Saturn Oil & Gas Inc.

Good morning, ladies and gentlemen. Welcome to Saturn's first quarter 2025 results conference call. As a reminder, all participants are in a listen-only mode, and the conference is being recorded. After management's remarks, there will be an opportunity to ask questions. To join the question queue, you may press star, then 1 on your telephone keypad. Should you need assistance during the conference call, you may signal an operator by pressing star, then 0. I will now turn the meeting over to Ms. Cindy Gray, Vice President, Investor Relations. Please go ahead, Cindy. Thank you, Betsy. Good morning, everyone, and thank you for joining us for Saturn's first quarter 2025 earnings conference call. Please note that the company's financial statements, MD&A, and press release are available on our website and have been filed on CDAR+. Some of the statements on today's call may contain forward-looking information, references to non-IFRS and other financial measures, And as such, listeners are encouraged to review the associated risks outlined in our most recent MD&A. Listeners are also cautioned not to place undue reliance on these forward-looking statements, since a number of factors could cause the actual future results to differ materially from the targets and expectations expressed. The company undertakes no obligation to update or revise any forward-looking statement, whether as a result of new information, future events, or otherwise, unless expressly required by applicable securities law. For further information on risk factors, please view the company's AIS files on CDR Plus and on our website. Also note, all amounts discussed today are Canadian dollars, unless otherwise stated. Today's call will include comments from various members of Saturn's executive team, including John Jeffery, CEO, Justin Kaufman, CDO, and Scott Sanborn, RCFO. Following our prepared remarks, we'll open the lines up to participants on the call for a question and answer session. If we aren't able to address your question today, we encourage you to reach out to Saturn directly through the website. I'll now turn it over to John.

Hey, thank you, Cindy. Good morning, everyone. I just want to start by saying how extremely proud of Saturn's achievements and performance through the first period and subsequent quarter and I am, and as we continue to navigate the very fluid and volatile environment. To date, in 2025, our team has continued to execute on our blueprint strategies. driving new corporate records, including quarterly production at just under 42,000 VOE a day, adjusted funds flow of $131 million, and adjusted EBIT of $158 million, all of which also beat analysts' expectations. Our free funds flow of $58 million is the highest we've generated in any first quarter of any year. With so much uncertainty facing E&P companies in the current environment, shareholders, and bondholders by directing our energy to those factors that we can't control. To set the stage for our discussion around the Q1 results and our go-forward plans, I wanted to quickly highlight some of the key benefits of our strategy and asset base, particularly given the market that we find ourselves in. Our blueprint strategy guides how Saturn operates, focusing on asset optimization, offering a straightforward approach that can be replicated across our entire portfolio. With oil-weighted mid-life cycle assets, we are constantly finding new optimization opportunities, operational cost savings, and ways to increase production at low costs. Collectively, these incremental wins can collect and drive meaningful impact for the organization. For example, the Flat Lake bathroom assets that we acquired in 2024 were integrated into our portfolio throughout last year. Our team immediately went to work identifying multiple synergies and operational efficiencies. holding the asset we successfully reduced operating costs by 13 percent driving a cost savings of seven and a half million dollars realized in the second half of 2024 alone expanding it out to this year again that's almost 15 million dollar cost savings that we will experience this year thanks to the synergies and the hard work of our operations team this type of incremental improvements to be our Saturn blueprint. As a result, our asset base is well aligned with our strategy. Saturn's portfolio is comprised of its first suite of low decline, high return stack plays with multiple light oil zones. Not only has our current development program benefit from a long runway due to the large oil in place and relatively low recovery states in our field. As a result, we continue to explore options for enhanced oil recovery, such as water floods that can bolster our sustainability and migrate and further mitigate declines, which Justin will talk more about later. Saturn's asset base also We have the flexibility to redirect capital to areas offering the highest rates of return. Again, one of the best things about our asset base is the short lead time, so we don't need to commit to large paths that take 12 to 18 months to develop. As such, we're very flexible. In the current market environment, we believe some of the best returns can be generated by investing directly into Saturn Sparrows. As such, we've allocated some of our free funds below to ongoing share buybacks. we made our first open market bond repurchase last month. When both of those dipped well below par, buying these bonds and shares at a discount served to further enhance the value of the company. Looking forward to the balance of 2025, we have the ability to defer making decisions about capital expenditures for the second half of the year. Given we believe in long-term oil price demand, Saturn will not waste our resources by deploying a large capital program if oil remains sub-$55. The depth and quality of our asset portfolio, coupled with our strong head book, position Saturn with the resilience for long-term sustainable growth and value creation. Investing capital where we see attractive returns increases our competitiveness now and for the future. Before I turn it over to Justin, I want to provide additional color on the outcomes of our capital program report. I just want to express my appreciation to the entire team for their hard work throughout the past four months, and to thank our shareholders and note holders for their continued support of our confidence in Saturday. Thanks, John.

