Spartan Delta Corp. announces second quarter 2020 results and provides an operational update

Message to Shareholders

Structural changes to the market over the last two quarters have materially enhanced the opportunity set for Spartan’s targeted acquisition and consolidation strategy. The Company is focused across multiple jurisdictions on rarely seen opportunities to acquire top tier assets at historically low valuations, while utilizing restructuring tools to reduce burdensome debt, legacy fixed cost commitments and unnecessary overhead. The Company’s intent is to acquire a diversified portfolio of quality assets that can be restructured, optimized and rebranded, financially or operationally to yield lower payout ratios and generate material free cash flow. Simultaneously, the Company continues to focus on the expansion of its opportunity suite through internally generated prospects and strategic tuck-in acquisitions.

Consistent with Spartan’s core values around environmental, social and governance (“ESG“) stewardship of assets, and investor capital, Spartan is fostering a mutually beneficial relationship based on trust and mutual respect with the O’Chiese First Nation. Furthermore, the Company’s focus remains on the health and safety of all our staff and communities in which we operate during the COVID-19 pandemic.

Despite the market volatility and physical challenges presented by COVID-19, on June 1, 2020, the Company closed a transformational asset acquisition for total consideration of $108.8 million (the “Transaction“) consisting of high-quality, multi-zone, oil and gas operated production in Alberta, a large land base and strategic infrastructure. This infrastructure, with an estimated $200 million of replacement value net to the Company, ensures Spartan can capitalize on both organic growth and strategic acquisitions, positively impacting corporate operating efficiencies. The Transaction positions Spartan as an intermediate energy company whose growth strategy is focused on the acquisition and sustainable development of underexploited and undercapitalized assets.

Spartan recognized a gain of $53.0 million on the Transaction, highlighting the strength of the acquisition metrics and quality of the underlying assets, as well as Spartan’s ability to access capital in a challenging business environment. The Company raised gross proceeds of $64.0 million through non-brokered equity private placements at a subscription price of $2.00 per common share and established a $100.0 million revolving credit facility with a syndicate of financial institutions (the “Credit Facility“).

On June 1, 2020, the Company completed a name change from “Return Energy Inc.” to “Spartan Delta Corp.” and a consolidation of common shares on the basis of a ratio of one-hundred (100) pre-consolidation common shares for each post-consolidation common share.

The Consolidated Statements of Net Income (Loss) and Comprehensive Income (Loss) for the three and six months ended June 30, 2020 includes results of operations related to the acquired assets for the 30-day period from closing the Transaction on June 1, 2020.

Financial and Operating Highlights

Second Quarter 2020 Highlights

• Spartan closed the Transaction for total consideration of $108.8 million on June 1, 2020. A gain on acquisition of $53.0 million was recognized as the consideration was less than the estimated fair value of the net assets acquired.
• In connection with the Transaction, the Company raised gross proceeds of $64.0 million through non-brokered equity private placements at a subscription price of $2.00 per common share. Spartan also established the Credit Facility, which has an authorized borrowing amount of $100.0 million.
• Spartan reported average production of 8,906 BOE/d (70% gas) for the three months ended June 30, 2020, with June production from the Transaction averaging 26,200 BOE/d.
• Oil and gas sales revenue (before royalties) was $11.6 million. Spartan’s combined average realized price was $14.31 per BOE ($14.48 per BOE after financial instruments).
• Spartan’s natural gas production is 100% AECO linked and the Company has strategically hedged approximately 60% of its natural gas volumes for the second half of 2020 and approximately 45% of forecast natural gas volumes for 2021 to protect project economics and cash flows.
• Corporate royalty rates averaged 6.5% of oil and gas sales, $0.93 per BOE. Operating and transportation expenses averaged $6.96 per BOE and $1.38 per BOE, respectively.
• Spartan reported an Operating Netback of $5.90 per BOE (see “Reader Advisories – Non-GAAP Measures“, below).
• The Company reported Adjusted Funds from Operations of $3.4 million ($0.07 per share, diluted), resulting in a Corporate Netback of $4.19 per BOE after general and administrative and interest expenses of $1.48 per BOE and $0.23 per BOE, respectively (see “Reader Advisories – Non-GAAP Measures“, below).
• Total capital expenditures were $110.0 million inclusive of $108.8 million incurred for the Transaction, and approximately $1.0 million on seismic.
• As at June 30, 2020, Spartan’s Liability Management Rating (“LMR“) exceeded 6.0 in Alberta. Spartan is committed to environmental stewardship and seeks to maintain an industry leading LMR.
• As at June 30, 2020, Spartan had drawn $26.9 million on its Credit Facility and had Net Debt of $26.2 million (see “Reader Advisories – Non-GAAP Measures“, below). The Company is well positioned to confront the challenges of the current business environment and has sufficient financial flexibility to take advantage of future opportunities.

