The production guidance range is now 39,000 boe
Saturn delivered record results across several key metrics this quarter, including production averaging over 39,000 boe/d (barrels of oil equivalent/day), adjusted EBITDA of approximately CAD 136 million and adjusted cash flow of over CAD 94 million. This was driven by the continued above-average performance of the production wells, disciplined cost reductions and a strategic cash flow generation plan. The Company ended the quarter with over CAD 110 million in cash on hand and is actively executing a share buyback program, which has resulted in the cancellation of 2.2 million shares to date. It is the Company's clear objective to continue to grow value per share.
Third Quarter 2024 Highlights
Production averaged 39,049 boe/d, 30% higher than Q2 2024 and 49% higher than Q3 2023. This now includes the Battrum and Flat Lake projects acquired in mid-June 2024, as well as volumes from new developments. Adjusted EBITDA reached a company record of CAD 135.8 million, up 28% from the second quarter of 2024, despite realized oil prices being 9% lower. Net income for the past quarter increased to CAD 101.6 million or CAD 0.50 per share. The important adjusted funds flow (AFF) metric reached CAD 94.1 million, also marking a quarterly record. The figure included a one-time CAD 20 million payment for the early termination of old WTI oil hedges. Saturn opportunistically chose to unwind these hedges as oil prices fell, and the cost of monetizing them became significantly less. Development capital expenditure totalled CAD 80.8 million for approximately 41 new locations. Free cash flow of CAD 9.7 million was generated in the third quarter, reflecting an active investment program during this period as well as the one-time costs to improve the hedge book mentioned above.
Net debt reduction slower than anticipated
Net debt of CAD 779.0 million at quarter end was 2% lower than in Q2 2024, providing the Company with substantial liquidity and financial flexibility, including approximately CAD 113 million in cash and an undrawn CAD 150 million revolving credit facility. Saturn's leverage ratio currently reflects 1.4 times the ratio of annualized quarterly adjusted EBITDA. Share buybacks have reduced the number of shares outstanding to 202.0 million common shares. Due to the primary debt being in USD, management has decided to enter into swap contracts to fix the exchange rate for the next three years. This provides better security for the debt capital.
The following is an overview of the operating figures for the third quarter of 2024 and 2023 by comparison:
Operations on the ground delivering good results
Operational performance in Q3 2024 was driven by strong production efficiency and the performance of new production wells. Southeast Saskatchewan is the cornerstone of the production base, with stable, multi-zone light oil plays complemented by promising development opportunities through new technologies. In Q3 2024, production in this area averaged 19,695 boe/d, almost 50% higher than in Q2 2024. Building on its success in utilizing multilateral uncased wells (OHML) in the Bakken formation, Saturn is now applying this expertise to the Spearfish formation at Manor. New production from this well is expected to come online in the coming weeks. Prior to drilling, Saturn secured additional contiguous lands to expand its inventory of well locations. OHML drilling in southeast Saskatchewan is not only one of the most capital-efficient plays, but several wells will also benefit from the new government-mandated royalty exemption for the first 100,000 barrels of production.
barrels of oil equivalent/day is the new benchmark
Saturn's area in West Saskatchewan reached an average production of 7,904 boe/d in the third quarter of 2024. The Battrum assets are geologically focused in the prolific Success and Roseray formations. Given the technical complexity of this area, extensive geological and geophysical work has been carried out at Battrum. Management has identified further opportunities in the Viking area to increase production and reserves. Work in Central Alberta is also progressing as planned. Given the continued good results in the development of new discoveries, particularly in the Cardium area, Saturn completed a strategic tuck-in acquisition in Brazeau shortly after the end of the quarter, adding 63 well bores across the entire asset package, along with the production of approximately 700 boe/d. The acquired assets are adjacent to the top four producing wells and are consistent with the "build-out" strategy of securing additional acreage in areas of greatest technical success.
Outlook shows strong potential
For the remainder of the year, Saturn will have four rigs simultaneously drilling horizontal wells targeting light oil, with two rigs in southeast Saskatchewan, one in west Saskatchewan and one in central Alberta. Average production of 39,000 to 40,000 boe/d is expected in the fourth quarter of 2024, which is at the upper end of the previously announced forecast. This is based on capital expenditures of CAD 90-95 million, which is earmarked for the planned drilling of approximately 20 wells along with production optimization, capital expenditures on facilities and the conversion of 10 production wells to injection wells to facilitate secondary production at Flat Lake in the fourth quarter.
Interim conclusion: Despite record numbers, the share price is dormant
Saturn Oil & Gas can grow from quarter to quarter. The ratio of net debt to adjusted EBITDA is rising only slightly; due to the high cash flow, the much-watched ratio will fall to around 1.0 to 0.9 by June 30, 2025. It currently stands at around 1.4, with free cash of over CAD 66 million in the quarter. The low WTI price, which has been hovering around USD 72 (WTI) for weeks now, could have a negative impact on the share price. To secure interest and principal payments, Saturn will continue to sell at least 50% of its production forward until mid-2025. Contrary to expectations, Saturn has already begun its share buyback program. This shareholder-friendly measure will continue in the coming quarters. Medium-term efforts are focused on further production increases and a significant debt reduction.
Analysts' price expectations on the Refinitiv Eikon platform recently ranged from CAD 3.75 to CAD 7.50 on a 12-month horizon. On average, six analyst firms expect a price of CAD 5.57 on a 12-month basis. With an annual adjusted EBITDA of almost CAD 780 million, debt will fall to around CAD 650 million at the end of the year. This also reduces the prospective EV/EBITDA to around 1.4. Within the "mid-tier producers" in North America, this factor is around 3.8. In a sector comparison, this results in a relatively low factor, suggesting a higher future valuation. A medium-term value alignment of the stock to the new proportions is very likely, as the institutional share of investors continues to rise due to the recent commitment of the major investor, GMT Capital. If a dividend payout were to come into focus at some point, Saturn Oil & Gas would be a solid addition to dividend-oriented funds. Due to the high pace of growth and a continuous reduction in debt, a significant appreciation is expected in 2025.
This update is based on our initial report 11/21
