Spartan Delta looks set to fly

High leverage to natural gas prices and low costs

Spartan Delta (SDE.TO) acquired the former Bellatrix’s deep basin acreage and reserves out of the insolvency of Bellatrix and gained a lot of infrastructure for pennies on the dollar. Spartan then acquired Velvet at a price that today looks very attractive given the productivity of the Velvet wells and the subsequent rise in world oil prices and the parallel increase in Canadian light oil prices.

I have modeled Spartan Delta’s results based on their disclosure documents. That model appears below:

Not everyone will agree with my model assumptions but feel free to build your own model using data you prefer. I have assumed better utilization of processing facilities results results in flat operating costs and a growing mix of oil to gas post-Velvet will offset inflation and see level transportation costs across the whole of the company’s production. For the next three years I have assumed CAD$100 per barrel oil prices (they are currently somewhat higher), a natural gas price of CAD$7.00 this year (currently CAD$7.89) and CAD$8.00 in 2023 and 2024 with the tight natural gas markets likely to see firmer prices for quite a while, and a CAD$40.00 a barrel realized price for NGL’s assuming the mix tends towards lower valued molecules. Natural gas liquids are the most difficult to predict (as if oil & gas were easy) owing to the wide variance between prices for propane, ethane, and condensate and the operating choices for extracting these during processing or leaving them in the gas stream.

Spartan Delta’s corporate presentation is based on lower commodity prices than I foresee but still shows substantial growth and very high free cash flows. At US$80 WTI and CAD$3.75 natural gas the company projects cash flow of CAD$589 million and free cash flow of CAD$259 million for 2022. If current commodity prices persist (as I think likely) those numbers are low and cash flow closer to CAD$900 million this year. There is a lot of water to run under the bridge so I see my model as more of a sensitivity analysis than a forecast. You should too.

The point is clear however. At prices anywhere close to those assumed (which are lower than those in effect today) Spartan Delta stock has a value in the range $25 to $50 using a multiple of 4X EBITDA. Given the company can not only grow but also generate a mountain of free cash flow while growing, a higher multiple may manifest itself as markets react to results. Based on the current trading price of the stock of about CAD$12.50 per share, this company is deeply undervalued.

I own 96,000 shares.