Spartan Delta Corp. announces first quarter 2023 results

Selected financial and operational information is set out below and should be read in conjunction with Spartan’s unaudited consolidated interim financial statements and related management’s discussion and analysis (“MD&A“) for the three months ended March 31, 2023 and 2022, which are filed on SEDAR at www.sedar.com and are available on the Company’s website at www.spartandeltacorp.com. The highlights reported in this press release include certain non-GAAP financial measures and ratios which have been identified using capital letters. The reader is cautioned that these measures may not be directly comparable to other issuers; refer to additional information under the heading “Reader Advisories – Non-GAAP Measures and Ratios”.

Spartan is pleased to report its financial and operating results for Q1 2023 which highlight a continuation of strong operational performance and organic growth.

• The Company achieved 10% growth in production from an average of 72,588 BOE/d in Q1 2022 to 80,200 BOE/d in Q1 2023. Despite facing third party outages in Q1 2023 which, curtailed production by approximately 1,000 BOE/d, production was on target with 2023 guidance of 80,000 to 82,000 BOE/d.
• Spartan successfully executed a $139.8 MM capital program in Q1 2023, with specific focus placed on the development of its Gold Creek and Karr assets located in the Montney oil window as well as continued development across multiple horizons in the Deep Basin.
  • In the Deep Basin, Spartan drilled 6.0 net wells, of which 2.0 net wells were drilled in the Cardium Formation and 4.0 net wells were drilled in the Falher Formations. A total of 9.5 net Deep Basin wells were completed in Q1 2023, including 2.0 net wells drilled in Q4 2022, and 9.5 net wells were brought on production, inclusive of 3.5 net wells drilled in Q4 2022.
  • In the Montney, Spartan drilled 2.0 net wells from a 2 well pad in Gold Creek West, 8.0 net wells over two well pads in Gold Creek East and 1.0 net well off a 3 well pad in Karr which are expected to bring on production in Q2 2023. In addition, the Company brought on production a 3.3 net well pad in Gold Creek West that was drilled and completed in Q4 2022.
• The Company’s production growth partly mitigated the impact of reduced oil and gas prices which drove the 2% decrease in oil and gas sales revenue to $316.2 MM in Q1 2023 compared to $322.4 MM in Q1 2022.
• Spartan reported net income of $86.4 MM ($0.49 per share, diluted) in Q1 2023, up 41% from $61.2 MM ($0.36 per share, diluted) in Q1 2022. Unrealized gains on commodity derivatives primarily drove the increase in net income.
• The Company’s operations generated Adjusted Funds Flow of $182.3 MM ($1.03 per share, diluted) in Q1 2023, up 14% from $159.7 MM ($0.92 per share, diluted) in Q1 2022. Cash provided by operating activities increased to $214.7 MM in Q1 2023 from $137.8 MM in Q1 2022 due to the impact of changes in non-cash working capital.
• Spartan used existing cash on hand to fund $76.6 MM of an eligible dividend paid to shareholders in the first quarter of 2023, relating to the special dividend of $0.50 per share declared in Q4 2022.
• Spartan generated Free Funds Flow of $42.4 MM in Q1 2023, down 18% from $51.7 MM in Q1 2022.
• On May 10, 2023, the Company completed the sale of its Gold Creek and Karr Montney properties for cash consideration of approximately $1.7 billion (the “Asset Sale“) and, concurrently, Spartan’s revolving credit facility (“Credit Facility“) and second lien term facility (“Term Facility“) were amended to reduce the authorized borrowing amount under the Credit Facility to $250 MM and to accelerate the maturity of the Term Facility to December 2023. Repayment of the $150 MM Term Facility is expected to be funded by cash on hand of $133 MM, future cash flows from operations and access to the undrawn Credit Facility.

2023 GUIDANCE

The Company expects to release updated guidance concurrent with results of the May 16, 2023 annual meeting of shareholders, before markets open on May 17, 2023.

