CALGARY – Here’s a term you probably haven’t heard in a while, at least when it comes to oil development in Saskatchewan: “Bought deal offering.”

It was a method of financing Crescent Point Energy used consistently in its growth to, at one point, over 170,000 barrels equivalent per day. The company would routinely announce another round of bought deal financing, and then some sort of acquisition a few days later.

Bought deal offerings were common during the heady days of the oil boom and junior oil producer growth. But in recent years, as banks have been shy to invest in oil, such financing was increasingly rare.

Now Saturn Oil & Gas Inc. is the company who just completed a bought deal offering, making an announcement on March 10 that they had just closed their most recent offering. In this case, the company was initially seeking $8 million, ended up with $18.4 million, and had interest for substantially more investment on top of that.

On March 11, CEO John Jeffrey explained to Pipeline Online what this all means, and on March 14, the company’s updated guidance provided details of what they are going to do with it.

First off, the March 10 announcement said the company had “closed its previously announced bought deal offering and concurrent non-brokered private placement offerings. Pursuant to the bought deal offering, the company issued 6,141,000 units for $3.00 per unit (including full exercise of the underwriters’ over-allotment option) for gross proceeds of $18,423,000. Under the company’s concurrent non-brokered private placement the company issued 730,000 units for gross proceeds of $2,190,000. Total gross proceeds raised under the offerings was $20,613,000.

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“The units issued pursuant to the offerings were issued for $3.00 per unit and consisted of one common share of the company and one common share purchase warrant of the company. Each warrant will be exercisable to acquire one share for 36 months following the closing date, at an exercise price of $4.00.

“The company will direct the proceeds of the Offerings towards its recently closed strategic acquisition as well as drilling and completions work, working capital, and general corporate purposes.”

So what does that all mean, especially the bought deal offering?

Jeffrey explained there are two types of financing, marketed and bought deal, in this type of scenario. When it comes to marketed, you go to the banker and say you want $20 million, as an example, and the banker will say, “Sure, we’ll do our best and then you go out and you market it.”

Jeffrey said, “And you go to all the institutions and whatnot, and you see basically how much you can fill. So, you’re not really sure what the markets going to do, and you got to test it out, and hopefully you get what you’re after.”

As for bought deal, he said, “The alternative is when the bank, or your banking syndicates, basically looks at it and says, ‘Listen, we’re so confident in this, we will underwrite the financing,’ and the bank steps in and buys those $18 million. So, they’re guaranteeing those funds as its theirs. So, effectively, they make a deal with the company that they’re going to buy those shares. Then they turn around and sell them, at the same price, of course. It just shows a level of confidence in their ability to execute on the funding they’re committed to.”

It doesn’t have to be done as an accretive deal, but generally it is, Jeffrey explained. In their case, it is accretive.

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“We’re quite happy with the deal that we did. I think that, with the rally in oil price, effectively we bought these assets just about one times cash flow,” he said, referring to the recently-purchased 240 bpd Viking assets in west central Saskatchewan.

Substantially oversubscribed

In this case, the bought deal offering was oversubscribed, by quite a bit. “We had indications of substantially higher demand,” he said, above and beyond the $18.4 million they raised.

“The bought deal, itself, was for $8 million. It allows for 100 per cent overallocation. So you’re allowed to go to $16 million. And then they have a 15 per cent ‘Greenshoe’ that they can exercise which takes you to that $18.4 million. So, from $8 million, obviously we overallocated, took the full overallocation, exercised the Greenshoe for the rest of that. So, a lot of demand,” Jeffrey said.

A Greenshoe, according to Investopedia, “is a provision in an underwriting agreement that grants the underwriter the right to sell investors more shares than initially planned by the issuer if the demand for a security issue proves higher than expected.”

The banks had 90 days to exercise the Greenshoe, but Jeffrey said they exercised it right away.

Capital plan and guidance

On March 14, the company released its guidance and a fully-funded $50 million capital plan. “All of that is being spend in Saskatchewan, with the bulk of it in the southeast,” Jeffrey said. “That’s more drilling capital, and better for the Saskatchewan economy.

“The banks are starting to show some faith in oil and gas again, which is great, directly resulting in more work in Saskatchewan.”

“As a result of the strategic acquisition and recently closed, upsized and oversubscribed equity issues, Saturn has increased its 2022 capital expenditure program,” he noted in the release. “Equally important, because of the debt consolidation, the company is now permitted to give guidance to the expected financial impact of our upcoming growth-oriented capital budget which remains underpinned by substantial free funds flow that will also materially reduce outstanding indebtedness.”

The release noted, “Saturn’s assets provide for a foundation of sustainability: base decline is low at less than 13 per cent; production efficiencies are attractive at less than $15,000 per flowing barrel of oil; and high operating netbacks are more than $60/boe, at current oil prices. Furthermore, as Saturn owns extensive infrastructure and undeveloped land within its operational areas, the company can direct over 85 per cent of its capital expenditures towards growth projects, with the balance directed to facilities and undeveloped land. Company average production for Q4 2021 was 7,245 boepd with 96 per cent oil and NGL.

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“Saturn remains dedicated to reducing its debt levels and expects to make $38.1 million in principal payments this year and to exit 2022 with a debt to 2022 EBITDA ratio of 0.5x. As a testament to Saturn’s ESG commitment, it has allocated $13.3 million to abandonment and reclamation spending and other emission reduction capital projects, which are government funded under the Accelerated Site Closure Program.”

The company currently has one rig drilling northeast of Lampman. The 2022 capital expenditure program is currently has contracted one drilling rig to be active throughout the year at its Oxbow Asset, excluding breakup and maintenance periods. Over 85 per cent of the 2022 drilling budget will be directed to the Oxbow Asset, with select drilling targets at the Viking Asset. There are at least 29.2 net wells planned in the southeast, and five in the Viking. Workovers and optimization is planned for 50 to 100 existing wells.

As for guidance, the additional financial flexibility provided by the previously announced strategic acquisition, debt consolidation and bought public offering has Saturn saying it “is now positioned to pursue an expanded 2022 capital expenditure plan which we expect will deliver substantial organic free funds flow at a conservative WTI oil price assumption of US$75.00/bbl for significant growth and accelerated debt repayment.”

Highlights of the 2022 capital expenditure program include forecasts of:

  • average annual production in the range of 7,800 to 8,200 boepd, generating hedged EBITDA in the range of $73 to $77 million;
  • 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;
  • Saturn’s implied debt adjusted free funds flow yield for 2022 is 24 – 27 per cent, based on the Company’s enterprise value of $126.5 million; and
  • At the mid-point of guidance, year-end 2022 net debt is expected to be reduced to $39.4 million (down 45 per cent from an estimated $71.0 million at year-end 2021.)

Saturn’s forecasted funds flow is most sensitive to changes in crude oil prices, the company said. Saturn estimates that each additional +US$5/bbl increase in the US$ WTI oil price will provide an extra approximately $4.1 million in adjusted funds flow such that with the current 12-month WTI strip >US$100/bbl, Saturn would expect to have approximately $83.5 million in adjusted funds flow at the midpoint of its production guidance. This would effectively double the company’s annual free funds flow to $40.9 million (from $20.4 million), which is available for further accelerated debt repayment allowing for 2022 year end net debt forecasted at less than $19 million.

 

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