CRGY - Spartan Delta: Evaluating The Deal

2023-09-06 09:35:49 ET

Summary

• Spartan Delta announced a significant sale, allowing the company to issue a special dividend and split into two smaller companies.
• Shareholders have the option to invest the money received back into the remaining companies or do something else.
• Crescent Point Energy purchased the acreage that Spartan Delta sold, and management believes this is a buyer's market, giving them the upper hand.
• Oil prices so far bear out the assumptions of Crescent Point Energy management. But it is likely to take more time than this to properly evaluate the outcome.
• There are a large variety of investment strategies to use depending upon the investor's evaluation of the various company prospects.

Spartan Delta ( DALXF ) announced a relatively significant sale. That sale was going to allow the company to issue both a special dividend and then the company was going to split in two. Shareholders would have the option of exercising warrants in the smaller company. The idea behind this is that two smaller companies focused combined with the sale should benefit shareholders. Right now, the whole deal looks like a breakeven proposition. But the newly configured management has just begun to run both new companies. Shareholders may want to give the new companies time to show the benefits of the deal. Some potential investors may want to get in on any pullback because it is not unusual for the market to waiver about the deal until some results are posted.

The Deal

Now that the deal is complete, here is what the shareholders ended up with:

(This is a Canadian company that reports in Canadian dollars unless otherwise noted.)

Management is clear that both companies should have strong finances as long as things continue to go as planned. We will know for sure when the third quarter is reported for both of the remaining companies.

As management noted in the presentation, there was a Montney sale for C$1.7 billion that really funded just about everything that came after. Now the two remaining companies each have their land holdings. The hope is that the smaller businesses will result in superior growth prospects.

Shareholders have the option of putting the money received back into the remaining two companies or electing to do something else. Sometimes a plan like this is not particularly popular because investors often do not want their capital back if there are profitable things that can be done with the capital.

This plan does cater to the market attitude of returning capital to shareholders in a big way. The real question that needs to be answered by each investor is if this is the best thing to do with a long-term view of investing.

Crescent Point View

Crescent Point Energy ( CPG ) purchased the acreage that Spartan Delta sold. The reasons for buying are shown below :

(Note: This is a Canadian company that reports in Canadian dollars also.)

In the eyes of the buyer, this was a deal that would pay for itself in about 3 years (provided of course that oil prices remained in the price range assumed by management). Right now, this management is coming out ahead as oil prices have strengthened considerably lately.

It does not take much of a window for management to hedge good oil prices that assure a bargain purchase. Back in May , I wrote that management was using a WTI price of $75. The nice part about higher prices is that the extra money flows straight to the bottom line with only a few charges like royalties along the way. Much of what is on the income statement is paid for at lower prices. So, what happens is the margin widens and the company gets its money back sooner rather than later.

I follow a lot of companies like Crescent Energy ( CRGY ) where management believes this is a buyer's market. Therefore, waiting may well have proven to be a smart strategy for Spartan Delta management.

Spartan Delta management did note in the presentation that shareholders received value for this acreage. That value resulted in dividends paid to shareholders. What shareholders need to decide is if this was best for them or if Crescent Point management will come out ahead.

It will probably take some years for that evaluation to unfold. But right now it would appear that Crescent Point management has the upper hand.

Spartan Delta Management Has What It Wants

Spartan Delta management therefore has to show that concentrating on the remaining assets will result in an overall superior return. That is definitely a possibility. Sometimes the buyer management is in a position to do more with acreage than the selling management for any number of reasons. In that case it would be a "win-win" deal.

Investors would also have the option of putting some of the money received into Crescent Point Energy common shares if they believe that is a good deal for Crescent Point shareholders. There is a good possibility that all three companies will outperform in the future.

As can be seen above, the Spartan Delta acreage is concentrated in place. It is, of course, the hope of management that this acreage and its concentration will lead to superior performance. Management is likely to be judged on that outcome as the future unfolds.

The danger here is that Mr. Market can be an impatient taskmaster. So, results need to happen pretty fast to keep the market happy. Otherwise, "the kitchen is going to get very hot".

A speculative upside has to be Logan Energy ( LOECF ) which hopefully benefited (to the maximum possible) from the warrant offering. That benefit is assumed throughout the presentation. Should that be the case, the new company will have a lot of money to considerably boost initial production well past the (probably) necessary 10,000 BOED that often results in cost savings. To pile on that assumption, such an accomplishment would necessarily affect the stock price as well.

Key Ideas

So far, it looks like Crescent Point Energy management is coming out ahead in its purchase of the acreage from Spartan Delta. Management used a fairly conservative commodity selling price that has so far been exceeded.

It does not take a much higher price to materially increase cash flow from the acquisition because "all" the costs are paid for at lower prices. Only a few costs, like royalties, would change when prices rise. Since "the bottom line" and cash flow are both a percentage of revenue, it does not take a lot of revenue change to materially affect "down the line" items like cash flow, operating income and of course, net income.

But the total evaluation of the deal has a period of time to go yet. Management never stated that Logan Energy and Spartan Delta would reach the maximum price at the end of the deal. The key here is that management can make more money with the remainder than it would have with the whole company. Should that prove to be the case, shareholders could come out with the better deal.

Some may want to take the cash received and invest it into Crescent Point Energy as a way to hedge which company does the best. Similarly, risk-averse investors may want to sell one or both companies due to their smaller size.

Personally, I own Crescent Point Energy. But I could not fault others for doing any number of things because five years from now any one of a number of strategies could prove correct. For that reason, it will likely take about 5 years to evaluate the wisdom of this deal unless there is a major event that demands a shorter time period.

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