Interview with Saturn Oil + Gas Inc.
Saturn Oil + Gas CEO John Jeffrey: "Acquisition has increased production by 2,000%"
time to read: 9 minutes | The interview was conducted by Mario Hose on July 27th, 2021 in Calgary (CAN).
CEO | Saturn Oil + Gas Inc.
Suite 1000 - 207 9 Ave SW, T2P 1K3 Calgary (CAN)
Table of contents:
What the acquisition means
news|financial: "Mr. Jeffrey, in June 2021, Saturn acquired the Oxbow Asset in Southeast Saskatchewan. What are the most significant changes for you?"
"[...] The Oxbow Asset now delivers a substantial free cash flow stream to internally fund our impactful drilling and workover programs. [...]" John Jeffrey, CEO, Saturn Oil + Gas Inc.
The biggest impact for Saturn is the financial stability the Oxbow Asset brings to the Company. Oxbow immediately added long-term cash flow generation capability from the acquired 6,700 boe/d, high-quality oil production base. The acquisition increased Saturn's corporate production by 2,000%, completely transforming the Company.
Saturn has had for years a deep inventory of light oil targeted drilling projects. The Oxbow Asset now delivers a substantial free cash flow stream to internally fund our impactful drilling and workover programs. Going forward, Saturn's organic growth can come from in-house development projects that are internally funded, and the Company has become less reliant on external capital sources.
news|financial: "How many drill targets do you own now, and how many do you operate?"
Equally important as the production base acquired, the Oxbow Asset adds hundreds of light oil drilling locations to fuel Saturn's growth plans. Previous to the acquisition, Saturn had 134 gross drilling locations that were assigned certified reserves by our third-party evaluator. This inventory increased 180% with the Oxbow acquisition to a total of 378 booked gross locations. In addition, Saturn has identified 200+ un-booked locations that amount to over a decade's worth of drilling inventory. Saturn maintains a high working interest of over 85%, and we operate over 75% of our production and future drilling.
news|financial: "Did you also acquire infrastructure with the deal?"
"[...] The widespread infrastructure and low decline in oil production culminate in a long-term cash flow generating asset that is also very scalable. [...]" John Jeffrey, CEO, Saturn Oil + Gas Inc.
The Oxbow Asset comprises mature fields that have received extensive investment, over the years, into its production gathering systems, central processing facilities and disposal wells. The widespread infrastructure and low decline in oil production culminate in a long-term cash flow generating asset that is also very scalable. Production additions through workovers of existing wells and the drilling of new locations are highly economical and benefit greatly from the extensive infrastructure, with excess capacity, already in place. Having such an extensive infrastructure in place offers a strong strategic advantage to Saturn in the area.
Role of the Viking property
news|financial: "Besides the new Oxbow asset, the Company also owns the Viking assets in Western Saskatchewan. Where is your focus for the future?"
The Viking Asset remains a core growth area for Saturn. With over 35,000 net acres of land, Saturn has achieved critical mass in West Central Saskatchewan as the result of targeted land sales over several years. Saturn has become a leading low-cost operator in the area, highlighted by the superior performance of the Extended-Reach Horizontal (ERH) drilling into the shallow light oil Viking formation. The production profile for the most recent 23 ERH wells Saturn has drilled into the Viking are among the highest in the industry for this area. Viking wells are characterized by high-quality light oil, short payback periods and strong economics. Saturn is taking a balanced approach to drilling new wells in both the Viking and Oxbow areas with the intention of growing both assets.
Current and future production
news|financial: "What is your current production, and what is your goal until the end of 2022?"
"[...] Our goal is to increase production through 8,000 boe/d by year-end 2022, through workover programs, drilling of new wells and optimizing current production. [...]" John Jeffrey, CEO, Saturn Oil + Gas Inc.
Pro forma production is approximately 7,000 barrels of oil equivalent per day (boe/d), of which 95% is high-quality crude oil and 5% natural gas. Our goal is to increase production through 8,000 boe/d by year-end 2022, through workover programs, drilling of new wells and optimizing current production. While this is a modest and achievable growth target, we also expect to retire approximately CAD 70 million of debt in this period, or about 60% of current levels of approximately CAD 115 million. This is based on projects currently in our inventory and funded by internal cash flow. For added security, Saturn has hedged a significant portion of its oil production to backstop the debt repayment schedule.
How sustainable is production?
news|financial: "Could you please tell us more about your reserves and the sustainability of production?"
With the combination of the Oxbow and Viking assets, Saturn has assembled a robust reserve base. Based on previous third-party evaluations of the assets, management estimates the Company has over 50 million proved and probable barrels of oil equivalent reserves, or P+P Reserves. As a common measure of the sustainability of current production levels, Saturn has a P+P Reserves Life index of approximately 20 years, which is calculated by dividing the current production annualized into the P+P reserves.
news|financial: "Given the internal inventory of development projects, is Saturn done looking for acquisitions?"
