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

Thank you for standing by. This is the conference operator. Welcome to the Saturn Oil and Gas Q3 2024 Conference Call and Webcast. [Operator Instructions] As a reminder, the conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Cindi Gray, Vice President, Investor Relations, Saturn Oil & Gas. Please go ahead.

Thank you, Darin. Good morning, everyone, and thank you for joining us for Saturn's Q3 '24 Earnings Conference Call. Please note that the company's financial statements, MD&A and press release are available on our website and have been filed on SEDAR+. Our corporate presentation will be updated shortly and will be available on our website as well. 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 associated risks outlined in our most recent MD&A. Listeners are cautioned not to place undue reliance on these forward-looking statements. Thus 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 statement, 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 view the company's annual information form filed on SEDAR+ and available on our website. All amounts discussed today are in Canadian dollars, unless otherwise stated. Today's call features remarks from members of Saturn's executive team, including John Jeffrey, Chief Executive Officer; Justin Kaufmann, Chief Development Officer; and Scott Sanborn, Chief Financial Officer. Following the team's prepared remarks, we'll be conducting a Q&A and we'll open the line to questions from participants. I'll now turn it over to John Jeffrey.

Thank you, Cindy, and good morning, everyone. I'm proud to share Saturn's Q3 results will show how our strategic blueprint for value creation continues to drive successful execution. By effectively managing the factors within our control, the company is exceeding expectations and steadily growing adjusted funds flow. We are safely and responsibly delivering results that surpassed market expectations. The third quarter was our first full period integrating the Saskatchewan acquisition of Battrum and Flat Lake assets, which were acquired in mid-June for less than 2x cash flow. Although we've only managed the assets for a short time, we have already begun reducing operating costs and deploying capital. Early results are exciting, and we should be able to share those in the coming months with you. Not only did we achieve several corporate records for production, adjusted EBITDA and AFF, we also exceed consensus estimates on a number of fronts. Saturn delivered our highest average production, surpassing 39,000 BOE a day. During the quarter, Saturn was able to make the best out of a falling oil price by monetizing some older hedge positions required by our prior lender. We believe oil to be ranged about between USD 70 and USD 90. So we repurchased approximately $20 million of these hedges, which, if we are correct, could have an impact -- could have impacted future cash flows by close to $40 million. Our record adjusted EBITDA of $136 million also came in above consensus, while AFF was highest in our history at $94 million. When normalized for these one-off hedge costs, adjusted funds flow was over $114 million or $0.56 a share ahead of consensus estimates. When oil price jumped back during the quarter, we acted quickly and layered in new oil collars that are in line with our future OL outlook. [ Asco ] will expand upon, we are also able to lock in favorable foreign exchange rates on principal interest payments for our senior notes over the next 3 years. Our nimble capital allocation strategy and the nature of our asset base enable Saturn to target locations or production optimization that offer robust returns. We intend to continue growing per share value by pursuing strategic tuck-in acquisitions that bolster our footprint in high-performing areas. Offer cost strategies -- offer cost synergies and expand our drilling inventory. For example, we've seen solid well outperformance in our development of the Brazeau Cardium area of Central Alberta. Subsequent to quarter end, we closed a $20 million tuck-in acquisition in Brazeau that significantly increased our drilling inventory production and land based in that area, much of which is adjacent to Saturn's 4 best-performing wells. Such strategic and accretive acquisitions are an integral part of that blueprint for value creation. Concurrent with South Saskatchewan acquisition, Saturn also reshaped the balance sheet with an issuance of 9 to 5, 8 senior notes, which are free for [ impune ] hedge requirements or limitations on capital and have effectively reduced the company's interest rate by about 40%. While debt reduction continues to be a priority along with strategic tuck-in acquisitions, Saturn launched the first phase of our return of capital framework on August 27, with the implementation of a share buyback or an NCIB. Since inception of the NCIB, we have maxed out our daily purchase limits of approximately 46,000 shares and to date, we have returned over $4.7 million to shareholders through the purchase and cancellation of 1.9 million shares in the open market. Longer term and in a more favorable commodity environment, our return of capital framework could evolve to include a dividend. However, until we see a tightening of Saturn's valuation gap relative to our peers, we believe buying back our shares lets us acquire the lowest cost barrels possible, while generating value for shareholders without drilling up our acreage. It is a testament to the skill, experience and entrepreneurial attitude of our teams that Saturn is able to see things differently -- do things differently and disrupt tradition. And often inefficient practices operationally corporate. I'm very proud of our teams commitment to innovation, safety and responsible development and for their unwavering support of the communities in which we live and work and at the end of the year, we expect to release Saturn's 2025 budget and guidance, building on our 2024 capital expenditure program and targeting continued AFF optimization. Given the steady growth and evolution we have achieved over the past few years, I believe now is an ideal time to take a first look or maybe even a closer look at the Saturn opportunity. With that, I'll turn it over to Justin Kaufmann to speak to our operational performance. Justin?

