Spartan Delta Corp.
(SDE-T) C$12.44
Q4 Overshadowed by Pending Results of Strategic Process
Event
Reports Q4/22 Results and YE-Reserves. Guidance Unchanged
Impact: NEUTRAL
Stronger-than-expected Volumes; CF Meets Street: Q4/22 production averaged 74.6 mBOE/d, which was slightly ahead of TD/consensus of ~73 mBOE/d. Volumes increased 3% q/q. CFPS of $1.25 was 5% shy of our estimate ($1.32), but met consensus of $1.24. The shortfall relative to our forecast was largely driven by lower- than-expected realized pricing (~$0.03/share) and higher-than-expected hedging losses (~$0.03/share).
PDP Reserves Up 8%; 2P Reserves Up 6%: The company increased PDP reserves at an average FD&A cost of $11.80/BOE, and 2P reserves at $23.35/BOE.
2023 Capex of $430mm and Guidance of 80-82 mBOE/d Unchanged.
Future Direction Contingent on Outcome of Strategic Repositioning Process:
Recall that in Q4/22, Spartan announced that it was exploring strategic alternatives. Although a corporate sale is on the table, Spartan stated that this could include other value-enhancing efforts, including mergers, the sale of specific assets/royalties, and/ or the spin-out of assets to a newly formed company.
Our View: The outcome of this process could materially reshape the current composition of assets and/or strategy. This overshadows the Q4/22 results. The fall in natural-gas prices since November could make some options more challenging as volatility typically leads to spreads between bid and ask prices in the A&D market.
Regardless of the Strategic Review Outcome, SDE is Well-positioned: Spartan exited the year with net debt of $148 million. Even under a strip pricing scenario, we estimate that debt will be entirely repaid by Q3/23. For 2023, we forecast that Spartan will grow 11% y/y and generate $307 million in FCF (after all capex at strip pricing); this equates to 14% of the current market cap.
TD Investment Conclusion
Spartan offers significant y/y volume growth, exposure to high-impact, liquids-rich areas of the Montney and Deep Basin, FCF, and a potential positive outcome from the strategic alternatives process or a likely return-of-capital framework. From a valuation perspective, Spartan is trading at 2.6x 2023E EV/DACF, which is a discount to the gas-weighted peers (3.1x).