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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Hello, and good morning from Calgary. Thank you, everyone, for joining the investor call for Saturn's Q1 2023 Financial and Operations Update. My name is Kevin Smith, Vice President, Corporate Development and your moderator for this call. We'll start this presentation with quick introduction from management, and with all that, to address any questions or comments you have. Please feel free to submit your questions and comments through the Q&A button at the bottom of your screen.
Joining us today is John Jeffrey, Chief Executive Officer; Justin Kaufman, Chief Development Officer; and Scott Sanborn, Chief Financial Officer.
I'll now hand the conference call over to John Jeffrey.
Thank you very much. So this is John Jeffrey, Chief Executive Officer at Saturn Oil & Gas. I want to thank to all of our shareholders and supporters for joining us today to discuss the tremendous quarter for Saturn and the amazing start to 2023.
First issue I want to address is the wildfires that are ongoing in Central Alberta. My wholehearted gratitude goes out to those emergency responders for their important efforts managing the situation, and I send my best wishes for safety and a speedier return to their homes and normal routines. All of Saturn staff in the affected areas are safe and out of harm's way. We've had no reports of damage to our facilities or infrastructure. Saturn has curtailed its production in the area until it is safe to resume operations, to which we will know more in the coming days as it looks like the fires are now starting to finally subside a little bit. So for now, we remain patient.
The key achievement in Q1 was the closing of the Ridgeback acquisition on February 28. The acquisition only contributed to one month of operations to our quarterly results, but the transaction itself was a true game changer for us. The acquisition increased Saturn's Oil & Gas production base by over 140%, a major win for Saturn shareholders, but the long-term price is the extensive portfolio of attractive development opportunities that came with the company and the team of skilled professionals that best understand the compelling upside and long-term sustainability in its undeveloped resources.
In a moment, we will pass it over to Justin to outline some of the immediate plans we have to develop these new assets and when we expect to get back to drilling, which is hopefully next month. We'll also touch on a very successful drilling program Saturn undertook in Q1 of this year. Finally, Scott will go through the financial summary of what was an extensively strong quarter for production, cash flow and profitability.
The key message for shareholders is we now have built a solid development platform in 3 core areas across Alberta and Saskatchewan, all focused on high-margin light oil. The capital investment opportunity in these areas offer exceptionally strong return profiles. And with our inventory of over 1,000 development drilling locations, Saturn has a sustainability for multiple decades of development.
I'll now hand it off to Justin Kaufman, our Chief Development Officer, for an overview of our Q1 drilling and our plans for the rest of the year. Over to you, Justin.
Thanks, John. I'm pleased to say that Q1 was the most successful quarter the company has ever had with regards to development drilling. Saturn drilled 8 Viking wells and 5 Mississippian wells in the quarter. The company continues to delineate off prior successes, and this has led to production results that were 37% above guidance on an IP30 basis. The highlight of this drilling program was the 11-21 Weir Hill well that achieved 150 barrels per day of initial production. And out of the approximately 200 wells drilled in the province, it ranked in the top 5.
We are currently waiting on breakup to pass, and then we expect to have 2 full-time rigs operating. One will be focused in Alberta drilling Montney and Cardium wells, which we acquired in the Ridgeback acquisition, which John mentioned. These wells have some of the highest rate of return in our inventory. And we are developing on previously built surface locations as well, which aids in reducing some of the upfront capital costs.
The second rig will be focusing on drilling Bakken and Mississippian wells in Southeast Saskatchewan. The company is excited to delineate its conventional Bakken play drilling multi-leg unstimulated horizontal wells. The development has been derisked by offsetting producers and has the potential to open up a deep inventory of currently unbooked locations. The rig will split time between the Mississippian and the Bakken wells, with Saturn continuing delineate off its prior successes within the Frobisher formation. We are extremely happy with the development to date and look forward to a busy drilling season in 2023.
I will now hand it over to Scott for some of the financial details of a record-setting quarter we released yesterday.
Thanks, Justin. This is a big period for Saturn as we started in 2023. We're very excited to have this quarter out. It shows the impact of our accessible 2022 and 2023 year-to-date drilling programs, as Justin mentioned, where we drilled 13 wells this quarter.
We're active in 2022 M&A achievements with our 2 Viking acquisitions in West Central Saskatchewan, in addition to the partial inclusion of our 2023 Ridgeback acquisition, which closed on February 28 for $525 million, including $475 million in cash and the issuance of 19.4 million Saturn common shares. With the mid-quarter close, the operational results for the acquisition are included on a prospective basis and, as such, only include one month of both financial and operational results.
