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

Hello, and thank you for joining the investor webinar for Saturn Oil's Q1 2024 financial and operations update. My name is Kevin Smith, Vice President of Corporate Development; and I'm your moderator. We'll start with the 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, Chief Legal Officer. I'll now hand the conference call over to our CEO, John Jeffrey.

Hello, and thank you for joining us today live or listening to the replay for our Q1 2024 investor update. We have a lot to cover today in addition to details of our Q1 results, I expect many on the webcast will be interested in hearing about the highlights of the exciting acquisition we announced last week. And importantly, how we see it enhancing Saturn's capital structure and greatly improving our cost of capital moving forward. But for now, let's start with Q1 results announced yesterday. We began the year with excellent initial production rates from 9 wells drilled in Southeast Saskatchewan and Central Alberta. I'll leave it for Justin to go over some highlights, but I will say these are the best wells Saturn has drilled to date. Q1 also came with some operational challenges including a cold snap that delivered record-setting low temperatures across Alberta and Saskatchewan, which had temporary impact on some of our production facilities. At our Kindersley field office in West Central Saskatchewan, the temperature fell to an all-time record low of minus 44 degrees Celsius in early January. And for our investors south of the border, that was close to minus 50 Fahrenheit. We estimate we are down for about 2,000 barrels a day for approximately 10 days, impacting Saturn's quarterly average production by around 300 barrels a day. I would like to thank Saturn's field staff who braved the cold to minimize the operational impact and downtime. It was a cold one, and hopefully, one for the ages. Another challenge to Western Canada oil producers in Q1 was the increased price differential between WTI and Western Canada's benchmark MSB, which averaged USD about $8.5 a barrel for the quarter. This unusual price gap came as a result of refinery maintenance in the U.S., matched with some temporary export constraints to the U.S. during the quarter. Comparatively, last year, Canada's MSB sold for approximately USD 3 less WTI, which is closer to its historical price range. The good news is the Trans Mountain pipeline has been recently expanded, and was just filled with product in April, making an immediate impact to the Canadian oil differentials, which are now back to normal levels around that USD 3 a barrel. The Trans Mountain expansion is shipping 3x the previous volumes of oil from Alberta to Pacific Coast. This allows producers to receive Brent oil pricing, which typically sells to a premium to U.S.-based WTI. This new export expansion is a major win for all Western Canadian oil producers, and we expect the positive impact to be realized in Saturn's Q2 financials and moving forward. But for now, let's turn our attention over to the highlights of the Saskatchewan asset acquisition we announced on May 6, which we expect to close in about a month from now on June 14. It is an absolutely terrific acquisition on many aspects and one that will have a lasting positive impact for Saturn shareholders for years to come. The assets are made up of about 13,000 barrels a day, 96% liquids, with high netback of over $50 per barrel last year with low declines of approximately 16%. This production is set to increase Saturn Oil's overall crude oil production by about 60% and Saturn's overall liquids weighting from about 81% to 86%, further solidifying Saturn as one of the most light oil-weighted producers of its size. The new oil production we are adding is currently unhedged, which will have a very positive impact to Saturn's average sale price and expand our netback per BOE going forward. The new production is an incredible fit with our existing operations in Southern Saskatchewan. As you've seen in previous acquisitions, there will be many opportunities to drive material development and operational synergies. The deal is very accretive on a per share basis, over 10% accretive on a net asset value for both PDP and 2P. For the next 12 months after close, we see the deal over 20% accretive on adjusted funds flow per share and 30% accretive on a free funds flow per share. The acquisition has also offered the opportunity for a major recapitalization of our debt structure. This will lead to a significant reduction in overall interest paid, enhanced capital allocation flexibility and no development in capital spending restrictions. And of course, since we were able to acquire these amazing assets at a low valuation, just makes a whole transaction an incredible step forward for Saturn and its shareholders. But for now, I'm going to hand the webcast over to Justin Kaufmann for an operational update. Justin?

Thank you, John. And as John commented, in Q1 2024, we had one of the best development programs ever, exceeded production expectations in Southeast Saskatchewan and Central Alberta, which included record-setting Cardium wells for the company. These were our first Cardium wells in the Brazeau area, which all 4 of them being completed and brought onto production in late Q1. These wells were all 100% working interest and delivered a total of 2,800 barrels per day, IP30 between the 4 of them. To state how impressive this production number is, of the hundreds of wells Saturn has drilled since inception, these wells rank 1, 2, 3 and 4 on an IP30 basis. In doing that, they deliver production numbers that were 30% above forecasted expectations. These wells also came in 8% under budget, which set up a capital efficiency of about $6,000 per barrel. Saturn has over 120 booked and unbooked locations in the region, and we expect to be back drilling in the area within the next 12 months. Now turning to Southeast Saskatchewan, Saturn drilled 5 conventional horizontal wells with 100% working interest in Q1, 3 Mississippian aged Frobisher and Tilston targets and 2 Spearfish targets. As a group, these 5 wells exceeded our expected IP30 type curve by 33%. Our Southeast Saskatchewan conventional well production results continue to get better year-over-year, thanks to the strength of our technical team. Obviously, these results are important as the company has over 400 of these locations identified, and they are currently our highest rate of return assets. Saturn also started drilling an open-hole multilateral well in the Viewfield area of Southeast Saskatchewan following our success with 2 open home multilegs wells in Q4 last year. The new open hole multileg well was drilled with 8 horizontal legs up to 2 miles each. The well was just put on to production over the weekend, and we should have IP30 results in the next month. Q1 certainly produced some very excellent results with the drill bit, and after breakup, the team is excited to be drilling on the recently announced acquisition assets John described earlier. Given the close proximity of the assets to Saturn's existing operations, Saturn expects to seamlessly and efficiently expand the future capital program to include the Battrum and Flat Lake assets into the expanded capital development program. Our drilling and completions offsetting these 2 packages are direct analogs of how we are going to attack the exploitation in these plays. Also, the acquisition production has a very low decline rate of approximately 16%, which will reduce Saturn's corporate decline. And the acquisition comes with an extensive portfolio of high-quality oil-focused development opportunities that include approximately 950 locations. Between the decline rate and identified locations, we believe production levels can be maintained for over 20 years at a drilling pace of only about 20 to 30 wells per year. These are areas our technical teams know very well, and we are excited to get going in developing these new opportunities for years to come. I will now hand it over to Scott for a financial overview of Q1 and of the announced acquisition.