While Saturn's immediate focus is on enhancing the current production base with projects already in hand, we continue to see many attractive acquisition targets that would fit well strategically into our operations. Many of the traditional acquirors in our operating areas have merged their way rapidly into much larger production levels, to the point that many of the assets Saturn sees as attractive may not be considered impactful enough to the now larger competitors. The small to midsize producer group has become thinned out, and we see Saturn as a natural consolidator of production and drilling opportunities throughout Saskatchewan. We strongly doubt Oxbow will be the last acquisition for Saturn.
Upside thanks to rising oil prices?
news|financial: "Given the recent rise in oil prices, what is the cash generation potential Saturn's production base holds?"
"[...] Current forecasted cash flows have the capability of repaying all corporate debt in 24 months. Saturn's aggressive debt repayment is strategic to increasing capabilities for future acquisitions. [...]" John Jeffrey, CEO, Saturn Oil + Gas Inc.
The attractiveness of the Oxbow acquisition has only increased with the recent rising oil prices. Saturn started negotiating the acquisition in October 2020 when WTI oil was approximately USD 40 per barrel, and since that time, the economics of the Oxbow operations have increased significantly.
Saturn expects that after interest payments and general and administrative expenses, our current production level will generate approximately CAD 65 million of corporate cash flow over the next 12 months, assuming USD 65 WTI oil price. To put that into perspective, Saturn's market capitalization at the current CAD 0.12 share price is approximately CAD 60 million. We appreciate that a price to cash earnings ratio of 1x is a low metric and well below where most of our peers trade at, we also acknowledge that we are a relatively new company and are just starting to communicate to the market the profound value opportunity and growth expectations that are represented in Saturn's shares.
Saturn is also focused on maintaining a strong balance sheet and is directing significant funds from operation toward debt repayment. Current forecasted cash flows have the capability of repaying all corporate debt in 24 months. Saturn's aggressive debt repayment is strategic to increasing capabilities for future acquisitions.
Saturn as the cheapest oil producer in North America
news|financial: "GBC Investment Research from Germany published a 'buy' recommendation for the stock and a price target of CAD 0.46. At the current share price of CAD 0.12, Saturn must be one of the cheapest oil producers in North America. Why is this so?"
We at Saturn are delighted by the confidence the market showed when we recently raised CAD 32.2 million in new equity in June 2021. We increased the offering size twice and we were still oversubscribed. All of the directors of the board and each of senior management participated in the offering. But the financing has also resulted in a more than a doubling of the Company's freely traded shares in just the past few weeks, which has substantially increased trading volume.
We believe the market will sort itself out, as the Saturn team continues to focus on building upon the strong shareholder value now in hand. We estimate the company’s Net Asset Value, net of current debt, to be CAD 294 million, which is about CAD 0.59 per common share, based on the 10% discounted pre-tax net operating cash flows of the proved plus probable reserves. For Saturn this is just the beginning, as the company’s upcoming drilling programs and workover campaigns are designed to increase the asset base and enhance shareholder value.
news|financial: "ESG is becoming more important for investors and society. What is your point of view, and what are you planning to do?"
"[...] Saturn's goal is to be a leader in pro-actively cleaning up certain legacy assets that have no further production potential, with the operation sites to be restored back to, or better than previous conditions. [...]" John Jeffrey, CEO, Saturn Oil + Gas Inc.
Environmental protection is at the forefront of all of Saturn's operations. Canada has some of the strictest environmental protection legislation and laws, globally. Saturn's goal is to be a leader in pro-actively cleaning up certain legacy assets that have no further production potential, with the operation sites to be restored back to, or better than previous conditions. Saturn has received CAD 10 million of government funds from the Accelerated Site Closure Program and has made an additional deposit of CAD 21 million for asset retirement expenditures.
Saturn aspires to be a leading example of what it is to be a responsible corporate citizen. This includes embracing the Canadian values of human rights and equality in dealing with our stakeholders and employees. Understanding that the Oil Patch has had a history of being a male-dominated industry, Saturn is making a real effort to change that by providing more opportunities to females, in key roles, as we grow our operations and staff.
Growth and personnel
news|financial: "How is Saturn managing the rapid growth from the Oxbow acquisition?"
"[...] With Saturn's rapid growth from the Oxbow acquisition, we have dramatically expanded our team at both the corporate and the field level, increasing our staff from 8 to over 60 people in 2021. [...]" John Jeffrey, CEO, Saturn Oil + Gas Inc.
One of the most important factors for successful growth is the ability to add good people. The oil and gas sector was particularly impacted in 2020 during the Covid pandemic. Many talented industry professionals lost their employment when field developments were halted. With Saturn's rapid growth from the Oxbow acquisition, we have dramatically expanded our team at both the corporate and the field level, increasing our staff from 8 to over 60 people in 2021. Many of Saturn's new team members came with the Oxbow asset, whose collective skill sets and in-depth knowledge of the area are even more valuable than the acquired wells, infrastructure, and drilling locations. All of our new team members are bringing a fresh excitement and enthusiasm at the chance to join a newly transformed company, at the beginning of what is poised for years of further growth.
news|financial: "Thank you very much for talking to us."