ATB Outperform ATB Capital Markets analyst Amir Arif sees Saturn Oil & Gas Inc. as a “value play for long-term oil exposure.”
In a research report released Monday, he initiated coverage of the Calgary-based company with an “outperform” recommendation, touting the potential from a “transformative” $525-million acquisition of light oil weighted assets in Southeast and Southwest Saskatchewan earlier this year along with a “significant” refinancing of its debt structure.
“The acquisition improved the size, liquids weighting, decline rate, and inventory life, resulting in an improved and more sustainable free cashflow profile for the Company that we believe is not factored in the stock,” he said. “At the same time, the debt refinancing significantly lowered the interest expense from 16 percent to 9.6 percent, brought $81-million gross cash onto the balance sheet, and the Company established an undrawn $150-million revolver for tuck-in acquisitions.
“Finally, the acquisition has improved the PDP NAV value meaningfully with the stock now trading below PDP strip NAV. While the corporate assets are mostly conventional and relatively mature, the low decline rate, oil weighting, and inventory results in a more visible free cashflow profile compared to most of its peers.”
While the announcement of the acquisition received a lukewarm reaction from the Street with shares dropping 8 percent immediately, Mr. Arif emphasized the stock has performed “slightly better than its peer group before the recent downdraft related to the correction in WTI.” since then.
“Given the current share price, we believe the positive impact of the acquisition on the production base and reduced financing costs are not currently priced into the stock,” he said. “As the full impact of the acquisition is reflected with quarterly results in the next few quarters, we believe SOIL is in position to move higher, especially in the event of a potential upswing in WTI prices given its oil weighting. Even without a change in the oil outlook, the free cashflow generation alone should reduce debt and improve the equity valuation. .... Since the announcement, Saturn has had periods of outperformance relative to the broader E&P space. Since the announcement, Saturn is down 7 per cent relative to E&P stocks being down 11 percent.”
Believing its increased size should improve its “market relevance,” the analyst now sees Saturn as “attractive for value investors and those with a positive bias on the long-term outlook for WTI relative to the strip which indicates a drop to US$66/bbl by late 2026.”
“While the corporate outlook is for modest production growth with a conventional and mature asset base, the PDP NAV valuation of 0.7 times provides a margin of safety which cannot be found in many other E&P names, in our view,” he said. “t the same time, the 2P NAV [net asset value] relative to the stock price indicates meaningful longer-term upside relative to peers. The 2025 estimated free cashflow yield of 31 percent relative to its peers also reflects its mispricing. As this free cashflow generation brings leverage down from 1.5 times D/CF annualized post the deal to 1.3 times by year-end 2025 and 1.0 times by YE26 (at strip pricing), we believe the stock will respond positively. Additionally, the start of a buyback program (announced in late August) should also provide incremental support to the stock.”
Mr. Arif set a 12-month price target of $3.80. The average target on the Street is $5.58, according to LSEG data.