Post by
mrmomo on Mar 29, 2023 10:12am
Many questions.....very few answers.
After revewing this deal in depth, there are still things that aren't made clear or don't make sense to me and we are left with many unanswered questions of why the company decided to pursue this path. I'll try to be brief with my assessement as i don't want this commentary to be too long and i'll try to give my own personal views/explanations to make sense of this deal with Crescent Point. As i explained in previous posts before this deal was announced, though i expected this deal to go down this way, which it did, i really didn't expect Crescent Point to be the buyer or be involved in ANY manner here with Sparta, so this was indeed a surprise to me.
First question right out of the gate, and the most obivious one, is why Crescent Point didn't buy the WHOLE company? Why only that specific portion of Sparta's vast portfolio of assets? Is because CPG didn't find the other assets as being accretive to the company and therefore not interested to buy them? Or is it that Sparta didn't wish to part with those assets from the start and therefore not available to be sold.....to anyone? In addition, was CPG the ONLY buyer and the only one who made any substantive or attractive offer to Sparta? Like i said, many questions, valid questions remain unanswered here, as to why the deal went down the way it did. But i MAY have a reasonable, solid explanation of why it was structured this way.
Before i give my reasononing of why the deal came about like this, i just want to focus on the assets that were acquired by CPG, and try to understand from both sides why those were sold/bought. If we look at the actual properties that were picked up by CPG, you will notice (for those that are knowledgeable in this sector like myself!) that these were the old assets of Inception & most of Velvet. And it's the latter's i wish to focus on. Assuming that ALL of Sparta's assets were up for sale, i'll go back to the same unanswered question, of why CPG did't buy up ALL of Velvets assets? Why leave out a small portion like Simonette? Which was one large, nearly contiguous land package of the previous Velvet? Out of all the unanwered questions in this deal, this baffles me the most. But i do have an explanation for that too.
In reality my friends, i really didn't expect for CPG to be the eventual buyer or be involved at all. Though CPG has been fairly active on the acquisition front in the last few years, avergaging sizable acquisition of at least one per year, they were really focused elsehwere. So it did come as both a big surprise and a disappointment when they were revealed as the buyer. Was CPG really the only that was interested or made ANY offers? Who knows, and i doubt we will ever find out what really went on behind those closed doors during that "strategic review" process. But it would be really interesting to know, just for curiousity sake, if ANYONE else was involved in that process.
Some explanation, some answers. Based on what i got out of this deal between CPG & SDE, this is my assessement & own personal views of why this deal was done this way. The first assumption i'll make is that the WHOLE company was never for sale from the start. WHY do i make that assumption? Because if we look at the people involved with Sparta and the history of those folks, including the types strategies/mgmt they've imployed over the years with building out SDE, this should come as no surprise the deal was structured this way. So basing myself on that premise, that the intentions & exit strategy from mgmt from the start was to sell the company's assets by piecemeal and retain some for future "considerations". In other words, the individual parts of the company are greater or more valuable as stand alone pieces than as a whole, and therefore this fact along with the previous "history" of mgmt fully explains why they proceeded this way.
The eventual break-up and individual parts. As i expected, because this "review process" was taking so long, that this wasn't going to be an outright, simple sale or purchase of assets by the company. It was going to be more complicated and result in the break up of the company into pieces, and that's exactly what happen. I figured a few small non-core divestitures and then splitting the company into two, with the Montney assets in one & the Deep basin in the other, with one being retained & the other being offloaded to a possible suitor. Though it went down as i said it would, i really expected them to hold on to the Montney assets AND sell the Deep Basin ones. But in fact the opposite occurred. SDE elected to keep the Deep Basin lands, sell most of the prime Montney assets and spinning off undesirable stuff. Of which the last part, i'll have much more to say on. So why did SDE choose to retain Deep Basin over Montney? Who knows, maybe they think that the Deep Basin portfolio offers much more value with a higher premium as a potential stand alone sale to a bigger producer somewhere down the road..... than what Montney could attract. Just my opinion.
So is this a good deal? Well, it depends.....and for who we're talking about. For s/h i would say it's in the middle & a grey area. Not great but not bad either. I really don't think this deal was structured this way with the interest of the s/h in mind or as primary concerns. Though the s/h intrests were taken into "consideration" this was really an exit strategy & future setup for mgmt & all insiders involved. One only has to see how this deal was meticulousy structured to fully understand who this benefits the most & why. For the assets that were sold to CPG, which in imho were the BEST assets the company had (including Simonette which was retained & not sold), they got 1,7B for 34K boepd. Which is about $50k per flowing barrel, which is acceptable for assets being about ~40% liquids (can't confrim 100%). So on that end, that's good for s/h and they get that as a one time payout in the form of a divvy. After the sale, holders of the company also get some shares in a spinoff junior explorer.....named Logan Energy. As luck would have it, lol, THEY are the ones that get the Simonette assets, which is not only questionable but a nice happenstance of why those assets weren't sold to CPG along with the rest.
What's left? Well, only Deep Basin and this imho was intentional as well, keeping with that same strategy of the indivdual parts are worth more than the whole. Intentional in the sense that this will be set up for a possible sale as well to a larger producer in that area some time in the next 24 months. If we take a look a the bigger picture and general overview of this deal, though it was great for insiders & mgmt, and more or less neutral for s/h, imho it's a BIG step backwards for the Canadian oil patch overall. Instead of some major accetive M&A and beneficial consolidation for the sector, this deal further fragments the Canadian industry and goes in the oppsoite direction of where it should go. The Canadian O&G space needs more cosolidation & bigger more efficient operators NOT more fragmentation and more small zombie operators who just take up valuable space & resources. These guys in Alberta still think these are the 90's and everything will be status quo and will be fine, so they want to continue the shell game and i don't see them giving that jig up anytime soon. The best outcome for all, for the holders, for Alberta and for the Canadian oil patch, would have been for CPG to buyout ALL of SDE to reduce the numbers of players. But it didn't turn out that way and that's unfortunate for the industry.
That's it for now......if anyone had questions regarding this deal, i'll gladly try to answer them if i can......
GLTA