Saturn Oil & Gas initiates an NCIB that makes sense

Deeply undervalued stock warrants share buyback

Saturn Oil & Gas (SOIL.V) is one of my largest holdings. An unconventional but brilliant management team has grown by acquiring undervalued assets at a time when investors fear debt and run for the exit doors when a management team is bold enough to expand through acquisition and fund the purchase with debt. Markets did not like the Veren (VRN.TO) acquisiton of Kaybob Duvernay assets, the Baytex (BTE.TO) acquisition of Ranger, or the Tamarack Valley (TVX.TO) purchase of Deltastream, and all three stocks have suffered in trading price somewhat despite solid support by Bay Street analysts. All three have made the top ten list of Ninepoint Energy (NNRG) holdings.

I don’t hold any of those three since I believe they overpaid for the acquired assets and relied too heavily on short term and bank financing, although I am confident all of them will do well if commodity prices remain firm.

Saturn is a different kettle of fish, as I will argue. Saturn Oil & Gas did not make the Ninepoint list likely because a majority of the shares are held by insiders and it is not a heavily traded stock. Or, maybe Eric Nuttall just disagrees with me regarding value.

Saturn’s 2023 acquisition of Ridgeback was a stroke of genius, buying deeply undervalued assets at a deeply discounted price, in my opinion. Saturn followed that in the spring of 2024 with the acquisition for $525 million of another set of deeply discounted assets in Southern Saskatchewan known as the Battrum and Flat Lake assets.

Saturn refinanced all of its debt in parallel with the more recent acquisition and issued a US$650 million 9.625% Note and entered into a $100 million reserve based lending facility, also issuing $100 million of common equity, while repaying all earlier debt. The result is a company with output now running in the 40,000 Boe/day range with no near term debt maturities and netbacks from production in the CDN$40 per Boe range.

Saturn’s cash flow strategy is bold, brilliant and will serve investors well. EBITDA for the next 12 months of CDN$600 million plus makes the debt manageable and a solid hedge book protecting the next year or so against unforeseen collapses in commodity prices means the company will restore a pristine balance sheet almost certainly with little risk of a solvency issue along the way.

With an enterprise value at today’s stock price of CDN$1.3 billion, Saturn is trading at 2 X EBITDA or about half the valuation of its peers.

Retail investors dislike outliers, tend to follow advisors rather than do their own homework, and miss undervalued stocks with regularity. They have little ability to weigh risk and reward.

Based on my own analysis comprising a model of Saturn’s operations and a modified Black Scholes valuation of its reserves, I am confident we will see SOIL.V stock trade north of $10.00 during 2025, about a fourfold gain from its current depressed level.

We will see. There are the usual risks of commodity price collapse, general market weakness, etc. and there is no way to make outsized gains without taking above average risks. But the Saturn Normal Course Issue Bid (NCIB) is in my opinion going to increase the potential for this company’s shares to rise sharply over the next year or two.