CIBCHave a $19.50 target. GLTA
EQUITY RESEARCH
November 9, 2022 Earnings Update
SPARTAN DELTA CORP.
Special Dividend Accompanies Strong Q3 Update
Our Conclusion
Spartan Delta’s Q3 production topped our estimate on lighter-than-expected capital spending. The company announced a $0.50/sh special dividend, payable in January, after surpassing its $150MM net debt floor. The company plans to release its 2023 budget and return of capital framework prior to year-end, which we expect could include a moderate growth outlook in 2023 and the introduction of share buybacks or, secondarily, additional dividends. Our revised estimates on strip see Spartan’s 2023E payout ratio at 44%, leaving $534MM in free cash flow ($3.43/sh), potentially available for shareholder returns. For 2023, we expect inflationary pressures impact capital efficiencies by ~6% from 2022 levels; therefore, we moderate our production growth estimate in lieu of higher capital spending. As a result, our 2023E CFPS decreases to $5.14 from $5.21. Spartan’s operational results demonstrate the quality of its extensive asset base and with the stock trading at 1.9x 2023E EV/DACF on strip versus peers at 3.1x and a free cash flow
yield of 23% (peers 16%), we continue to see Spartan as one of the more
discounted names under coverage with good return potential.
Key Points
Production and cash flow beat consensus on lighter-than-expected
capital spending. Production of 72.1 MBoe/d topped our estimate of 70.2
MBoe/d and consensus of 70.7 MBoe/d, while cash flow of $1.16/sh was shy of our estimate $1.19/sh and ahead of consensus at $1.12/sh. Capital spending of $82MM was well below our estimate of $110MM and Street at $114MM. We are assuming additional capital spending in Q4 to account for drilling and completion activity at Gold Creek, Deep Basin, and Simonette, but our full-year 2022 estimate remains unchanged at $420MM versus Street at $425MM.
Returning excess cash through a $0.50/sh special dividend. Spartan
intends to provide a 2023 return of capital strategy and budget prior to the new year, but indicated that it is considering a combination of share
repurchases and dividends. At current valuations, we see share repurchases as a powerful tool to enhance returns for Spartan. Our FCF yield of 23% on strip indicates the company could institute a 10% NCIB and a modest dividend of ~$1.50/sh, while remaining at or below its $150MM debt floor.
Adding some inflationary provisions to our 2023 capital spending
estimates. Our 2023 production estimate moves to 77.0 MBoe/d (40%
liquids) from 78.8 MBoe/d (41% liquids) prior (Street 77.7 MBoe/d) as
inflationary pressures impact capital efficiencies in 2023 by ~6%. Our capital spending estimate for 2023 increases by 1% to $425MM (Street $411MM). We have also moderated our royalty rate assumption as a higher proportion of the company’s production shifts to East Gold Creek, which qualifies for a flat 5% royalty under the Alberta Emerging Resources Program.