Spartan Delta Corp. is pleased to announce its financial and operating results for the fourth quarter and year ended December 31, 2020, as well as its independent oil and gas reserves evaluation as of December 31, 2020, prepared by McDaniel & Associates Consultants Ltd. (the "McDaniel Report").
Corporate Milestones Achieved Since the Recapitalization of Spartan Delta Corp. in December 2019
Completed a transformational Spirit River and Cardium asset acquisition in June 2020, which included ~25,000 boe/d of production in west central Alberta, consisting of ~250 bbls/d of crude oil, ~1,000 bbls/d of condensate, ~6,500 bbls/d of NGLs and ~103.5 MMcf/d of conventional natural gas.
Maintained production at 26,141 boe/d on average during the second half of 2020, consisting of ~330 bbls/d of crude oil, ~1,100 bbls/d of condensate, ~6,800 bbls/d of NGLs and ~107.5 MMcf/d of conventional natural gas, through low-cost field optimization, which more than offset normal corporate declines.
Reduced operating costs by 18% in less than three quarters of operating the properties acquired in June 2020.
Established a $100 million syndicated credit facility and successfully accessed capital markets raising aggregate gross proceeds of $213 million from equity financings since the inception in December 2019, inclusive of a $124 million financing expected to be completed in March 2021.
Recently closed three small acquisitions and executed definitive agreements for two additional acquisitions which are collectively expected to add ~9,500 boe/d of run-rate production, consisting of ~2,090 bbls/d of crude oil, ~475 bbls/d of condensate, ~760 bbls/d of NGLs and ~37.05 MMcf/d of conventional natural gas.
Added a new core development and consolidation area with a material entry into the Alberta Montney.
Fourth Quarter 2020 Financial and Operational Highlights
Development Execution: Spartan drilled four and brought on production two extended reach horizontal Spirit River wells at Ferrier, Alberta during the fourth quarter and subsequently drilled and completed the remainder of the eight-well winter program in the first quarter of 2021. The winter drilling program was delivered ahead of schedule and below budget with six wells having produced, on restricted production for operational efficiencies and decline management purposes, at an average IP30 of 1,580 boe/d, consisting of 93 bbls/d condensate, 370 bbls/d NGLs and 6.85 MMcf/d conventional natural gas. Two of these wells have produced for more than two months at an average IP60 of 1,526 boe/d, consisting of 82 bbls/d condensate, 345 bbls/d NGLs and 6.53 MMcf/d conventional natural gas.
Production Optimization: Maintained fourth quarter 2020 production volumes of 26,010 boe/d, in-line with third quarter 2020 volumes, primarily through production optimization as the Company's first two new wells were brought onstream in mid-December.
Improved Operating Netback: Spartan's Operating Netback increased by 15% and averaged $9.59/boe for the fourth quarter of 2020, up from $8.32/boe in the third quarter of 2020. The improved operating netback reflects the decrease in per unit operating costs in conjunction with stronger commodity prices, partly offset by higher royalties.
Strong Cash Flows: The Company generated Adjusted Funds from Operations of $18.9 million ($0.33 per share, basic and $0.28 per share, diluted) during the fourth quarter of 2020, resulting in a Corporate Netback of $7.92/boe. Free Funds Flow was $2.8 million after leases, decommissioning and $14.0 million of capital expenditures.
Operational Excellence: Spartan generated meaningful cost savings and reduced its operating expenses each consecutive quarter during 2020, highlighting the successful integration of the acquired assets and impact of the Company's strategic initiatives. Operating expenses averaged $5.68/boe for the quarter ended December 31, 2020, down 7% from $6.10/boe during the previous quarter and down 18% since the acquisition of the Company's west central Alberta assets in the second quarter of 2020.
Balance Sheet Strength: Spartan exited the fourth quarter with its credit facility undrawn and an authorized borrowing amount of $100.0 million. Spartan had Net Debt of $12.3 million as at December 31, 2020.
