Issue link: http://resourceworld.uberflip.com/i/460990
F E B R U A R Y / M A R C H 2 0 1 5 www.resourceworld.com 31 spartan energy corp. [SPE-TSX] is a Calgary-based oil and gas company with properties in Saskatchewan. It has posi- tioned itself to prosper under difficult circumstances. In June of this year, the company announced a $98 million acquisi- tion of properties funded by a $130 million financing at $3.75 per share. The key attributes of this acquisition were high netbacks of $52 per barrel, at the time the deal was announced and low decline rates. (Netbacks are calculated by taking all of the revenues from the oil, less all costs associated with getting the oil to a market.) The company identified the acquired assets as being under-explored and in need of new production techniques. Since closing this acquisition, the landscape for the oil and gas industry has changed dra- matically, with the industry as a whole planning and executing for a US $100 per barrel price, but now facing a US $55 per barrel price. In this environment, only the companies with the highest margins can survive and prosper. The key worry for oil and gas companies now is debt and debt service ratios. A gen- erally accepted operating principle in the oil and gas business is a debt service ratio of total debt of less than two times annual cash flow. In the third quarter of 2014, many junior and intermediate sized companies had debt service ratios of 1.6 to 1.8, but with the dramatically falling oil price, these companies now find this ratio offside at 3 or more. In contrast, Spartan's debt service ratio is less than 1.0. As the chart illustrates, the company can maintain this strong finan- cial position even at US $70 per barrel oil. Since its major acquisition in the spring, Spartan has built up production to a rate exceeding its 2014 exit rate guidance of 8,600 barrels of oil and gas equivalent per day. In 2015 it is hoped the company can continue its internally funded, bread and butter drilling programs, augmented by accretive acquisitions. I am looking for a 2015 exit of 10,000 boe/d. The risks to the stock are external price risk from a weak global oil price environment and execution risk on its drilling programs. As to the oil price risk, my opinion is that current oil prices are sufficiently low to contract oil produc- tion from shale oil plays in North America, but that this process may take as long as two years. The longer the trough in oil prices persists, the more Spartan's competitive advantage increases. Contracting shale pro- duction will lead to improving oil prices, and I am hoping for a rebound into the $80's for oil. n This article expresses the opinions of Alf Stewart, and not necessarily those of Raymond James Ltd. Statistics and factual data and other information are from sources RJL believes to be reliable but their accuracy can- not be guaranteed. As an investment in Metals Creek Resource Corp. is not suitable for all investors, a recommendation would only be made after a personal review of an individu- al's financial objectives. Raymond James Ltd., member – Canadian Investor Protection Fund. spartan energy: growing production in a low oil price environment b r o k e r ' s p i c k s A l f S t e w a r t Source: Spartan Energy Corp.