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

Good morning, ladies and gentlemen. Welcome to Saturn's First Quarter 2025 Results Conference Call. [Operator Instructions] The conference is being recorded. [Operator Instructions] I will now turn the meeting over to Ms. Cindy Gray, Vice President, Investor Relations. Please go ahead, Cindy.

Thank you, Betsy. Good morning, everyone, and thank you for joining us for Saturn's First Quarter 2025 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+. 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 also cautioned not to place undue reliance on these forward-looking statements since 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 statements, 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 AIF filed on SEDAR+ and on our website. Also note, all amounts discussed today are Canadian dollars unless otherwise stated. Today's call will include comments from various members of Saturn's executive team, including John Jeffrey, CEO; Justin Kaufmann, CDO; and Scott Sanborn, our CFO. Following our prepared remarks, we'll open the lines up to participants on the call for a question-and-answer session. If we aren't able to address your questions today, we'd encourage you to reach out to Saturn directly through the website. I'll now turn it over to John.

Thank you, Cindy, and good morning, everyone. I just want to start by saying how extremely proud of Saturn's achievements and performance through the first period and subsequent quarter end I am and as we continue to navigate a very fluid and volatile environment. To date, in 2025, our team has continued to execute on our blueprint strategy. driving new corporate records, including quarterly production at just under 42,000 BOE a day, adjusted funds flow of $131 million and adjusted EBITDA of $158 million, all of which also beat analyst expectations. Our free funds flow of $58 million is the highest we've generated in any first quarter of any year. With so much uncertainty facing E&P companies in the current environment, Saturn remains sharply focused on creating long-term value for our shareholders and bondholders by directing our energy to those factors that we can control. To set the stage for our discussion around the Q1 results and our go-forward plans, I wanted to quickly highlight some of the key benefits of our strategy and asset base, particularly given the market that we find ourselves in. Our blueprint strategy guides how Saturn operates, focusing on asset optimization, offering a straightforward approach that can be replicated across our entire portfolio. With oil-weighted mid-life cycle assets, we are constantly finding new optimization opportunities, operational cost savings and ways to increase production at low cost. Collectively, these incremental wins can collect and drive meaningful impact for the organization. For example, the Flat Lake Battrum assets that we acquired in 2024 were integrated into our portfolio throughout last year. Our team immediately went to work identifying multiple synergies and operational efficiencies. After only 6 months of owning the asset, we successfully reduced operating costs by 13%, driving cost savings of $7.5 million realized in the second half of 2024 alone. Expanding it out to this year, again, that's almost a $15 million cost savings that we will experience this year, thanks to the synergies and the hard work of our operations team. This type of incremental improvement represents what the Saturn team does repeatedly and what we've been executing on and what it means to be our Saturn blueprint. As a result, our asset base is well aligned with our strategy. Saturn portfolio is comprised of a diverse suite of low decline, high-return stacked plays with multiple light oil zones. Not only has our current development program continued to realize outperformance from our assets, including our Q1 CapEx program that came in 20% above type curve. We also benefit from a long runway due to large oil in place and relatively low recovery states in our field. As a result, we continue to explore options for enhanced oil recovery, such as waterfloods that could bolster our sustainability and migrate -- and further mitigate declines, which Justin will talk more about later. Saturn's asset base also provides the ability to quickly pivot capital in response to market shifts, along with the optionality to redirect capital to gas-weighted assets should gas prices ultimately spike. We have the flexibility to redirect capital to areas offering the highest rates of return. Again, one of the best things about our asset base is the short lead times. So we don't need to commit to large pads that take 12 to 18 months to develop. And as such, we can be very flexible. In the current market environment, we believe some of the best returns can be generated by investing directly into Saturn's barrels. As such, we've allocated some of our free funds flow to ongoing share buybacks. We made our first open market bond repurchase last month when both of those dipped well below par. buying these bonds and shares at a discount served to further enhance the value of the company. Looking forward to the balance of 2025, we have the ability to defer making decisions about capital expenditures for the second half of the year. Given we believe in long-term oil price demand, Saturn will not waste our resources by deploying a large capital program if oil remains sub $55. The depth and quality of our asset portfolio, coupled with our strong hedge book, positions Saturn with the resilience for long-term sustainable growth and value creation. Investing capital where we see attractive returns increases our competitiveness now and for the future. Before I turn it over to Justin, I want to provide additional color on the outcomes of our capital program in the quarter. I just want to express my appreciation to the entire team for their hard work throughout the past 4 months and to thank our shareholders and noteholders for the continued support of our confidence in Saturn.