We recorded many company achievements this quarter, including record sales of approximately $131 million, record adjusted EBITDA of approximately $70 million, record adjusted funds flow of approximately $55 million or $0.63 per share, record free funds flow of $30 million after drilling -- after spending $24 million in capital expenditures, and of course, 137% increase in production to reach record average of just under 18,000 barrels a day with first quarter exit rate of approximately 30,000 BOE per day.
With the recent expansion, the company's production base is now diversified with 3 distinct core areas, being Southeast Saskatchewan with our expanded Oxbow asset; West Central Saskatchewan with our Viking asset; and Alberta, which represents Central Alberta with our Cardium asset and primarily Kaybob and Deer Mountain areas in North Alberta.
In order to execute on this quarter and the acquisition, in conjunction with $30 million of free cash flow, the company expanded its senior term loan with its existing lender by $375 million, concurrently making $12 million in debt repayments and successfully closed a bought deal equity financing for gross proceeds of $125 million, bringing an exit debt -- net debt of $556 million, representing approximately 1.8x debt to pro forma annualized quarterly cash flow.
We were also successful in our efforts on the liquidity front without increasing our debt balance in the quarter by entering into a $30 million unsecured demand letter of credit facility with a syndicate of Canadian banks supported by performance security guarantee from Export Development Canada. As confirmation, the LC facility has no impact to Saturn's debt balance and provides the company with additional flexibility to replace cash collateralized letters of credit, which we expect to execute on in the coming weeks.
On the human resources front, as this is a corporate acquisition, I'd like to thank both the talented employee base we're lucky enough to retain upon the Ridgeback acquisition for the hard work and the dedication of the existing Saturn staff, who have been with us and shown dedication through this tremendous period of growth over the last few years. Integration is nearing completion. And without you, it would not be possible.
With that, I'll turn it over to Kevin with any questions.
Great. Thanks, Scott. So I'll remind everyone, you can submit your questions through the Q&A button at the bottom of your screen, and so here comes the first question. Is the $25 million per month of principal repayment under the senior term loan facilities affected by the lower production due to the Alberta wildfires?
Yes, I can take that. Since we don't know the total impact of when the wildfires are going to subside, now we do have business interruption insurance, now this is our most gassy field, so it will have the lower netbacks associated compared to what you'd see in our Oxbow or West Central field. So it -- if we can get this wrapped up in the next couple of weeks, I don't think there'll be any impact to our ability to meet our debt obligations for the balance of this year. We're carrying a very strong cash balance right now. The only potential impact that's going to be is it could be to our capital program nearing the end of the year, but that's going to fluctuate with the oil price anyways.
Thanks, John. Second question, did Saturn take on any commitments along with the Ridgeback acquisition?
So we did increase our hedge profile as we do with every acquisition. And again, that is to ensure that in any pricing environment that we are able to totally satisfy 100% of our debt obligations and retire all of our debt within 3 years. So you've seen that strategy rollout in the Viking with the original Oxbow deal. You've seen it again now. So we did layer on additional hedges with this. However, the entity itself did not come with any material commitments that we had to honor.
Okay. A question here. Some industry players haven't been reporting back on success in the Bakken with unstimulated conventional wells. Is this something that Saturn is considering?
Yes. I think I'm going to turn this one over to Justin as he can get into a little more detail about the extensive land that we actually hold in this area.
Yes. Thanks, John. And absolutely, we currently have 3 multi-legs on the drill program right now. These multi-legs have already been delineated from other offsetting producers. The offsetting producers results, which are public, have averaged approximately 250 barrels a day. To put that in perspective, our frac stimulated Bakken, our IP30s are about half that. And then the frac Bakken and unfracked come out around the same capital cost. So there is a major wedge gain on potential production on these multi-leg conventional Bakkens. Of the 30 we're drilling -- of the 3 we're drilling, it has the potential to open up approximately 100 unbooked locations. And these locations are on fee land, which also helps in the netbacks of the area. So we are extremely excited as a company to start developing up there in the next couple of months.
Thanks, Justin. I have a question here. With a couple of months of Ridgeback operations now behind you, where do you expect operating costs to trend in the second half of this year?
I'll probably let Justin weigh back in on this. I know pro forma, we've seen significant operating cost reductions by combining these 2 entities. But Justin might have more exact details on that.
Yes, we are going to be seeing some synergies in Southeast Saskatchewan, especially because of how contiguous the land base with the Ridgeback acquisition is with ours. So there will be some labor savings there and some potential savings related to buildings in Saskatchewan that our operators operate on and even how we blend and move our oil around. So there is some optimization there. So pro forma, we are seeing some. As far as the Ridgeback acquisition goes, we are seeing operating costs essentially coming in about how we projected on that side. So we will see a pro forma reduced our costs with most of the synergies coming in Southeast Saskatchewan.