Thanks, John. As mentioned earlier on the call, Saturn achieved a new production record in the quarter averaging over 39,000 barrels a day, which exceeded expectations comprised of 83% higher value oil and liquids. This along with our previous forecast following the Southeast Saskatchelan acquisition. As average volumes for the last half of 2024 are expected to range between 38,000 to 40,000 barrels a day. Capital expenditures in the quarter totaled $84.4 million, including capitalized G&A with that Saturn drills 48 gross wells that contributed to volume increases along with investments in capital-efficient production optimization initiatives that will expand on shortly. Saturn's asset portfolio features diverse development potential attributes to our long-term sustainability. Today, we are largely oil-weighted from a production reserves and revenue perspective but we also have gas-rich assets in Alberta that offer longer-term development targets as natural gas prices rebound. Being able to quickly pivot depending on commodity prices, availability of services or shifting macro landscape underscores the value of our strategy and diverse asset base. We can drill open home Mississippian wells, exploit the Bakken by the combination of frac and conventional open hole approach or a focus on quick payback returns in West Saskatchewan Viking. Saturn's Blueprint involves applying proven operating strategies from 1 asset or area within the portfolio to other areas in an effort to improve capital efficiencies, payouts and returns. In addition, it includes our core-up strategy of pursuing tuck-in acquisitions in areas where we are generating the highest rates of return. The $20.5 million Brazeau Cardium tuck-in acquisition that John mentioned earlier demonstrates our strategy in action. The transaction closed October 1 and added 63 net locations and approximately 700 barrels a day of production. Along with expanding land in an area where new Cardium development has shown material production outperformance relative to type curves. The acquisition also features land and locations adjacent to where our 4 best Cardium wells were drilled earlier in 2024. Recent Cardium wells have been drilled longer and used higher stage counts in the fracs, resulting in a significant upload -- uplift in oil production and increasing rate of return expectations. In the past couple of weeks having successfully drilled the longest Cardium well in Canada out of sample set of over 6,000 wells, having total length of 7,570 meters measured depth. The achievement demonstrates Saturn's technical ability to go outside the norm and create opportunities in areas overlooked by other producers. In our Kaybob Montney area, our team continued to unlock value through a highly capital-efficient production optimization projects, converting 6 wells from gas lift to conventional pump jacks at Kaybob. This low-cost, high-value exercise resulted in more than 500 barrels a day of the new volumes coming on stream at a cost of just over $3,000 per barrel, representing some of the highest rate of return barrels in our portfolio. In Southeast Saskatchewan, incorporating and expanded use of seismic has increased confidence in well placement and result in improved production across several regions targeting Missippian and Bakken development. Our teams are currently processing and valuing seismic use in rosary and success to map out drilling location targets for next year. Our open hole multi-leg development deployed in the Bakken, where we have performed well above our peers on a normalized basis is now being tested in the Spearfish at [indiscernible], demonstrating [indiscernible] , proven technology similar areas can change cost parameters and open up new inventory. Saturn's also continue to invest in our pre-pressured Bakken program with 10, 12 conversions planned for Q4 of this year. Since this area was modestly booked from a reserve perspective, we expect being able to expand future reserves while also continuing to lower declines. Each of these incremental improvements area by area and asset by asset contributed Saturn's overall health performance. And now I'll turn it over to Scott to review the financial highlights.