Thanks, Tom. Through the first 3 months of the year, our operations and technical teams have done an outstanding job of deploying capital prudently, safely and responsibly while continuing to improve efficiency. Our Q1 capital program was executed with 0 lost time injuries in the quarter despite having a 69% increase in person hours worked over Q1 last year. Approximately 3/4 of Saturn's $73 million capital program was directed to drilling activities, resulting in the completion of 33 drill wells, all of which were brought on in the quarter. The bulk of these wells, 26 in total were in Southeast Saskatchewan with 6 in West Saskatchewan and 1 in Alberta. About 22% of our Q1 capital was allocated to facilities, which included continued investment in our waterflood projects. The balance of the capital went to land and seismic. During the quarter, we converted 3 top producers to injectors to support both the waterflood at Flat Lake and future pre-pressurized Battrum locations. Today, Saturn has more than 160 injectors at Flat Lake, over 140 at Battrum and about 60 in Oxbow, Southeast Saskatchewan. We have identified the opportunity to expand our waterflood program in Southeast Saskatchewan, in particular, at our Prolene Bakken field. This is an area where our operations are immediately adjacent to one of our peers' existing waterflood patterns, which has seen more than 20% of the producers converted to injectors, which has translated to strong success in reducing decline rates under 15%. We have started the initial capital stages of the Prolene waterflood and when proven successful, it could potentially lead up to more than 200 pre-pressurized waterflood infill locations to the Viewfield area. Another exciting development for Saturn was the Saskatchewan government's introduction of the low productivity and reactivation oil well program, an incentive program designed to encourage industry to invest new capital into low producing and inactive horizontal wells. The goal is to create incremental oil production and revenue from existing wells as part of the Saskatchewan government's target to increase production to 600,000 barrels by 2030. Due to this incentive, Saturn completed its first horizontal reentry into the Frobisher since 2022, with results from that reentry coming in 50% above our internal type curves. Our technical team is excited to continue with this type of horizontal completion, and we have hundreds of potential candidates that we are looking to build into our 5-year development plan. Other notable activities in Saskatchewan during the quarter include the drilling of our first [indiscernible] horizontal well since 2023, which exhibited strong results and came on 50% higher than type curve. This was an important result as we have close to 100 of these locations in our corporate inventory. In addition, we drilled our second Spearfish multilateral horizontal well targeting the P1 sands, along with the company's longest ever Spearfish horizontal well targeting the P2 sands at over 3,500 meters. We also drilled our first [ Unger ] well in Flat Lake. All in Saturn's Mississippian Spearfish program in Q1 delivered results across a total of 13 wells drilled that averaged over 50% above type curve. This is another positive data point that underpins Saturn's long-term sustainability since our Mississippian Spearfish well inventory features approximately 600 locations, represents more than 20% of our total corporate inventory and is where we have a lot of our Tier 1 locations. Looking now at our open hole multi-lake Bakken development, we drilled 2 8-leg open hole multilateral horizontals. One well was drilling 1 mile and the other at 2 mile and participated in 2 non-op open hole wells as well. Based on initial production wells rates -- sorry, we anticipate our 2-mile open hole multi-leg well could be contained for top performing well in Southeast Saskatchewan in Q2. All-in results from this program came in 20% above type curve. The combination of all our technical team's hard work and tireless efforts was showcased through record production of approximately 41,700 barrels attributable to outperformance of our type curves and strong volumes. I'll now turn it over to Scott to review the financial.