The table below summarizes the Company’s financial and operating results for the three months ended March 31, 2023 and March 31, 2022:

Spartan is committed to creating value for its shareholders, focused on sustainability both in operations and financial performance. The Company’s ESG-focused culture is centered on generating Free Funds Flow through responsible oil and gas exploration and development. The Company has established a portfolio of high-quality production and development opportunities in the Deep Basin. Spartan will continue to focus on the execution of the Company’s organic drilling program in the Deep Basin, delivering operational synergies in a respectful and responsible manner to the environment and communities it operates in. The Company is well positioned to continue pursuing immediate production optimization, future growth with organic drilling, opportunistic acquisitions and the delivery of free funds flow and periodic special dividends to shareholders.

Spartan’s corporate presentation as of March 28, 2023 can be accessed on the Company’s website at www.spartandeltacorp.com.

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 May 12, 2023, which includes discussion of the purpose and composition of the specified financial measures and detailed reconciliations to the most directly comparable GAAP financial measures.

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.

The Company refers to Adjusted Funds Flow expressed per unit of production as an “Adjusted Funds Flow Netback“.

“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.

Adjusted Funds Flow per share

Adjusted Funds Flow (“AFF“) per share is a non-GAAP financial ratio used by the Spartan as a key performance indicator. AFF per share is calculated using the same methodology as net income per share (“EPS“), however the diluted weighted average common shares (“WA Shares“) outstanding for AFF may differ from the diluted weighted average determined in accordance with IFRS for purposes of calculating EPS due to non-cash items that impact net income only. The dilutive impact of stock options and share awards is more dilutive to AFF than EPS because the number of shares deemed to be repurchased under the treasury stock method is not adjusted for unrecognized share based compensation expense as it is non-cash (see also, “Share Capital”).

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.

Adjusted Net Capital A&D

“Adjusted Net Capital A&D” is a supplemental measure disclosed by Spartan which aggregates the total amount of cash, debt and share consideration used to acquire crude oil and natural gas assets during the period, net of cash proceeds received on dispositions. The Company believes this is useful information because it is more representative of the total transaction value than the cash acquisition costs or total cash used in investing activities, determined in accordance with IFRS.

Net Debt (Surplus) and Adjusted Working Capital

References to “Net Debt (Surplus)” includes long-term debt 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, derivative financial instrument assets and liabilities, lease liabilities, assets/liabilities held for sale or distribution and current debt (if applicable). As at March 31, 2023 and December 31, 2022, the Adjusted Working Capital (surplus) deficit includes cash and cash equivalents, accounts receivable, prepaid expenses and deposits, other current assets, accounts payable and accrued liabilities, dividends payable, share-based compensation liability, and the current portion of decommissioning obligations.

Spartan uses Net Debt (Surplus) as a key performance measure to manage the Company’s targeted debt levels. The Company believes its presentation of Adjusted Working Capital and Net Debt (Surplus) are 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.

References to “Cash Financing Expenses” includes interest and fees on long-term debt, net of interest income, and excludes financing costs related to lease liabilities and accretion of decommissioning obligations. Cash Financing Expenses is a non-GAAP financial measure used by Spartan in its budget and guidance as it corresponds to the Company’s definition of Net Debt (Surplus), however it should not be viewed as an alternative to total financing expenses presented in accordance with IFRS.

Net Debt to Annualized AFF Ratio

The Company monitors its capital structure using a “Net Debt to Annualized AFF Ratio“, which is a non-GAAP financial ratio calculated as the ratio of the Company’s “Net Debt” to its “Annualized Adjusted Funds Flow” which is calculated by multiplying Adjusted Funds Flow for the most recent quarter, normalized for significant non-recurring items, by a factor of 4.

Other Measurements

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 and medium crude 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.

Spartan’s common shares are listed on the Toronto Stock Exchange (“TSX“) and trade under the symbol “SDE”. The volume weighted average trading price of Spartan’s common shares on the TSX was $13.59 for the three months ended March 31, 2023. Spartan’s closing share price was $14.10 on March 31, 2023, compared to $14.95 on December 31, 2022.

As at March 31, 2023 and as of the date hereof, there are 171.4 MM 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: 3.7 MM restricted share awards; and 3.3 MM stock options outstanding with an average exercise price of $4.56 per common share and average remaining term of 0.1 years.

The table below summarizes the weighted average number of common shares outstanding (000s) used in the calculation of diluted EPS and diluted AFF per share: