Spartan Delta Corp. announces strategic repositioning process and preliminary guidance for 2023

Non-GAAP Measures and Ratios

This press release contains certain financial measures and ratios which do not have standardized meanings prescribed by International Financial Reporting Standards (“IFRS“) or Generally Accepted Accounting Principles (“GAAP“). As these non-GAAP financial measures and ratios are commonly used in the oil and gas industry, Spartan believes that their inclusion is useful to investors. The reader is cautioned that these amounts may not be directly comparable to measures for other companies where similar terminology is used.

The non-GAAP measures and ratios used in this press release, represented by the capitalized and defined terms outlined below, are used by Spartan as key measures of financial performance and are not intended to represent operating profits nor should they be viewed as an alternative to cash provided by operating activities, net income or other measures of financial performance calculated in accordance with IFRS.

The definitions below should be read in conjunction with the “Non-GAAP Measures and Ratios” section of the Company’s MD&A dated November 8, 2022, which includes discussion of the purpose and composition of the specified financial measures and detailed reconciliations to the most directly comparable GAAP financial measures as at September 30, 2022.

Operating Income and Operating Netback

Operating Income, a non-GAAP financial measure, is a useful supplemental measure that provides an indication of the Company’s ability to generate cash from field operations, prior to administrative overhead, financing and other business expenses. “Operating Income, before hedging” is calculated by Spartan as oil and gas sales, net of royalties, plus processing and other revenue, less operating and transportation expenses. “Operating Income, after hedging” is calculated by adjusting Operating Income for: (i) realized gains or losses on derivative financial instruments including settlements on acquired derivative financial instrument liabilities (together a non-GAAP financial measure “Settlements on Commodity Derivative Contracts“), and (ii) pipeline transportation revenue, net of pipeline transportation expense (the “Net Pipeline Transportation Margin“). The Company refers to Operating Income expressed per unit of production as an “Operating Netback” and reports the Operating Netback before and after hedging, both of which are non-GAAP financial ratios. Spartan considers Operating Netback an important measure to evaluate its operational performance as it demonstrates its field level profitability relative to current commodity prices.

Adjusted Funds Flow and Free Funds Flow

Cash provided by operating activities is the most directly comparable measure to Adjusted Funds Flow. “Adjusted Funds Flow” is reconciled to cash provided by operating activities by excluding changes in non-cash working capital, adding back transaction costs on acquisitions, and deducting the principal portion of lease payments. Spartan utilizes Adjusted Funds Flow as a key performance measure in the Company’s annual financial forecasts and public guidance. Transaction costs, which primarily include legal and financial advisory fees, regulatory and other expenses directly attributable to execution of acquisitions, are added back because the Company’s definition of Free Funds Flow excludes capital expenditures related to acquisitions and dispositions. For greater clarity, incremental overhead expenses related to ongoing integration and restructuring post-acquisition are not adjusted and are included in Spartan’s general and administrative expenses. Lease liabilities are not included in Spartan’s definition of Net Debt (non-GAAP measure defined herein) therefore lease payments are deducted in the period incurred to determine Adjusted Funds Flow.

“Free Funds Flow” is calculated by Spartan as Adjusted Funds Flow less Capital Expenditures before A&D, which is also a non-GAAP financial measure (defined herein). Spartan believes Free Funds Flow provides an indication of the amount of funds the Company has available for future capital allocation decisions such as to repay long-term debt, reinvest in the business or return capital to shareholders.

Capital Expenditures, before A&D

“Capital Expenditures before A&D” is used by Spartan to measure its capital investment level compared to the Company’s annual budgeted capital expenditures for its organic drilling program. It includes capital expenditures on exploration and evaluation assets and property, plant and equipment, before acquisitions and dispositions. The directly comparable GAAP measure to capital expenditures is cash used in investing activities.

Net Debt (Surplus) and Adjusted Working Capital

References to “Net Debt (Surplus)” includes long-term debt outstanding, if any, under Spartan’s revolving credit facility and second lien term facility, net of Adjusted Working Capital. Net Debt (Surplus) and Adjusted Working Capital are both non-GAAP financial measures. “Adjusted Working Capital” is calculated as current assets less current liabilities, excluding lease liabilities and derivative financial instrument assets and liabilities.

