Saturn Oil & Gas may be a sleeper
Valuation is impressively cheap despite the high debt load
Saturn Oil & Gas (SOIL-V) is a Canadian light oil and gas producer with annual output of over 26,000 Barrels of oil equivalent (Boe) per day. The market doesn’t like the company much since it has a pile of debt. The company’s latest presentation estimates Enterprise Value (EV) at under $800 million based on a share price of $2.25 (shares currently trading about $2.40. All currency in this article will be Canadian dollars.
Given the outstanding warrants and RSUs I will round the share count to 150 million.
Operating costs are about $22 a barrel and royalties about 11%. Light oil in Canadian dollars is about $100 a barrel these days, if not a bit more, so netbacks are relatively high for oil at ($100 x .89) - $22 = $67 a barrel.
Saturn is offside on its hedges but as at September saw EBITDA for 2023 at $375 million after the hedge book losses and sees free funds flow of $145 million for the year.
At current prices (more or less) the company sees its $474 million debt evaporating and reaching zero debt by second quarter 2026.
Commodity prices are volatile and the projections carry risk, but assume for a moment management meets its goals and market prices for oil and gas cooperate. By Q2 2026, with no growth in production and the hedge book rolled off, Saturn could have over $400 million EBITDA which, if valued at a 4 times multiple is $1.6 billion in enterprise value and implies a share price in excess of $10.00.
There is a lot of room between the cup and the lip for spillage, commodity prices may tank, and drilling results can both excite and disappoint. But for my money, the prospect of a fourfold increase in share value in just over two years is too hard to ignore so I am betting on the stock. Management’s plan to limit capital outlays to sustaining capital and direct free cash flow to debt reduction is sensible and if the commodity gods don’t deal a bad hand, should produce a result not far from the company’s projections.
I like the risk return profile and have added some to my oil & gas portfolio.