Spartan Delta Corp. is pleased to report its unaudited financial and operating results for the three and six month periods ended June 30, 2021.
MESSAGE TO SHAREHOLDERS
In the second quarter of 2021, Spartan achieved record average production of 39,638 BOE per day and generated Adjusted Funds Flow of $53.0 million. Production volumes were 24% higher than the previous quarter and Adjusted Funds Flow increased by 53% from $34.6 million in the first quarter of 2021.
Looking back to the second quarter of 2020, Spartan's average production was 8,906 BOE per day and Adjusted Funds Flow was $2.8 million. The Company closed its first transformational transaction, the acquisition of its Deep Basin assets in west central Alberta, for total consideration of $108.8 million on June 1, 2020. Since then, Spartan has completed a series of strategic acquisitions which added a second core development area targeting the Montney in northwest Alberta, anchored by the acquisition of Inception Exploration Ltd. (the "Inception Acquisition") and the acquisition of assets located primarily in the Simonette area of Alberta, both of which closed on March 18, 2021. In addition, Spartan completed several smaller tuck-in acquisitions to build upon the Company's core land holdings in the Deep Basin and Alberta Montney. Total consideration for the acquisitions completed during the first six months of 2021 was $163.0 million, plus $4.0 million of assumed net debt.
Spartan is pleased to share its second quarter results which demonstrate strong operational execution in the field and successful integration of the acquisitions.
The Company also benefited from rising crude oil prices and strong gas prices during the second quarter of 2021. The Canadian dollar equivalent WTI crude oil price averaged $81.04 per barrel during the three months ended June 30, 2021 and has recovered dramatically from the low average price of $38.41 per barrel in the second quarter of 2020. The AECO 5A natural gas reference price averaged $2.93 per GJ in the second quarter of 2021, 55% higher than the average price of $1.89 per GJ in the comparative quarter of 2020.
The recently announced acquisition of Velvet Energy Ltd. ("Velvet"), which is expected to close at the end of August, is a major milestone in Spartan's Montney consolidation strategy. The acquisition will further consolidate and add material scale to the Company's Montney focused core development area in northwest Alberta, building on the position acquired during the first half of 2021. Pro forma Spartan will be a dominant player in the Montney oil fairway with a tremendous portfolio of assets concentrated in large contiguous blocks. The oil weighted production and development of the Velvet assets will provide further commodity diversification to the Spartan portfolio, complimenting the Company's liquids-rich natural gas properties in the central Alberta Deep Basin.
SECOND QUARTER 2021 HIGHLIGHTS
- Achieved record average quarterly production of 39,638 BOE per day, up 24% from the previous quarter
- Spartan's Operating Netback increased by 18% quarter over quarter to $16.89 per BOE, reflecting higher oil prices and the increased crude oil weighting with the integration of the recently acquired properties
- Increased Adjusted Funds from Operations by 51% to $56.1 million in the second quarter, resulting in a Corporate Netback of $15.55 per BOE, up 20% from the Corporate Netback of $12.94 per BOE in the first quarter of 2021
- Focused on production optimization through spring break-up and prepared for an active H2 drilling program, commenced drilling of a two-well pad at Brazeau and four-well pad at Gold Creek in late June
- Delivered Free Funds Flow of $43.6 million after deducting $9.4 million of exploration and development capital expenditures from $53.0 million of Adjusted Funds Flow
- Further consolidated the Company's core northwest Alberta Montney acreage by closing three strategic tuck-in acquisitions for total consideration of $11.6 million
- Exited the second quarter with a Net Surplus of $131.7 million and an undrawn credit facility at June 30, 2021
Prior to completion of the Deep Basin asset acquisition on June 1, 2020, the Company did not have significant assets or operations. While comparative figures for the three and six month periods ended June 30, 2020 are provided in the table, the discussion in this press release focuses on the second quarter relative to the first quarter of 2021.
RECORD AVERAGE PRODUCTION AND REVENUE
Production averaged 39,638 BOE per day during the second quarter of 2021, up 24% from average production of 31,914 BOE per day in the first quarter of 2021. The increase is driven primarily by production from the recent acquisitions and from Spartan's drilling program completed in the first quarter. In addition, production optimization projects helped to offset the impact of natural declines.