2020 Reserve Evaluation Highlights
Spartan is pleased to provide highlights of the Company's December 31, 2020 reserves from the McDaniel Report, below. The results of the McDaniel Report are reflective of Spartan's significant acquisition in West Central Alberta, making up a majority of the Company's reserves in 2020. The West Central reserves were reconfigured in 2020 to capitalize on extended reach horizontal drilling techniques ("ERH") and to adjust booked locations to more accurately reflect the near-term development plans of the Company post-acquisition.
72% of the 101 booked locations and 56% of the total inventory are ERH.
Reconfiguring to ERH has made booked locations more efficient, economic and reduced the environmental impact of the development:
o Approximately a 70% increase in IRR, while only increasing capital cost by 25% when compared to conventional bookings of one-mile horizontals; (See "Reader Advisories Non-GAAP Measures")
o Go-forward estimated undeveloped finding and development ("F&D") costs has been decreased considerably with proved undeveloped F&D costs equal to $3.94 and proved plus probable undeveloped F&D costs equal to $3.35; and
o Go-forward proved undeveloped recycle ratio of 2.4x and proved plus probable undeveloped recycle ratio of 2.9x.
Future development capital ("FDC") totaled $266.5 million in the total proved category with 63 net locations and $417.3 million in the total proved plus probable category with 101 net locations.
The Company has over 425 Spirit River and Cardium locations in inventory (>75% unbooked).
Before-tax net present value ("NPV") of reserves, discounted at 10%, is $375.9 million on a proved developed producing basis, $777.3 million on a total proved basis, and $1.1 billion on a total proved plus probable basis.
Approximately 33% of the Company's reserves are in the proved developed producing category and 65% of the reserves are in the total proved category.
2020 Independent Qualified Reserve Evaluation
The following tables highlight the findings of the McDaniel Report, which has been prepared in accordance with the definitions, standards and procedures contained in National Instrument 51-101 Standards of Disclosure for Oil and Gas Activities ("NI 51-101") and the most recent publication of the Canadian Oil and Gas Evaluation Handbook. The McDaniel Report was based on the average forecast pricing of McDaniel, GLJ Ltd. and Sproule Associates Limited. See "Reader Advisories Oil and Gas Advisories" for more information. Additional reserves information as required under NI 51-101 will be included in Spartan's Annual Information Form, which will be filed on SEDAR on or before March 30, 2021.
Summary of Oil and Natural Gas Reserves as at December 31, 2020
Forecast Prices Used in Estimates
The forecast cost and price assumptions assume increases in wellhead selling prices and take into account inflation with respect to future operating and capital costs.
Outlook and Guidance
On February 16, 2021, Spartan announced that the Company entered into definitive agreements with respect to three strategic acquisitions (the "Acquisitions"), the completion of which will create a new core development and consolidation area for the Company and a material entry in the Alberta Montney. The Acquisitions include: (a) assets in the Alberta Montney fairway, including the corporate acquisition of Inception Exploration Ltd. (the "Inception Acquisition") and the purchase of assets located primarily in the Simonette area of northwest Alberta (the "Simonette Acquisition"); and (b) the acquisition of a tuck-in asset in the Company's West Central core area, which closed on March 5, 2021 (the "Willesden Green Acquisition"). The Inception Acquisition and Simonette Acquisition are expected to close on or about March 18, 2021.
As part of the Company's press release dated February 16, 2021, Spartan also announced intentions to complete an $80.0 million equity financing and provided revised corporate guidance for 2021 which reflected the Company's preliminary operating and financial forecast after giving effect to the proposed Acquisitions and financing. The initial equity financing was comprised of a $50.0 million non-brokered private placement and a $30.0 million bought deal prospectus offering. Subsequent to the initial announcement, the equity financings were upsized by 55% to aggregate gross proceeds of $124.0 million, comprised of a $79.0 million non-brokered private placement and a $45.0 million bought deal prospectus offering (together, the "2021 Financings"). The 2021 Financings are expected to be completed concurrently with, and are conditional upon, the successful completion of the Inception Acquisition.
Based on the recent rise in crude oil and NGL prices, additional proceeds from the upsized 2021 Financings and minor revisions to the expected timing and allocation of budgeted capital expenditures, the Company has further revised its operating and financial guidance for 2021. The revised guidance outlined below was approved by the Company's board of directors on March 11, 2021.
