Message to Shareholders
Spartan’s results for the three months ended September 30, 2020, reflect the first full quarter of operations following completion of a transformational asset acquisition on June 1, 2020, for total consideration of $108.8 million (the “Acquisition“). In the third quarter, Spartan delivered Free Funds Flow of $13.2 million (see “Reader Advisories – Non-GAAP Measures“, below), highlighting the robust economics of the Company’s operations under current AECO pricing and lower baseline operating expenses.
Average production for the third quarter was maintained inline with June production levels despite a base decline of 19% on its asset base through the Company’s production optimization activities in the field. Spartan has realized a marked improvement in operating costs which are down 12% quarter over quarter as the focus on cost reduction initiatives over the first four months of operating the Acquisition assets begins to be reflected in operating results.
Third Quarter 2020 Highlights
- Stable base production: Spartan reported average production of 26,282 BOE per day (69% gas) for the three months ended September 30, 2020.
- Strong cash flows: The Company generated Adjusted Funds from Operations of $15.9 million ($0.23 per share, diluted) during the third quarter of 2020, resulting in a Corporate Netback of $6.56 per BOE. Free Funds Flow was $13.2 million after leases, decommissioning and capital expenditures. See “Reader Advisories – Non-GAAP Measures“, below.
- Operational excellence: As a result of cost reduction initiatives across the organization, operating expenses averaged $6.10 per BOE for the quarter ended September 30, 2020, down 12% from $6.96 per BOE during the previous quarter.
- Prudent risk management: To mitigate ongoing volatility in commodity markets and to satisfy the one-time minimum hedging requirements under the Company’s credit facility, Spartan has hedged approximately 52% of its forecasted natural gas volumes for the remainder of 2020 and approximately 35% of forecasted natural gas volumes for 2021.
- Focus on sustainability: As of September 30, 2020, Spartan’s Liability Management Rating (LMR) was 5.5 in Alberta, reflecting the high quality of its asset base versus an industry average of 4.8.
- Balance sheet strength: Spartan exited the third quarter with $10.0 million drawn on its credit facility with an authorized borrowing amount of $100.0 million and had Net Debt of $14.5 million at September 30, 2020 (see “Reader Advisories – Non-GAAP Measures“, below). The Company is well positioned to execute on its capital expenditure program and has sufficient financial flexibility to take advantage of future opportunities.
The Company’s financial and operating results for the three and nine month periods ended September 30, 2020, are summarized in the table below.
Financial and Operating Highlights
Three months ended September 30 |
Nine months ended September 30 |
|||
(CA$ thousands, except as otherwise indicated) |
2020 |
2019 |
2020 |
2019 |
OPERATING |
||||
Average daily production (BOE/d) |
||||
Crude oil and condensate (bbls/d) |
1,431 |
24 |
646 |
26 |
NGLs (bbls/d) |
6,811 |
12 |
3,037 |
14 |
Natural gas (mcf/d) |
108,237 |
1,077 |
49,091 |
1,112 |
BOE/d |
26,282 |
215 |
11,865 |
225 |
Average realized prices, before financial instruments |
||||
Crude oil and condensate ($/bbl) |
48.90 |
63.23 |
48.01 |
64.19 |
NGLs ($/bbl) |
15.65 |
49.41 |
15.55 |
54.50 |
Natural gas ($/mcf) |
2.30 |
0.63 |
2.21 |
1.29 |
Combined average ($/BOE) |
16.19 |
12.94 |
15.72 |
17.13 |
Operating and Corporate Netbacks ($/BOE) (1) |
||||
Oil and gas sales, before financial instruments |
16.19 |
12.94 |
15.72 |
17.13 |
Realized gain on financial instruments |
0.44 |
– |
0.37 |
– |
Oil and gas sales, after financial instruments |
16.63 |
12.94 |
16.09 |
17.13 |
Processing and other revenue |
0.50 |
1.89 |
0.56 |
1.62 |
Royalties |
(1.37) |
(0.12) |
(1.25) |
0.40 |
Operating expenses |
(6.10) |
(23.51) |
(6.43) |
(22.47) |
Transportation expenses |
(1.34) |
– |
(1.34) |
– |
Operating Netback (1) |
8.32 |
(8.80) |
7.63 |
(3.32) |
General and administrative expenses |
(1.50) |
(11.19) |
(1.75) |
(13.78) |
Interest expense, net of interest income |
(0.26) |
– |
(0.23) |
– |
Corporate Netback (1) |
6.56 |
(19.99) |
5.65 |
(17.10) |
FINANCIAL |
||||
Oil and gas sales |
39,149 |
257 |
51,118 |
1,054 |
Cash provided by (used in) operating activities |
22,724 |
(247) |
16,145 |
(699) |
Adjusted Funds from Operations (1) |
15,854 |
(394) |
18,369 |
(1,049) |
$ per share, basic |
0.27 |
(0.36) |
0.46 |
(0.95) |
$ per share, diluted |
0.23 |
(0.36) |
0.36 |
(0.95) |
Net income (loss) and comprehensive income (loss) |
(7,281) |
(691) |
35,305 |
(1,938) |
$ per share, basic |
(0.13) |
