Brian Zinchuk is editor and owner of Pipeline Online
CALGARY – Last year was transformational for Saturn Oil & Gas, with the acquisition of former Crescent Point properties in the Oxbow area. The result was a substantial growth in the company, just prior to dramatic increases in oil prices. Those realities were reflected in the company’s year-end financials, released at the end of business on April 29.
“The fourth quarter of 2021 was an important milestone for Saturn as we initiated our first drilling program at our newly acquired Oxbow asset,” said Justin Kaufmann, senior vice president exploration, in a press release. “Our inaugural Oxbow drilling program was highlighted with the top performing well drilled in Saskatchewan in Q4 2021 of the 550+ wells drilled with over 500 hours of production data.”
The company said it achieved corporate record production with fourth quarter 2021 average of 7,279 boepd, compared to 415 boepd in the fourth quarter of 2020, an increase of 1,654 per cent.
Saturn generated adjusted funds flow of $9.7 million and $27.3 million in the three and twelve months ended December 31, 2021 compared to $1.2 million and $3.5 million in the comparable 2020 periods primarily due to contributions from the operations of the Oxbow asset.
It also achieved operating netbacks for the three and twelve months ended December 31, 2021 of $35.66 per boe and $36.38 per boe.
Saturn invested $3.6 million development capital in the fourth quarter, drilling four 100 per cent working interest Frobisher wells.
The company generated fourth quarter free adjusted funds flow of $5.7 million, excluding property acquisition expenditures of $2.8 million relating to the Oxbow Asset. It exited the fourth quarter with $71.1 million net debt, realizing an annualized net debt to H2 2021 adjusted funds flow of 1.5x.
In a message to shareholders, Saturn’s press release said, “2021 was the most impactful year in the history of Saturn, which was highlighted by the acquisition of the Oxbow asset in June of 2021. This transformational acquisition enhanced the company’s long-term sustainability by adding a low decline, light oil focused production base that provides substantial cash flow to fund the future growth of the Company and to retire the debt incurred in the acquisition. The Oxbow asset also has extensive development potential with 298 gross booked drilling locations and an additional 200+ identified and un-booked gross drilling locations which collectively provide over a decade of internally generated drilling inventory. Also critical to Saturn’s future growth plans is the optimization and workover of the non-producing wells acquired at Oxbow and to return many of these wells into economic production.”
Saturn said it invested approximately $91.1 million in combined capital expenditures and property acquisitions in 2021 between the acquisition of the Oxbow asset and its 2021 drilling program. This investment resulted in a production increase of 3,024 per cent, from 233 boepd in Q1 2021 to 7,279 boepd in Q4 2021. “The production increase of 7,046 boepd implies an attractive capital investment efficiency of $12,929 per boepd. Saturn is focused on repeating the success of 2021 by continuing to direct future capital expenditures to the highest expected return projects in our inventory,” the company said.
Saturn said it made substantial increases to its reserve base in 2021 with total proved (TP) and total proved plus probable (TPP) reserves increasing year over year by 910 per cent and 668 per cent, respectively. Finding, development and acquisition costs of reserves were achieved at “attractive metrics” of $3.15/boe for TP and $2.14/boe for TPP ($9.69/boe for TP and $9.28/boe including future development capital) which it said are top tier amongst light oil peers.
The fourth quarter of 2021 marked the end of the integration period of the Oxbow acquisition and the beginning of the development of the company’s new core growth unit in southeastern Saskatchewan. Saturn drilled four successful horizontal wells in light oil-bearing Frobisher zones in the Glen Ewen area in the fourth quarter of 2021, which were placed into production in December of 2021 and in January of 2022. The initial production of Saturn’s first group of Oxbow wells has exceeded the company’s expectations averaging 96.3 bpd per well, for the first 30 days, representing a 40 per cent increase above the average type curve of all wells drilled in Southeast Saskatchewan Mississippian play in the past five years, with a sample size of 1,400 wells.
The initial success of these drill results has encouraged Saturn to undertake a 29.2 net well drilling program for 2022 at the Oxbow asset. This program is planned to be executed by one drilling rig which has been contracted throughout 2022, the company said.
Saturn directed substantially all of its Q3 2021 capital expenditure program to the Viking asset in west central Saskatchewan with the drilling of three successful horizontal wells in the Loverna area. The Viking asset contains 53 gross booked drilling locations with reserves at year end 2021 representing approximately 15 per cent of the company’s overall booked drilling locations. Subsequent to year end, Saturn acquired a synergistic asset in Viking area increasing the company’s land position 200 per cent and adding additional drilling locations, in February 2022. Saturn has budgeted to drill five net Viking wells, starting in June of 2022, representing approximately 15 per cent of the wells Saturn plans to drill in 2022.
Over the period of the boom, Crescent Point bought up the assets of many companies in southeast Saskatchewan, and a substantial portion of that is what Saturn acquired as its “Oxbow asset.” As a result, the newcomer to the area also has a substantial number of old wells it is now liable for.
Saturn said it continues to prioritize the abandonment and reclamation of wells that no longer have economic production potential as part of the company’s land reclamation program. The company has contracted two service rigs to work exclusively on decommissioning old well bores and to date 38 wells have been abandoned. Saturn’s land reclamation program in 2022 is 100 per cent funded by $13.8 million awarded under the Accelerated Site Closure Program (ASCP) and through the Indigenous business credit pool. The company is targeting abandoning a total of 150 to 200 unproductive wells in 2022. Saturn continues to have a $21 million deposit with the Saskatchewan government for future abandonment and reclamation obligations.
Saturn said it is pursuing a balanced approach to sustainable production growth and rapid repayment of debt. The company is forecasting 2022 to be another record year for oil and gas production, as outlined in the March 15, 2022 announcement of the fully funded $50 million capital program. The budgeted 2022 capital program is expected to result in:
- Average 2022 annual production in the range of 7,800 to 8,200 boepd;
- Generating hedged EBITDA in the range of $73 to $77 million, based on USD $75 WTI oil price assumption;
- Corporate hedged EBITDA to reach between $93 to $97 million, based on USD $100 WTI oil price assumption; and
- Q4 2022 average production in the range of 8,100 to 8,500 boepd, representing year-over-year production growth between 12 per cent – 17 per cent.
As a guiding principle, Saturn intends to direct approximately 50 per cent of future corporate cash flow towards growth capital expenditures and approximately 50 per cent to the repayment of debt. Saturn is committed to reducing debt levels in the near term and expects to make principal payments of approximately $38 million in 2022 and $40 million in 2023 which is expected to result in approximately zero net debt by year end 2023, assuming USD $75 WTI oil prices, under its current senior term loan. Saturn anticipates that when future debt levels reach a sustainable level and debt repayments are terminated, the company will have the capability to direct a portion of corporate cash flow to shareholders in the form of a dividend or share buyback program, subject to board of directors’ approval. Saturn has outstanding 13.4 million warrants, on a post consolidated basis, that expire on June 4, 2023 (trading symbol SOIL.WT, post-consolidated strike price of $3.20/share) that if exercised, would result in up to $42.9 million of proceeds that could accelerate the reduction of net debt.