- Strategic $260 million asset acquisition expands Saturn's proforma production by over 50% on closing to ~11,4001 boe/d to be funded by combination of term debt and a $65 million bought-deal subscription receipt financing
- Accretive transaction drives 2023 guidance for adjusted funds flow2 of $223 million equating to $3.98 per share
- Provides substantial free cash flow which can be directed to debt reduction and to fund top tier organic growth (25% from closing to the end of 2023), both of which are anticipated to drive enhanced shareholder returns
Saturn Oil & Gas Inc. has entered into an arms-length definitive agreement to acquire synergistic assets in the Viking area of West-central Saskatchewan (the "Viking Acquisition") for approximately $260 million, funding details for which are outlined below. The Viking Acquisition is expected to close on or about July 6, 2022 (the "Closing Date") with an effective date of May 1, 2022.
Through the Viking Acquisition, Saturn will acquire approximately 4,000 boe/d (~98% light oil and liquids)3 of high cash flow netback production and over 140 net sections of land, strategically positioned in the Viking fairway, which boasts one of the most attractive light oil resource plays in North America highlighted by payouts on newly drilled wells of approximately seven months based on a WTI oil price of USD 95/bbl. The Viking Acquisition bolsters Saturn's existing Viking light oil asset in West-central Saskatchewan (the "Viking Asset") while complementing its core growth asset in Southeast Saskatchewan which targets the Frobisher and Midale (the "Oxbow Asset"), further building size and scale for the Company's growing operations in Saskatchewan.
TRANSACTION HIGHLIGHTS
Expands Existing Core Production Area: Significantly expands Saturn's production base in its existing core production area in West-central Saskatchewan while also providing an operational fit and expertise with proforma production at the Closing Date forecast to be approximately 11,400 boe/d1, an increase of approximately 52% over Q1 2022 volumes;
Highly Accretive on a Per Share Basis: The Viking Acquisition increases Saturn's 2022 adjusted funds flow2 ("AFF") guidance by 18% to $2.92 per weighted average share4 over previous guidance of $2.48. With a full 12 month impact of the Viking Acquisition, the 2023 forecast adjusted funds flow5 is $223 million which equates to $3.98 per basic share.
Doubles Saturn's Land Position and Increases Viking Drilling Inventory by 250%: Brings 186 gross (146 net) sections with high working interest (79% average) in a coveted region of the Viking oil fairway. Adds 138 (gross) booked Viking drilling locations which are anticipated to deliver paybacks of seven months based on a WTI oil price of USD 95/bbl and provide sustainable production for over a decade;
Generates High Cash Flow at Various Commodity Price Levels: Strong corporate netbacks can be realized down to $50 Edmonton light oil prices, underpinning the generation of substantial free cash flow that can be directed to reducing debt levels and funding near-term organic growth which, given available infrastructure, will serve to reduce per boe operating costs.
Provides Robust Corporate Netbacks: Viking acquisition is forecasted to reduce Saturn's corporate royalty rate from approximately 15% down to 12%, and decrease operating costs per boe by 16%, which will enhance corporate netbacks. Saturn expects to realize further cost savings across transportation, labour and treating costs with the addition of treating capabilities afforded by the Viking Acquisition.
Increased Size and Scale: Expansion of the production base is expected to enable Saturn to capture operating efficiencies and realize high facility utilization (currently operating at <60% utilization) which can result in fixed and variable costs being allocated over larger per unit volumes of production.
Attractive Acquisition Metrics:
"This significant transaction represents yet another critical milestone for Saturn as we execute our strategy of building a scalable portfolio of free cash flow generating assets that support both near and longer-term development, while also diversifying our production exposure across multiple highly economic plays to enhance our sustainability," said John Jeffrey, CEO of Saturn. "This Viking Acquisition allows Saturn to bring proven expertise in the efficient and responsible development of Viking light oil plays and benefit from additional size and scale to further improve our already low-cost structure and streamlined operations. Upon closing of the Viking Acquisition, we forecast run rate production volumes of approximately 11,400 boe/d (96% crude oil and NGL)1, positioning Saturn to generate strong free cash flow which can be directed to debt repayment and future growth opportunities that can enhance shareholder returns."