Thanks, Justin, and good morning, everybody. As John mentioned, we had another record quarter based on production, adjusted EBITDA and strong adjusted funds flow and continue to execute on our MTIB. All of which demonstrate the strength of Saturn's strategy. We believe the normalized adjusted funds flow of $114 million, free funds flow of $29.7 million, excluding the onetime hedge monetization, offer a better indicator of Saturn's run rate capabilities for generating cash going forward. With our senior notes debt refinancing completed in the second quarter, we started Q3 in a strong financial position with cash on the balance sheet and a lower prospective interest rate. Further, we are no longer subject to restrictive hedge requirements that were part of our previous debt instruments, including an obligation to hedge total production 3 years out. As John spoke on earlier, this resulted in Saturn's carrying some unfavorably priced swaps and low-range collars, which we meaningfully address in the quarter, improving our hedge book going forward. We similarly took advantage of the upper price movement and layered in higher-value colors, including contracts with ceilings that are north of $84 per barrel. Company also capitalized on the strong Canadian dollar relative to U.S. mid-September, locking in foreign exchange rate hedges for the next 3 years on both principal and interest payment portions of our senior notes. Since natural gas is generally immaterial to our overall financial picture, representing only 1% of revenue and approximately 17% of production volumes. We did layer in a small amount of natural gas hedges, approximately 10,000 GJs per day at $2.73 per GJ through the end of 2026. This active hedge management provides another example of a factor within our control that allowed us to protect against the downside and mitigate risk. Identifying opportunities to reduce costs remains a priority for Saturn, and I'm proud to highlight that our OpEx of $19.86 per BOE in Q3 was again our $20 target. Even though the new platform Flat Lake assets had a higher operating costs than our corporate average. This exemplifies how our team improves efficiencies and can bring down per unit cost to bring cost OpEx post acquisition. From an APAC perspective, this focus on controlling costs, coupled with a relatively low royalty rates positively contributes to our bottom line. Saturn's Q3 royalties averaged 13%, operating costs were under $20 a BOE and transportation was $1.70 per BOE, driving average operating netback of $42. We will continue to focus on cost reduction and net back enhancements to support adjusted funds flow and free funds flow going forward. Net debt December 30 totaled $779 million, representing approximately 1.4x net debt to annualized quarterly adjusted EBITDA. We remain committed to continued debt reduction as part of the Saturn's Blueprint and anticipating achieving net debt-to-EBITDA approaching 1x for the end of 2025. Company had liquidity at September 30, over $260 million, including $113 million of cash and $150 million of undrawn availability under our credit facility. This financial flexibility positions the company for continue advancing activities that improve per share metrics, including the NCIB and tuck-in strategic acquisitions. Since October 27 through the end of last week to date, Saturn has returned $5.4 million to shareholders to repurchase cancellations of approximately 2.2 million shares. This aggregate dollar value represents approximately $0.03 per share based on the Q3 weighted average shares outstanding. We intend to continue this pace of buyback with WTI Holdings at or above $7 per barrel. But we saw WTI in the range of $60 to $65 for an extended period through 2025, our capital allocation strategy will be assessed and potentially adjusted. However, at current WTI levels, we anticipate maintaining our practice of maximizing the daily MCI purchase limits. Further, we are expanding our capital markets focus to reach new pools of capital and introduce the Saturn story to the interested potential investors. We believe there's opportunities for multiple expansion given our fundamentals compared to our current relative valuation. Our full 2025 budget and guidance are expected to be released before the end of the year with our preliminary expectations being to maintain a stable budget supports continued robust free cash flow generation. With that, I'll turn it back to the operator to open up the line for any questions.

[Operator Instructions] The first question comes from Amir Arif with HTV Capital.

A couple of questions. One, just around the hedging. The one-off hedges, just curious, was that limited based on the cash flow you had? Or are there any additional legacy hedges that you do plan on closing in future quarters? Or have you closed over...

