It would come as no surprise if this is the first time you are reading about Saturn Oil & Gas (TSX:SOIL). This Western Canadian energy company emerged from the turbulent times of the 2020 COVID-19 pandemic to build a substantial free cash flowing enterprise, in just a very short period. Saturn has burst onto the oil patch as an exciting new name for investors, growing its revenue 1,929 percent over the past three years. This recent growth has earned Saturn the 18th place on The Globe & Mail’s 2023 ranking of Canada’s top growing companies and the No. 1 spot as the nation’s fasting growing oil and gas company.
An enviable portfolio
Saturn was off the radar screen of most investors in early 2021, when it was producing just 233 barrels per day (bbls/d) of light oil. This humble rebirth story started in the aftermath of crude oil’s price implosion in 2020, where for the first time in history the WTI benchmark price for light oil traded negative. This dramatic price drop caused mass panic in the oil sector with many larger players looking to quickly dispose of assets, cut debt levels and avoid insolvency.
This unique dynamic allowed disciplined buyers, including Saturn’s executive team, to pick up prospective assets at steep discounts. The fortitude to buy quality assets when oil prices were volatile and with an indeterminate future was rewarded when the WTI oil price recovered to more than U$71 in December 2021, and then averaged more than U$94 for calendar 2022.
The return of strong oil prices is now driving high operating netbacks and strong cash flows across the oil industry. The persistence of Saudi Arabia and Russia to continue voluntary supply cuts, matched with growing oil demand in developing countries, appears to have set the stage for high global oil prices for some time to come.
Few companies have benefitted more from the increasing oil prices than Saturn, which has seen its rapid production growth translate into achieving corporate-record adjusted EBITDA of C$95 million in Q2 2023, up 428 per cent year-over-year.
Saturn Oil & Gas adjusted EBITDA
Saturn Oil & Gas’ Oxbow Asset
With a focus on rewarding shareholders by increasing reserves, production and cash flows at attractive returns on invested capital, the company began its monumental three-year growth run by acquiring the undervalued Oxbow Asset in Southeast Saskatchewan in June 2021. The Oxbow acquisition increased Saturn’s production by 6,700 barrels of oil equivalent per day (boe/d) (~95 per cent light oil and natural gas liquids (NGLs)). It was a challenging acquisition, increasing production by more than 2,000 per cent, given the market volatility, but new supportive financial backers weighed in and got the deal closed. More on Saturn’s shareholder group in a moment.
Oxbow production has since grown to 11,388 boe/d by Q2 2023, up another 62 per cent year over year. Saturn drilled six horizontal wells in 2021, followed up with a 25 horizontal well program in 2022. To date, Saturn has had a 100 per cent success ratio with all new Oxbow wells on production for light oil. In 2023, Saturn has released the results of the first 10 new horizontal wells drilled this year in Oxbow, with the best results yet, averaging just over 90 bbl/d of light oil for the first 30 days of production, which is 24 per cent above internal set expectations for a strong economic oil well.
Contributing to 2023’s drilling success was Saturn’s first drill program targeting Oxbow’s prolific Spearfish formation, which “outperformed internal expectations by 33 per cent” and “generated capital efficiencies that are among the strongest we’ve seen across our asset base,” according to a statement from Justin Kaufmann, Saturn’s chief development officer. The Oxbow Asset is Saturn’s largest “cash cow” property and with more than 500 booked gross drilling locations, more than 20 years of development inventory is inhouse.
Saturn Oil & Gas’ Viking Asset
Saturn’s second core development asset is in west central Saskatchewan, the Viking Asset, which the company grew from less than 300 boe/d in January 2022 to more than 5,000 boe/d in December 2022. This rapid growth came as a combination of the strong production results from 22 horizonal wells drilled last year and two value-added asset acquisitions.
Saturn’s drilling in the Viking area has had a 100 per cent success rate. Highlighting the drilling success were a few step-out locations in the Plato East field, which has extended the company’s expected boundaries of the vast light oil resource for future development. Saturn has drilled eight additional horizontal wells in the Viking Asset in 2023. A deep inventory of more than 160 gross booked drilling locations is expected to support decades of future development.
Ridgeback Resources acquisition
Saturn has continued to make transformational acquisitions, most recently buying Ridgeback Resources in February 2023. Purchased for only 1.7x the private company’s expected 12-month net operating income, Ridgeback increased crude oil and natural gas production by a further 140 per cent with more than 17,000 boe/d (72 per cent light oil and NGLs) of net production. The Ridgeback properties overlapped closely with Saturn’s Oxbow Asset and is in line with its strategy of being the dominant and lowest-cost oil producer in Southeast Saskatchewan.
After the Oxbow properties, the second crown jewel of the Ridgeback acquisition was a large contiguous Cardium Asset in Central Alberta, complete with more than 20 years of booked drilling inventory. With production averaging more than 11,000 boe/d during Q2 2023, Alberta has quickly become an integral part of Saturn’s development plans. Saturn has one drill rig working full time in the new Alberta assets, and the company is due to release new drilling results in Q4 2023.
150+ million boe of reserves
What sets Saturn apart from most of its peers is sustainability built on the deep inventory of drilling locations. Yes, production has grown rapidly, but so too, at an equal pace, have the company’s reserves. Saturn boasted more than 150 million barrels of oil equivalent proforma proved and probable reserves, effective year end 2022. Based on Q2 2023 production of 25,988 boe/d, Saturn’s Reserve Life Index (reserves divided by annualized production) is estimated at a lofty 15.8 years. These third-party evaluated reserves are a strong indication that the high cash flow Saturn shareholders enjoy today can be replicated for many years to come.
Saturn’s meticulous management
Saturn’s veteran management team has one overriding focus that guides its efforts: generating positive shareholder returns. As we’ve seen, the team has an established track record of pursuing these returns through the responsible development of high-quality assets. Let’s learn a little bit more about what qualifies them to fortify Saturn’s established role in Canadian light-oil development:
- John Jeffrey, CEO, served as a finance manager for a Fortune 500 engineering consulting firm in Canada that was involved with the drilling of more than 800 wells across Western Canada. Jeffrey took over leadership of the company in 2017, establishing the foundation for Saturn’s current rapid growth.
- Scott Sanborn, CFO, got his start with KPMG LLP and brings 15 years of finance, capital markets and accounting experience in the oil and gas industry.
- Justin Kaufmann, chief development officer, is a registered geologist with The Association of Professional Engineers and Geoscientists of Saskatchewan, and directs all of Saturn’s technical evaluations and operations.
- Grant MacKenzie, CLO, recently joined Saturn in July as chief legal counsel from his role as partner and Calgary corporate co-lead of Dentons Canada. MacKenzie has been closely involved with Saturn during its transformational growth since 2021.
- Kevin Smith, VP of corporate development, has spent more than 25 years in energy and finance, including standout roles as vice president, business development for Renaissance Oil, which built the first independent oil and gas producer in Mexico in more than 80 years, as well as investment banking roles with Paradigm Capital, Macquarie Capital Markets Canada and HSBC Securities.
It’s under the leadership of these seasoned professionals that Saturn has grown from seven employees just a few years ago to more than 280 strong, with financial results substantiating the company’s high-potential for long-term success.
Access to capital through strong relationships
The company also benefits from a strong relationship with its main lender, a private family office, which provided C$87 million to acquire the initial Oxbow Asset, and more recently C$375 million for the Ridgeback purchase. In total, this tech billionaire has extended credit for four Saturn acquisitions and has been a supportive capital partner.
Saturn has also picked up an influential shareholder in 2023, GMT Capital, a private investment company with approximately $5 billion of assets under management. GMT became a Saturn shareholder thorough its backing of the Ridgeback acquisition. GMT has since been adding to its Saturn equity position in the secondary market, reaching an ownership stake of 24.9 per cent of Saturn’s outstanding shares.
Street view of Saturn Oil & Gas
Saturn’s growth has attracted the attention of now six research analysts each with a buy recommendation.
In September 2023, Canaccord Genuity Research Analyst Mike Muller, P.Geo., CFA, upgraded his Saturn recommendation from Speculative Buy to Buy with a target price of $5.75, which is more than a double from its current trading price.
“In our view, SOIL continues to offer tremendous value”, commented Muller, who is forecasting Saturn’s 2024 cash flow at $2.27 per basic share, assuming a US$70 WTIL oil price.
“Given the potential upside in the story, we see SOIL sitting as our top pick in the junior oil E&P space at this time,” said Adam Gill, CFA, research analyst with Echelon Capital Markets. “From a stock perspective, the valuation is extremely compelling,” Gill said about Saturn, “by far the cheapest stock in the Canadian junior E&P universe.”
Gill has a $5.65 target price for Saturn’s shares.
A classic value play
A widespread but exaggerated belief in oil’s demise has resulted in reduced investment in the oil industry in general. Investor apathy for “fossil fuels” has resulted in depressed valuations across the public and private oil and gas companies. However, with the current high global oil prices and robust economics demonstrated by light oil developers, now might be one of the most attractive times to invest in the industry, ahead of the pack.
Saturn recently announced it is accelerating its light oil development with the capital expenditure program to be heavily weighted to the back end for 2023. The company invested $33.5 million into development in the first half of 2023. Saturn expects to invest up to $96.5 million in the second half of 2023, with the expectation for a strong exit production for the year end and setting the stage for a strong start to 2024.
In light of the company’s rapid growth and the market’s low valuation of its current outpouring of cash flow from operations, Saturn is a compelling opportunity for shareholders to participate in the strong economics of light oil development, at a low valuation entry point.
Canada’s fastest growing oil company may also be one of the oil patch’s best value plays.
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