Thanks, Justin, and good morning, everyone. Saturn's financial performance reflected the strong operational results Justin spoke to, exceeding analyst consensus across nearly all metrics, and I'm very pleased to quickly run through the highlights. Saturn generated record adjusted funds flow of $131 million or $0.66 per share, driven by a record quarterly production of nearly 41,700 barrels per day, up from just over 41,000 barrels per day in the fourth quarter of '24. Net of derivatives, our operating netback per BOE was $41.99, higher than the $40.41 in the previous quarter, of which our hedging derivatives will further insulate Saturn from any future downward price volatility, which I will touch on shortly. With just over $73 million in Q1 capital expenditures, our free cash flow was nearly $58 million for the quarter. $34 million of which was directed towards financing activities, primarily relating to the repaying USD 16.3 million in debt on our senior notes, equating to just over CAD 23 million. In addition, we remained active on our NCIB directing $5.8 million to the repurchase of 2.8 million common shares for cancellation at a weighted average price of $2.08. At quarter end, the company had net debt of CAD 814 million, comprised of $601 million principal outstanding -- U.S. dollars principal outstanding on our senior notes and adjusted working capital of $37 million, inclusive of approximately $80 million in cash. This resulted in net debt to annualized adjusted EBITDA of 1.3x, in line with guidance and Street consensus. We maintained liquidity at year-end of approximately $230 million, again, comprised of $80 million in cash and $150 million undrawn credit facility. We believe having financial flexibility underpins our strength and resilience through volatile markets. Subsequent to quarter end, Saturn was able to capitalize on the falling oil price environment and associated market volatility to improve our position. Through April, we saw periods where our bonds were undervalued and accordingly purchased USD 15 million face value of our senior secured notes at a discount to par, thereby further accelerating our debt reduction progress while reducing future interest costs. Worth noting, our open market purchase has no impact on our scheduled 2.5% or USD 16.3 million quarterly repayment commitments. Rather, it is in addition to and reduces the bullet payment of home maturity. In addition, we invested $2.3 million to high-grade our hedge book by terminating certain WTI hedging contracts approximating combined average swap price of USD 58 on 3,300 barrels a day in the second half of '26 and 7,800 barrels a day in Q1 '27. The termination has no effect on our plans to deviate from our hedging target of 50% to 60% of PDP oil and liquid volumes net of royalties 12 months out and 20% to 30% 18 months out. However, we will continuously look to opportunistically time the entry of any future hedges. Worth noting again, should oil fall below $50, we are not required to hedge into that market. Looking forward, should we continue to see oil price weaken, the value of our hedge book increases. For reference, the cash settlement forecast of our hedge book, $60 WTI approximates $60 million and at $50, it's $160 million. Effectively, for every $5 decrease in WTI, value of our hedge book increases by approximately $50 million. Using 2020 as an example, oil goes to 0, the value of our hedge book plus cash on hand today would essentially allow us to pay up our debt. So we will continue to remain active on the hedging front with the goal of optimizing our book. With go-forward capital budgets under scrutiny in the current environment, I wanted to close out remarks with a reminder of how Saturn is think about capital for the balance of '25. The seasonal pause in activity due to spring breakup here in Canada gives us time to monitor commodity prices and assess market conditions, which will drive future capital allocation decisions based on applicable rate of returns. Since we have the ability to first such decisions on our capital expenditure program in the second half of the year without incurring financial penalty or experiencing any repercussions related to long-term contracts, we intend to reevaluate through July based on commodity prices. Further, because the majority of our drilling occurs in the latter part of the year, pausing until July is not expected to impact our 2025 forecast volumes, assuming we maintain -- we will continue to be mindful of balancing cash flow generation with the preservation of our reserves while deciding on capital execution plans entering a $50 to $60 WTI environment. Thanks again for joining us today, and I'll now hand over to the operator to commence the Q&A. Operator?

The first question today comes from Adam Gill with Pentum Financial.

On a solid quarter. Three questions for me. First off, can you frame how spending would look like in a sub-$60 WTI environment? And then maybe some guide rails if it was $60 to $70 and $70 plus.

Yes, absolutely. Well, $70-plus would effectively be our guidance. So CapEx of just around that $300 million, $310 million mark. So anything kind of $70 million plus, just refer to our guidance. I think that's a great starting point. If you look at closer to $60 million, basically, what we're going to do is we're almost going to retrench from West to East. So we're going to first would pull back on the Viking and then Battrum and then you just pull back on Alberta kind of leaving that Southeast development last. So the easiest way to think about it and a quick shorthand, if you see oil average is $60 million, we'll probably be close to that $200 million mark and $50 million to $55 million closer to $100 million to $150 million. So somewhere in that range kind of a quick shorthand of what -- how much capital we deploy those different levels.

Great. And if it was kind of the $200 million or the $100 million to $150 million in these lower oil price environments, where do you see production standing at the end of the year?

We'll have to model that out. Again, with the bulk of that capital coming in Q4, we will have a minimum impact on this year's production. It'd be more of an impact on next year's given that we've already had successful and overproductive Q1. Again, so we were looking to get back in the field mid-June. We've since pushed that out a month to mid-July. That will have no impact on this year's production, but it all kind of depends on what oil price looks like at that point when we do get back out in the field.

Okay. Understood. Second question is, how are you weighing allocating capital towards production initiatives versus continuing to execute on the NCIB and maybe even paying down more debt beyond the scheduled amortization?

Well, we continue to monitor the bond markets. When we see our bonds trading anywhere in the 80s, any time it's buy 10 get 1 free in the bond market, we like that. I think the yield was north of 15% there for a while. Again, with the hedge book and the defensive position we've built, I just think there's a misalignment. So we're happy to get in the market there and continue to buy those bonds and retire them at that discount. However, we are careful about our liquidity. So we don't want to overextend ourselves. We want to ensure that we are remaining flexible because, again, they are bonds, it's not an RBL that we can pull from or repull from should we have a need for capital. So again, what we are targeting here for this year is instead of 4 amort payments was to effectively do a fifth amort payment. And we have basically done that now. But we'll continue to monitor that bond market. And if we believe our liquidity is strong, I think you would see us in the bond market buying and retiring some more debt at these levels.

Okay. Great. And my last question is kind of tangential to that. Would you ever look at using the credit facility to buy back some of this debt if the prices really got low? Or do you just want to do this from free cash flow?

No, we don't like the idea of paying with Mastercard. I'd rather just use free cash flow in the meantime now if we see price drop in the 70s or something crazy, perhaps we use more free cash flow. But no, we just don't believe that aligns with our defensive strategy to incur debt to pay off the second...

[Operator Instructions] Since there are no more questions, this concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.