Ridgeback Resources’ Bakken land, in yellow. The grey area in the centre is mostly land controlled by Crescent Point in their Viewfield Bakken play. Ridgeback Resources

 

CALGARY – Saturn Oil & Gas Ltd. is continuing an exponential growth pattern through acquisitions.

At the close of the markets on Friday, Jan. 20, Saturn announced it was acquiring Ridgeback Resources Inc., one of the largest players in the Saskatchewan Bakken and Mississippian plays, which also has significant operations in three areas of Alberta. The deal is for $525 million.

Ridgeback is led by CEO J. Paul Charron. His management team had incorporated CanEra Resources Inc. (CanEra I) in 2008 and sold in 2010 for $603 million. CanEra Energy Corp. (CanEra II) incorporated in 2010 and sold four years later in May, 2014, for $1.1 billion, just before the big oil downturn hit later that year.

In 2013, Petrobakken changed its name to Lightstream Resources. It went bankrupt in 2016 with $1.2 billion in debt, and the court approved sale of “its assets to a new company that will be owned by its creditors,” according to a Canadian Press report of Dec. 9, 2016. Ridgeback Resources Inc. was that new company, formed in June, 2017, taking over those Lightstream properties.

On July 5, 2022, BOE Report carried a Reuters story which stated Apollo Global Management Inc and the credit arm of Blackstone Group Inc were looking to sell Canadian oil and gas producer Ridgeback Resources for more than C$1 billion. “Apollo and Blackstone formed Ridgeback in 2016 to buy bankrupt Canadian oil producer Lightstream Resources in a C$1.35 billion deal. The two U.S. buyout firms were among the largest bondholders of Lightstream.”

Step forward to Jan. 20, and Saturn was able to make a deal for half of that value, for most, but not all, of what Ridgeback was last summer. Ridgeback had successfully sold off its 2,500 boepd Grande Prairie properties to another party. That deal closed Dec. 1.

Saturn is calling this deal “transformational,” adding “17,000 boepd (~71 per cent light oil and natural gas liquids), with a proved developed producing reserve value of $915 million, forecasted 12-month Net Operating Income/ Operating Free Funds Flow of $311 million / $228 million, 99.4 MMboe of proved plus probable reserves, and over 700 net drilling locations, to sustain the acquired production for over 15 years.”

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In Saskatchewan, the Ridgeback land base forms something of a halo almost completely surrounding Crescent Point’s Viewfield Bakken play. Indeed, it closely rivals Crescent Point’s holdings in that area. It has been developed for both Bakken and Mississippian production.

In the last two years, Saturn had previously purchased a sizeable portion of Crescent Point’s conventional oil production properties in the Oxbow area which are adjacent to the new Ridgeback assets in southeast Saskatchewan.

The release notes, “Pro forma the acquisition, Saturn will be positioned as a bona fide mid-cap oil producer with a market capitalization of approximately $292 million and an enterprise value of $850 million, with run rate production of approximately 30,000 boepd, a combined proved developed producing reserve value of $1.4 billion, forecasted 2023E EBITDA / Free Funds Flow of $477 million / $228 million, and 163 MMboe of proved plus probable reserves.”

In Q1 of 2021 Saturn was producing just 233 bpd out of the Kindersley area. It’s been a busy two years. As the result of four acquisitions and development drilling, the company expects to exit Q1 2023 at approximately 30,000 boepd.

That’s according to John Jeffrey, president and CEO.

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

Bought deal financing

The financing side is described as such: “The $525 million consideration for the Ridgeback acquisition will include a $475 million cash payment and the issuance of $50 million of Saturn common shares to the shareholders of Ridgeback (the “consideration shares”) at a deemed price of $2.5765 per consideration share ($41 million in deemed consideration using the offering price of $2.11 per share). The cash consideration of $475 million will be funded through proceeds from an increase of $375 million to the company’s existing senior secured term loan (“senior secured term loan”) and a bought-deal subscription receipt financing for aggregate gross proceeds of approximately $125 million (the “offering”). Ridgeback has no outstanding debt and is expected to have a working capital surplus of approximately $20 million at the closing date.”

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People

Ridgeback has approximately 170 staff, and Jeffery explained as it’s a corporate purchase, they’re looking to retain the Ridgeback team. “It’s a corporate sale, so we get the whole team, should they choose to come.

“And that’s one of the things we like most about the transaction. They’ve got a great technical team over there. That’s one of the things Ridgeback’s senior management team highlighted to us.

“Saturn is a small team currently, right? So, we’re a growing company. It’s not like one of the big producers is scooping up the assets, and half their team is getting laid off. No, we need these professionals to execute and develop the attractive portfolio of assets. We need their expertise and they’ve got a great reputation of doing great work, and we’re excited to have them come over.”

That includes the field staff.

The inclusion will more than double Saturn’s staff, bringing it to close to 300, all-in.

Ridgeback has a field office in Stoughton, and Saturn has a field office in Carlyle.

Ridgeback Resources’ Mississippian wells, in black. Ridgeback Resources

Operating areas

The Ridgeback assets consist of over 430,000 net acres of land, in four core areas. Three are in Alberta, one is in Saskatchewan. Saturn described them as such:

  • Southeast Saskatchewan – A strategic extension of Saturn’s existing and adjacent core development area;
  • Alberta Cardium – Entry into one of North America’s largest and most economic oil pools, with over 300 development drilling locations;
  • Kaybob Montney – Highly economic, de-risked light oil play with fast payback development drilling locations; and
  • Deer Mountain Swan Hills – High oil weighted production, with an established enhanced oil recovery program.