The Viking Acquisition will be funded through proceeds from an increase of $200.0 million to its existing senior secured term loan ("Senior Secured Term Loan") and a bought-deal subscription receipt financing for aggregate gross proceeds of $65.0 million (the "Offering"). Details of the Offering and the Senior Secured Term Loan are provided below.
Strategic Benefits
The Viking Acquisition is consistent with Saturn's strategy to become a premier, publicly traded light oil producer through the acquisition and development of undervalued, low-risk opportunities that support building a strong portfolio of cash flowing assets offering strategic development upside.
Diversified Play Exposure Enhances Sustainability – Improves the balance of production between the Company's core Oxbow Asset and Viking Asset. The Viking Asset previously comprised 6% of total production and with the addition of the Viking Acquisition, the Viking will now represent approximately 35% of overall production, diversifying our asset concentration.
Stable Production with Minimal Maintenance Capital – The Company forecasts keeping Viking production flat at ~4,500 boe/d by drilling 35 to 40 wells per year generating free funds flow2 of over $85 million per year with potential for growth. Base production is easily replaced year-over-year due to stable long-life assets and production optimization underpinning recent drilling.
Compelling Economics with Enhanced Financial Flexibility – Robust AFF generation is driven by attractive half cycle economics with IRRs over 200% while exceptional netbacks support payouts of approximately seven months. Reserve type curve forecasts remain robust with area break even on Edmonton Light prices down to as low as ~$50/bbl8. The Viking Acquisition is expected to strengthen Saturn's risk management portfolio, allowing the Company to significantly improve its average realized price of hedged oil and obtain greater upside exposure in a strong price environment.
Conservative Area Reserves Bookings Offer Upside – Low proportion of booked inventory and conservative type curves on the Viking Acquisition assets present opportunities to leverage extended reach horizontal ("ERH") wells, pursue exploitation of the Upper Viking and implement production optimization and waterflood.
Flexible Marketing Arrangements and Improved Hedge Book – Crude produced in the area is sold on the Mid-Sask pipeline at Kerrobert, while gas is marketed under one year gas sales contracts. Saturn also realizes benefits to its hedge book as existing out-of-the-money hedges become significantly diluted through the Viking Acquisition, and allow the Company to capture more of the upside of the current strong price environment.
Strong Infrastructure - Owned infrastructure allows for minimal spend with support for growth supported by sufficient egress in the area while significant processing capacity is available across the field with four operated oil batteries having over 12,000 bbl/d of capacity, two LACT pumps and gas sales connections with 3rd party gas plants in area.
Positive Environmental & Emissions Performance: - Area benefits from responsibly deployed capital directed to abandonment and reclamation programs with limited inactive liabilities and a strong limited liability rating ("LLR") of 3.50. Go forward emissions reduction potential is possible through tie-in points in Hershel and Plato for gas sales, gas injection potential based on modelling results, and bitcoin and power generation with produced gas.
Pro-Forma numbers are based on pricing assumptions of: a WTI price of USD 95/bbl for 2022 and USD 90/bbl for 2023; an MSW/WTI differential of USD 4.00/bbl; an AECO price of $5.00/GJ; and a USD/CAD exchange rate of $1.25.
Combined, over 18 months post close, Saturn's aggregate guidance includes capital spend of $155 million, production growth of 25% and adjusted funds flow of $329 million2, resulting in free funds flow2 of $174 million.
THREE-YEAR PLAN
On the back of the transformational Viking Acquisition, the Company intends to initiate an inaugural three-year plan focused on free funds flow growth, payout of debt, ARO discipline, leveraging strong relationships with key stakeholders, positioning Saturn to offer greater institutional appeal, improved liquidity, and the potential for future inclusion in key indices.
