Spartan Delta Corp.
(SDE-T) C$12.55
Q2/22 Beat. Guidance Bump. Absent an RoC Strategy, Cash Builds
Event
Reports Q2/22 Results, Increases Capital and Production Guidance
Impact: POSITIVE
Strong Quarter. Q2/22 Slightly Ahead of TD, but Comfortably above Consensus: Spartan Delta reported Q2/22 production of 73.0 mBOE/d, which was comfortably ahead of both TD (71.4 mBOE/d) and consensus (70.3 mBOE/d) estimates. Volumes were up 1% q/q (despite planned downtime) and exceeded the high end of the company's guidance range of 68.5-72.5 mBOE/d. CFPS of $1.35 was in line with our forecast ($1.34) and beat consensus ($1.25).
Capex Bump to Account for Inflation and 2023 Growth Tailwinds: Spartan increased its 2022 capital budget by $90 million (27%) to $420 million. Approximately half of this is to account for industry inflationary pressures, with the remainder to accelerate volume growth in late-2022 and into 2023. On stronger-than-anticipated Q2/22 volumes, combined with higher spending, Spartan increased its 2022 production guidance to 71-73 mBOE/d (from 68.5-72.5 mBOE/d), although slightly more gas-weighted than previously modelled. In addition to the capex increase, the company tweaked a variety of its cost assumptions to reflect inflationary pressures. Specifically, the company now expects higher royalties (~12.5% of revenue vs. 12% previously) and higher opex/transx costs (+$0.84/BOE).
Our View: We have updated our model to include higher capital spending in both 2022 (guidance) and 2023 (our assumption). Although this drives modestly higher production volumes, after layering in higher cash costs and under our backwardated commodity price assumptions, it results in a modest downward revision to our 2023 CFPS estimate.
On Track to Achieve Net-Cash by YE-2022: After a series of acquisitions, Spartan had taken on some leverage. However, given high commodity prices, we expect Spartan to be in a net-cash position at YE-2022. Extending this to next year – absent incremental acquisitions, capital increases, or a return-of-capital strategy – we expect Spartan to have built net cash to ~$440 million by YE-2023 (20% of the current market cap). Spartan may announce a return-of-capital plan as early as H2/22, in our view.
TD Investment Conclusion
Spartan Delta offers significant y/y volume growth, exposure to high-impact, liquids- rich areas of the Montney and Deep Basin, FCF, and potential emerging shareholder- return initiatives.