Brian Zinchuk is editor and owner of Pipeline Online
CALGARY – Saturn established itself in the Viking play of west central Saskatchewan, then over the last year it grew tremendously from a large purchase in southeast Saskatchewan. It’s on the hunt again, this time back in its old stomping grounds of the Viking, picking up 4,000 boepd in a deal announced late May 31.
Saturn Oil & Gas Inc. announced that it has entered into an arms-length definitive agreement to acquire synergistic assets in the Viking area of West-central Saskatchewan for approximately $260 million. The Viking acquisition is expected to close on or about July 6, 2022 with an effective date of May 1, 2022.
Those assets are coming from Crescent Point Energy Corp. Crescent Point had consistently kept a drilling rig working in the area for many years, but the company put substantial chunks of its non-cores assets for sale a few years ago. Saturn had previously purchased the what they call their “Oxbow asset” from Crescent Point.
Through the Viking acquisition, Saturn said it will “acquire approximately 4,000 boepd (~98 per cent light oil and liquids) of high cash flow netback production and over 140 net sections of land, strategically positioned in the Viking fairway, which boasts one of the most attractive light oil resource plays in North America highlighted by payouts on newly drilled wells of approximately seven months based on a WTI oil price of US$95/bbl.”
The Viking acquisition bolsters Saturn’s existing Viking light oil asset in west-central Saskatchewan while complementing its core growth asset in Southeast Saskatchewan which targets the Frobisher and Midale (referred to as the “Oxbow asset”), further building size and scale for the company’s growing operations in Saskatchewan.
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Transaction highlights
- Expands Existing Core Production Area: Significantly expands Saturn’s production base in its existing core production area in west-central Saskatchewan while also providing an operational fit and expertise with proforma production at the closing date forecast to be approximately 11,400 boepd1, an increase of approximately 52 per cent over Q1 2022 volumes;
- Highly accretive on a per share basis: The Viking acquisition increases Saturn’s 2022 adjusted funds flow2 (AFF) guidance by 18 per cent to $2.92 per weighted average share over previous guidance of $2.48. With a full 12 month impact of the Viking acquisition, the 2023 forecast adjusted funds flow is $223 million which equates to $3.98 per basic share.
- Doubles Saturn’s Land Position and Increases Viking Drilling Inventory by 250 per cent: Brings 186 gross (146 net) sections with high working interest (79 per cent average) in a coveted region of the Viking oil fairway. Adds 138 (gross) booked Viking drilling locations which are anticipated to deliver paybacks of seven months based on a WTI oil price of US$95/bbl and provide sustainable production for over a decade;
- Generates high cash flow at various commodity price levels: Strong corporate netbacks can be realized down to $50 Edmonton light oil prices, underpinning the generation of substantial free cash flow that can be directed to reducing debt levels and funding near-term organic growth which, given available infrastructure, will serve to reduce per boe operating costs.
- Provides robust corporate netbacks: Viking acquisition is forecasted to reduce Saturn’s corporate royalty rate from approximately 15 per cent down to 12 per cent, and decrease operating costs per boe by 16 per cent, which will enhance corporate netbacks. Saturn expects to realize further cost savings across transportation, labour and treating costs with the addition of treating capabilities afforded by the Viking acquisition.
- Increased Size and Scale: Expansion of the production base is expected to enable Saturn to capture operating efficiencies and realize high facility utilization (currently operating at <60 per cent utilization) which can result in fixed and variable costs being allocated over larger per unit volumes of production.
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Saturn Oil & Gas president and CEO John Jeffrey, speaking to European investors via Zoom. Screen capture
Attractive acquisition Metrics:
“This significant transaction represents yet another critical milestone for Saturn as we execute our strategy of building a scalable portfolio of free cash flow generating assets that support both near and longer-term development, while also diversifying our production exposure across multiple highly economic plays to enhance our sustainability,” said John Jeffrey, CEO of Saturn, in a release. “This Viking acquisition allows Saturn to bring proven expertise in the efficient and responsible development of Viking light oil plays and benefit from additional size and scale to further improve our already low-cost structure and streamlined operations. Upon closing of the Viking acquisition, we forecast run rate production volumes of approximately 11,400 boepd (96 per cent crude oil and NGL)1, positioning Saturn to generate strong free cash flow which can be directed to debt repayment and future growth opportunities that can enhance shareholder returns.”
The Viking acquisition will be funded through proceeds from an increase of $200 million to its existing senior secured term loan and a bought-deal subscription receipt financing for aggregate gross proceeds of $65.0 million.
Strategic benefits
The Viking acquisition is consistent with Saturn’s strategy to become a premier, publicly traded light oil producer through the acquisition and development of undervalued, low-risk opportunities that support building a strong portfolio of cash flowing assets offering strategic development upside.
The company said this provide Diversified Play Exposure which enhances sustainability. It Improves the balance of production between the company’s core Oxbow asset and Viking asset. The Viking asset previously comprised 6 per cent of total production and with the addition of the Viking acquisition, the Viking will now represent approximately 35 per cent of overall production, diversifying our asset concentration.