No, really. Yes. We're just trying to be as opportunistic as things come up. Again, our liquidity at the end of the quarter well in excess of $100 million in cash, over $260 million of total liquidity. So cash flow and cash availability is definitely not the limiting factor. Just really trying to take advantage of the volatility when we see oil spike up to 78 in the quarter, we layered on some additional hedges when it fell back down, we bought up some legacy ones. So that was a one-off in the quarter are we likely to keep doing it. We're always watching that if we can improve that hedge book. Again, our thoughts here is that we believe oil is going to be in that 70% to 90% range. So just trying to upgrade our hedge book to kind of reflect that range. So that's really been our strategy. And I think you're going to continue to see us kind of roll that out if we have an opportunity to by setup that's underwater or layered on when the strength ends, I think we're likely to do that.

And so -- but generally speaking, the future hedges you are layering on, they're all generally going to be more colors?

Yes. We do prefer the callers. I mean, obviously, with the FX, that was a swap, but looking at WTI, we're going to focus on collars that kind of see it within our outlook for price of oil.

Okay. That sounds good. And then just a second question, just on the capital -- the pace of capital spending. I mean the first half of the year, a company was smaller, it was about $50 million spend. Second half, there's about $170 million spend coming. Just curious if you have the systems in place and the staff to efficiently be deploying this larger pace of capital that you're starting to run with now given the size of the company?

Yes, absolutely. I think you're going to see -- again, I kind of alluded to it there briefly, but really excited to get the results in Q3 looked fantastic. Early results in Q4 are the same. So I think we have the exact right size of staff in place to execute on the balance of 2024 and going into 2025. So hopefully, we can have that guidance out here in December. Full year '25, but right now, staffing levels are great that the team that Justin and his guys have put together. Justin doing a bang out job beating tight curves, beating expectations. So I think you can expect more of that coming through the balance of this year and hopefully, in 2025 as well.

We have the next question from Adam Gill with Ventum Financial.

So just on the tuck-in acquisitions, how active do you expect it to be on the smaller acquisition front? Is there a limit in terms of how much you want to spend on that? And how full is the slate of opportunities for you to make these tuck-in deals?

We're always looking. So what you've seen us do throughout the year so far, if you ignore the Battrum Flat Lake, the larger acquisition, you've seen a sales on it and then pick up that ad and resources in Southeast Saskatchewan as well as that Brazeau Cardium one as well. So net-net, we pick we netted a couple of hundred barrels a day. Actually, but more importantly, we netted about 50 locations better. So when you look at PDP, when you look at locations, we definitely came out ahead of that. when you kind of take those 3 in its aggregate. That being said, if we can do smaller tuck-in acquisitions that build on our core areas with the best results and we can do so out of cash flow. I think you're going to see us continue to focus on that. As far as pipeline, I think we're seeing an ongoing consolidation, I think, in some of our core areas or are limited, although a number of smaller players available. And if we can continue to pick up good assets with good running room at 2x or you're going to continue to see us focus on that if it fits with our long-term Blueprint strategy.

Great. Second question, on the open-hole multilateral drilling, you've obviously started to apply that outside of the Bakken play. So first off, do you see that mainly as a boost to economics or as expanding the location opportunities? And then secondly, how many employees have you identified as potential candidates for this development technique?

Yes. I think that feels like more of a dire question. So I'll pass that over to Justin Kaufmann to chime in.

Yes, we're looking at it through a multiple different place. Some companies have tested in Viking. Some companies look at part south and Flat Lake in the Bakken, right now in Spearfish, that's kind of the first outway outside of the North new field package. We chose that specific area because of the relative sickness of the P1 sand there and that's similar to how we chose it and in the Viewfield Bakken So really reservoir parameters are essentially dictate where and how you can use that. We'll push it to a Spearfish and we'll see it go from there. There is potential in the Flat Lake area, but a little bit more science has to be on upfront, but we'll continue to potentially try in new areas depending on development success we see along the way.

And just with that Spearfish location, would that have been slated for a regular single lateral, dual lateral horizontal well. But just given the incentives now you're going to go with the [indiscernible] lake?