Spartan uses Net Debt (Surplus) as a key performance measure to manage the Company’s targeted debt levels. The Company believes its presentation of Net Debt (Surplus) is useful as supplemental measures because lease liabilities and derivative financial instrument assets and liabilities relate to contractual obligations for future production periods. Lease payments and cash receipts or settlements on derivative financial instruments are included in Spartan’s reported Adjusted Funds Flow in the production month to which the obligation relates.

All dollar figures included herein are presented in Canadian dollars, unless otherwise noted.

This press release contains various references to the abbreviation “BOE” which means barrels of oil equivalent. Where amounts are expressed on a BOE basis, natural gas volumes have been converted to oil equivalence at six thousand cubic feet (Mcf) per barrel (bbl). The term BOE may be misleading, particularly if used in isolation. A BOE conversion ratio of six thousand cubic feet per barrel is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead and is significantly different than the value ratio based on the current price of crude oil and natural gas. This conversion factor is an industry accepted norm and is not based on either energy content or current prices. Such abbreviation may be misleading, particularly if used in isolation.

References to “oil” in this press release include light crude oil, medium crude oil, heavy oil and tight oil combined. NI 51-101 includes condensate within the product type of “natural gas liquids”. References to “natural gas liquids” or “NGLs” include pentane, butane, propane and ethane. References to “gas” or “natural gas” relates to conventional natural gas. References to “liquids” includes crude oil, condensate and NGLs.

The significant assumptions used in the forecast of Operating Netbacks and Adjusted Funds Flow for 2023 are summarized below. These key performance measures expressed per BOE are based on the midpoint of calendar year average production guidance for 2023 of 81,000 BOE/d.

Changes in forecast commodity prices, exchange rates, differences in the amount and timing of capital expenditures, and variances in average production estimates can have a significant impact on the key performance measures included in Spartan’s guidance. The Company’s actual results may differ materially from these estimates. Holding all other assumptions constant, a US$10/bbl increase (decrease) in the forecasted average WTI crude oil price for 2023 would increase Adjusted Funds Flow by approximately $91 million (decrease by $94 million). An increase (decrease) of CA$1.00/GJ in the forecasted average AECO natural gas price for 2023, holding the NYMEX-AECO basis differential and all other assumptions constant, would increase Adjusted Funds Flow by approximately $63 million (decrease by $69 million). Holding U.S. dollar benchmark commodity prices and all other assumptions constant, an increase (decrease) of $0.10 in the US$/CA$ exchange rate would increase Adjusted Funds Flow by approximately $52 million (decrease by $53 million). Assuming capital expenditures are unchanged, the impact on Free Funds Flow would be equivalent to the increase or decrease in Adjusted Funds Flow. An increase (decrease) in Free Funds Flow will result in an equivalent decrease (increase) in the forecasted Net Debt (Surplus).

Spartan’s common shares are listed on the Toronto Stock Exchange (“TSX”) and trade under the symbol “SDE”.  As of the date hereof, there are 156.1 million common shares outstanding. There are no preferred shares or special shares outstanding. The following securities are outstanding as of the date of this press release: 15.1 million common share purchase warrants with an exercise price of $1.00 per common share; 3.0 million restricted share awards; and 3.5 million stock options outstanding with an average exercise price of $4.48 per common share and average remaining term of 3.1 years.

This press release discloses drilling inventory in three categories: (a) proved locations; (b) probable locations; and (c) unbooked/potential locations. Proved locations and probable locations are derived from an independent oil and gas reserves evaluation of Spartan’s assets prepared by McDaniel & Associates Consultants Ltd. as of December 31, 2021 and account for drilling locations that have associated proved and/or probable reserves, as applicable. Unbooked locations are internal estimates based on the prospective acreage and an assumption as to the number of wells that can be drilled per section based on industry practice and internal review. Unbooked locations do not have attributed reserves or resources.

