- Saturn expects to be debt-free in 24 months based on production forecasts, capital budget, hedging levels and current forward pricing
- Mission is to continue to be an acquirer of accretive assets in Western Canada
- Acquisition builds on Saturn’s existing environmental, social and governance (“ESG”) performance, while supplying responsibly-produced ethical Canadian crude oil to service global market demand
Calgary, Alberta–(Newsfile Corp. – May 13, 2021) – Saturn Oil & Gas Inc. (TSXV: SOIL) (FSE: SMK) (“Saturn” or the “Company”) is pleased to announce that it has entered into an arms-length definitive agreement to acquire assets in the Oxbow area of Southeast Saskatchewan (the “Oxbow Assets” or the “Acquisition”) for approximately $93 million, funding for which is outlined below.
Pursuant to the Acquisition, Saturn will acquire approximately 6,700 boe/d (~95% light oil and liquids)1 with over 450 net sections of land, largely positioned across one of the most economic oil plays in North America. The Acquisition enhances Saturn’s financial and operational strength through the addition of a high-quality and very low decline (12%) light oil asset base that is projected to generate robust free cash flow at current prices. The Oxbow Assets produce primarily from the Frobisher and Midale formations and feature a sizeable inventory of targets for workover, development and optimization. The Oxbow Assets are expected to generate $65-70 million in net operating income over the next 12 months2.
“This Acquisition is in our ‘backyard’ in southeast Saskatchewan, furthering Saturn’s strategy of building a scalable portfolio of free cash flow generating assets that offer attractive opportunities to allocate capital for both near and longer-term development, while increasing our exposure to some of Canada’s most highly economic plays,” said John Jeffrey, Chairman and CEO of Saturn. “We believe the Oxbow assets – purchased from a very experienced oil operator – provide significant upside value with near-term recompletion and optimization opportunities, as well as long-term growth from a deep inventory of booked and un-booked drilling locations on the properties. Pro forma the Acquisition, we forecast 2021 average production of over 7,500 boe/d (91% oil), which greatly enhances our business model and positions Saturn for significant free cash flow generation that can be directed to debt repayment and future growth opportunities that enhance shareholder returns. I would like to thank all of our employees and partners for their time and effort in supporting Saturn through this transformational period.”
The Acquisition will be funded through proceeds from an $82.0 million senior secured term loan (“Senior Secured Term Loan”) a best-efforts agency private placement for aggregate gross proceeds of $6.0 million being led by Echelon Wealth Partners Inc. (the “Brokered Private Placement”) and a concurrent non-brokered private placement for aggregate gross proceeds of $15.0 million (the “Non-Brokered Private Placement” and together with the Brokered Private Placement, the “Private Placements”). Details of the Senior Secured Term Loan and the Private Placements are provided below.
1 As at April 1, 2021 Production report. Comprised of 6,197 bbls/d of light and medium crude oil, 149 bbls/d of NGLs, and 2,165 mcf/d of conventional natural gas.
2 May 5, 2021 future prices, $5 diff (US), $1.23FX, blowdown metrics (future 12 months on blowdown scenario)
Strategic Benefits and Rationale for Saturn
The Acquisition is aligned with Saturn’s strategy to become a premier, publicly traded light oil producer through the acquisition and development of undervalued, low-risk opportunities to build a strong portfolio of cash flowing assets with strategic development upside.
