Saturn Oil & Gas (TSX:SOIL) Q3 2026 Earnings Call

0:00 Good morning, ladies and gentlemen. Welcome to Saturn's third quarter 2026 results conference call. As a reminder, all participants are in 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.

0:43 Thank you, operator. Good morning, everyone, and thank you for joining us to hear management's remarks about our third quarter 2026 results. Please note that our Q3 financial statements, MD&A, and press release are filed on CDAR Plus and available on our website. Today's call may include forward-looking information and references to non-IFRS and other financial measures. Listeners are encouraged to review the disclaimers outlined in our most recent MD&A. Listeners are also cautioned not to place undue reliance on these forward-looking statements, since several factors could cause actual future results to differ materially from the targets and expectations expressed. The company undertakes no obligation to update or revise any forward-looking statements, whether because of new information Future Events, or otherwise, unless expressly required by applicable securities law.

1:33 For more information on risk factors, please view the company's AIF, filed on CDAR+, and available on our website. Also note that all amounts discussed today are Canadian dollars, unless otherwise stated. On today's call, we'll hear remarks from John Jeffrey, Saturn's Chief Executive Officer, Justin Kaufmann, our Chief Development Officer, and Scott Sanborn, our Chief Financial Officer, before opening it up to Q&A. I'll now hand the call over to John.

2:01 Good morning everyone and thank you for joining us today. As we outlined in the press release yesterday, Q3 was a defining period for Saturn. We delivered record results and took deliberate steps that have fundamentally strengthened the company and set us up for an exceedingly strong 2027. We are proud to report new records not only for production but also for adjusted funds flow, Capital Expenditures, and the number of wells drilled, showcasing our ability to continue to do some very exciting things with some very boring assets. Production of over 43,700 barrels a day exceeded quarterly guidance and analysts' expectations for the ninth quarter in a row. Our record adjusted funds flow totaled $150 million, or 84 cents per share, which was 24% higher than the previous quarter.

2:53 and 56% higher than the same quarter last year. These results were achieved while executing Saturn's largest quarterly capital expenditure program to date, investing $128 million with 83% of that directed to drilling, completing, equipping and tie-in activities. As Justin will expand on, we had six rigs running and set a new high for wells drilled in a single quarter. With this larger capital program, we saw an increase of 42% in total man hours worked compared to Q3 of last year and I'm extremely proud of our team for safely managing the higher level of activity with zero lost time injuries. Safety is at the heart of everything we do and I want to congratulate our hardworking field staff for making sure that everyone gets home safely at the end of each and every day.

3:42 The third quarter also demonstrates Saturn's blueprint strategy in action. We closed the accretive acquisitions of Burgess Creek and Triland Energy for $177 million, or about 1.7 times net operating income. This added approximately 3,700 BOE per day of high net back, 96% light oil and liquids production into our portfolio. These tuck-in acquisitions are a perfect fit within our southeast Saskatchewan core area, where we know the rock, we own the infrastructure, and we can apply our operating model to immediately reduce costs and improve net backs. We completed the integration of these assets ahead of schedule, and we've already seen operating cost savings and synergies that exceeded our initial forecasts.

4:28 We originally expected operating costs to reduce on these assets by about $2.50 per BOE, and so far we've done even better, delivering savings of closer to $3 a BOE, with even more potential left to realize. Along with the acquisitions and higher forecasted organic growth this year, we also restructured the balance sheet. We refinanced our second lead notes with the new dual tranche US and Canadian senior unsecured notes due in 2031. In addition to benefiting from unsecured structure, we have lowered our effective interest rate cost by approximately 200 basis points, extended the maturity out by two years, removed the mandatory 10% amortization that gives us more flexible and more freedom inside our covenants.

5:14 Our new notes give us a much greater control of our free funds flow. will continue to be directed towards net debt reduction, shareholder returns, and opportunistic acquisitions. We've also expanded our credit facility, and Saturn now has access to a total available borrowing base of up to $500 million. An equity re-rate also appears to be underway in the Saturn's market value. Year-to-date, our market cap has expanded material, from approximately $450 million coming into the year to approximately $1.7 billion today. reflecting a per share value increase of over 250%. Over the same time, our net debt as a percentage of enterprise value has declined from 63% at the end of year 2025 to 37% based on our current market cap and net debt at the end of September 30th.

