Desjardins Securities analyst Chris MacCulloch expects the market to “adopt a more cautious view” on Spartan Delta Corp.’s first foray into the West Shale Basin Duvernay formation, citing “its chequered history of industry result.”
After the bell on Tuesday, the Calgary-based company announced the completion of a series of asset acquisitions in the area for approximately $25-million. It came alongside the release of Spartan’s preliminary 2024 guidance and announcement CFO Geri Greenall plans to step down at year-end.
Mr. MacCulloch emphasized Spartan will “attempt to replicate previous success in the oil window of the Montney, which ultimately resulted in the return of $9.50 per share of capital earlier this year.”
“In aggregate, the acquisitions include 400 boe/d [barrels of oil equivalent per day] of production and 130,000 net acres of land in the volatile oil, condensate and liquids-rich gas window of the Duvernay, which is internally viewed as geologically similar to the Kaybob Duvernay and East Shale Basin Duvernay,” said the analyst in a report titled Duver-’nay’ or Duver-’yay’?. “Details on development plans remain limited as SDE pursues further consolidation in the area, which it views as fragmented, undercapitalized and ripe for consolidation. However, the company plans to provide additional colour on long-term development plans in the new year, potentially coinciding with further M&A activity.”
“There were no surprises from the preliminary 2024 capital budget in our view, with total Deep Basin capex of $130-million broadly aligning with our forecast of $125-million, although we have also incorporated an additional $20-million to account for initial development of the Duvernay. Meanwhile, production is expected to range from 38,500–40,500 boe/d (69-per-cent natural gas), the mid-point of which matched our expectations (after accounting for the Duvernay acquisitions). Plans to add a second rig to accelerate development of the Cardium, Spirit River and other oil-weighted plays are expected to improve capital efficiencies by 20 per cent.”
Maintaining a “buy” recommendation for Spartan Delta shares, Mr. MacCulloch lowered his target to $5.50 from $6. The average on the Street is $5.90.
Elsewhere, Scotia Capital’s Cameron Bean trimmed his target to $6.50 from $7 with a “sector outperform” rating.
“SDE’s 2024 guidance came with puts and takes,” he said. “Both production guidance and capex were slightly better than expected; however the company expects opex to come in approximately 16 per cent higher than us and the Street were forecasting. As a result, cash flow guidance is 6 per cent lower than expected. SDE unveiled more details on its entry into the West Shale Duvenay, with another deal(s) adding considerable acreage to boost the company’s position to more than 200 net sections. While the 2023 guide does not have Duvenay capex at this point, we have added a handful of wells to our 2024 to 2026 forecasts and NAV estimate. While the play is at an early stage, offsetting operators have shown promising results and enthusiasm for its potential. If the play works out for SDE, we believe it could add an important avenue of growth for the company.”