Saturn Oil & Gas Inc. ($SOIL)

Good morning, ladies and gentlemen. Welcome to Saturn's First Quarter 2026 Results Conference Call. [Operator Instructions] The conference is being recorded. [Operator Instructions] I will now turn the call over to Ms. Cindy Gray, Vice President, Investor Relations. Please go ahead, Cindy.

Thank you, operator. Good morning, everyone, and thanks for joining us to hear management's remarks about Saturn's first quarter 2026 results. Please note that our financial statements, MD&A and press release are all filed on SEDAR+ and available on our website. 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 disclaimers 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 our AIF filed on SEDAR+ and our website. Also note, all amounts discussed today are in Canadian dollars unless otherwise stated. On today's call, we'll hear from John Jeffrey, Saturn's CEO; Scott Sanborn, our CFO; and Justin Kaufmann, our Chief Development Officer, followed by Q&A. I'll now hand the call over to John.

Thank you, Cindy. Good morning, everyone, and thank you for taking the time to join us today. Saturn's first quarter of 2026 built on the momentum we delivered in Q4. Volumes of over 43,100 BOEs a day beat analyst expectations for the seventh consecutive quarter, while we exceeded our quarterly guidance by more than 1,600 BOE a day. We also came in ahead of the analyst forecast on adjusted funds flow and free funds flow, a notable achievement since we only benefited from 1 month of a stronger oil price in March. This really highlights what a difference 1 month can make. Earlier in the year, plenty of market commentary was calling for oil to drop below USD 60 per barrel due to oversupply concerns, and it traded around that level for the first 2 months of the year. Fast forward to mid-March and the Iranian conflict drove prices significantly higher with the WTI benchmark averaging USD 91 per barrel in the month. Despite the volatility and ongoing uncertainty about how and when this conflict will be resolved, Saturn's focus has not changed. We continue to navigate those factors within our control, including being disciplined but opportunistic in our capital allocation. We remain committed to reducing debt and protecting the downside. Ultimately, our goal is to improve per share metrics and create lasting value for shareholders. Our 2026 capital budget was based off $60 WTI so we intentionally kept it lower to protect the future value of the product in the ground. However, as the price of oil has risen drastically since the beginning of March, Saturn has closely monitored the macro environment and the forward curve for pricing. Since spring breakup is underway, our ability to drill is restricted. So we're using this natural pause to assess market conditions and explore potential adjustments to our capital program. We believe that the nimble nature of our asset base and the flexibility of our capital program represents key differentiators for Saturn. We've shown time and again that our team is ready and able to ramp up or slow down activity without negative impacts to the assets or our partners in the service sector. And this time is no different. We're planning to accelerate capital from the second half of 2026 into Q2, which is typically our lowest capital expenditure period due to breakup. Subject to weather, we are aiming to get rigs back in the field more quickly this year, targeting late May to mid-June. This is expected to enable Saturn to bring new volumes on production earlier and capitalize on a stronger oil price for the benefit of the company and our shareholders. Should oil remain elevated, we may look to update our full year 2026 capital budget and guidance to better reflect what the curve is indicating and increased cash flow generation. Debt repayment remains paramount for Saturn, and our results in Q1 demonstrate our ongoing commitment to reducing net debt. Exiting Q1, our net debt declined 5% compared to year-end 2025. And every dollar of debt that we take down is accretive to our equity value and further improves our per share metrics. Alongside debt reduction, we are committed to returning capital to shareholders via Saturn share buyback program. Our daily NCIB purchases continued through Q1 and helped to showcase the successful execution of our buyback. Since August of 2025, when we renewed our NCIB, the number of shares we have bought back is nearing the maximum allowable for a 1-year period, equal to 12.1 million shares. As our share price strengthened in March, we reduced the number of shares being purchased each day while remaining the same approximate dollar spend. To further minimize dilution, Saturn has elected to settle our equity-based compensation awards by purchasing shares in the open market rather than issuing new shares from treasury. This is a deliberate outcome of our strategy and designed to support per share value increases across all performance metrics. Another element of our long-term strategy is hedging, which protects the downside, particularly when debt is included in the capital stack. As prices have increased, Saturn has continued to layer on incremental contracts while still remaining meaningfully exposed to higher prices on our unhedged barrels. And Scott will speak further to our hedging program later on the call. From a capital allocation perspective, we will continue to prioritize free funds flow towards a combination of debt reduction, ongoing share buyback and other initiatives that improve our per share metric, such as accretive tuck-in acquisitions that meet our screening activity. In the first quarter, for example, we closed a small tuck-in acquisition that fits perfectly within our Flat Lake area of Southeast Saskatchewan. This core acquisition adds immediate value to Saturn with current production in the 300 to 400 BOE a day range, future identified locations, infrastructure consolidation opportunities, cost reduction potential and a strategic pipeline. This pipeline has the potential to deliver oil into North Dakota pricing hub, which is currently realizing a premium to WTI. Saturn is currently in the process of bringing this pipeline back into service, and we are excited to see what this prospect has for us. I'm very proud of the work and the dedication of our team through another successful quarter and their tireless effort and adherence to our strong safety culture. Scott will now provide a financial overview, followed by Justin concluding the call with a discussion about Q1 development and Saturn's go-forward program. Scott?

