Vote No to this Deal! Well Spartan shareholders, the 24 cent premium that we enjoyed yesterday to the price of Pinecrest is quickly evaporating.
As of writing, we are trading at a price of $4.50. Pinecrest is trading at $1.61. Our premium is now:
$4.5 - (2.738 x 1.61) = 9 cents.
I ask that you don't listen to the ‘soft shoe’ presented by terroir and jayd54. They obviously have more equity invested in Pinecrest than Spartan. They will be richer from this deal, while Spartan shareholders will be poorer, in my opinion. And this is not a ‘done deal’ as some would like to think. It’s not done until the votes are in!
So, why are we seeing this management based ‘softshoe’ here? Well, tucking Spartan into its pocket is accretive to Pinecrest. It will help protect it against the downside during the summer when they cannot drill, and will allow them to use the healthy Spartan balance sheet to backstop a likely huge equity offer in the new year (see point 7. below).
So once again, I ask you fellow Spartan shareholder, do you want your shares exchanged at par, and do you want:
1. To go with Pinecrest, whose share price has done nothing but tank for the last year? And pick your timeframe, whether it is 3 months, 6 months, or 12 months, Spartan is outperforming Pinecrest all the way. Here is the performance of both based on the current prices of $4.50 and $1.61. And please note that because Pinecrest is now dragging down Spartan with it, the Spartan numbers would be better than what appears below.
Period 3 mos 6 mos 12 mos
Spartan 3% 31% +39%
Pinecrest -10% -9% -29%
2. To go with Pinecrest, whose balance sheet is not as good as Spartan's? Choose whatever metric you like, current working capital (Spartan’s was $20.9M as of Sept. 30th by the way), YE working capital, or YE debt to cashflow, Spartan’s is better.
3. To allow Pinecrest and Spartan management to exercise the following into the market starting next February? Remember the deal says that ALL warrants and options will automatically vest.
That's right, they can sell all they want folks, there is nothing holding them back. Rick McHardy and several large stockholders will not be part of the Pinecrest operating team going forward. Rick will be a board member, but that does not stop him from selling what he wants (correct me if I am wrong).
In my opinion, the only way Rick et al are going to start a new company is to exercise a lot of their 8.055 million options into the market. Or they can dump a lot of their new converted Pinecrest shares. Either way, the Pinecrest share price will be depressed during this selling. Here is the current situation for warrants/options at the end of Q3 (per SEDI).
PINECREST
Options Weighted Average Exercise Price Weighted Average Remaining Life
10,800,000 $1.84 3.5 years
Performance Warrants Exercise Price Expiry
4,830,000 $0.50 May 21, 2015
SPARTAN
Options Weighted Average Price Weighted Average Remaining Life
8,055,000 $3.43 4.09 years
And let’s not forget that come February, should this deal succeed, you may well see the new Pinecrest issue more options to its executive and working team. Maybe they will be fortunate enough to catch a nice low in the stock in setting the exercise price … only time will tell.
4. Go with Pinecrest, which:
- Cannot drill in the summer.
- Has limited road access to a lot of their potential locations? Let’s face it, while the Pinecrest lands have a lot of oil, this oil is quite remote.
- Have higher per well drilling costs. Drilling/completion/tie-in costs for Pinecrest are higher on average. Spartan purchased a lot of existing infrastructure when it bought its Pembina package. In fact, they have 250+ km of pipe in place. There is road infrastructure nearly everywhere to boot.
- Do not have lands that are as probable for drilling as Spartan. This is based on Spartan’s comments on how many vertical drill logs that they have for their Pembina area. From their comments, Spartan seem pretty convinced that the pay zone is there across all their land.
- Have not, at least to me, fully proved out their waterflood benefits. There is debate on what the increased recovery factor. Is it 1.5x, 2x, 3x, 5x on average? To me, another quarter - two quarters of results are warranted. This is key.
5. To see your new Pinecrest shares consolidated 3:1 in February? Again, consolidations (reverse stock splits) are not generally beneficial to the wallet. Management will argue that they need a $5 stock price to attract larger players. This is true. But what will likely happen, is that it will be some of these new players (suckers?) who will be purchasing large blocks of Pinecrest shares dumped by ex. Spartan team members into the market. They need these players in order to get rid of their shares without depressing the price. This is my opinion.
6. To have your Spartan equity converted from one of the most successful growth E&Ps in Canada, to a slow growth dividend player? This one is important.
In earlier posts I noted that converting PRY/STO equity into a CPG like dividend player is not likely to be financially healthy. In the last year, CPG shares have gone down 7%, while it has paid out about the same amount in dividends. And these guys are supposedly the best of the best. In essence, CPG money is dead money. And they don’t look like they are going anywhere soon with all those shares that they keep issuing.
With Pinecrest projected to pay out over 8%/annum in dividends, there is only barely enough to keep production relatively flat in 2013. Per its own presentation, Pinecrest estimate a 2012 combined exit production of 9,200 – 9,400 boe/d. Then they state that that their 2013 average will be 9,200 – 9,600 boe/d. To me this is pretty close to zero growth. Maybe they exit 2013 at 10,000 boe/d? Big deal. Again, this is close to zero growth.
Conversely, if Spartan gets going, they can expand their battery facility in 2013 while keeping their output at a healthy 5,000 boepd or so. And they DO NOT need to issue equity to accomplish this! Nearing the completion of the battery, they can then accelerate their drilling to fill up that new 7,500 bpd (or so) battery capacity. It will likely take them a year or two to hit the new battery capacity. Based on this, my thought is that Spartan’s stock price will hit $6/share exiting 2013. Versus today’s price of $4.5, this is a healthy 33% gain.
So, which do you want for 2013?
a. Pinecrest dividend player. Receive an 8% dividend, and get 6.5% of it with a dividend tax credit. Very little to no stock appreciation - at least not in 2013. Not unless the waterflood proves out (I am not convinced) and they steal some assets (see point 7. below)
Note: only a few Spartan holders have an average purchase cost in the $3’s. Many of us were affected badly by the downturn this summer. We repurchased shares on the way up again at higher prices than originally held. In fact, I purchased lots of shares in the high $4s and even the $5 on the expectation of a much better buyout. These are all underwater now. So this argument, that woohoo, you will get a big 10%+ divvy only applies to a few.
b. Spartan left as is. Exit the year at $6, and if you must cash in your shares, look at a 33% capital gain from here ($6/$4.5). Depending on your marginal tax rate, this could be as high as about 24% in Ontario. You will get at least 25% = (33% x 0.76). You will get more if you are in a low – medium marginal rate situation.
Oh, and by the way, I believe that disassociating our Spartan shares from Pinecrest (i.e. this deal dies) will provide an instant 30 – 40 cent/share pop for Spartan shares. This is my belief. We are currently under the drag of Pinecrest.
7. To see a large Pinecrest dilution in early 2013?
Stated by management, neither Pinecrest nor Spartan can make a large acquisition in 2013 without issuing equity. Looking at their balance sheets, this is true. They need the combined power of both companies to do it.
So let’s say they buy $400M in assets as a $1Bn company. This will require the issue of $80M shares, at $5/share.
There is no guarantee that the deal will be accretive. It would only make sense that it is, but in order for it to overcome both the share dilution and loss in 2013 expected capital return (see point 6. above), it will have to be very accretive indeed. And it will need to be better than what CPG has done as of late. And remember how everyone says that this Pinecrest dividend payer will be the next CPG? Well, if you vote for this all stock deal at 'par', you will get what you deserve.
Thanks for reading,
Larsen6