Many investors focus on cash flow analysis to identify the most promising opportunities. With rising energy prices, oil and gas companies have become some of the most attractive opportunities in today’s market. And in particular, many smaller under-the-radar oil and gas companies offer the most compelling valuations for investors.

Let’s look at why Saturn Oil & Gas Inc. (TSX-V: SOIL) is so attractive from a cash flow standpoint and why investors should take note.

A Series of Savvy Acquisitions

Saturn Oil made a series of transformational acquisitions, resulting in a 4,750% increase in production growth over the past 18 months.

In June 2021, Saturn Oil took its first big step with the Oxbow acquisition taking on C$87 million in a senior secured term loan and C$32 million in private placements to acquire a property that added daily production of roughly 7,000 barrels of oil equivalent (BOE).

In July 2022, the company expanded their lending facility by $200 million, and with the backing of a $75 million bought deal equity financing, Saturn Oil scooped up the Viking acquisition.  This most recent acquisition tacked on another 4,000 BOE per day of 98% light oil with high netbacks.

Both the Oxbow and Saturn acquisitions were settled at attractive metrics, with purchase prices less than two times the cash flow the assets were generating at the time.  With the funding already in place for the Viking acquisition, in early June 2022, Saturn Oil went ahead of the closing date and locked in 85% of the economics with hedges for the new oil production when WTI was in the range of USD 118 and USD 120.  The timing could not have been better, and the new hedges provide good visibility to future cash flows. 

Delivering Impressive Cash Flow

Through the acquisitions and an ongoing successful drilling program, Saturn Oil recently reached a milestone of 12,000 BOE per day and is well on its way to reach a targeted average of 13,500 BOE per day in 2023.  The company has an ambitious capital program for H2 2022 with the drilling of 50 horizontal wells targeting light oil.  To put that drilling program in context, Saturn Oil plans to drill more wells in the last six months of 2022 than it has in its history as an oil and gas company.  

The company estimates 2023 corporate cash flow in the range of $216.3 million to $230.9 million, which translates to between $3.63 and $3.87 per basic share. These are compelling figures given that the market currently values its shares at just $2.59 per share.

The company plans to leverage half of these cash flows to grow production and the other half to pay down its debt. At its current pace, the company anticipates becoming net debt-free by the end of 2024 while increasing production to 15,000 boe/d by 2025. Those production levels should generate an estimated $860 million in cumulative cash flow over three years.

Analysts See Strong Potential

According to analysts, Saturn Oil is relatively unknown among oil and gas majors but could offer much more attractive growth potential.

Most recently, Canaccord Genuity analysts Mike Mueller P.Geo, CFA, issued a Speculative Buy Rating and a $7.00 per share price target for Saturn Oil’s stock. The 12-month price target represents a significant 170% increase over the current market price, making it a compelling opportunity for investors in the oil and gas space.

The analyst cites the company’s strong free cash flow profile, highlighting near-term equity accretion, a steep valuation discount relative to its peers, and several potential catalysts in 2H 2022 and 2023 as drivers. The price target reflects a blended approach that applies a 0.8x multiple to its C-NAV calculation and a 3x multiple to its 2023E DACF estimate.

The research report can be viewed at this link: Full Research Report

Looking Ahead

Saturn Oil & Gas Inc. (TSX-V: SOIL) is generating strong cash flows following a couple of savvy acquisitions. As the management team continues to execute on its vision, analysts are taking note and believe that the stock could be significantly undervalued relative to its peers. As a result, investors may want to take a closer look.

To learn more, visit the company’s website or complete the form below to receive the investor presentation:

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