SPARTAN DELTA CORP
Downgrading Spartan Delta To Neutral But Upside Remains
Through Logan
Our Conclusion
We are adjusting our price target to reflect our updated valuation view on pro
forma Spartan Delta and the Logan Energy Montney assets. We believe the
current share price does not fully reflect the option value of the Logan
warrants based on our valuation of the Logan assets. Based on our
$4.00/share price target for SDE, our net asset value (NAV) estimate for the
Logan assets at $2.32/share, the Logan warrants at $1.15/share, and the
special dividend of $9.50/share, totalling $16.97/share vs. the current share
price of $15.17/share, we see additional upside for shareholders prior to
June 21. Spartan Delta’s Deep Basin strategy will focus on maximizing free
cash flow and shareholder returns through the issuance of special dividends
while Logan Energy will operate as a stand-alone Montney growth company.
Our price target of $4.00 represents the ex-distribution value of Spartan Delta
and is based on 3.9x 2024E EV/DACF; peers are trading at 5.0x 2024E
EV/DACF. We foresee limited upside to our NAV for the Deep Basin assets
at this juncture and, therefore, as of June 18, downgrade our rating from
Outperformer to Neutral.
Key Points
Shareholders of SDE-CA as of June 20 will be entitled to the
$9.50/share dividend, one share of Logan Energy, and one Logan
transaction warrant: The Logan assets include ~300 net sections of
Montney rights across three core assets and ~4,500 Boe/d of existing
production, which we estimate could grow by 50% over the next 18 months.
Our NAV estimate for the Logan assets is $402MM on strip pricing, which
computes to ~14x 2024E cash flow or $2.32/share of SDE. The transaction
warrants expire on July 17, 2023, and have an exercise price of $0.35/Logan
share. Based on our NAV for the Logan assets, we estimate the transaction
warrants have a value of $1.15/share.
We estimate the Deep Basin assets have ~10 years of high-quality
inventory in the Spirit River and Cardium: While we believe the remaining
inventory is of high quality, we estimate the remaining drilling locations at
~192. Assuming a future drilling program of 20-25 wells per year, this
translates into ~8-10 years of inventory, which screens below most Canadian
small-/mid-cap gas-weighted peers at well over 10 years. Upside to our
estimates could come from additional pay zones on Spartan’s lands, but we
do not expect these opportunities to be widespread across the entire land
base. We estimate a NAV of $653MM or $3.72/share on strip pricing.
On recent strip we estimate Spartan Delta could pay ~$0.30/share in
special dividends in 2024E, representing a ~7.5% yield on our price
target: We estimate the company’s maintenance capex requirement is
$130MM or ~20 wells per year to maintain production levels at 37 MBoe/d.