Spartan Delta Corp T.SDE

CIBC on tour: SO and $5 target

[Westcoastenergy]

On May 2, we visited Spartan Delta’s Willesden Green Duvernay asset near Rimbey, Alberta where the company showcased its drilling, fracking, and water-handling operations. We walked away from the tour with a greater appreciation of the key challenges in the fairway in terms of engineering optimization and water management. The tour was well attended by Street analysts and included members of the company’s management team, along with the PrairieSky management team. Management highlighted the significant investment in water infrastructure that it undertook over the past six months that will help drive down costs, along with aspirations to centralize fluid handling for continued cost improvements. The stock is trading at 3.2x 2026E EV/DACF on the CIBC price deck versus peers at 3.3x. Key Points Investments in water storage and transportation are expected to drive reductions in completion costs moving forward: During Q1/25, Spartan completed the construction of its water storage reservoirs, which currently have a combined capacity of ~420 e3m3 with plans to expand capacity to ~880 e3m3 this summer. At an average completion intensity of 50 e3m3 per well, the Spartan reservoirs are currently capable of supplying water to about eight wells through the dry summer months, assuming no recharge. Water for the reservoirs comes from surface and groundwater sources, authorized under temporary diversion licenses (TDL), although Spartan is planning to drill for alternative water sources below the potable zone but shallow enough to allow for surface storage. Once expanded, Spartan will have invested ~$12MM in water storage capacity, which is expected to drive meaningful reductions in completion costs compared to the 2024 program. Drilling and completions ran relatively smoothly, and we were impressed by the efforts to maintain good stakeholder relationships: Completions account for approximately two-thirds of the total well cost. Cost optimization is primarily derived from water intensity and completion design. The company estimates 3-4 well pads are optimal for fracking logistics as it allows for two wirelines to run simultaneously but keeps the spud to onstream time as short as possible for the pad. During both drilling and completions activities, the company installs sound walls to keep noise levels below 45 dBA at night (below 55 dBA during the day). For context, a normal conversation is typically ~60 dBA, while a soft whisper is ~30 dBA. Centralization of liquids processing could reduce opex materially and vastly decrease vehicle traffic: Management indicated it is assessing options to centralize its liquids handling, including investing in a gathering system to collect oil and water production from its well sites. This has the potential to reduce operating and transportation costs, increase price realizations and reduce tanker traffic on local roads. 
Company Profile Spartan Delta Corp. operates Deep Basin assets in Ferrier and Willesden Green, along with an emerging Duvernay portfolio in the West Shale Basin. Investment Thesis Spartan Delta has a meaningful land position in the West Shale Duvernay which extends its inventory runway to 20+ years and adds intriguing liquids growth to the portfolio. Its Deep Basin assets have strong free cash flow generation potential and cash flow torque to natural gas pricing. Price Target (Base Case): C$5.00 Our 12- to 18-month price target of $5.00 is based on a 2026E EV/DACF multiple of 4.8x on our CIBC base commodity price forecasts. We estimate net debt of $336MM in 2026E. Our price target represents 0.5x our risked NAV on our CIBC base