Data on the table
Despite the global upheavals in oil & gas, Saturn management is continuing on the consistent path of expanding its properties. Only when you know where and how much oil can be developed at what cost does meaningful production planning make sense. In the latest external reserve assessment of Ryder Scott Company-Canada (according to standard NI 51-101 as of December 31, 2021), the surprise potential was high, and expectations were even exceeded.
Ryder Scott experts concluded that the Saturn Oil & Gas assets in the southeast ("Oxbow Asset") and midwest ("Viking Asset") of Saskatchewan show a whopping 50.7 million barrels of oil equivalent ("boe") of Proved and Probable reserves. Compared to last year's estimate, the increase is a remarkable 668%. This work relates to 351 booked drilling locations, 85% of which are in the Oxbow Asset alone. In the oil to gas mix, the samples are 96% oil and natural gas liquids ("NGL") and only 4% natural gas. This is important when comparing energy companies because oil and NGL’s are much higher value products in North America, compared to natural gas. The life of the reserves, the so-called reserve life index ("RLI"), was given as 8.7 years, based only on the currently producing oil wells, known as Proved Developed Producing (“PDP”). If the undeveloped oil wells are included in addition to the audited measurements, a Proved and Probable value of 19.2 years is obtained. This figure roughly indicates the maximum production duration, based on the average daily production of 7,245 barrels per day in Q4 2021. For conventional oil and gas companies these RLI measurements are of the highest in industry and indicate long life future cash flows are sustainable. In March 2022, production was already at 7,500 barrels per day.
Oil market in trouble
Saturn Oil & Gas has undergone a historic transformation in the space of ten months. This is all against the backdrop of not knowing what the oil market would be like a good 20 months ago. At that time, a 12-year low in the price per barrel of less than USD 35 had been reached due to the global Covid-19 pandemic and the resulting sharp decrease in oil demand. The entire fracking industry was lopsided with its financing and had to give oil away in part because there were no favorable storage options available in the forward market for physical delivery. The entire market was showing signs of unraveling at the time, putting downward pressure on the long-term forward curves for all grades of oil worldwide.
Today's shortage situation turns the conditions from 2020 back into a completely opposite dimension. The surpluses from the Corona-era lockdown are wished back today, because now the problem is on the strained producer side and in fragile logistics. The already strained supply relationships between the industry and the raw material producers are becoming even more complicated due to sanctions and embargoes. Most recently, there were even attacks by Huthi rebels during the live Formula 1 broadcast in Saudi Arabia. It hit a Saudi Aramco plant, and valuable oil turned into smoke and clouds of poison. The oil price reacted with a shock, rising to over USD 120 per barrel before the end of the week. Worldwide, analysts are faced with the problem that the uncertain production and supply relations and the little visible cooperation of OPEC can push the prices for fossil energy into unimagined dimensions if Russia, with about 10% of the world market, should be cut off entirely as a producer from the markets. Currently, Russia is supplying China and India at reduced world market prices, which relieves the demand side somewhat and brings profits to the buyers. However, it also serves as financing for Moscow to the exclusion of the West. All in all, a depressing situation.
What the figures mean for the Saturn share
In calculating the Company's net present value ("NPV"), we relate Ryder Scott's results to the number of shares minus the remaining debt. In a prudent view, the net present value of the PDP estimate is CAD 276 million, less CAD 71.1 million of debt. That provides an equity value of CAD 205 million, or CAD 8.14 per share on an undiluted basis of 25.2 million shares. Taking into account outstanding warrants, the fully diluted share count is 59.1 million shares. We reduce net debt in this view with proceeds from the exercise of outstanding warrants. That provides an adjusted value per share of CAD 4.49, which we consider to be the lower limit of the valuation for calculative purposes.
"Increase in audited proved and probable reserves"
Adding the audited proved and probable reserves, the calculation is very positive and delivers a share value of CAD 22.91 before options and warrants. The fully diluted inclusion of the 59.1 million shares still delivers a value of CAD 10.79 per share, whereby the Company's cash would then even have additional liquidity of CAD 60 million. Thus the arithmetical derivation from total view of the available production possibilities.
Analysts of GBC AG had already calculated, without the elaboration of Ryder Scott in their last research, a conservative mean value of CAD 13.12 and repeated their buy recommendation. An update is likely to follow here as well.
The outlook for 2022/2023
Saturn Oil & Gas is currently in the best of all worlds if one ignores the war and humanitarian catastrophes on the other side of the Atlantic. The most recently acquired and now appraised properties put the Canadians in a position to produce an expected average of 8,000 barrels per day (boe/d) in 2022. The huge investment of over CAD 100 million is now paying off because the Company can deliver consistently in the world's greatest shortage situation of the last four decades. Canada is and remains a very important and politically stable partner for international energy markets. It is precisely this jurisdiction that transfers to the locally producing companies and puts North American energy percentages in particular in a top position worldwide in the current environment.
The highly regarded EV/EBITDA valuation metric measures enterprise value including debt relative to adjusted EBITDA. This ratio is set at 1.7 to 1.9 at the end of the year. This is virtually unheard of in a sector comparison. Using averages in the forecast, net debt is expected to reduce to the corridor of CAD 37.4 to 41.4 million at year-end 2022. That would be a 45% decrease from an estimated CAD 71.0 million at year-end 2021.
Interim conclusion: an excellent setup
With the cash flows that can now be generated, Saturn Oil & Gas will be able to manage a complete debt reduction by mid-2023. In the first six months of 2023 the Company is scheduled repay an additional CAD 22.3 million, reducing net debt to a lower corridor of CAD 15.1 to CAD 19.1 million. It is important to note that the outstanding warrants that now trade as SOIL.WT will expire in June 2023. If Saturn’s share price is above the CAD 3.20 strike price at that time, the Company can expect proceeds the exercising SOIL.WT warrants to result in up to a CAD 42.9 million windfall. The Company would then find itself in the comfortable position with a forecasted CAD $25 million net cash surplus. That is because the Company's core competency lies in its strong drilling and production results while maintaining a very lean cost structure. Assuming this is the case, Saturn is now entering a new era, as the free funds after investments and taxes can even be distributed as dividends starting from mid 2023. This should also excite institutional investors.
What the stock market is completely overlooking at the moment: Current oil prices are over USD 100 - but Saturn has only used an assumption of USD 75 in its calculation for 2022. This forecast even drops slightly in subsequent years. As things stand, the warlike actions are likely to exacerbate the supply shortage for a while yet. Yesterday, the share already managed to jump above the CAD 3.00 mark with high volumes. That was the placement level of the last large transaction. With the publication of the current reserve estimate, the share overhang should now quickly disappear and allow the Canadians to move upwards.
The update is on our initial Report 11/21