The highlights of the Acquisition and the anticipated benefits associated with the Oxbow Assets include, but are not limited to, the following:
- Attractive purchase price with material asset expansion
- ~6,700 boe/d (~95% light oil and liquids)1 of sustainable, reliable and high working interest production (88% WI) that is 76% operated
- Highly attractive purchase price of ~1.4x cash flow3 or ~$14,000 per flowing boe
- Saturn’s Oil and Gas production will increase by more than 2,000% over current volumes while PDP reserves will grow more than 1,300% over the Company’s year end 2020 reserves
- Land base increases by 775% with an increase in booked drilling locations of more than 180%
- Conventional multi-zone asset base with large, identified low-risk drilling inventory and significant workover opportunities
- Concentrated in the Midale / Frobisher formations, the Oxbow Assets provide exposure to highly economic light oil plays4 offsetting leading operators, with competitive forecast returns
- Large inventory of 244 booked and more than 200 un-booked locations5 supports long-term development
- Saturn has identified the potential to generate significant annual free cash flow6 through optimizing and recompleting more than 500 existing well bores over the next three years
- Low capital expenditures required, with approximately $5 million of annual workover capex expected to offset low declines and grow annual production by approximately 200 boe/d
- Highly economic assets with attractive netbacks6 and free cash flow profile
- Expected to be highly accretive
- Highly productive wells with strong operating netbacks7 (over $28/boe) and capital costs on new drills estimated at $0.92 million per well, with per unit royalties forecast at $7 to $8/boe and operating costs of $5 to $7/boe on new drills within the first three years
- Locked-in area economics with approximately 70% of forecast production hedged over the next year, 60% for the second year and ~50% for years three and four with incremental volumes from growth capital fully exposed to commodity prices
- Scale, strategic optionality and enhanced flexibility
- Expanded scale provides increased strategic optionality in adapting to operating and capital markets conditions and improves financial capacity due to increased cash flow generation
- Low leverage with pro forma debt to cash flow of approximately 1.7 at closing. Saturn anticipates being debt free in 24 months based on current strip pricing,
- The addition of another material core area provides improved flexibility in capital deployment can offer better returns on investment and robust returns for shareholders
- Scale provides opportunities for cost savings along with greater operating efficiencies to reduce per unit production costs
3 May 5, 2021 future prices, $5 diff (US), $1.23FX, blowdown metrics (future 12 months on blowdown scenario)
4 Source: Scotiabank’s September 2019 playbook.
5 Midale/Frobisher/Alida/Spearfish/Tilston/Red Jacket locations in SE Saskatchewan
6 $5 million Capex budget per year for workovers
7 See “Information Regarding Disclosure on Oil and Gas Operational Information and Non-IFRS Measures” under “Reader Advisory” below”.
- Strong infrastructure position with multiple sales points and capacity for future growth
- 60 owned, operated and well maintained key production facilities with excess capacity
- Extensive battery network featuring comprehensive Kingston Midstream connections with production predominantly LACT-connected
- Conserved gas processed at third-party gas plants
- Furthers Saturn’s environmental, social and governance (“ESG”) performance
- Fresh water usage will be negligible as no fracture stimulations are required to develop the assets
- Future potential to initiate an enhanced oil recovery initiative using only produced water
- Saturn’s environmental footprint will be minimized with pipeline-connected, multi-well pad development of the Oxbow Assets
- Liability clean up accelerated by over $10 million of federal Accelerated Site Closure Program funding
Asset Acquisition Summary
|Purchase Price||$93 million|
|Annual decline rate8||~12%|
|Land||~280,000 net acres (450 net sections)|
|Drilling Locations9||244 booked (200 unbooked)|
|Forecast 2021 average operating netback (strip)10||$28.00/boe|
|Forecast future 12 month Net Operating Income11||$65-70 million|
|PDP Reserves||24.19 mmboe|
|Total Proved Reserves||33.24 mmboe|
|Total Proved + Probable Reserves||44.73 mmboe|
|Future 12 Month Cash Flow Multiple13||1.4x|
|Estimated Production Cost (at April 1, 2021)14||$14,000/boe/d|
|Estimated Total Proved Reserves Cost15||$2.80/boe|
|Estimated PDP Reserves Cost||$3.84/boe|
8 Decline rate based on 2021 versus 2020 PDP reserves. See “Reader Advisory – Reserves Disclosure”, below.
9 244 net booked horizontal locations. See “Reader Advisory – Drilling Locations” for additional details.
