Spartan Delta Corp T.SDE

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[retiredcf]

EQUITY RESEARCH

June 18, 2023 Rating Change - Downgrade

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.

[Bamsmba]

This is a must read for any SDE owner clarifying that Logan Warrants and shares are where the 'value' lies. Thanks RetiredCF!

[TerribleEng]

This basically validates what I was saying with the giveaway. They raised all that outside financing at a 35 cent valuation when the actual assets were worth over $2. It was free money. Buy assets worth $2 at a 35 valuation and receive more warrants on top of that. If the financing was done at market rates the dilution to shareholders would be less than 17% instead of 50%. Proforma after

[Seppelt]

Regardless, SDE in its current form is history. Almost history and, compared to its many peers, it has been a very good ride. Those who haven't sold, or sold a portion only and still have some left, will have to decide what to do with the proceeds of $9.50 dividend. Plenty of options in this space given the recent weakness in equity markets. And it will be interesting to keep an eye on Logan

[TerribleEng]

Yeah I think Logan is headed for a consolidation post financing and SDE is headed for a sale... to a larger player looking to consolidate their acreage and expand in the deep basin. 

[PabloLafortune]

Kudos to CIBC for a timely and relevant analysis....

[anticline]

Thanks for that retiredcf. Looking at my RBC account I see I have the new much smaller SDE trading at five bucks and change but I have not seen hide nor hair of the dividend nor any sign of Logan shares and warrants. Anyone have any idea of when these additional items should appear? I realize it's early but I was under the impression that all these things would happen fairly quickly.

[anticline]

I guess it will take a while for this to settle out as per the following:  Financial Intermediary Procedure You are a beneficial Shareholder if you own Spartan Shares through a Financial Intermediary such as a bank, broker or trust company. Beneficial shareholders will not be required to take action individually in order to receive the Distribution or to exchange existing Spartan Shares

[retiredcf]

My SDE holdings are in a CIBC account and I would be surprised if the dividend, Logan shares and wts are not in the account by the close on Friday. If they are not there by then, I would inquire. GLTA