Another Raised Target (CIBC)EQUITY RESEARCH
August 10, 2022 Earnings Update
SPARTAN DELTA CORP.
Q2/22 Results Mixed With Updated Guidance And Tax-
Sheltering Acquisition
Our Conclusion
Spartan’s Q2 featured strong production and cash flow, but capital spending
came in ahead of expectations. The company is increasing its capital and
production guidance for 2022 with a 14% inflationary impact over previous
guidance, and no production response until early 2023. The $6MM corporate
acquisition of Bellatrix is shrewd and extends Spartan’s tax horizon beyond
2024 on our base price assumptions. We see the strong production result
and resultant cash flow beat as positives, but the magnitude of increased
capital spending for the year may overshadow the update. We have updated
our 2023 and 2024 assumptions, which see 2023E CPFS increasing to $5.03
from $4.60 and are raising our price target to $19.50 (3.4x 2023E EV/DACF).
Key Points
Production and cash flow beat expectations, capital spending misses.
Production of 73.0 MBoe/d topped our estimate of 70.6 MBoe/d and Street at
70.7 MBoe/d. Capital spending of $91M was ahead of our estimate of
$87MM and, while the median Street estimate was at $80MM. Cash flow of
$1.34/sh was shy of our estimate of $1.36/sh and beat the Street at $1.25/sh.
Capital and production guidance increased. Spending for the year was
increased by 27% to $420MM (from $330MM) versus our prior estimate of
$355MM and Street at $356MM. This was somewhat expected, but is still
well over where consensus sits and marks one of the biggest (on a
percentage basis) guidance increases we have seen this quarter. Within the
updated budget is ~$45MM in development activity, which will support
production volumes in early 2023 plus a 14% inflationary impact (~$45MM)
over prior guidance. Due to strong well results in the first half of 2022,
production is expected to increase to a midpoint of 72.0 MBoe/d (from 70.5
MBoe/d prior) versus our prior estimate of 71.6 MBoe/d and Street at 71.1
MBoe/d.
Updating estimates for 2023 with higher capital spending and modest
production growth. We are taking our 2023E capital spending to $400MM
from $355MM prior, which compares to Street at $370MM. We estimate
production of 75.9 MBoe/d (41% liquids) in 2023 versus Street at 77.5
MBoe/d (41% liquids). We are assuming a 2023E capital efficiency of
$15k/Boe/d (37% decline rate) versus our 2022 estimate of $14k/Boe/d (37%
decline rate).
The acquisition of Bellatrix adds $600MM in non-capital losses to tax
pools. Spartan closed the corporate acquisition of Bellatrix for $6MM after
the quarter. Using our updated modeling assumptions and base price deck,
we estimate Spartan will be tax-sheltered through 2024. Without the Bellatrix
pools, we estimate Spartan would have faced ~$65MM in cash taxes in 2023
and $69MM in 2024.