Oil producers are not favoured by most investors these days.
Investors feel uncertainty and unease about them as investments. Uncertainty comes from the focus on renewable energy and the unknown future for oil and gas, given the volatility of crude oil prices.
Uneasiness derives from the desire to not support the carbon emitting fossil fuel industry.
Some analysts believe the oil and gas producing sector will become like the tobacco companies, avoided by investors, but paying huge dividends.
The upshot is that investors are ignoring highly profitable oil and gas stocks. Low demand has created bargains among these companies.
Saturn Oil and Gas joins the list as an undervalued oil producer with growing production.
Production has grown from 439 barrels oil per day in 2017 to almost 7,300 by 2021.
Until a few weeks ago, Saturn had two oil plays in Saskatchewan: the Viking layer around Kerrobert in the west central part of the province and the southeastern Oxbow play.
Recent results during 2022 produced an average 12,500 barrels of oil per day. Production in December was 13,128 barrels.
A company changer was acquisition in February of privately-owned Ridgeback Resources. That deal added 17,000 barrels a day production with a 15-year inventory of well drilling locations.
Sixty per cent of Saturn production will now be from Alberta with fields in Swan Hills, Kaybob Montney and Cardium plays. Production is 76 per cent oil and natural gas liquids now, down from 96 per cent in Saskatchewan fields.
Saturn drilled 57 wells last year and now has over 700 locations to drill. Payback of wells in Alberta is six to eight months.
Production of 30,000 barrels a day might attract some funds and big investors to bid for the shares.
The company had estimated $100 million of free cash flow for 2023 after expenses and capital spending. The acquisition, even with doubling of shares outstanding and a 232 per cent increase in debt, is estimating $238 million in free cash flow.
With this cash flow, the debt could be paid off in just over two years, based on $80 US oil.
Currently Saturn shares trade at $2.67 a share, only up about 40 cents since the acquisition was announced.
With cash flow estimated at $1.38, a share versus the previously $1.08 Saturn shares are trading about twice their cash flow rate. One can expect them to trade between three and five times cash flow.
And the company can increase production rapidly
There is no dividend but once debt is reduced substantially, dividends might start flowing.
CAUTION: Remember when investing, consult your adviser and do your homework before buying any security. Bizworld does not recommend investments.
Ron Walter can be reached at ronjoy@sasktel.net
The views and opinions expressed in this article are those of the author, and do not necessarily reflect the position of this publication.