For the first three months of the year, our operations and technical teams have done an outstanding job of deploying capital prudently, safely, and responsibly, while continuing to improve efficiency. Our Q1 Capital over Q1 last year. Approximately three quarters of Saturn's $73 million capital program was directed to drilling activities, resulting in the completion of 33 gross wells, all of which were brought on in the quarter. The bulk of these wells, 26 in total, were in southeast Saskatchewan, with six in west Saskatchewan and one in Alberta. About 22% of our Q1 capital was allocated to facilities, which included continued investment in our water club projects. The balance of the capital went to land and size. During the quarter, we converted three Torquay producers to injectors to support both the water flow at Flat Lake and future pre-pressurized balkan locations. Today, Saturn has more than 160 injectors at Flat Lake, over 140 at Batram, and about 60 in Oxbow, southeast Saskatchewan. We have identified the opportunity to expand our water flow program in southeast Saskatchewan, in particular at our Trillium and Balkan fields. This is an area where our operations are immediately adjacent to one of our peers' existing water flood patterns, which has seen more than 20% of the producers convert to injectors, which has translated to strong success in reducing decline rates to under 15%. We have started the initial capital stages of the prelim water flood, and when proven successful, it could potentially lead up to more than 200 pre-pressurized water flood infill locations to the view field area. Another exciting development and inactive horizontal wells the goal is to create incremental oil production and revenue from existing wells as part of the schedule government's target to increase production to 600 000 barrels by 2030. due to this incentive center completed its first horizontal re-entry into the curvature since 2022 with results from that re-entry coming in 50 above our internal type curves Our technical team is excited to continue with this type of horizontal installation, and we have hundreds of potential candidates that we are looking to build into our five-year development plan. Other notable activities in Saskatchewan during the quarter include the drilling of our first Mid-Ale horizontal well since 2023, which exhibited strong results and came on 50% higher than tight curve. This was an important result as we have close to 100 of these locations, sands, along with the company's longest-ever spearfish horizontal well, targeting the PQ sands at over 3,500 meters. We also drilled our first under-well in Flat Lake. All-In Saturn's Mississippian Spearfish Program, NQ1, delivered results across a total of 13 wells drilled that averaged over 50% above type curve. This is another positive data point that underpins Saturn's long-term sustainability, since our Mississippian spearfish well inventory features approximately 600 locations. It represents more than 20% of our total corporate inventory and is where we have a lot of our Tier 1 locations. Looking now at our open-hole multi-lake Balkan development, we drilled two 8-lake open-hole multilateral horizontals. One well was sold in one mile and the other at two mile and participated in two non-off open-hole wells as well. Based on initial production wells, We anticipate our two-mile open-hole multi-leg well could be contended for top-performing well in southeast Saskatchewan in Q2. All-in results from this program came in 20% above type curve. The combination of all our technical team's hard work and tireless efforts was showcased through record production of approximately 41,700 barrels attributable to outperformance of our type curves and strong volume.

Thanks, Justin, and good morning, everyone. Saturn's financial performance reflected the strong operation results Justin spoke to, exceeding analyst consensus across nearly all metrics, and I'm very pleased to quickly run through the highlights. Saturn generated record-adjusted funds flow of $131 million, or $0.66 per share, driven by our record quarterly production of nearly 41,700 barrels per day, up from just over 41,000 barrels per day in the fourth quarter of 2014. Net of derivatives, our operating net back per BOE was $41.99, higher than the $40.41 in the previous quarter, of which our hedging derivatives will further insulate Saturn from any future downward price volatility, which I will touch on shortly. With just over $73 million in Q1 capital expenditures, our free cash flow was nearly $58 million for the quarter, $34 million of which was directed towards financing activities, primarily relating to the repaying $16.3 million U.S. dollars in debt on our senior notes, equating to just over $23 million Canadian dollars. In addition, we remain active on our NCID, directing $5.8 million to the repurchase of 2.8 million common shares for cancellation at a weighted average price of $2.08. At quarter end, the company had net debt of $814 million CAD, comprised of $601 million U.S. dollars principal outstanding on our senior notes, and adjusted working capital of $37 million, inclusive of approximately $80 million in cash. This results in net debt to annualized adjusted EBITDA of 1.3 times, in line with guidance and street consensus. We maintain liquidity at year-end of approximately $230 million, again comprised of $80 million in cash and $150 million in undrawn credit facility. We believe that financial flexibility underpins our strength and resilience through volatile markets. Subsequent quarter end, Saturn was able to capitalize on the falling oil price environment and associated market volatility to improve our position. Through April, we saw periods where our bonds were undervalued and accordingly purchased US $15 million face value of our senior secured notes at a discounted par, thereby further accelerating our debt reduction payment upon maturity. In addition, we invested $2.3 million to upgrade our hedge book by terminating certain W-2I hedging contracts, approximating a combined average stall price of $58 USD on $3,300 a day for the second F-26 and $7,800 a day for Q-1-27. The termination has no effect on our plans to deviate from our hedging target of 50% to 60% of PDP oil and liquid volumes net of royalties 12 months out However, we will continuously look to optimistically time the entry of any future hedges. Worth noting again, should oil fall below $50, we are not required to hedge into that market. Looking forward, should we continue to see oil price weaken, the value of our hedge book increases. For reference, the cash settlement forecast of our hedge book is $60 WTI, approximately $60 million, and of $50, it's $160 million. Effectively, for every $5 decrease in WTI, the value of our hedge book increases by approximately $50 million. Using 2020 as an example, oil goes to zero. The value of our hedge book, plus cash on hand today, would essentially allow us to pay up our debt. So we will continue to remain active on the hedging front, with the goal of optimizing our book. With gold forward capital budgets under scrutiny in the current environment, I wanted to close out remarks with a reminder of how Saturn is thinking about capital for the balance of $25 million. The seasonal pause in activity due to spring break up here in Canada gives us time to monitor commodity prices and assess market conditions, which will drive future capital allocation decisions based on applicable rate of returns. Since we have the ability to process decisions on our capitalist country program the second half of the year without incurring financial penalty or experiencing any repercussions related to long-term contracts, we intend to re-evaluate through July based on commodity prices. Further, because the majority of our drone occurs in the latter part of the year, pausing until July is not expected to impact our 2025 forecast volumes, assuming we maintain full capital budget. We will continue to be mindful of balancing cash flow generation with the preservation of our reserves while deciding on capital execution plans entering a 50 to 60 WTI environment. Thanks again for joining us today, and I'll now hand over to the operator to commence the Q&A. Operator?