Highlights of the three-year strategic plan, based on the assumptions set forth above and management's expectations (including lender and board approvals) include:
- $100 million in capital expenditures per year ($355 million over the life of the plan, inclusive of H2/22).
- Rapid near term average production growth of 25% from closing of the Viking Acquisition to the end of 2023, underpinning a 2025 production target of ~15,000 boe/d.
- Beyond our guidance period of H2/22 (USD 95 WTI) and 2023 (USD 90 WTI), our base case assumptions include a flat oil price of US$85 in 2024 and 2025.
- Over the next 3.6 years, we anticipate generation of up to $860 million of funds flow2, inclusive of $106 million in H2/22, which in turn generates over $500 million of free adjusted funds flow2.
- If Saturn elected to apply all excess free cash flow to debt reduction, the Company would have the ability to be debt free in Q4/2024, and to exit 2025 with approximately $200 million in cash on our balance sheet.
- 10 years of drilling inventory expected to remain in 2025.
- Continue our strong commitment to environmental, social and governance principles, including meeting our ARO obligations.
Bought Deal Equity Financing
In concert with signing the definitive agreement for the Viking Acquisition, Saturn has entered into an agreement with syndicate of underwriters (the "Underwriters") co-led by Canaccord Genuity Corp. and Eight Capital to issue and sell, approximately 23.6 million subscription receipts ("Subscription Receipts") on a bought deal basis. The Subscription Receipts will be offered at a price of $2.75 per Subscription Receipt (the "Offering Price") for aggregate gross proceeds of approximately $65.0 million (the "Bought Public Offering"). The Company has also granted the Underwriters an over-allotment option to purchase up to an additional 3.5 million Subscription Receipts on the same terms and conditions as the Public Bought Offering, exercisable not later than 30 days after the closing of the Offering.
Each Subscription Receipt represents the right of the holder to receive, upon closing of the Viking Acquisition, without payment of additional consideration, one unit of the Company (each, a "Unit"). Each Unit will consist of one common share (a "Share") and one half common share purchase warrant of the Company (a "Warrant"). Each full Warrant will be exercisable to acquire one Share for 12 months and a day following the date of issue, at an exercise price of $3.20, subject to adjustment in certain events. The Company will make reasonable efforts to list Subscription Receipts and the Warrants, subject to TSX Venture Exchange ("TSXV") approval.
If the Viking Acquisition is not completed as described above by 120 days from the closing date of the Offering or if the Viking Acquisition is terminated at an earlier time, the gross proceeds of the Bought Public Offering and pro rata entitlement to interest earned or deemed to be earned on the gross proceeds of the Offering, net of any applicable withholding taxes, will be paid to holders of the Subscription Receipts and the Subscription Receipts will be cancelled.
The Subscription Receipts will be offered in all provinces and territories of Canada (excluding Quebec) pursuant to a prospectus supplement to the Company's base shelf prospectus, which will describe the terms of the Subscription Receipts. The Offering is expected to close on or about June 8, 2022 and is subject to certain conditions including, but not limited to, the approval of the TSXV.
This news release does not constitute an offer to sell or a solicitation of an offer to sell any of securities in the United States. The securities have not been and will not be registered under the U.S. Securities Act or any state securities laws and may not be offered or sold within the United States or to U.S. Persons unless registered under the U.S. Securities Act and applicable state securities laws or an exemption from such registration is available.
Senior Secured Term Loan
Saturn expects to enter an amended and restated senior secured loan agreement with its U.S. based institutional lender (the "Lender") to provide addition loan proceeds of $200.0 million. The loan will bear interest at a rate of CDOR + 11.5% and will amortize over three years, with 50% repayable in the first year, 30% in the second year and 20% in the final year. Based on forecast production rates and hedged commodity prices, Saturn anticipates repaying the loan in full well in advance of its scheduled amortization payments. Execution of the further amendment is subject to the execution of mutually acceptable credit documentation giving effect to the terms provided in the commitment letter, and the satisfaction of the other customary conditions to closing, including the satisfaction of all conditions to the completion of the Viking Acquisition.