Oil and gas sales (before royalties) were $96.4 million for the three months ended June 30, 2021, up 39% from $69.3 million in the previous quarter ended March 31, 2021. Spartan's combined average selling price of $26.71 per BOE ($26.17 per BOE after financial instruments) increased by 11% from the average price of $24.12 per BOE ($23.09 per BOE after financial instruments) in the previous quarter, driven by further recovery of crude oil prices and the higher oil weighting of Spartan's production following the Inception Acquisition. Spartan's realized gas price was unchanged at $3.15 per MCF in the first and second quarters of 2021.
Spartan's average royalty rate decreased to 10.8% of oil and gas sales in the second quarter compared to 12.6% in the first quarter of 2021, primarily due to lower royalties on new production from the winter drilling program and the acquired assets.
INCREASED OPERATING INCOME AND OPERATING NETBACKS
The Company generated Operating Income of $60.9 million during the quarter ended June 30, 2021, an increase of $19.9 million or 49% compared to Operating Income of $41.0 million in the previous quarter. On a per unit basis, Spartan's Operating Netback of $16.89 per BOE for the second quarter was 18% higher than the average Operating Netback of $14.28 per BOE in the first quarter of 2021. In addition to higher oil prices, among other contributing factors, the improved netback highlights strong results from the acquired properties. In particular, the Gold Creek Montney assets acquired through the Inception Acquisition produced an Operating Netback of $30.35 per BOE for the three months ended June 30, 2021, contributing to the increase in Spartan's corporate average Operating Netback.
Operating expenses averaged $5.56 per BOE for the quarter ended June 30, 2021, compared to $5.06 per BOE in the preceding quarter. The increase in per unit operating expenses reflects higher average operating costs on the recently acquired properties, partly offset by a further reduction of operating costs in the Company's west central Alberta core area. Spartan has identified opportunities to improve efficiencies, optimize production and reduce operating costs on the assets acquired in the Gold Creek and Simonette areas. However average operating expenses per unit are generally expected to be higher as the Company's portfolio becomes more oil weighted relative to the Deep Basin assets.
Transportation expenses averaged $1.62 per BOE during the second quarter of 2021, up 21% from the previous quarter average of $1.34 per BOE. The Company entered into new NGLs marketing contracts effective April 1, 2021, which resulted in $1.3 million of fractionation and processing charges being classified within transportation expenses that were previously presented as a deduction from revenue. Spartan's average transportation expense per unit has otherwise decreased quarter over quarter.
STRONG CORPORATE NETBACKS AND CASH FLOWS
Spartan's Adjusted Funds from Operations of $56.1 million resulted in a Corporate Netback of $15.55 per BOE for the second quarter of 2021. Adjusted Funds from Operations increased by 51% from $37.2 million in the first quarter of 2021 and the Corporate Netback increased by 20% from $12.94 per BOE. The positive impact of higher netbacks from the field was retained as lower cash interest costs offset the modest increase in per unit general and administrative ("G&A") expenses relative to the first quarter of 2021.
G&A expenses averaged $1.33 per BOE during the three months ended June 30, 2021. Compared to the previous quarter average of $1.22 per BOE, net G&A expenses are higher due to lower overhead recoveries in conjunction with reduced capital expenditures through spring break up. Spartan's gross G&A expenses (before recoveries) decreased by 10% from $1.68 per BOE in the first quarter to $1.51 per BOE in the second quarter of 2021.
Adjusted Funds Flow was $53.0 million after deducting $2.6 million of lease payments and $0.6 million of decommissioning expenditures from Adjusted Funds from Operations for the quarter ended June 30, 2021. Free Funds Flow was $43.6 million following a seasonally quiet quarter with relatively low capital expenditures.
NET INCOME
Spartan generated net income of $19.7 million ($0.15 per share, diluted) for the three months ended June 30, 2021, and $78.8 million ($0.75 per share, diluted) of net income year-to-date in 2021. The variance in net income quarter over quarter is primarily due to a gain of $35.1 million on the Inception Acquisition during the first quarter of 2021, changes in the fair value of financial instruments, and deferred income taxes.