In southeast Saskatchewan, Jeffrey noted in some areas this will include a “stacked play,” with both Mississippian and Bakken production and potential. The Mississippian targets include Frobisher, Alida, Tilston and Midale light oil development.

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Bakken reborn?

While recent years have seen Bakken unconventional development, with multistage fracking, starting to peter out, there’s a new development on the horizon that has Jeffrey excited.

North of Stoughton, Cache Island Corp. has pioneered a new form of Bakken well, with six laterals and open hole completion. This foregoes fracking, which has been a staple of Bakken development since around 2006, greatly reducing costs.

Justin Kaufmann, chief development officer, explained drilling additional laterals costs $30,000 to $50,000 each. He said, “If you drill a six leg well, that’s five additional legs, so you’re looking at $200,000 to $250,000. Whereas to frack that Bakken well, you’re getting closer to $600,000 to $700,000.”

Kauffman noted that in the northeast area of the earlier Bakken development, the formation is thinner, and some early fracking came through into the Lodgepole formation, thus causing additional, unwanted produced water.

“With this conventional completion technique, it’s not happening anymore. This allows you to bring on oil where previously they brought on water, opening up a brand new area, where we know there is oil, for potential development,” he said.

Notably, Cache Island is headed up by former Crescent Point CEO Scott Saxberg, and Crescent Point has since drilled two similar wells near Cache Island’s efforts, reporting strong results.

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Jeffrey said, “So what gets me excited about that area is their initial IP (initial production) numbers look fantastic. Your EUR is supposed to be higher. You’re drilling them for 70 per cent of the cost of an unconventional well. Both Crescent Point and Cache Island have since licensed more wells.

“So, what does that mean for Saturn? Well, we haven’t developed in the unconventional Bakken, and there’s over 266 booked locations with another 150 unbooked locations that come with the Ridgeback acquisition. But when you start looking at the conventional side of things, we see there is well over 100 potential conventional Bakken locations, in addition to that. And then Mississippian development on top, because we have stacked pay through a lot of the acquired area, specifically in the northeast, where you get Bakken underlying the Mississippian.”

Jeffry noted they bought in for the low decline production and the proven drilling locations, but there’s the Mississippian upside and now potential conventional Bakken development. He pointed out. “The new conventional concept play is being evaluated on land surrounding what we own, so the upside is tremendous.”

Kaufmann noted it could have substantial impact on their current reserve location basis that they’re acquiring from Ridgeback.

Jeffrey said, “We’ve got over 100 drilling locations just offsetting the two wells that they’ve drilled. We own 65 per cent of the land around the test wells. So, they are proving up our land for us, which is very much appreciated.”

Alberta

Asked what the split in value was between the Alberta and Saskatchewan portions of the deal, Kaufmann said, “I think it’s close to 50/50, based on what we know so far. Obviously when we integrate our technical teams, they’re going have important input to future development. Based on the conventional Bakken that we see, even though there’s more production on the Alberta side is about balanced on each side of the border.”

Jeffrey noted that even though the Saskatchewan production was about 30 per cent out of the acquired 17,000 boepd overall, they internally valued the Saskatchewan portion as at least 40 per cent of their overall initial bid.

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In Alberta the bulk of production is in the Pembina Cardium play where there’s around 9,200 boepd, and there’s a bit up at Swan Hills and Kaybob.

With the Alberta Cardium play, the deal opens up a third core area for Saturn, after its Viking core near Kindersley and the southeast Saskatchewan Oxbow asset. Jeffrey said they have had outstanding success in Viking drilling where initial production is coming on 50 per cent above their industry based targeted types wells.

Jeffrey stated, “For us, one of the most attractive aspects of the deal is the low price. We paid only 2.3 times price to free cash flow and a 40 per cent discount to the PDP NPV10% on the assets of over $900 million. If you look at net operating income (NOI) on the acquired properties over the next 12 months, we expect over $300 million. So, we’re paying less than two times NOI.

“It’s a very clean asset. This is the cleanest deal we’ve ever looked at. Corporately their LOR is at 3.5, if you average out Alberta and Saskatchewan.

“A huge bonus is the addition of their technical team, because we’re a relatively small team. We get the benefit of their collective technical staff and their team have done a great job drilling wells lately. They have over $850 million in tax pools that is a welcome addition in these high oil prices and strong cash flows. So, there are just benefit after benefits. The more we dig into the opportunity set, we find something else we like,” Jeffrey said.

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Additional notes

Saturn said its “strategy remains to efficiently maintain production and maximize free cash flow to rapidly reduce indebtedness which is expected to be fully repaid within three years, and will be evaluating various opportunities to return significant capital to shareholders.”

GMT Capital Corp. and Libra Advisors, LLC have indicated that they will make lead orders and strategic investments that the company indicated were part of just four major investors that make up about 90 per cent of the equity raise, and that they that are expected to be long term holders.

Saturn will seek to appoint up to two new members to the board of directors to expand its technical and operational expertise, and separately the company has entered into new employment agreements with Jeffrey and Kaufmann to align incentives with shareholder interests. The release notes their initial agreements were made when Saturn was a much smaller company. The new agreements reference performance warrants for the two.

 

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The rise, and perhaps fall, of fracking in southeast Saskatchewan? Crescent Point starts drilling Viewfield Bakken wells without fracking them

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