Spartan Delta: Starting Over Again (OTCMKTS:DALXF)

Spartan Delta (OTCPK:DALXF) is a Canadian company that reports in Canadian dollars. Last year, the company issued a big dividend that effectively ended the main project. Now management is touting that accomplishment while starting another growth project to go after large gains again. That makes this an atypical company not suited for income investors. But for those that like a “beginning and an end” this type of corporation may be for you. For everyone else, the company is effectively a new growth company starting out again with a management history of success in the recent past.

Note that the last time around, management effectively distributed another company (Logan Energy (LGN:CA)) while also giving back roughly triple the cash raised. For most investors, that marks a successful end to a proposed profitable venture.

Investors now have several choices. The cash distribution was made possible by the sale of those properties to Crescent Point Energy (CPG). Investors do have the choice of investing in Crescent Point if they are interested in that situation. Logan Energy is far smaller and so, at least for the time being, is unlikely to be covered here.

This article will be about the Spartan Delta proposition going forward knowing that this management and board “beat the odds” to a considerable success the last time around.

Natural Gas Operator

The focus this time appears to be primarily on natural gas in Canada’s Deep Basin.

Those who follow Cenovus Energy (CVE) know that the Deep Basin was known for its natural gas production. Clearly, this time around, management is also including some liquids production. That can add considerable value to the natural gas production while keeping exposure to the ability of North America to join the stronger world natural gas market as the ability to export natural gas increases.

This appears to be a very profitable proposition if successful.

Spartan Delta proposes to grow this beginning organization as they did before through a combination of acquisitions and organic growth. Balance sheet strength will be a primary consideration as well company growth. Dividends are going to be a considerably lower priority.

The company is now considerably smaller than what it was. That makes the company a more speculative idea than was the case before. As is typical in Canada, the company has a considerable midstream presence on the land it owns, but will connect with other operators to get the product to market.

Expansion Room

One of the huge differences between the United States and Canada is that the industry in Canada can easily acquire more acreage without having to buy out another competitor.

As can be easily seen above, there are plenty of spaces that are not leased. This often keeps buyout prices lower because the alternative of leasing other acreage is always available.

Furthermore, it means the industry has considerable room for expansion should that be indicated. Right now, Canadian production is somewhat supply constrained because Canada has reserves that far exceed its needs. But that can easily change as more exporting capacity comes online in the near future.

Prospects for either organic growth or through consolidation look very good for the company from that perspective. This is an area of North America where the “big boys” often do not have all the good acreage already tied up. Therefore, a startup can often obtain a very profitable position comparable to the “big boys” if it gets there early enough. That is often not true in the United States.

The result of all of this is that acreage costs in a basin like this where there is acreage to be acquired is often miniscule compared to the United States.

Management has a focus area upon which to grow the company. This is important as a specific long-term goal rather than “we want to start a company”. Probably the biggest idea about the whole area is that it was long known for natural gas production.

However, technology improvements have brought other intervals into consideration. Many of those intervals have liquids. Of those liquids, condensate is very important to the industry as a whole because Canada produces a lot of heavy oil and thermal oil (also tar sands). The condensate is needed to enable these heavier products to flow through pipelines to the refinery.

Condensate often sells at a premium to light oil in Canada because Canada must often import the condensate it needs. Depending upon how development progresses, this could definitely turn out to be a superior profitability opportunity.

Risks

This is effectively a new and much smaller company going forward as the large majority of operations were sold. Any new venture has to be considered as a higher risk of failure proposition. Mitigating this is the past success of management and the board of directors. However, that does not eliminate the new company risk.

The emphasis on finances is going to decrease the new company financial risk considerably. Companies with strong finances often get as many chances as they need to succeed.

The acreage could turn out to be less profitable than planned. Management could then need to come up with a new plan or liquidate the company.

There is always the risk of loss of key personnel. That could derail even the best plans for lots of profits.

Summary

Spartan Delta is now effectively a new company with sufficient assets and cash flow to “grow within its means”. Management clearly has some knowledge of the basin of operations.

The upstream area of the business is noticeably volatile and very dependent upon suitable commodity prices. A small operator is limited to growth prospects that it can compete for. Management noted the fragmentation of the operations in the area. This bodes well for the proposed consolidation strategy. However, in a fast-moving industry like this one that can change overnight.

For investors that can handle the risks of a relatively new company in Canada, this management team has the experience and track record to lower the risks of a lot of small company operators. To me, that makes this a speculative strong buy because it is important to have a prior public company success when looking at small companies in this industry. There are simply too many ways to fail.

Now let’s see how the future unfolds for this idea.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.