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OUR TAKE: Slight Positive. SDE reported Q1/25 Adjusted Funds Flow ahead of expectations on higher-than-expected realized pricing. The company continued to execute on its capital program, drilling 13 (9.8 net) and TILing 5.0 (3.9 net) wells in the quarter (4.2 net drilled in the Duvernay). SDE’s water infrastructure projects are progressing on time and budget, with two reservoirs completed during the quarter. The company’s initial Duvernay wells continue to deliver strong results with average IP90 rates >1,000 boe/d (in line with our high case type curve). The positive Q1/25 results and continued progress in the Duvernay were somewhat counterbalanced by a tax reassessment that could pull the company’s tax horizon forward by ~18 months. While weak oil prices may dampen some enthusiasm for the South Duvernay for a period of time, we continue to believe SDE’s results in the play will have an important long term impact on the stock. Moreover, we believe the company’s high efficiency Deep Basin gas assets should capture more attention in an improving AECO market (our expectation following the LNG Canada ramp). We continue to rate the stock Sector Outperform and see it as a top option for AECO exposure and Duvernay oil growth.
KEY RESULTS
Costs inline, realizations drive Q1/25 CF beat. Production of ~38.3 mboe/d was in line, while post-hedging realizations of $27.26 came in ~6% ahead of consensus on higher realized prices across the board, and higher hedging gains. Cash costs of $13.16 came in slightly better than consensus, with higher royalties and opex offset by lower transportation and financining costs compared to us and the street. AFF of $46M ($0.23/share) beat the Street by ~6% on higher realizations. Capex of $73M was ~8% below the street (and 12% ahead of us) and resulted in a FCF deficit of ~$27M, ~$9M or 24% lower than the Street (~38% higher than us). See Exhibit 1 for detailed results versus consensus expectations. (Positive).
Operations update. During Q1/25, SDE drilled 7.0 (5.6 net) and completed and TIL’d 5.0 (3.9 net) wells in the Deep Basin and drilled 6.0 (4.2 net) wells in the West Shale Duvernay. SDE’s four initial Duvernay wells continue to perform well, with average IP90 rates of over 1,000 boe/d (83% liquids). The company’s Duvernay water infrastructure projects are on track, with two water reservoirs completed during the quarter. Post break-up in Q2/25, SDE plans to complete 3.0 (2.6 net) Cardium DUCs. In the Duvernay, SDE is drilling the final well on its four-well 02-22 pad (70% WI), and the first well on its four-well 07-15 pad (100% WI). SDE is also completing the three-well 06-04 (70% WI) pad, and expects to complete the 02-22 pad later in Q2/25.
Tax pool risk. SDE received a reassessment from the CRA for a previously amalgamated subsidiary that seeks to disallow the carry forward of approximately $217.8M of non-capital loss pools. The company believes its filings are appropriate and plans to defend its position. SDE exited Q1/25 with ~$366.2M of non- capital loss pools. If the pools in question are disallowed, we estimate the company’s tax horizon will move to 1H/26 from 2H/27 (based on current strip prices). (Slight Negative)
Hedging update. SDE added 8 mmcf/d of AECO swaps and 0.8 mbbl/d of C$ WTI swaps for the balance of 2025. The gas swap additions boosted its floor price to ~$2.31/mmBtu(~4¢ higher than Q4/24) and now cover ~57% of its gas production. The oil swap additions boosted its floor price to ~$99.89/bbl floor (~$0.73 higher than Q4/24) and now cover 18% of its oil production. The company also added ~36 mmcf/d of AECO swaps and 0.5 mbbl/d of C$ WTI swaps for 2026. SDE now has ~32% of its 2026 gas hedged at ~$2.88/mmBtu and ~5% of its 2026 oil hedged at ~$93.40/bbl.
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