6:02 Based on these achievements, in October, we announced a $302 million agreement to acquire Corex Resources, a private company with assets in Southwest Manitoba, that are immediately adjacent to our southeast Saskatchewan operations. Saturn gained approximately 7,000 barrels per day of 100% light oil, own infrastructure, and deep drilling inventory, including unbooked open-hole multilateral locations that offer upside not recognized in the current reserves. We are excited to apply the expertise we've built in southeast Saskatchewan to these new assets. With the purchase price representing roughly 1.6 times net operating income, and around 82% of PDP. The acquisition metrics on this transaction are a perfect example of the Saturn Blueprint action.

6:50 Consideration will be funded with $252 million of cash and the issuance of $50 million worth of our shares, which reflects Corex shareholders' desire to participate in the future upside that Saturn offers. We expect the acquisition to be immediately accretive to NetBack, adjusted funds flow per share and free funds flow per share, Further, our team has identified approximately $6 million in expected annual efficiencies through facility consolidation, streamlined field operation, lowered operating costs, and improved marketing arrangements. Combined with Adam's forecast of 10% year-over-year production growth, the Corex acquisition drives up our 2026 exit production target to between 54,000 and 56,000 BOE per day. That is a significant step forward for Saturn and really sets us up for a strong 2027 with an expanded asset base, more robust cash flow, and a significant free cash flow based on current commodity prices.

7:49 Closing of the Corex acquisition is expected just before Christmas, and we anticipate releasing our full year guidance alongside with that. Saturn's third quarter results reflect more than just an active quarter. They show the effectiveness of our blueprint model Thanks, Sean. I'm so proud of our team. Q3 was the most active development quarter in our history. We invested $128 million, ran six rigs, and drilled 60 gross wells.

8:35 while keeping a tight grip on costs. Through the first three quarters of 2026, our cost to drill complete equipment tie-in wells came in nearly 3% below legend. One of our most exciting wins in the quarter was the open-hole multilateral program, where we drilled eight open-hole multilateral wells in southeast Saskatchewan. The program continues to outperform as we got results from the 8 of 22 Torquay well in Q3, which is now the most successful open-hole multilateral well to date. significantly exceeding our internal type curve expectation. The 8 of 22 well achieved initial production of 410 barrels per day over the first 30 days and 360 barrels per day over the first 90 days, putting it at the top 10 best performing oil well in the province based on third-party rankings.

9:23 With the strong results from the Torquay, we see additional growth potential in production and reserves. It also proves we can apply this technique to multiple formations. which we've done successfully in five different zones, the Bakken, Spearfish, Midale, Provo-Shirt, and now Torquay. In Q4, we plan to drill a pilot open-hole multilateral well in the lower Chaudavit. We will continue to evaluate other zones where this type of drilling could increase recoveries and capital efficiency, including opportunities in Manitoba from the Core-X acquisition. We've identified about 30 net unbooked lodgepole open-hole multilateral locations in the Verdant Fields. The benefit of Saturn's diversified, high-quality inventory was really visible this quarter, as southeast Saskatchewan experienced higher-than-normal rainfall, limiting access to certain areas.

10:13 Surface conditions required us to adjust capital in real time. We seamlessly shifted about $30 million of Q3 capital into Q4, including the startup of a seventh rig in southeast Saskatchewan. Our deep inventory of surface locations, nimble asset base, and our team's innovative approach enabled us to keep race active with minimal disruption while maintaining momentum and still beating analysts' expectations for production. At Flat Lake, our team quickly turned a challenge into an opportunity, as a heavy rainfall caused water to pool on the surface. We engaged with landowners for permission to bring in specialized crews for overland pumping so Senator could pump standing water directly to prac sites for completion. This addressed the surface water issue while also eliminating our need to truck water. As a result, we expect to lower area completion costs by approximately $1 million and saw a reduction in truck traffic of more than 2,000 loads.

11:09 A further example of Saturn innovation was on display at West Feminine, where we successfully drilled the first-ever horseshoe-shaped cardion well, which is expected to be fracked this week. To mitigate land constraints, the horseshoe design allowed us to drill a 2-mile lateral within a single 1-mile square section. while capturing the economics associated with longer laterals and accessing inventory that might otherwise have been strengthened. We estimate drilling in this configuration saves us about $1.7 million in capital compared with drilling two 1-mile wells to access the same reservoir. And we've already identified more than 10 locations with potential to apply the same technique. Just another example of how we can add value to assets overlooked by others. Our cardio program at West Pemina continued to advance as we drilled Saturn's largest multiwell cardium pad to date. This seven-well pad includes three three-mile laterals and four two-mile laterals. Developing more wells from a single pad enables us to distribute costs over more legs while making better use of existing infrastructure, all of which drives ongoing improvement in our cardium capital efficiencies.

