is balance sheet management. So at first we send it towards our debt repayment and then the excess cash flow goes towards sustaining capital projects. So that's how we have it laid out, and that's what we do with our cash flow generated from operations.

There's a second part to this question relating to including that information in our corporate presentation. We will be putting out guidance for 2024, we expect by the end of the year. That's likely in the December time frame. And at that point in time, we can get in a little more details about our expected financials for 2024. But currently, we don't have guidance yet for 2024 published. The next question is, can you talk about the higher prices you receive for condensate in light oils? And what percent of the business is represented by this?

Yes, I can jump in here. I think Justin can probably add some context following this. But since there were 83% light oil or since we're 83% liquids, I believe we're about 80% -- 78% to 80% light oil, is that -- Justin, do you have the exact split of what we're at?

Yes, that's close. So about 10% of our production, our BOE is gas, about 10% of other liquids and then close to 75% to 80% of that oil blend.

There's a question here. How many BOEs per day did Saturn produce at the end of September, and what is our current production?

Yes. So I will say we are on track to meet our guidance numbers for the quarter. I'm not sure that we can give mid-quarter update at this time, but I will say that we're confident in our ability to meet or exceed our guidance numbers that we put out a few months back.

Okay. Next question is, have insiders been buying Saturn shares.

Actually, Kevin, I think you have the answer to that in front of you.

Yes, yes, absolutely. So Saturn executives have been updating their SEDI disclosures on insider transaction of our shares. I know that John, our CEO; and Grant when he joined us as Chief Legal Officer, were buying shares this summer. We've also noticed that our largest shareholder, GMT Capital out of Atlanta, has acquired additional 2 million shares in September. They now own 26.4% of Saturn's equity. The next question is, has there been an increase in drilling costs, and how close is Saturn to its budget for annual CapEx?

We haven't really seen much true inflation from the start of the year. But that -- all of that is due to the scale of our program since we're running one straight rig in Alberta, one straight rig in Saskatchewan. There's obviously efficiencies to running a program like that. We did have a guidance of $130 million CapEx a few months ago. And we're definitely on pace to fall below that. And a lot of that is led by some cost cutting by Jamie Kuntz and our operations team. So we've seen a reduction on the facility capital that we previously thought we were going to inject this year. So expect us to be below budget as far as capital costs on this year's guidance.

Next question. Do you expect a further increase in royalty payments in Q4?

I can take that one, Kevin. No, we do not. You probably are meaning the increased royalty payments from the second quarter to the third quarter. The second quarter had the benefit of a royalty credit related to purchase price adjustment on the Ridgeback acquisition. So on a go-forward basis, we forecast in that 11% to 13% range.

Okay. Is Saturn trying to refinance its loans with lower costs?

Yes. I think we're always trying to optimize our capital structure of the company in every format. So that's something you're going to see us focused on here definitely over the next 6 to 12 months. And just to get a capital structure that is the lowest cost, but also leaves us flexible enough to do the things we want to do just to achieve our corporate goals here for the short and long run.

Okay. Another question here on operations. Can you expand on the increased drilling lengths of Saturn's new wells?

Yes, for sure, Kevin. And it's not only Saturn is doing well. If you look at the industry as a whole, obviously, they're trying to get to greater and greater lengths to increase that capital efficiency, and we are no different. So where we have 2 sections of land buddied up next to each other, continues to each other. We try to see how far we can drill to help improve that rate of return on a per well basis. I did mention our 12-2 Cardium well earlier being about 6,800 meters in length. We are extremely happy that we were able to execute as a program, especially with all of our drilling and completions team being in-house. We did use a bit of a different completion technique in order to do that, led by our completion manager, Dale. So yes, extremely successful results as far as an execution base on that program, and we're just seeing the initial production numbers with those increased lengths. So we're pretty happy with the results we've seen so far.

Okay. Then I have a question here regarding hedging. It's did you add any more hedging in the last quarter when oil prices were higher?

Yes. Actually, Justin, I'll let you jump in as you were the quarterback of that hedge program we did.

Yes. In September, we hedged just over 1,000 barrels a day for a month of oil was about $87 at the time. So if you look at where oil price is today, we are pretty happy with adding those incremental hedges.

About 3 weeks ago, we were questioning that choice of his and now he looks pretty smart. So I think he's getting last laugh.

That's great. Well, that's all I see for questions in the Q&A. So I'll hand it back to John to wrap it up.

Excellent. Well, listen, I appreciate everyone's interest in Saturn Oil. I appreciate everyone taking the time this morning. If you have any further questions, feel free to reach out directly to myself or Kevin or just directly to the company, and we'll be happy to get answers back to you. Thank you for your time this morning.

Thank you, John.

Thanks, everyone.