Thank you. We will now begin the question and answer session. To join the question queue, you may press star, then 1 on your telephone keypad. You will hear a tone acknowledging your request. If you are using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star, then 2. We will pause for a moment as callers join the queue. The first question today comes from Adam Gill with Centum Financial. Please go ahead.

Hey, team. Congrats on a solid quarter. Three questions for me. First off, can you frame how spending would look like in a sub $60 WTI environment? And then maybe, you know, some guide rails if it was 60 to 70 and 70 plus?

Yeah, absolutely. Well, 70 plus would effectively be our guidance. So cap backs up, you know, just around that $300, $310 million mark. So Anything kind of 70-plus, just refer to our guidance. I think that's a great starting point. If you look at closer to 60, basically what we're going to do is we're almost going to retrench from west to east. So we're going to first pull back on the Viking and then Batram, and then you just pull back on Alberta, kind of leaving that southeast development last. So the easiest way to think about it, 50 million. So somewhere in that range, kind of a quick and dirty shorthand of how much capital we deploy those different levels.

Great. And if it was kind of the 200 million or the 100 to 150 million in these lower oil price environments, where do you see production standing at the end of the year?

We'll have to model that out. Again, with the bulk of that capital coming in before, we'll have a minimum

to get back in the field mid-june we've since pushed out of the month to mid-july i guess that will have no impact on this year's production but it all kind of depends on what the price looks like at that point when we do get back on the field okay understood um second question is how are you weighing uh allocating capital towards production initiatives versus continuing to execute on the ncib and maybe even paying down more debt beyond the scheduled amortization?

Well, we continue to monitor the bond markets. When we see our bonds trading anywhere in the 80s, anytime it's buy 10, get one free in the bond market, we like that. I think the yield was north of 15% there for a while. Again, with the hedge book and the defensive position we've built, I just think there's a misalignment. So we're happy to get in the market there and continue to buy those bonds and retire them at that discount. However, we are careful about our liquidity. So, you know, we don't want to overextend ourselves. We want to ensure that we are remaining flexible because, again, they are bonds on an RBL that we can pull from or re-pull from should we have a need for capital. So, again, what we're targeting here for this year is instead of $4 million more payment do a fifth hour payment. We have basically done that now, but we'll continue to monitor that bond market, and if we believe our liquidity is strong, I think we would see us in the bond market buying and retiring some more debt at these levels.

Okay, great. And my last question is kind of technical to that. Would you ever look at using the credit facility to buy back some of this debt if... if the prices, you know, really got low, or do you just want to do this from free cash flow?

No, we don't like the idea of paying with your MasterCard. I'd rather just use free cash flow in the meantime, but now, you know, if we see price drop in the 70s or something crazy, you know, perhaps we use more free cash flow, but no, we just don't believe that aligns with our defensive strategy to incur debt to pay off the second line of debt.

Okay, sounds good. Thanks for the answers, and I'll leave it there. Thank you.

Once again, if you have a question, please press star then 1 to join the question queue. Since there are no more questions, this concludes today's conference call. You may disconnect your line. Thank you for participating, and have a pleasant day.