CA - Spartan Delta Is Focusing

2023-05-22 10:50:11 ET

Summary

• Spartan Delta Corp. will spin off Logan Energy while selling acreage to Crescent Point Energy.
• The surviving Spartan Delta will be a natural gas producer with some liquids.
• Logan Energy will begin with far less production and is far more dependent upon the exercise of the warrants for beginning cash.
• Much of the stock value will come back as a large return of capital payment.
• I like the chance of success for the newly focused companies. However, they will be considered riskier than the original company.

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

Shareholders will have several ways to win with the proposed Spartan Delta Corp. ( OTCPK:DALXF ) reorganization. This is going to be one of the very few times that the quarterly report really will not be that significant (excepting a major surprise). Instead, everyone will be concentrating on the upcoming special vote.

Spartan Delta did announce a C$1.7 billion sale to Crescent Point Energy Corp. ( CPG ), which was expected to close in May. On May 10, management announced that this had closed. This sale gives the company the money to carry out the above proposals for what is left. The rest of the plan shown above is totally controlled by management.

The nice part about this is that shareholders will receive the majority of their investment back as return on capital. Management hopes that these same shareholders will want to invest some of that money into the new Logan Energy corporation. This company is depending upon the exercise of the warrants for a large part of its financing to begin developing its acreage.

It should be noted that the new Logan Energy company will be listed on the Venture (TSXV) part of the exchange. The price of the shares is estimated currently to be less than $1. That may make this a bit speculative for some investors that considered Spartan Delta a satisfactory risk.

The remaining Spartan Delta company will be, of course, far smaller than the company is right now. So, it may be considered a bit riskier than the combined company is now. However, I am always in favor of focus, as that usually gives investors clear choices.

The remaining Spartan Delta company after this process completes appears to have a management that is experienced in building and selling companies. As such, this company could outperform the competition by a fair amount just based upon the experience of management alone.

The new Logan Energy needs to obtain adequate financing from the exercise of the warrants. Should that be the case (and that is the big initial risk), then likewise this company also has experienced management that is likely to do better than average.

Smaller companies are usually dependent upon key personnel. Therefore, it is incumbent that shareholders monitor the investment for key personnel changes. But the likely outcome of this is two managements that build companies to later sell at a better price.

The new company will be a natural gas producer with some liquids. The company is expected to become a Deep Basin pure play. As is typical with smaller companies, the whole situation will be far easier to understand. But the management gave up some basin diversification to achieve this outcome.

This is an interesting development, as a lot of recent years have not been particularly kind to natural gas. Many remember that the fast growth of the unconventional business led to many years of excess natural gas supplies that kept driving down the price of natural gas over time.

But now, as North America increases the export ability of the industry over the next few years, the price of natural gas should join the far stronger world market. That may be what management sees in the future for natural gas profitability.

In addition, some liquids like ethane and propane are raw materials for the plastic industry that plays a key part of the green revolution. The outlook for some liquids prices as a result is very good as well.

This new company could have a very interesting future depending upon the development strategy taken by management.

Logan Energy will have much lower initial production. As such, it is critical that the warrants issued to shareholders get executed because this company is likely to be cash flow negative in the beginning until production gets to a higher level.

There will not be any debt at the start of the company operating history as a standalone (which is a plus). However, management will have to act promptly and efficiently to get production to a satisfactory level.

Assuming that the company does net sufficient cash from the exercise of warrants, the lease area is one of the more productive areas of the Canadian Oil & Gas industry. Therefore, development of the leases should not be all that risky.

Since the price of the shares will initially be fairly low and there will be a large number of shares outstanding, the chances of an eventual reverse split will be relatively high. That would likely happen after some satisfactory level of production is established with sufficient minimum amounts of cash flow.

Key Takeaways

Spartan Delta Corp. is selling the more mature part of the portfolio to Crescent Point Energy. The current market is still perceived to be a buyers' market. But then again, selling prices are better than they were two years ago. The key idea is that this sale gave management the chance to focus the company on a key area to develop as a specialization.

The main idea would be that management expects to be a better company as in more profitable with either more dividends or more appreciation potential than was the case before the reorganization. It is also possible that all three parts will be better investments as part of the new arrangement. Investors that believe this can establish positions in all three companies.

Spartan Delta will focus on two closely located areas that are part of the Deep Basin as a primarily natural gas producer with some liquids production. This could end up working out very well for shareholders as North America increases the ability to export natural gas.

The other remaining leases will go to Logan Energy to similarly specialize and develop. Specialization is sometimes a very good way to maximize profits in a business. The specialist can often vertically integrate to increase the profitability of the operation (or otherwise save money).

For shareholders the large return of capital minimizes the risk of serious long-term principal losses. But the surviving companies are smaller and will probably be regarded as riskier ventures than was the original Spartan Delta corporation.

I personally like the chances of success of the parts. For me, this would be a strong buy consideration based upon the cash back. Investing more money in Logan is definitely speculative. The new Spartan Delta is also elevated risk. But the sheer amount of cash returned lowers the downside risk.

Note that for the current price in the $11 range, about $9.50 Canadian is coming back. Even if you have to pay taxes, there is not much left to risk. What is left as stock value is in fairly experienced hands. That will lower the smaller company, and new company risk.

Investors can reduce the risk of the total amount of money by reinvesting the large return of capital amount in something that balances the overall risk. In that sense, investors are making a basket that suits their risk level.

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