Spartan Energy (SPE.TO) isn’t very well known, but this company is aggressively increasing its production rate. A good move, as it will reduce the overhead and interest expenses per produced barrel of oil-equivalent. But is the company profitable? Let’s find out.


 SPE1
Source: stockcharts.com

The Q1 results are better than expected

The company achieved a record quarterly production of almost 21,500 barrels of oil-equivalent per day. As in excess of 90% of the total quarterly production consisted of oil and other liquids, the company isn’t really exposed to the higher volatility on the oil and gas markets.
SPE2 
Source: press release

Thanks to an increase of in excess of 100% in its production rate and the higher oil price, Spartan was able to more than threefold its total revenue, and ended Q1 with a total revenue of C$88M. This was sufficient to generate a pre-tax profit of almost C$1M and a net income of C$244,000 despite the high depletion charges and interest expenses. Excluding the royalties payable on the total oil production, the operating and transportation expenses in Q1 were C$33.9M. As Spartan produced a total of 1.931 million barrels of oil-equivalent, the total ‘pure’ production cost was just C$17.5 per barrel, which is less than US$15. An amazing achievement, and it really were the royalty payments (C$8.5/barrel) which have a huge impact on the bottom line.

Despite the low net income, we were actually pretty certain Spartan’s cash flow statements would provide us with a more complete overview of how the company is really doing.
SPE3 
Source: financial statements

The total operating cash flow was approximately C$49M which is an amazing achievement. Yes, the total capex was C$49M as well resulting in a zero-sum game but this was entirely due to the fact Spartan has been spending a ton of cash in the first quarter of the year (resulting in the March production rate being 2% higher than expected), and the capex in the next few quarters will be much lower. Based on the full-year guidance of C$145M and the Q1 capex spend, the Q2-4 quarterly capex will be just C$35M, and this should be sufficient to increase the production rate by in excess of 2,000 boe/day. Combined with a 24% decline rate (5,000 barrels), the capital intensity is approximately C$21,000 per flowing barrel. This means the sustaining capex to keep the production rate stable (without increasing it) would be roughly C$110M, or less than C$30M per quarter.

The PV10 calculations indicate the company is still undervalued

So based on the Q1 performance, Spartan Energy would be generating a total of C$90M in free cash flow if the company would keep its production rate stable. However, the company prefers to boost its output, and this is definitely warranted based on the reserves.

The 2P Reserves as of at the end of last year increased to 109 million barrels, which means you basically buy one barrel of oil in the ground per five shares you own of Spartan Energy. Based on the current production rate, the reserve life index is approximately 14 years and we would expect this year’s activities to increase both the reserves and the reserve life index.
SPE4 
Source: press release

Spartan also released its PV10 values dated December 31st. The total 2P reserves have a total value of C$1.84B using a discount rate of 10%. After deducting the C$215M in net debt, Spartan’s NAV is approximately C$1.6B, or C$3 per share. That’s indeed substantially higher than the current share price and this could be explained by the decommissioning liabilities and the recent soft oil price. However, should the oil price increase again towards the $55-60 level, Spartan Energy will be a clear winner as its cash flows will increase by double digit percentages.

Investment thesis

Spartan Energy is combining a low production cost with a robust balance sheet. The C$215M in net debt isn’t worrisome as it represents less than 15% of the PV10 value of the company’s assets and should Spartan not spend any cash on its properties, the C$215M would be repaid within 18-24 months from the incoming cash flow of the current operations.

And this puts Spartan in an excellent position as it can ‘time’ its investments in the oil fields depending on the cost structure to complete new wells.

Disclosure:  the author has a long position in Spartan Energy

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