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It provides stable production with minimal maintenance capital. The company forecasts keeping Viking production flat at ~4,500 boepd by drilling 35 to 40 wells per year generating free funds flow2 of over $85 million per year with potential for growth. Saturn said base production is easily replaced year-over-year due to stable long-life assets and production optimization underpinning recent drilling.
Saturn found compelling economics with enhanced financial flexibility – Robust AFF generation is driven by attractive half cycle economics with IRRs over 200 per cent while exceptional netbacks support payouts of approximately seven months. Reserve type curve forecasts remain robust with area break even on Edmonton Light prices down to as low as ~$50/bbl[8]. The Viking acquisition is expected to strengthen Saturn’s risk management portfolio, allowing the company to significantly improve its average realized price of hedged oil and obtain greater upside exposure in a strong price environment.
The company noted a low proportion of booked inventory and conservative type curves on the Viking acquisition assets present opportunities to leverage extended reach horizontal wells, pursue exploitation of the Upper Viking and implement production optimization and waterflood.
It also provides flexible marketing arrangements and improved hedge book. Saturn noted that crude produced in the area is sold on the Mid-Sask pipeline at Kerrobert, while gas is marketed under one year gas sales contracts. Saturn also realizes benefits to its hedge book as existing out-of-the-money hedges become significantly diluted through the Viking acquisition, and allow the company to capture more of the upside of the current strong price environment.
Owned infrastructure allows for minimal spend with support for growth supported by sufficient egress in the area while significant processing capacity is available across the field with four operated oil batteries having over 12,000 bbl/d of capacity, two LACT pumps and gas sales connections with 3rd party gas plants in area.
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The area benefits from responsibly deployed capital directed to abandonment and reclamation programs with limited inactive liabilities and a strong limited liability rating (LLR) of 3.50, Saturn said Go forward emissions reduction potential is possible through tie-in points in Hershel and Plato for gas sales, gas injection potential based on modelling results, and bitcoin and power generation with produced gas.
Pro-forma numbers are based on pricing assumptions of: a WTI price of US$95/bbl for 2022 and US$90/bbl for 2023; an MSW/WTI differential of USD 4.00/bbl; an AECO price of $5.00/GJ; and a USD/CAD exchange rate of $1.25.
Combined, over 18 months post close, Saturn’s aggregate guidance includes capital spend of $155 million, production growth of 25 per cent and adjusted funds flow of $329 million2, resulting in free funds flow of $174 million.
Three-year plan
On the back of the transformational Viking acquisition, the company intends to initiate an inaugural three-year plan focused on free funds flow growth, payout of debt, ARO discipline, leveraging strong relationships with key stakeholders, positioning Saturn to offer greater institutional appeal, improved liquidity, and the potential for future inclusion in key indices.
Highlights of the three-year strategic plan, based on the assumptions set forth above and management’s expectations (including lender and board approvals) include:
- $100 million in capital expenditures per year ($355 million over the life of the plan, inclusive of H2/22).
- Rapid near-term average production growth of 25 per cent from closing of the Viking acquisition to the end of 2023, underpinning a 2025 production target of ~15,000 boepd.
- Beyond our guidance period of H2/22 (US$95 WTI) and 2023 (USD 90 WTI), our base case assumptions include a flat oil price of US$85 in 2024 and 2025.
- Over the next 3.6 years, we anticipate generation of up to $860 million of funds flow2, inclusive of $106 million in H2/22, which in turn generates over $500 million of free adjusted funds flow2.
- If Saturn elected to apply all excess free cash flow to debt reduction, the company would have the ability to be debt free in Q4/2024, and to exit 2025 with approximately $200 million in cash on our balance sheet.
- 10 years of drilling inventory expected to remain in 2025.
- Continue our strong commitment to environmental, social and governance principles, including meeting our ARO obligations.
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Bought Deal Equity Financing
In concert with signing the definitive agreement for the Viking acquisition, Saturn has entered into an agreement with syndicate of underwriters co-led by Canaccord Genuity Corp. and Eight Capital to issue and sell, approximately 23.6 million subscription receipts on a bought deal basis
Senior Secured Term Loan
Saturn expects to enter an amended and restated senior secured loan agreement with its U.S. based institutional lender to provide addition loan proceeds of $200 million. The loan will bear interest at a rate of CDOR + 11.5 per cent and will amortize over three years, with 50 per cent repayable in the first year, 30 per cent in the second year and 20 per cent in the final year. Based on forecast production rates and hedged commodity prices, Saturn anticipates repaying the loan in full well in advance of its scheduled amortization payments. Execution of the further amendment is subject to the execution of mutually acceptable credit documentation giving effect to the terms provided in the commitment letter, and the satisfaction of the other customary conditions to closing, including the satisfaction of all conditions to the completion of the Viking acquisition.
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