Another question on costs, just on CapEx. Can you comment on the capital cost of the Saskatchewan wells and give an expectation of what that is for the Alberta wells going forward?
It depends on the play. In the Viking, we're seeing CapEx around $1.3 million to $1.4 million. That's what we're seeing through Q1, and those are essentially with inflation. So those are within our projections. Southeast Saskatchewan, we're seeing close to $1.1 million on the Mississippian, and we're projecting about $1.6 million on the Bakken. We don't expect the capital cost to sway much from those estimates. In Alberta, we'll be drilling a mixture of Cardium and Montney wells. The Montney wells, we expect to come in close to $3.5 million. And the Cardium wells, we're drilling different lengths of wellbores, anywhere from 1.5 to 2 miles. So the CapEx on those wells change anywhere from about a $3 million or $4 million apiece.
I've got a question regarding commodity pricing with -- can you speak to the margins that were taken in Q1 versus the prior quarters? And as well as a question about natural gas liquids. Realized price increased while natural gas prices decreased. What visibility do we have for natural gas liquids pricing going forward?
Yes. Go ahead, Justin.
So in the previous quarters, we did see liquid pricing around 55% of TI. Recently, we have seen that drop to about 50% of TI. So that's what we're realizing right now. So not materially different, but a little bit lower, and that's what kind of our marketers are expecting throughout the year. So that's what I'll have to say about the NGL pricing. Was there a second part to that question, Kevin?
The second question is, what do we expect going forward on natural gas liquids price?
Yes, essentially, it should stay fairly flat around that 50% TI for the remainder of the year.
And I'll just add there, Justin, in relation to the question on the NGL pricing. The product mix on our NGLs changed slightly post Ridgeback acquisition. So with the one month of production operations, NGL, the mix has changed very slightly.
Can someone comment to the existing debt facilities payback period and Saturn's confidence of meeting those obligations?
Sure. So we have -- the existing loan is scheduled to be paid off in the next 3 years, with 50% of that being repaid in the next 12 months. So about $25 million a month going back towards repayment. And again, given any fluctuation in commodity prices, that's what that hedge book allows for. So if we see oil rise or fall, in all those scenarios, we are able to meet our debt obligations. What might be impacted again is just going to be the capital available for deployment. So what you're going to see is, I think, we have it scheduled to exit this year at about $350 million of net debt. And again, that's assuming an $80 plot price, and I think we are still hopeful that that's what we're going to see average for the balance of the year.
Here's a question. Are there more acquisitions on the horizon?
We're not actively looking. We're not in the marketplace looking to grow. For us, we are trying to get to a certain size. In order to be a relevant size, you kind of had to be north of 20,000 a day. That allows you to get things like DBRS rating. It allows us to jump to the TSX big board. We don't see a lot of value in increasing the size to 40,000 or 45,000. I don't see there being a material shift in how we're viewing the market. We're floating between 27,000 and 30,000. I think that's the good or relevant size with a material amount of cash flow and investor interest. So definitely not looking, but I can't say. Amazing deal we were able to get with that Ridgeback acquisition. If another one came, I'd be lying if I said we wouldn't look at it. But we're not active in the market looking right now. For now, what we want to see is we want to see a return and appreciation of our share price for those that have invested in us so far.
Question on the drilling side. To what factors are contributing to the increase in initial production from the recent Q1 wells?
There's multiple reasons. One, we are delineating off of our previous successes. So that is probably one of the major reasons. The second being our technical team. We believe that we have one of the brightest technical teams in all of Calgary, the geology end of that being led by Kurt Soparlo, and the engineering side of it being led by Christian Giorgi. So those are 2 exceptional individuals that will continue to bring essentially overachieved on those type curve expectations. So yes, essentially #1, delineation; and then a strong technical team.
And a question here. The shares look undervalued. Any plans to buy back shares?
Right now, our current debt agreement doesn't allow for it. So our focus is going to be debt repayment. It's our belief that $1 towards debt is $1 value by -- towards a shareholder. So for now, we're going to focus on maintaining fire production and debt repayment. I think what you're going to see a shift to probably early to mid next year, it is more of a direct repayment to shareholders or in the form of buyback or dividends. But for now, it's going to be -- indirectly, it's through debt retirement.
Question here. Are there talks of moving to a larger exchange?
Yes. And so I gave that away earlier, but yes, we're looking to jump to the TSX main board. So we're in the process of doing that now.
All right. Well, that is all the questions that have been posed. I want to thank everybody for joining us today. We look forward to updating our shareholders in the near term here as for the next quarter. Thank you for joining. Cheers.
Thank you.
Thank you.
Thank you.