Spartan Delta Corp T.SDE

"SDE Firing on all Cylinders" Scotia Q4 Report - Must Read!

[Bamsmba]

OUR TAKE: Positive. SDE delivered strong Q4/21 results, with production and adjusted funds flow both ~7% ahead of expectations. The company’s capex was ~14% above consensus due to a $10M land acquisition, but in line with expectations excluding the purchase. SDE delivered solid reserves results (~1.1x corporate recycle ratio on PDP FD&A and >4.0x on PDP F&D costs). Reserve bookings exceeded our mid-year estimates on strong organic additions (~147% organic PDP production replacement). SDE also tightened its 2022 production guidance range and bumped capex by ~10%. This should not be a surprise, given the inflationary environment, though a couple Simonette Montney wells were added, which we like. If SDE can show stronger results versus the legacy wells in the play, the area could have solid (and underappreciated) development potential through company owned infrastructure. Overall, we see this as a positive release on the Q4 beats and solid reserves results. The capex overrun (Q4) and increase (2022) are modest negatives, but not material surprises in our view. With strong post acquisition operating results, a rapidly deleveraging balance sheet and an underappreciated high quality asset base, we continue to see SDE as a great pick.

KEY POINTS

Q4/21 AFF beat on higher production and lower costs. Production of 72.4 mboe/d was ~7% ahead of consensus, while AFF per share of $0.80 was also ~7% ahead on the production beat and lower-than-expected per unit royalty, G&A, and financing costs. Capex of $116M ($106M before a $10M land acquisition) was ~14% ahead of expectations (but just 4% ahead excluding the purchase). During Q4/21, SDE generated ~$21M of free cash flow, all of which was used to reduce net debt to ~$458M (~1.5x 2021 cash flow).

Solid PDP capital efficiencies. YE21 PDP reserves increased ~85% to 124 mmboe on FD&A costs of $15.84/boe. We estimate a ~1.1x corporate recycle ratio using SDE’s full year 2021 corporate netback (~1.3x using the Q4/21 corporate netback, which is more indicative of the go forward business). Given the Montney acquisitions the company completed during 2021 (PDP additions from acquisitions are typically much more expensive than organic additions), we view the company’s corporate recycle ratio as relatively strong. Notably, SDE reported organic PDP F&D costs of just $4.04/boe (>4.0x corporate recycle ratio), with organic PDP additions replacing ~147% of production.

• Quarterly Financials
• Yearly Financials

Historical price multiple calculations use FYE prices. All values in C$ unless otherwise indicated.
Source: FactSet; company reports; Scotiabank GBM estimates.

Qtly CFPS  (FD)	Q1	Q2	Q3	Q4	Year	EV/DACF
2020A	$-0.03	$0.02	$0.23	$0.27	$0.63	6.7x
2021E	$0.45A	$0.41A	$0.47A	$0.82	$2.23	4.9x
2022E	$0.67	$0.71	$0.87	$1.03	$3.28	3.0x
2023E	$1.05	$0.88	$0.91	$1.01	$3.86	2.1x

Exhibit 1 - Financial and Operational Summary – Strip Pricing

Source: Company reports; FactSet; Bloomberg; Scotiabank GBM estimates.

2022 budget and guidance update. SDE modestly increased its 2022 production guidance range to 68.5 mboe/d to 72.5 mboe/d (from 67.5 mboe/d to 72.5 mboe/d; we are at 72.9 mboe/d and the Street is at 71.3 mboe/d). The company also increased its 2022 capital budget by ~10% to $330M with the addition of infrastructure capital to prepare for the 2023 program, two Simonette Montney wells, and to account for inflationary pressures. We were already forecasting $340M, so the increase fits with our expectations. At the midpoint of its production guidance, SDE expects its 2022 program to generate ~$590M of AFF and ~$260M of FCF at US$80/bbl WTI and ~$3.95/mmBtu AECO; we see potential for much higher cash flow on our production forecast and current strip pricing (see Exhibit 2 for detailed sensitivities).

 

Exhibit 2 - Key Estimates Sensitivities

Source: Source: Company reports; FactSet; Bloomberg; Scotiabank GBM estimates.