Saturn Oil & Gas president and CEO John Jeffrey, speaking to European investors via Zoom. Screen capture

 

CALGARY – Saturn Oil & Gas had a good day on Feb. 17, announcing the acquisition of 240 bpd production in the Plato and Tautness areas of west central Saskatchewan from a junior producer, and speaking to investors across the pond in an online forum about the company’s substantial growth over the last year.

Saturn has had a long history of European investment. In November 2021, president and CEO John Jeffrey spoke to the Frankfurt, Germany-based International Investment Forum, and again on Feb. 17.

In that presentation he spoke about the company’s growth in the past year, principally through a major acquisition of 6,400 boepd production from Crescent Point Energy. That purchase dramatically increased the size of Saturn’s production, as well as its geographic base. Previously, Saturn had been focused on the Viking formation, with a core area west of Kindersley.

This story is based on Jeffrey’s presentation to the forum and a phone interview the same day with Pipeline Online. Saturn’s Dec. 2021 corporate presentation can be found here: saturn-oil-corporate-presentation-december 2021

The time was right to buy

It turns out buying production when oil was US$65 a barrel pays off when oil hits US$95 per barrel.

Jeffrey said, “In June of 2021, just about nine months ago, we completed our Oxbow acquisition, and that grew our production over 2,000 per cent. These were outstanding metrics at the time, at which it was a $65 oil environment when we closed the deal. Given today that we’re in excess of $90 oil pricing environment, this asset is worth multiples more of what it was then. And given its expected cash flow profile this year, this asset will kick off more cash this year than the whole purchase price.”

Jeffrey told the European investors that the management likes Saskatchewan so much in part because almost all of the management team has a personal history with the province.

Saturn used to be based in Saskatoon, but in recent years has relocated to Calgary.

Saskatchewan, he said, is “a great place to do business. It has a favorable royalty regime and a government that is strongly supports the energy industry. So it is one of the top industries, and they are very friendly to us.”

Jeffrey said the initial focus was on integrating the new assets in southeast Saskatchewan over the last nine months, and that was done ahead of schedule.

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“Now we’re shifting our focus from integration to growth for the Oxbow asset,” he said. “We have brought six new horizontal wells onto production in December and January, and we look forward to releasing some phenomenal drilling results shortly. We have a lot of exciting things coming up and we are out in the field, drilling today. And all thanks to this acquisition and today’s oil price. It really opens the door for a long, long history of what we have planned.”

Jeffrey noted they saw just about 2,900 per cent growth rate from Q1 to Q3 2021 production. “It’s going to be tough to duplicate that again in ’22. But we will still intend to be growing steadily and organically. The reason we’re able to produce predictable and repeatable growth, is the mature nature of the asset, where Saturn is drilling into well defined oil pools. There is extensive “low hanging fruit” opportunities with over 400 non-producing wells that we’re currently working over, putting back into production. We have 370 drill locations with booked reserves, giving us 20 years of drilling inventory. So what that means is at today’s production level, we can sustain that production over the next 20 years, just with the inventory we have in front of us today.

“The wells we do have coming on now are significantly higher producers than the area’s typical type curve. This success is all thanks to our very skilled technical team here, with an ongoing strategy of focusing on both new drills and optimization of his existing wellbores.”

Jeffry called the strategy of new drills and optimization as “walking down two paths.”

Regarding optimization, Jeffrey said, “When you look at the current pace of production, we have about 1,100 producing wells today. And we have about 400 non-producing candidates for workovers. Our technical team has been going through and finding and evaluating this large opportunity set for where we can re-drill them, we can turn them back on, or you can re-stimulate the formation; there are any number of number of things to make an inactive well active again.

“You can see so far to date, we’ve brought on over 20 older wells back to production with capital efficiency at about $1,700 a barrel per day. To put that in context, most of our peers are generally bringing new well production on for $15,000 to $25,000 a barrel per day. So, if you’re hoping for 100 barrels a day, you can expect to pay about $2 million to bring that on. Still very economic with the current oil prices.

“In contrast, with Saturn’s optimization program, because so many wellbores already exist, the infrastructure’s there, the land’s there, the lease is built. When we bring on production through workovers and optimization, we’re targeting $5,000 a barrel per day. So obviously, the economics favor optimization over drilling by quite a bit. We are delighted from the early results we have started off at $1,700 a barrel per day, but again, it’s thanks to our strong technical team, we’re able to undercut our own budgeted numbers by quite a margin. Our challenge will be to reproduce these results in scale, to which I have the utmost confidence in our team.”

Some of the optimization activities include acidization, perforations, and scab liners. “It’s engineering-heavy, but as you can see with the economic results, it’s definitely economic to do these,” Jeffrey said.

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From December to January, the company drilled six horizontal wells, and the results will be released soon. This follows three wells drilling in the third quarter of 2021 which added 200 bpd for $3.7million in spending. The company had over 370 booked drilling locations, and a further 100 unbooked locations.

In the Viking, they have over 120 booked locations.

The company is putting approximately 50 per cent of its cash flow going towards debt repayment, and another 50 per cent towards the drill bit and workovers, driving internal growth.