Spartan's 2021 capital expenditures are estimated to be approximately $101.0 million (unchanged from previous guidance). Leveraging Spartan's strategic infrastructure position including the infrastructure to be acquired with the Acquisitions, the capital expenditure program will be focused on the execution and acceleration of drill-ready development across the Company's core properties targeting the Montney, Spirit River, and Cardium formations.
Spartan expects 2021 production to average between 35,500 to 37,500 boe/d (previous guidance 35,000 to 37,000 BOE per day, see notes to below table for a breakdown by product type). The Company's organic development program, supplemented with production from the Acquisitions, is expected to deliver approximately 40% production growth in 2021 compared to average production of 26,010 boe/d during the fourth quarter of 2020 (see table under "Selected Financial and Operational Information", above, for a breakdown by product type).
The Company expects to generate approximately $139.0 million of Adjusted Funds Flow in 2021, up from previous guidance of $122.0 million (see "Reader Advisories - Non-GAAP Measures"). The increase in forecasted Adjusted Funds Flow is primarily driven by the increase in forecast oil prices to US$55.00 per barrel for WTI (previously US$50.00 per barrel) as well as the corresponding impact on NGL pricing. Spartan's forecast of $2.75 per GJ for AECO natural gas is unchanged. Reallocation of capital within the budget as well as minor changes in expected "on-stream" dates also contributed to the increase in forecasted Adjusted Funds Flow.
Spartan is now forecasting its Net Surplus to be approximately $115.0 million at the end of 2021 compared to previous guidance of $54.0 million. The increase in forecasted Net Surplus reflects the $17.0 million increase in forecast Adjusted Funds Flow and $44.0 million of additional proceeds from the upsized 2021 Financings. Spartan expects to use its cash surplus to continue executing on the Company's targeted acquisition and consolidation strategy.
Spartan's guidance is contingent upon the successful completion of the Inception Acquisition, Simonette Acquisition and the 2021 Financings (see "Reader Advisories Forward-Looking Statements"). In addition, 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 the budget. The Company's actual results may differ materially from these estimates. Holding all other assumptions constant for 2021: if the forecast for AECO natural gas increased (decreased) by $0.25/GJ, the Adjusted Funds Flow forecast for 2021 would increase (decrease) by approximately $7.0 million; or, if the WTI crude oil reference price forecast increased (decreased) by US$5.00/bbl, the Adjusted Funds Flow forecast for 2021 would increase (decrease) by approximately $9.0 million. Assuming capital expenditures are unchanged, the impact on Free Funds Flow and resulting Net Debt (Surplus) would be equivalent to the increase or decrease in Adjusted Funds Flow.
Share Award Grants
On August 19, 2020, the Board of Directors of the Company approved a Share Award Incentive Plan (the "Plan"). The Plan is intended to assist in retaining and engaging the directors, officers and any future employees of the Company and to provide additional incentive to these individuals for their efforts on behalf of the Company. The Plan allows the Company to issue restricted share awards ("RSAs") and performance share awards ("PSAs"), provided that the aggregate number of common shares that may be issuable pursuant to the Plan does not exceed 2,900,000. The Plan is subject to the approval of the TSX Venture Exchange and the formal approval of the Plan by the shareholders of the Company at the next annual general meeting.
Effective March 11, 2021, the Company has issued a total of 984,100 options under its existing stock option plan and 1,180,800 RSAs under the Plan to officers and directors of the Company. The options each have an exercise price of $4.08 per share, are exercisable for a period of 5 years and vest in one third increments on the first, second and third anniversaries from the date of grant. The RSAs each vest in one third increments on the first, second and third anniversaries from the date of grant. Each RSA was valued at $4.08 per share. The grant of the RSAs is subject to final regulatory and shareholder approval of the Plan.
In recognition of their continued strong contributions to operations in their respective disciplines, Spartan is pleased to announce the promotion of Brendan Paton, from Manager, Engineering to Vice President, Engineering and Ashley Hohm, from Manager, Finance and Controller to Vice President, Finance and Controller.