Saturn Oil & Gas keeps acquiring

Investors running for cover will regret it

Saturn Oil & Gas (SOIL.V) saw a lot of negative sentiment when it made its last acquisition funded with high interest debt despite clear evidence that debt would fall away very quickly. High netbacks, a $50 million equity issue and a $27 million asset disposition saw some investors gain a bit of confidence, only to run for the exit doors when Saturn today announced a $525 million acquisition from Crescent Point of some Saskatchewan assets that add 13,500 barrels a day of production, 96% liquids.

The purchase from Crescent Point funding comes from a new debt financing at lower interest rates arranged by Goldman Sachs and a $100 million bought deal equity issue.

Holding commodity prices steady, I see the acquired assets as accretive to share value despite the dilution of another $100 million equity issue (about 42 million shares). The lower interest rate on the debt has a positive impact on cash flows, a nice bonus.

Keeping current financial models of the companies in which I hold shares gives me the ability to digest news quickly and assess the impact on the company’s economics, even if the data are a little rough. Here is my updated model of Saturn.

Sure, there is plenty of risk in commodity prices but the data are grossly accurate and they point to a serious case of undervaluation. In today’s energy market, investors see added debt and acquisitions as negative news and (just as found by Richard Thaler in his Nobel prize winning conclusions that investors over react to bad news and under appreciate favorable developments), Saturn shares sold off on the announcement and the Twittersphere was full of posters lambasting management for decisions that will make them wealthier over time.

Not me. I immediately added 10,000 shares. Anytime I can buy $100,000 to $125,000 in value for less than $25,000 I am first in line.

For the detractors, it is too bad you don’t run an oil & gas company. It would be great experience and teach you an important life lesson - don’t pay too much attention to shareholders - your duty is the best interest of the corporations, not shareholders, and the shareholder base can’t agree on their own best interests anyway and always bitch at changes.