Thanks, John, and good morning, everyone. Saturn's financial performance continued to excel this quarter despite only realizing escalated oil prices beginning in March. The company generated adjusted funds flow of $170 million or $0.59 per basic share, beating the average analyst consensus by 5%, while our free funds flow of $62 million exceeded the average consensus by 13%. Royalties in the quarter came in below guidance, averaging approximately 11% due to the Alberta royalty incentive on new wells and the impact of the sliding scale royalty framework. Operating costs of $20.49 per BOE were exactly at the midpoint of our annual guidance range, but higher than previous quarter, reflecting the usual seasonality and colder weather conditions faced by our team during the first quarter. With the rapid escalation of oil prices in March, we recorded a realized hedging loss of $21 million or $5.45 per BOE for the quarter as the market price for crude oil exceeded the price set in the company's derivative contracts. That said, our hedging program is working exactly as intended from a risk management perspective by implementing stability and certainty. Our hedging strategy goes beyond timing the cycle tops and bottoms. It's about average costing and consistency, ensuring we can always meet our financial obligations while protecting Saturn resilience. With the current price volatility, Saturn's strategy has been to add additional hedges at smaller increments but a higher frequency in order to capture average price in the period and also weight those incremental volumes toward the near term [indiscernible] prices rather than the tail end of the curve in a declining price environment. From an accounting perspective, the sharp move in commodity prices also drove a large unrealized hedging loss in the quarter, impacting net income and earnings per share figures. This created a wide swing in reported earnings, but the impact is noncash so it does not impact cash flow. As such, this quarter's earnings are not an accurate indicator of the cash generating and debt servicing capability of our business. Net debt declined 5% from the year-end 2025, and we exited Q1 with approximately $725 million, reflecting Saturn's ongoing commitment to debt repayment. Saturn retains ample liquidity with a $150 million credit facility with a small $14 million draw at quarter end plus an uncommitted accordion feature that can expand total capacity to $250 million. The non-call feature of our U.S. denominated senior notes expires in June this year and are subject to step-down premiums for the next 2 years. As a result, we continue to actively monitor yield curves and evaluate future opportunities that may allow Saturn to reduce our cost of capital and improve leverage metrics. Alongside debt repayment, we continue to prioritize the return of capital to shareholders. As John already mentioned, at March 31, we had 181 million shares outstanding, 8% lower than the number just 1 year ago. During the first quarter, we returned over $12 million to shareholders through the repurchase and cancellation of approximately 3.7 million shares under our NCIB. Since then, we have returned an additional $3.4 million through open market purchases of 600,000 shares. Despite the strong oil price environment and potential to generate higher income, Saturn remains well protected over $1.6 billion of tax pools. And given this coverage, we do not anticipate becoming cash taxable until 2028 and beyond given our current capital allocation strategy. This contributes positively to free funds flow generation in the current environment. With that overview, I'll hand things over to Justin to talk through our Q1 development program and our view on our capital going forward.