(0.62) |
0.87 |
(1.75) |
$ per share, diluted |
(0.13) |
(0.62) |
0.69 |
(1.75) |
Capital expenditures, net of dispositions |
1,178 |
1 |
111,523 |
(260) |
Total assets |
331,730 |
11,227 |
331,730 |
11,227 |
Net Debt (Surplus) (1) |
14,477 |
(29) |
14,477 |
(29) |
Shareholders’ equity |
124,413 |
1,190 |
124,413 |
1,190 |
Common shares outstanding (000s) (2) |
||||
Weighted average, basic |
58,118 |
1,106 |
40,358 |
1,106 |
Weighted average, diluted (2) |
68,231 |
1,106 |
50,823 |
1,106 |
End of period |
58,126 |
1,106 |
58,126 |
1,106 |
(1) |
“Operating Netback”, “Corporate Netback”, “Adjusted Funds from Operations” and “Net Debt (Surplus)” do not have standardized meanings under IFRS, refer to the “Non-GAAP Measures” advisories at the end of this press release. |
(2) |
Refer to the “Share Capital” advisories at the end of this press release. |
Outlook and Guidance
In late October 2020, the Company spud the first well of its six well winter drilling program targeting Spirit River liquids-rich natural gas. Five wells will target the Falher B formation and one well will target the Notikewin formation. Six additional wells are anticipated to be drilled in the second half of 2021 for a total of twelve wells in the 2020/2021 drilling campaign. The program is expected to pay out in less than twelve months and deliver greater than 100% internal rate of return on current commodity strip pricing.
Spartan’s capital expenditures are estimated to be $15.0 – 18.0 million for the fourth quarter of 2020 and production is forecast to average between 24,300 to 25,300 BOE per day. Capital expenditures are budgeted to be $40.0 – 43.0 million in 2021 and are expected to be fully funded by cash provided by operating activities. The range in budget is driven by timing of drilling; total capital expenditures are not expected to exceed $58.0 million in aggregate for the remainder of 2020 and 2021. Operational efficiencies remain a core focus with approximately $4.0 million of the capital program budgeted for optimization projects designed to offset base production declines and reduce operating costs.
The Company’s capital program is expected to deliver 13% production growth in 2021 compared to average production forecast for the fourth quarter of 2020. Spartan expects to generate approximately $66.0 million of Adjusted Funds Flow in 2021 (see “Reader Advisories – Non-GAAP Measures“, below) based on average commodity price assumptions of $2.75 per GJ for AECO, US$45 per barrel for WTI, and an exchange rate of 1.32 USD/CAD.
Below is a summary of corporate guidance for 2021:
(CA$ millions, except as otherwise noted) |
2021 Guidance |
Average Production |
|
Crude oil and condensate |
5% |
NGLs |
25% |
Natural gas |
70% |
Combined (BOE/d) |
27,000 – 29,000 |
Key Assumptions |
|
Average royalty rate (% of oil and gas sales) |
11% |
Operating expenses ($/BOE) |
6.00 |
Transportation expenses ($/BOE) |
1.45 |
G&A expenses ($/BOE) |
1.50 |
Capital expenditures |
40.0 – 43.0 |
Well count (# gross = net) |
8 – 9 |
Adjusted Funds Flow (1)(2) |
66.0 |
Free Funds Flow (1) |
23.0 – 26.0 |
Net Debt (Surplus), end of period (1) |
(8.5) |
(1) |
“Adjusted Funds Flow”, “Free Funds Flow” and “Net Debt (Surplus)” do not have standardized meanings under IFRS, refer to the “Non-GAAP Measures” advisories at the end of this press release. |
(2) |
Based on the midpoint of 2021 average production guidance of 28,000 BOE/d. |
Industry Leading Abandonment and Reclamation Program
As part of its ongoing partnership and commitment to sustainability, Spartan and the O’Chiese First Nation have established an industry leading abandonment and reclamation program. The program was implemented to demonstrate the Company’s dedication to proactively manage future liabilities and to preserve the environment for future generations.
Updated Corporate Presentation
An updated corporate presentation has been posted on the Company’s website along with this morning’s third quarter results release.
About Spartan Delta Corp.
Spartan is a differentiated energy company whose ESG-focused culture is centred on generating sustainable free funds flow through oil and gas exploration and development. Building on its existing high-quality, low-decline operated production in the heart of the Alberta Deep Basin, Spartan intends to continue acquiring undervalued diversified assets that can be restructured, optimized and rebranded, financially or operationally, yielding accretion to shareholder value. With excess infrastructure capacity, the Company is well positioned to continue pursuing immediate production optimization and responsible future growth. Further detail is available in Spartan’s November corporate presentation, which can be accessed on its website at www.spartandeltacorp.com.