10 The estimated operating netback was derived using estimated go-forward royalties and operating costs utilizing May 5, 2021 strip pricing which averages US$64.29/bbl; an MSW/WTI differential of US$5.00/bbl; an AECO price of $2.80/GJ; and a USD/CAD exchange rate of $1.23 all for the forecasted 12-month period from the Effective Date of April 1, 2021. The operating cost and royalty utilized for the operating netback calculation is $26.49/boe and $7.53/boe (or 11.75% of oil and gas revenue), respectively. See “Reader Advisory – Non-IFRS Measures” for additional details.
11 12 month future Net operating income based on production acquired and an operating netback in respect of the Assets of $28.13/boe. See Note (10), above, and “Reader Advisory – Non-IFRS Measures” for additional details.
12 YE20 independent reserve evaluation, working interest before royalty reserves, May 5, 2021 Future Prices, $5 diff (US), $1.23FX.
13 Assuming blowdown case with future 12 month net operating income of $65-70MM
14 Calculated by dividing the Purchase Price by production of 6,700 boe/d.
15 Calculated by dividing the Purchase Price by Total Proved Reserves (BOE) acquired.
Saturn Pro Forma Future 12 months16
|Capital Budget||$5 million|
|Average Daily Production17||~7,500 boe/d|
|% Oil and NGL||~95%|
|Future 12 month Net Operating income||$77-82 million|
|Drilling Locations||372 booked / >250 unbooked|
Pro-Forma numbers are based on pricing assumptions of: a WTI price of US$64.29/bbl; an MSW/WTI differential of US$5.00/bbl; an AECO price of $2.80/GJ; and a USD/CAD exchange rate of $1.23.
The Acquisition has an effective date of April 1, 2021 and is expected to close on or about May 31, 2021, subject to certain customary conditions and regulatory and other approvals.
In connection with the Acquisition, Saturn intends to complete a Non-Brokered Private Placement of special warrants (“Special Warrants”) by issuing an aggregate of 125,000,000 Special Warrants at a price of $0.12 per Special Warrant for aggregate gross proceeds of $15.0 million. Each Special Warrant will be convertible into one unit of Saturn (each, a “Unit”) without payment of additional consideration and shall be deemed to have been converted on the earlier of (a) four months and one day from the date of issuance, and (b) five (5) days after receipt of a final receipt for a short form prospectus filed in compliance with applicable Canadian securities laws (the “Conversion Date”).
Each Unit will be comprised of one Common Share and one Warrant of the Company, each Warrant entitling the holder thereof to purchase one Common Share (each a “Warrant Share”) in the capital of the Company at an exercise price of $0.16 per Warrant Share for 24 months from date of issuance of the Special Warrant.
In addition, the Company has engaged Echelon Wealth Partners Inc. to act as the lead agent and sole book runner to complete a concurrent $6.0 million best-efforts agency Private Placement of 50,000,000 subscription receipts (“Subscription Receipts”) at a price of $0.12 per Subscription Receipt. Upon satisfaction of the escrow release conditions, being the closing the Acquisition, each Subscription Receipt will be automatically converted into one Special Warrant on the same terms as the Special Warrants above.
The Company has agreed to grant the Agents an option (the “Agents Option”), which will allow the Agents to offer such number of additional Subscription Receipts as is equal to up to 15% of the Subscription Receipts issued under the Brokered Private Placement, having the same terms as the Subscription Receipts. The Agents’ Option may be exercised in whole or in part at any time up to two days prior to the closing of the Brokered Private Placement.
The Private Placements will take place by way of a private placement pursuant to applicable exemptions from the prospectus requirements in the offered jurisdictions, and in those jurisdictions where the Offering can lawfully be made, including the United States under private placement exemptions.