Thanks, Scott, and good morning, everyone. First quarter 2026 production was above 43,000 barrels per day, carried through the momentum we achieved in the previous quarter. This led to Saturn beating analyst expectations for the seventh consecutive quarter, as John mentioned, showcasing how our wells continue to outperform type curve. Heading into spring breakup, Saturn had 4 rigs running, 3 rigs were drilling open hole multilateral wells. We had 2 of the 3 rigs in the Bakken and one in the Midale on lands we acquired through 2025 tuck-in. The fourth rig was drilling conventional Mississippian and Spearfish wells. We deployed $45 million of capital in the quarter, which resulted in 23 gross wells being drilled, completed and brought on production, contributing to our strong volumes. The capital was directed to drill 21 wells in Southwest Saskatchewan, including 10 open hole multilateral wells that included 5 Bakken, 3 Midale and 2 Spearfish wells. In addition, we participated in 2 non-operated Notikewin wells drilled in Central Alberta and our West Pembina area. Our Saturn team continues to be excited about our open hole multi-leg program, which offers some of the shortest payouts and highest returns in our inventory. As mentioned in our year-end 2025 press release, we drilled our fourth open hole multi-lateral Spearfish well at 13-06, a 6-leg that came on with an IP30 of 365 barrels per day. This well had a peak volume rate of 400 barrels per day during the first 30 days and had a capital efficiency of $5,000 per barrel. Given this performance, we would expect to see the 13-06 well included on a list of the top-performing industry wells in Saskatchewan for April, compiled by independent research firms. This well is directly adjacent to our previous 16-05 Spearfish well, which exceeded type curve expectations by about 3x and was profiled as a top producer in Saskatchewan. As John highlighted, flexibility has always been a key differentiator for our capital program. Saturn has demonstrated the ability to pivot quickly and scale activity up or down depending on commodity prices, which supports our decision to accelerate some capital from the back half of the year into Q2. Our original Q2 capital budget ranged between $50 million and $20 million and contemplated limited drilling. However, we are now planning to bring forward approximately $20 million of capital from the latter half of this year into the second quarter, subject to weather conditions. In light of the strong price environment, we want to get rigs back in the field to target our short-cycle time inventory, which allows us to rapidly bring on volumes on stream and capitalize on higher prices in the near term. By accelerating capital into Q2, we can get rigs back to work earlier than originally expected in Southeast Saskatchewan, where we are planning a staggered start after the May long weekend. As soon as the ground is firm, we plan to add a fifth rig in West Central Saskatchewan, targeting high-impact fields, including our Viking and Success plays, which will supplement the existing 4 rigs running in Southeast Saskatchewan. Depending on weather and based on current forecast, Saturn anticipates drilling 4 to 5 wells in the West Central Saskatchewan area with an estimated 10 to 12 wells brought forward from our planned Q3 drilling in Southeast Saskatchewan. This capital acceleration is expected to result in Q2 2026 capital spending ranging between $35 million and $40 million, with quarterly volumes anticipated to average between 40,000 and 41,000 barrels per day. Given the oil price appreciation over the past 8 weeks and the forward curve looking favorable, Saturn is also exploring the potential to increase full year 2026 capital. Given approximately 70% of our total capital budget is deployed in Q3 and Q4, we believe any adjustments will be seamless from a rig availability, services and efficiency standpoint. With that, I'd like to thank everyone for joining us this morning, and we'll hand the call back to the operator to begin the Q&A.

[Operator Instructions] And your first question comes from the line of Adam Gill with Ventum Financial.

Congrats on the solid quarter. A quick question for me. What exactly are you looking for in terms of oil prices to make the final decision to actually ramp up capital spending for the year? And what's kind of the upper limit on where that spending could end up?

Well, really -- thanks for joining us today, Adam. Really, we're looking just for some stability here in the price. As everyone will tell you, the volatility is very hard to plan around. But if we are seeing kind of sustained prices mid- to upper 70s, I think we're going to take a hard look at expanding that capital plan. So again, we got a few weeks here before we're able to get back in the field and weather dependent, of course. But I think if we see oil kind of hanging in, who the heck knows with what's going on. But I think if we can see it high 70s, even in the 80s or higher, I think you could -- what we could execute on. So basically, we went into last year with a $320 million program, paring that back. So I think getting back to that $300 million mark, really what that would effectively done is just have deferred some of those wells into this year. So we have the locations. The team is ready for it. Again, we've already ramped up for that in the past. So I think about a 50% expansion to our CapEx plan would be the higher end if we see oil kind of closer to that $80 mark or even higher.

Your next question comes from the line of Jamie Somerville with ROTH Capital.

Can you hear me?

Yes, sir.

Perfect. A similar question, which is all price dependent, debt and hedging. On the last call, I think you mentioned a repayment acceleration option on your bonds. I'm wondering if you could provide detail -- any detail on the timing -- like the potential timing window and amounts around that? And then also with either that or your current amortization schedule, how does that impact the amount of hedging that you're likely to do going forward, given unpredictable oil prices and interesting futures?

Yes. Again, the problem with the curve, as you can see is just backwardation. It is starting to come up a little bit. So contractually, we have to maintain 50% rolling hedges for the next 12 months. Now in a raised oil environment like we're seeing today, we are at 55%, even closer to 60%. So we are trying to take advantage of this higher price. Again, just 4 months ago, we came into this year guiding at $60. You can hedge out into Q1 of '27 right now or closer to $80. So locking in some of that is what we're trying to do while we're bringing on more production. But I'm going to pass it over to Scott to talk on the actual debt instrument itself.

So we have a non-call feature rolling off on June 15. And the first step-down premium will be 4.81%. So that's roughly USD 24 million in the event that we go to refinance that.

Perfect. And just to clarify John's answer, there's no reduction in that 50% hedging for 12 months requirement as you're paying down the bonds as long as they're there, that requirement stays in place. Is that what you're saying?