Of the 41.7 net total booked drilling locations identified herein, 23.7 are net proved locations and 5 are net probable locations.

Unbooked locations have been identified by management as an estimation of Spartan’s multi-year drilling activities based on evaluation of applicable geologic, seismic, engineering, production and reserves information. There is no certainty that Spartan will drill all unbooked drilling locations and if drilled there is no certainty that such locations will result in additional oil and gas reserves, resources or production. The drilling locations considered for future development will ultimately depend upon the availability of capital, regulatory approvals, seasonal restrictions, oil and natural gas prices, costs, actual drilling results, additional reservoir information that is obtained and other factors. While certain of the unbooked drilling locations have been de-risked by drilling existing wells in relative close proximity to such unbooked drilling locations, other unbooked drilling locations are farther away from existing wells where management has less information about the characteristics of the reservoir and therefore there is more uncertainty whether wells will be drilled in such locations and if drilled there is more uncertainty that such wells will result in additional oil and gas reserves, resources or production.

Certain statements contained within this press release constitute forward-looking statements within the meaning of applicable Canadian securities legislation. All statements other than statements of historical fact may be forward-looking statements. Forward-looking statements are often, but not always, identified by the use of words such as “anticipate”, “budget”, “plan”, “endeavor”, “continue”, “estimate”, “evaluate”, “expect”, “forecast”, “monitor”, “may”, “will”, “can”, “able”, “potential”, “target”, “intend”, “consider”, “focus”, “identify”, “use”, “utilize”, “manage”, “maintain”, “remain”, “result”, “cultivate”, “could”, “should”, “believe” and similar expressions. Spartan believes that the expectations reflected in such forward-looking statements are reasonable as of the date hereof, but no assurance can be given that such expectations will prove to be correct and such forward-looking statements should not be unduly relied upon. Without limitation, this press release contains forward-looking statements pertaining to: the business plan, cost model and strategy of Spartan, including commodity diversification and oil weighted production; the expectation that the Repositioning Process may elicit change and enhance shareholder value; Spartan’s anticipated operational results; future intentions with respect to the return of capital; the impact of inflation on cost estimates; the expectation that Spartan can continue growing the business organically with decades of high-quality inventory; the Company’s 2023 capital budget and preliminary financial/operational guidance; Spartan’s anticipated operational results for 2023 including, but not limited to, estimated or anticipated production levels, capital expenditures and drilling plans; Spartan plans to deliver strong operational performance and to generate long term sustainable Free Funds Flow and organic growth; management’s expectations regarding encouraging drilling results and ability to replicate past performance; being well positioned to take advantage of opportunities in the current business environment, and to continue pursuing immediate production optimization, responsible future growth with organic drilling, and opportunistic acquisitions. Further, the ability of Spartan to pay the proposed special dividend and any future dividend payments and share buybacks, if any, will be subject to applicable laws (including the satisfaction of the solvency test contained in applicable corporate legislation) and contractual restrictions contained in the instruments governing its indebtedness, including its credit facility.

The forward-looking statements and information are based on certain key expectations and assumptions made by Spartan, including expectations and assumptions concerning the business plan of Spartan, the timing of and success of future drilling, development and completion activities, the performance of existing wells, the performance of new wells, the availability and performance of facilities and pipelines, the geological characteristics of Spartan’s properties, the successful integration of the recently acquired assets into Spartan’s operations, the successful application of drilling, completion and seismic technology, prevailing weather conditions, prevailing legislation affecting the oil and gas industry, prevailing commodity prices, price volatility, price differentials and the actual prices received for the Company’s products, impact of inflation on costs, royalty regimes and exchange rates, the application of regulatory and licensing requirements, the availability of capital, labour and services, the creditworthiness of industry partners and the ability to source and complete acquisitions.