Yes. Actually, like the original P1 sand was developed as a single lake fraced actually Spearfish sand. And it had very limited success on the actual inflow that they got at oil didn't really meet the volumetrics and make that location capital positive. But with the increased number of legs, we're going to see increased number of inflow. And we -- based on the permitting crossing that we're seeing, we think that we'll have similar results that we saw to our Bakken and the Viewfield area. So the single leg based on the relative thinness of the zone up there kind of restricted volume inflow, and we think we're going to spend on that with the additional rigs.

The next question is from Christopher True with Eight Capital.

So Saturn discussed about validating a stratigraphic trend between East Plateau and Plateau. Could you please discuss a little bit more on what you're seeing with this trend and what it could mean for Viking development if it's proved to be a successful trend?

Yes. Down in the Plateau area, it's more -- the Viking is a little bit more [indiscernible] trapped. With our development, we've been able to identify the thickness of the viking there we're seeing anywhere from 3 to 6 meters and general rest of our fitness and our development has helped us identify that. We have now drilled if not every section every second section along that total trend. We do see complete infill development to our east Plateau field, which will involve about 81-mile viking locations on a per-section basis. And that is where a lot of our keeper viking on in place. So we definitely see that trend continuing and we're able to prove up the economics of it. If you look 10 years ago, there was some other producers that tried half mile shorter horizontal locations that weren't able to make it work on as far as economics go, but with the new type of completions and the longer lateral lengths, you're seeing that increased rate of return and turning that return positive has helped obviously give us confidence in developing that trend at the same time. So a little bit new findings and then just using kind of newer completion techniques to help make those wells cap positive, I guess.

Christopher, does that answer your question?

Yes. Thank you

The next question comes from Jose Sanchez with Casner Investment.

I'm pretty glad to see that we are winding our hedge books, especially the swaps. Maybe you can provide more color on what are the free cash flow expected on the next 12 months? How much will be lost due to the new hedges figures that are in final line are not updated with a new hedge book.

Yes, absolutely. So Unfortunately, we haven't given full guidance yet. As I said you should be able to expect that from us here, hopefully, in the next 45 days, I think it would be great. It's going to say, when we did close Battrum and Flat Lake there in July, we did guide for 12 months out, and we did guide at $80 oil. And that's -- you can see in there, we show net and gross of derivatives at the time. Now that should improve by around $30 million, given the hedge book that we bought out and given that $80 mark. Yes, I think for the full 12 months, I think you're just going to have to wait the guidance, but that will include the full impact of our up-to-date hedge book at that time.

And you're working with an $80 WTI baseline?

Sorry, we were working for the July to -- July '24, July '25, that is what we use. We're seeing some of our peers come out with some at 70, some at 75 for 2025. Some of our peers, and I think we're probably prudent to do the same. We're waiting to see obviously how the election turned out in our oil response and then what the OPEC meeting does in December. I believe it is December 1. So when we come out, hopefully, second week of December. Hopefully, I think early numbers we're looking to guide at around $75 oil for next year. Again, we're just going to respond to what we're seeing in the market. If that's relevant. The big thing for us is we want our guidance to be similar to our peers. So the majority of our peers are coming out at $75. I think we're likely to do the same as long as the market kind of supports that thesis as well. So I think we're probably going to be probably around that $75 mark, but again, a couple of big data points left to come out before we can say that for sure.

My last question will be about water flooding. We are water flooding in several of our fields, great results. Can you maybe give us more color about how much of our wells are actually using water flood and how much could we expand that number to how much can we maximize that?

Yes, absolutely. And I think what I'll do is I'll pass that back to Justin Kaufmann to get into the details of where and how we are water flooding, Justin?

Yes. Specifically with the acquisition we did in the springtime on the Flat Lake area, we acquired close to 9,000 barrels a day. About half of that is under current flood. And that specific area is where we're going to be turning 10 producers...

Sir, you are not audible at this moment? Mr. Justin Kaufmann, you are not audible at this moment. Ladies and gentlemen, please stand by. Ladies and gentlemen we apologize. We will need to end our question-and-answer session at this point. This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.