Well, that's right. But it also aligns with what we are aiming to do here as a management team as well. Basically, that 12 months, in our opinion, gets through any major hiccups even if you go back to 2020 and COVID, if you look before COVID and after COVID, it took about 12 months to kind of resolve some of these issues. Basically, what we're trying to do here is that in any pricing environment, can we ensure that we can pay all our debt obligations. Let's say, oil goes to $5 a barrel, can we still satisfy all of our obligations as a company, and that allows us to do so. So corporately, that does align with what we would do. Now again, in this raised pricing environment, I think we're in a great position to take advantage of a higher strip. But yes, as long as those bonds are in place, that is the minimum we have to have.

Your next question comes from the line of Chris Damas with BCMI Research.

You have a significant shareholder that owns about 35% of the stock and also has a Board member. They've indicated they're selling 10 million shares. I wondered how do you handle the major shareholder when you're doing your NCIB? And secondly, can you give us some color on what GMT Capital's intent is and whether the company should probably try and shop that block around?

So if you actually look back, they have posted that several times. That's just their kind of standard requirement that they do post. They've never filled up or sold near that many. They've sold -- they've posted similar ones for some of their other bigger oil holdings as well. Basically, it just gives some flexibility. You've actually seen over the years that they have grown their position, never shrank it despite having filed that. In fact, I think last year, they had gained -- they had bought an additional 9 million shares to the market. So that's -- they want the flexibility to buy and sell kind of at whim. So they filed those on all of their major holdings that we can see. So that is pretty standard. They've never sold anywhere kind of near that amount. And again, it's their strategy. I'm not too concerned, but we stay in great contact with them, and we work very closely with them. Same with, again, all of our key shareholders, say, the top 10, we're in pretty frequent conversation with. They're quite happy I can tell with what we're doing with the share performance. And again, they've been very supportive. So in terms of actual strategy, if it comes to Libra or GMT or any of these, I can't speak to that, but I will say that they have filed these reports. Similar companies, they filed them in the past with us and yet year-over-year, their shareholdings tend to grow with a little bit of buying and selling on the margin. So none of that is overly concerning, but I will say we're very happy to have them as part of the story and our relationship with them has been fantastic.

Yes. And listen, I really believe the stock is undervalued. It's a bit of a gem with your strategy, I like the idea of counting pencils at the head office, which is very rare these days. Is there any indication that you might want to put the company up for sale given you've been active in M&A on the other side?

Yes. I think for $20 a share, we'd be willing to let it go, I think. But listen, what we've built here, I agree with you, I think we should be trading closer to our 1P. And right now, our 1P on the last reserve deck that came out at the end of March is $11.32. I'd say a lot of companies that should be the floor of their value. Again -- but you fast forward to the end of the year, once we have more debt paid down, more shares paid down, you're going to see that probably approaching $13 to $14. So again, it's not our company to sell. We're just a steward of shareholders' capital. But for us as a management team, I can say we didn't design this thing for a quick flip. We have a great team here. We have great assets, and we've got 20-plus years of drilling inventory that we'd like to see exploit. And we want to get the value for the shareholders and everybody. So if there's an offer that comes along and the shareholders believe it's in their best interest, then that's our job to execute. But in the interim, we're just running the best company we can. I haven't heard any of our major shareholders ask for that or none of them have come to us and said, listen, let's try and get a quick clip out of this. All of them that we've talked to, I think, see the long-term value and support kind of our vision in executing.

Your next question comes from the line of Jesus Santos with [indiscernible]

First of all, congratulations for these outstanding results. You mentioned that we are going to bring some CapEx forward. My question is if there is room for accelerating that even more and spudding some wells earlier?

Yes. So as you're aware, with what we deal with, specifically in our field, Central Alberta and Saskatchewan, we deal with breakup, where kind of from January -- from mid-March until mid-May, we can't get out in the field just due to road bans and other things. But I'm actually going to pass it over to Justin Kaufmann, and JK should be able to kind of walk through the intricacies of drilling and what we're able to do given our time line and the weather.

Yes. Generally, we get out into the field somewhere between mid-June and July. There's a lot of wet weather that we're dealing with coming out of spring. This year, we do want to accelerate that. We're going to be out in the field next week resetting our Viking wells. And then the following weeks, we'll have a staggered start with 4 rigs out the door after May long with the fifth rig in June. So 5 operating rigs before the end of this quarter with the sixth starting just after the July weekend. So we are accelerating that from our previous plan. That acceleration will be in Southeast and West Central. We have mentioned before, 3 core areas. We really like the short cycle times of the Viking. We can drill a well at 3 to 4 days, complete it, bring it online within 2 weeks. So we're looking to take advantage of these commodity prices, and that's what we're doing in those plays.

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.