Jeffrey said, “We’re committed to maintaining a conservative balance sheet, with a focus on debt repayment and organic production growth. After capital expenditures, Saturn expects to generate a free cash flow yield of about 25 to 30 per cent. We want to make sure that we are paying down debt as quick as possible. This provides us the financial flexibility to consider a future dividend, or it positions the company for the next transformations acquisition. However, it can’t be overlooked that in the $90 oil pricing environment, that Saturn needs to take a balanced approach and ensure we continue to be active drilling and bringing on incremental production. We have some recently drilled top tier wells that will pay off inside of four months.”

He added, “Given our modest valuation, new investors joining Saturn today gain a tremendous exposure to the recent rally in oil and gas prices.”

Jeffry expanded on three scenarios. When oil was at US$65/bbl for WTI, the initial focus was on debt repayment with a modest level of drilling, which was expected to result in a 2022 average production of 7,500 boepd. Currently the company is forecasting with oil at US$75/bbl, the drilling budget is being expanded in addition to the debt repayment, resulting in an average production of 8,200 boepd. The “blue sky” scenario with US$100/bbl oil would see that drilling budget expanded further, as well as quicker debt repayment. In that case, they could see an average of over 9,000 boepd production for the year.

“We haven’t seen oil pricing like this since 2014,” he said.

Jeffrey said they are committed to being good partners with farmers and good partners with the environment. A top priority of Saturn is returning old, inactive wells and facilities to pristine conditions. As part of the Oxbow acquisition, the company made a $21 million deposit with the Saskatchewan government, designated for future site reclamation. They currently have three service rigs working on abandonments through the Accelerated Site Closure Program, as the company has been given approximately $13.3 million from the federal program. In total they have a $40 million budget for reclamation. “We hope to clean up about 600 wells with that,” Jeffrey said. “By the end of this year alone, we’ll have over 200 wellsites remediated.”

Saturn employs two more service rigs doing other work.

The company has one drilling rig active now, is looking to add a second in the Viking area shortly, and is considering three drilling rigs after breakup.

Asked by an investor if Saturn was a takeover candidate, Jeffrey responded they are representing the best interests of their shareholders, if the right price comes along, but it is not part of their immediate strategy. “Our strategy now is to continue to grow to continue to continue to add value, pay down debt. I think we can return more value to shareholders the next couple of years by driving the debt levels down and driving the production up. Then at that point, we can look to start returning capital to the shareholders in the form of the dividends, share buybacks and other things.”

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While Enbridge’s Line 5 pipeline through Michigan has been in doubt, Jeffrey noted they are not exposed to it. Their product ships via Enbridge’s Line 3.

Jeffrey noted they are in the hunt for other acquisitions, looking at several prospects throughout Saskatchewan.

Their purchase announced on Feb. 17 was 1.4x cash flow based on US$65/bbl WTI oil, but with current prices north of US$90, that works out to less than 1.0x. The asset and equity markets are not pricing in the current increase in oil prices, and that creates mispricing opportunities and Saturn is looking for more.

Banks aren’t interested in oil

A substantial reason is the fact many banks just aren’t that interested in backing oil companies. Fortunately, Saturn has a private lender from New York backing them, according to Jeffrey.

“I think there’s a strong arbitrage opportunity right now. And we’re definitely looking at a number of different acquisitions. We want to stay active in that space,” he said.

He listed a number of companies, saying, “There’s a few juniors down there (in southeast Saskatchewan) still.

“There’s a lot of running room left.”

Asked if we’ll see a rebirth of junior producers, as the junior producer model all but died in 2014, Jeffrey responded, “My best answer is ‘probably.’

“The reason I say that, is capital has to start coming back to this space. It’s ludicrous right now that assets are selling for $30 to 35,000 per flowing barrel, and oil in the $90s. This was a reasonable metric when the price when oil was in the US$60s. So, many assets and companies remain undervalued still, which is great for us as it creates very attractive arbitrage. We can buy assets today at discount prices, the assets pay off the debt incurred, until such time as the asset’s cash flow is entirely owned by shareholders. Junior oils right now have been hurt by a few factors and the lack of capital has been a major detriment. When the Schedule A banks in this country quit lending to midsize companies, it just pushed pressure all the way down the capital side,” Jeffrey said.

That’s being reflected in lower drilling activity across the province, even with oil at US$90 per barrel. According to Jeffrey, “The lack of capital has created a constraint on drilling budgets and banks have continued to call back capital. This is leading several well-know petroleum producers to guide shareholder expectations for minimal growth to even falling in production year over year.”

He Jeffrey pointed out they are fortunate to have “extremely strong funding partners out of New York.”

“The only think I can point to, it’s not that their shareholders or executives want them to shrink. It’s their bankers telling them they need to pay down debt. And then that’s restricting that flow of capital that should be going towards the bit,” he said.

Oil companies are currently trading at low multiples. But that plays to Saturn’s advantage, Jeffrey said. “We have strong lending partners. We have strong equity partners, and we’re able to react quicker. So we expect industry will see at least 12 months of price arbitrage in front of us.  Saturn is working to leverage our financial relationships, pick up these mispriced assets near term that we know, in 18 months, should be valued at $70,000 to $75,000per flowing barrel.  When we join our peers and the group starts trading at a reasonable historic multiple of five or six times EBITDA, then that would be a multiple win for Saturn and our shareholders.”

 

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