12:17 We just finished tracking the wells on this pad and anticipate new volumes to come online in Q4. Looking ahead, we expect to run seven rigs through the balance of 2026 and into the first quarter of 2027. Capital in the final quarter of the year is anticipated to come in at the upper end of our range of 155 to 165 million, driving average volumes of 46 to 47,000 barrels per day. This is expected to position 2026 as one of the strongest organic growth years on a per barrel basis in Saturn's history. With that, I'll

12:55 Thanks, Justin, and thank you again, everyone, for joining us this morning. Echoing the guide's previous comments on Saturn's continued success and achievements in the third quarter, our results were supported by both record production and cash flow, strong realized oil prices, and our continued operational outperformance. We had records in both adjusted EBITDA with $171 million and adjusted funds flow of $150 million, leading to quarterly cash flow per share of $0.84, The combination of increased volumes and higher realized prices were supported by our field cost control, reduced transportation costs following the renegotiation of certain delivery contracts, and reduced G&A costs following our office relocation and increased capital recoveries with our expanded capital budget. These operational initiatives were further compounded by hedging impacts at half the level reported in Q2.

13:46 We generated free funds flow of $22 million or $0.12 per share in the quarter after funding our record capital program, resulting in year-to-date free funds flow totaling $167 million or $0.93 per share. We realized an operating netback over $54 per BOE before hedging and over $43 per BOE post-hedging. Our hedge program continued to provide the design downside protection and structured cash flow. Given the strength of the forward curve, we have continued to opportunistically layer in hedges to lock in our acquisition and project economics for the coming 12 to 18 months. Both during and subsequent to quarter end, we layered in 3 million barrels in 2027 at a weighted average price of $84 per barrel, protecting over $300 million of Canadian revenue.

14:33 Q3 saw a net loss of $43 million, largely due to non-cash, unrealized hedge losses, and many more. However, adjusted funds flow and our strong operating netback remain as our primary capital management focus as they offer a clearer view of Saturn's operating and performance going forward. As John mentioned, we completed our bond refinancing in Q3, the dual tranche offering of senior unsecured notes due in 2031. We issued 575 million US dollars at 8.5% and C$185 million at 7.5%, lowering our effective interest costs by about 2%. Our refinanced unsecured notes reflect an extended maturity profile out to 2031 with the relaxation of certain covenants, allowing us greater flexibility to execute on our blueprint strategy and capitalize on the current market volatility.

15:28 Proceeds from the issuance were used to retire our 9-5-8 senior secured second lien notes and fund the Burgess Creek and Triland acquisitions in the quarter. We exited the quarter with net debt to adjusted EBITDA of just 1.5 times and maintain our line of sight to reducing that ratio down below 1 times by the end of 2027 at current commodity prices. Further showcasing Saturn's stability is our strong liquidity profile with a fully undrawn credit facility at quarter end on a $500 million boring base. the nominal net working capital deficit inclusive of $80 million in cash on hand. As part of our continued commitment to returning capital to shareholders, during Q3, we repurchased and cancelled 1.5 million shares for $10.3 million under our NCIP.

16:15 Through October, we repurchased an additional 740,000 common shares for a cost of $6 million at a weighted average price of $8.07 per share. That brings our total return of capital to shareholders to over $80 million, repurchasing 25.5 million shares for cancellation since August of 2024. As John mentioned, we are excited to release our 2027 guidance, which will showcase a very active upcoming year, with that release expected mid to late December, aligning with the anticipated closing of the CORACS acquisition, subject to court regulatory approvals. Before wrapping up the call, I'd like to take a moment to welcome Wyatt Hamilton to our team, who recently joined Saturn as Vice President Marketing. Wyatt brings experience in commodity marketing, trading, and transportation across North American energy markets, and was most recently Director of Marketing at Whitecap Resources.

17:09 He will lead our marketing activities and help us to continue strengthening our commercial strategy as we evolve. With that, I'd like to thank everyone for your time this morning. I'll hand the call back to the operator to begin Q&A. 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. Since there are no questions, this concludes today's conference call.

18:04 You may disconnect your lines. Thank you for participating and have a pleasant day.