Operational Update

In response to COVID-19, Spartan is following all applicable rules and regulations as set out by the relevant health authorities and has implemented health and safety protocols into its operations. Spartan and its staff have adapted to the new work environment without significant disruptions at any operated facility or in day-to-day operations and virtual corporate and operational integration of new staff and corporate objectives has been successful through the first months of operations.

While the second quarter of 2020 continued to present challenges for the broader energy industry, Spartan maintained its focus on acquiring, closing and integrating the assets acquired through the Transaction. The Spartan team continues to successfully execute on production and cost optimization opportunities.

Outlook 

The Company is currently preparing a six (net) well Spirit River drilling program set to commence in the fourth quarter with the first of the wells expected to be online by year end. The program is expected to pay out in less than twelve months and deliver greater than 100% internal rate of return on current commodity strip pricing. Even after taking into account planned capital expenditures, Spartan will continue to generate significant free cash flow.

Looking forward through the remainder of 2020 and into 2021, Spartan plans to take advantage of the strength of its balance sheet, access to capital, shallow production decline rate, and strategic infrastructure to target future consolidation opportunities across the basin.

Spartan has demonstrated resilience in volatile markets and continues to execute the building of an ESG-focused business to generate sustainable free cash flow and shareholder returns.

Updated Corporate Presentation

An updated corporate presentation has been posted on the Company’s website along with this morning’s second quarter results release.

About Spartan Delta Corp.

Spartan Delta is a differentiated energy company whose ESG-focused culture is centered on generating sustainable free cash flow through oil and gas exploration and development.  Building on its existing high-quality, low-decline operated production in the heart of the Alberta Deep Basin, Spartan intends to continue acquiring undervalued diversified assets that can be restructured, optimized and rebranded, financially or operationally, yielding accretion to shareholder value. With excess infrastructure capacity, the Company is well positioned to continue pursuing immediate production optimization and responsible future growth. Further detail is available in Spartan’s August corporate presentation, which can be accessed on its website at www.spartandeltacorp.com.

READER ADVISORIES

Share Capital

Spartan’s common shares trade on the TSX Venture exchange (“TSXV“) under the symbol “SDE” (formerly “RTN”). The volume weighted average trading price of the Company’s common shares on the TSXV for the three and six months ended June 30, 2020 was $2.82 and $3.00, respectively.

The table below summarizes the weighted average (“WA“) number of common shares outstanding (000s) used in the calculation of net income (loss) per share and Adjusted Funds from Operations per share for the three and six months ended June 30, 2020 and June 30, 2019:

The Company uses the treasury stock method to determine the impact of dilutive securities in accordance with International Financial Reporting Standards (“IFRS“). Under this method, only “in-the-money” dilutive instruments impact the calculation of the diluted shares outstanding. The treasury stock method assumes that the proceeds received from the exercise of all potentially dilutive instruments are used to repurchase common shares at the average market price during the period.  In computing diluted net income per share and Adjusted Funds from Operations per share for the three and six months ended June 30, 2020, the effect of stock options was excluded as they were not in-the-money during the periods.

As at June 30, 2020 and as of the date hereof, the Company has 58.1 million common shares outstanding, 16.2 million common share purchase warrants outstanding with an exercise price of $1.00 per share, and 3.4 million stock options outstanding with an exercise price of $3.00 per share.