Thanks, Justin. It was an excellent period for Saturn as we progress through the first quarter despite market challenges. Production held flat in Q4, averaging 26,000 BOE per day, resulting in NOI of $96 million. The company realized an operating netback of $40 per BOE compared to $47 per BOE in Q4, driven primarily by the widening WTI MSW differential and cold weather conditions in the first half of the quarter. The company keeping total cash costs flat. Saturn cash flow of $68 million or $0.46 per share and invested $40 million in capital expenditures, resulting in free cash flow of $34 million, which was directed towards debt repayment. In total, Saturn repaid $76 million of debt, resulting in net debt quarter end of $386 million or 1.4x on an annualized basis. Moving on to M&A, which included post quarter end. We signed an agreement to sell our Swan Hills package in Northern Alberta for a gross purchase price of $27 million, expected to close by the end of the month, and continue to expand our footprint in Saskatchewan, acquiring 13,000 BOE per day, 96% light oil for anticipated net purchase price of $525 million, approximately 2.1x NOI transaction metric. Pro forma, the company will be approaching 40,000 BOE per day, and on a next 12-month basis, have over $1 billion run rate revenue, approximately $1.2 billion to yield $650 million of EBITDA net of derivatives. Net debt is expected to be $792 million or 1.2x next 12 months EBITDA, decreasing substantially over the next 12 months, targeting approximately $600 million, resulting in 0.9 to 1.0 debt to EBITDA on a trailing 12-month basis. As John mentioned, the transaction is very accretive across most metrics. Transaction is expected to close on June 14, with an effective date of January 1, 2024. With that, I'll hand it over to Kevin for any questions.

Thanks, Scott. A number of questions coming in. We'll start off with what is the interest savings from the Goldman Sachs debt and what details can you share?

Yes. Thanks, Kevin. This is Grant MacKenzie, Chief Legal Officer, speaking. We're really excited about the new debt commitments. We received offers -- no offers, commitments from both National Bank and Goldman Sachs to substantially recapitalize our debt structure. Both facilities will significantly reduce our interest costs and offer much greater flexibility. We are going to be able to provide much more fulsome details once final documentation has been entered into on closing, but we expect the new debt facilities will streamline our balance sheet and line up with a much more traditional capital stack.

Okay. Question here. The vendor reported a sale of $600 million assets and Saturn reported an acquisition of $525 million acquisition. What is the difference?

Yes. So John here. So the real difference is what is the cash at close. So lots of times you see with these deals that people have an effective date. In this case, the effective date goes back to January 1, which -- and that -- the cash flow from the effective date to closing date are those adjustments. But really, the question is, you can look at playing games with the effective date and setting it wherever you like. At the end of the day, is what are you getting and what are you paying at the day of close. At day of close, we estimate we'll be paying about $525 million for the 13,000 barrels a day. Alternatively, those viewing it on the effective date of Jan 1, we're paying $600 million for close to 14,000 barrels a day. So we just like to look at closing date, what does Saturn shareholders receive and what are we paying, and that's $525 million for about 13,000.

Okay. During the cold period in January, Saturn reported there was of reduction of 350 BOE a day. Was any of this damage permanent?

I'll pass that over to Justin to answer.

Definitely no permanent damage. We do see a little bit of downtime every year. but no permanent damage. And actually, usually, we do see some flush production on the tail end of that. So we will lose 0 barrels with that cold weather snap.

Question here regarding CapEx. Previous guidance was $145 million, increasing to $200 million annually for the existing assets. What is the explanation in this delta?

Two major reasons for that delta, once we did announce that Swan Hills divestiture. So we are replacing that 600 to 700 barrels lost in that development case. Also, our Q1 2025, we are going to be spending more than we did in 2024. 2024, there was some restraints on that. 2025, we are going to see some increased Viking development activity to help maintain that [ state flat ] production profile. So those would be the two main reasons.

How much more flexibility does the new debt structure provide for capital spending in overall operations?

Yes. I think the big one there is it really just removes all limitations. So effectively, in the past, we've had to seek approval for capital and for other opportunities like that. We don't have any such restrictions with this debt. So it's really going to allow us to take advantage of market conditions a little quicker. If we see a rally in oil and then we can react sooner and bring more production online. Yes, it really just puts the power back into the company hands.

Yes. And I'll just add on top of that, John. The window for drilling in the winter time is obviously pretty short in Canada. It's generally January, February and then halfway through March. We have seen delays to our Q1 program in the last 2 years with our previous lender. So this will give us added stability in knowing what our production profile will be coming out of our Q1 year moving forward.