The Company will use commercially reasonable efforts to prepare and file a preliminary short form prospectus in the provinces where the Special Warrants are sold, qualifying the distribution of the Units and the Compensation Options (as defined below), within 30 days after Closing (as defined below). The Company has agreed to promptly resolve all comments received or deficiencies raised by the securities regulatory authorities and use its commercially reasonable efforts to file and obtain receipts for the final short form prospectus as soon as possible after such regulatory comments and deficiencies have been resolved.
16 Management prepared – Calculated by estimated capital cost of $5,000/bbl in workover costs for reactivations/workovers
17 Average production weighted 5% to conventional natural gas, 90% to crude oil and 5% to NGLs.
In consideration for their services, certain advisors as well as the Agents and certain finders will receive commissions as set forth below. The Agents will received a commission equal to 7% of the gross proceeds of the Brokered Private Placements and will issue such number of compensation special warrants (“Compensation Special Warrants”) equal to 7% of the number of Special Warrants sold in the Brokered Private Placement (subject to reduced commission of 3.0% cash and 3.0% Brokers Warrants payable on subscriptions sourced by the Company). On the Non-Brokered Private placement, certain finders will receive commissions of 6% cash and 6% Compensation Special Warrants. In connection with the Acquisition, certain advisors will also receive Compensation Special Warrants. Each Compensation Special Warrant will be exercisable into one (1) compensation option (a “Compensation Option”), for no additional consideration, at any time after the Closing, and each Compensation Special Warrant not previously exercised shall be deemed exercised on the later of (i) the day after a receipt is issued for a final prospectus qualifying the Units for distribution in qualifying jurisdictions and (ii) the date that is four months and one day following the Closing. Each Compensation Option shall entitle the holder thereof to purchase one Unit (on the same terms as the Units above) at an exercise price of $0.12 at any time up to 24 months following the Closing.
The closing of the Private Placements (“Closing”) is expected to occur in one or more tranches on or before May 31, 2021 and is subject to certain conditions including, but not limited to, the receipt of all necessary approvals, including the approval of the TSX Venture Exchange (the “Exchange”). The Special Warrants will and, unless their distribution is qualified by a final prospectus, the Common Shares and Warrants comprising the Units, the Warrant Shares, Compensation Special Warrants, and the securities underlying the Compensation Special Warrants to be issued under the Private Placements will have a hold period of four months and one day from the Closing Date.
The proceeds of the Private Placements will be used to fund the cash deposit and the closing proceeds to the vendor pursuant to the terms of the Acquisition and for general corporate purposes. Certain management and directors of Saturn have committed to subscribing for $560,000 of the Non-Brokered Private Placement.
On completion of the Private Placements, the Company expects to have 409,573,715 common shares (basic) outstanding.
Senior Secured Term Loan
Saturn has executed a commitment letter in respect of the Senior Secured Term Loan with a reputable U.S.-based institutional lender (the “Lender”) for proceeds of $82.0 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. The commitment of the Lender 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 Acquisition.
Saturn’s existing reserve-based revolving note facility will be amended to be senior secured notes, extended to November 2024 and subordinated to the Senior Secured Term Loan, with interest payable 7.5% cash and 7.5% PIK. On the Closing Date, Saturn’s total debt position is estimated to be approximately $108 million, representing approximately 1.4x pro forma net operating income and approximately 1.7x pro forma cash flow.
Alvarez & Marsal Canada Securities ULC acted as exclusive financial advisor to Saturn with respect to the Senior Secured Term Loan and the Acquisition.
Dentons Canada LLP acted as Saturn’s legal counsel in connection with the Acquisition, the Private Placements and the Senior Secured Term Loan.
About Saturn Oil & Gas Inc.
Saturn Oil & Gas Inc. (TSXV: SOIL) (FSE: SMK) is a public energy company focused on the acquisition and development of undervalued, low-risk assets. Saturn is driven to build a strong portfolio of cash flowing assets with strategic land positions. De-risked assets and calculated execution will allow Saturn to achieve growth in reserves and production through retained earnings. Saturn’s portfolio will become its key to growth and provide long-term stability to shareholders.