Although Spartan believes that the expectations and assumptions on which such forward-looking statements and information are based are reasonable, undue reliance should not be placed on the forward-looking statements and information because Spartan can give no assurance that they will prove to be correct. By its nature, such forward-looking information is subject to various risks and uncertainties, which could cause the actual results and expectations to differ materially from the anticipated results or expectations expressed. These risks and uncertainties include, but are not limited to, the failure to achieve the anticipated benefits of the Repositioning Process or any transactions undertaken pursuant to the Repositioning Process; the risk that future dividend payments or share buybacks, if any, are reduced, suspended or cancelled, fluctuations in commodity prices, changes in industry regulations and political landscape both domestically and abroad, wars (including Russia’s military actions in Ukraine), hostilities, civil insurrections, foreign exchange or interest rates, increased operating and capital costs due to inflationary pressures (actual and anticipated), stock market volatility, impacts of the current COVID-19 pandemic and the retention of key management and employees. Ongoing military actions between Russia and Ukraine have the potential to threaten the supply of oil and gas from the region. The long-term impacts of the actions between these nations remains uncertain.

Please refer to Spartan’s MD&A for the period ended September 30, 2022 and AIF for the year ended December 31, 2021 for discussion of additional risk factors relating to Spartan, which can be accessed either on Spartan’s website at www.spartandeltacorp.com or under Spartan’s SEDAR profile on www.sedar.com. Readers are cautioned not to place undue reliance on this forward-looking information, which is given as of the date hereof, and to not use such forward-looking information for anything other than its intended purpose. Spartan undertakes no obligation to update publicly or revise any forward-looking information, whether as a result of new information, future events or otherwise, except as required by law.

This press release contains future-oriented financial information and financial outlook information (collectively, “FOFI“) about Spartan’s prospective results of operations and production, organic growth, operating costs, capital expenditures, Adjusted Funds Flow, Free Funds Flow, Net Debt (Surplus), Operating Netbacks, and Spartan’s corporate outlook and guidance for 2023 and components thereof, all of which are subject to the same assumptions, risk factors, limitations, and qualifications as set forth in the above paragraphs. FOFI contained in this document was approved by management as of the date of this document and was provided for the purpose of providing further information about Spartan’s proposed business activities in 2023. Spartan and its management believe that FOFI has been prepared on a reasonable basis, reflecting management’s best estimates and judgments, and represent, to the best of management’s knowledge and opinion, the Company’s expected course of action. However, because this information is highly subjective, it should not be relied on as necessarily indicative of future results. Spartan disclaims any intention or obligation to update or revise any FOFI contained in this document, whether as a result of new information, future events or otherwise, unless required pursuant to applicable law. Readers are cautioned that the FOFI contained in this document should not be used for purposes other than for which it is disclosed herein. Changes in forecast commodity prices, differences in the timing of capital expenditures, and variances in average production estimates can have a significant impact on the key performance measures included in Spartan’s guidance. The Company’s actual results may differ materially from these estimates.

A&D                 acquisitions and dispositions
AECO               Alberta Energy Company “C” Meter Station of the NOVA Pipeline System
AFF                  Adjusted Funds Flow
AIF                   refers to the Company’s Annual Information Form dated March 8, 2022
bbl                   barrel
bbls/d               barrels per day
BOE                 barrels of oil equivalent
BOE/d              barrels of oil equivalent per day
CA$                  Canadian Dollars
COVID-19         refers to the outbreak of the novel coronavirus, a public health crisis
ESG                 Environment, Social and Governance
G&A                 general and administrative expenses
GJ                    gigajoule
mcf                  one thousand cubic feet
mmbtu              one million British thermal units
mmcf                one million cubic feet
mcf/d               one thousand cubic feet per day
mmcf/d             one million cubic feet per day
MM                   millions
NI 51-101          National Instrument 51-101 – Standards of Disclosure for Oil and Gas Activities
NGL(s)              natural gas liquids
NYMEX            New York Mercantile Exchange, with reference to the U.S. dollar “Henry Hub” natural gas price index
TSX                  Toronto Stock Exchange
US$                  United States dollar
WTI                   West Texas Intermediate, the reference price paid in U.S. dollars at Cushing,Oklahoma for crude oil of standard grade