Changes in the fair value of financial instruments had a significant impact on net income during the first half of 2021. Due to continued strength of forecast AECO natural gas prices, Spartan recorded unrealized losses on risk management contracts of $1.7 million and $9.0 million, respectively, during the first and second quarters of 2021. In addition, the fair value of the convertible promissory note increased on appreciation of Spartan's share price, resulting in an unrealized loss of $13.6 million during the three months ended June 30, 2021.
During the three and six month periods ended June 30, 2020, Spartan recognized net income of $47.4 million and $42.6 million ($1.01 per share, diluted), respectively. The profit reported in the comparative periods included a gain of $53.0 million recognized on closing of the Deep Basin asset acquisition on June 1, 2020.
DEVELOPMENT CAPITAL PROGRAM
Spartan completed an 8 well drilling program in its core area at Ferrier, Alberta, during the fourth quarter of 2020 and first quarter of 2021. Capital expenditures were light and focused on production optimization through spring break-up in April and May. In late June, Spartan kicked off its drilling program for the second half of 2021 and commenced drilling of a two-well pad at Brazeau and a four-well pad at Gold Creek. For the three months ended June 30, 2021, total exploration and development capital expenditures (before A&D) were $9.4 million, of which the Company spent $5.7 million on drilling operations, $1.6 million on facilities and equipment, $1.0 million on production optimization, $1.0 million on land and seismic, and $0.1 million on corporate assets.
ACQUISITIONS
Spartan completed three small tuck-in acquisitions during the second quarter of 2021 for aggregate total consideration of $11.6 million, comprised of $10.1 million of cash and the issuance of 0.3 million common shares valued at $1.5 million. The acquisitions primarily include undeveloped acreage in the Company's Montney focused core areas at Gold Creek, Simonette and Karr in northwest Alberta, as well as approximately 300 BOE per day of production behind pipe which has since been reactivated subsequent to June 30, 2021.
Total consideration for the acquisitions completed during the first six months of 2021 was $163.0 million, comprised of: $30.4 million of cash consideration (after interim adjustments); the issuance of 27.5 million common shares valued at $107.3 million; and the issuance of a convertible promissory note with an acquisition date fair value of $25.3 million. In addition, Spartan assumed a net working capital deficit of $4.0 million in connection with the corporate acquisitions.
STRONG BALANCE SHEET
Total cash capital expenditures of $19.7 million (including A&D) were fully funded by cash provided by operating activities. Spartan exited the second quarter with a Net Surplus of $131.7 million at June 30, 2021, up $33.4 million from the Net Surplus of $98.3 million at March 31, 2021. The Company's credit facility is undrawn and Spartan is well positioned financially to execute on its strategic growth objectives.
COMMITMENT TO THE ENVIRONMENT
During the first six months of 2021, Spartan spent approximately $1.2 million on abandonment and reclamation projects and settled an additional $1.0 million of decommissioning obligations by utilizing funding available through the Alberta government's Site Rehabilitation Program.
The Company plans to release its inaugural Environmental, Social, and Governance ("ESG") report upon closing of the Velvet acquisition.
SUBSEQUENT EVENTS
On July 28, 2021, Spartan announced an agreement to acquire Velvet, a privately held light-oil Montney producer with operations primarily in the Gold Creek, Karr, and Pouce Coupe areas of northwest Alberta, for total consideration of approximately $743.3 million.
The Common Shares currently trade on the TSX Venture ("TSXV") under the symbol "SDE". Spartan has received conditional approval from the Toronto Stock Exchange ("TSX") to list its common shares on the TSX. In connection with its graduation, the common shares will delist from the TSXV. Final approval for TSX listing is subject to Spartan fulfilling certain standard and customary conditions. The trading symbol for the common shares on the TSX will remain unchanged as "SDE".
OUTLOOK AND GUIDANCE
As part of the Company's press release dated July 28, 2021, Spartan also provided revised guidance for 2021 and preliminary guidance for 2022. Refer to the aforementioned press release or the "Outlook and Guidance" section of the Company's MD&A for additional information.
