thomas lenne
There are plenty of Canadian energy companies paying fat dividends. Spartan Energy Corp. isn't one of them.
Instead, the emerging oil and gas company is spending to establish enviable growth prospects, with a reputable management team to back it up and a strong balance sheet to work with.
"Paying a dividend is just giving you back your money," said John O'Connell, CEO of Davis Rea, which owns shares of Spartan. "I'd rather give money to the guy who is going to spend it drilling holes, finding oil and increasing production."
Spartan is doing just that, generating rising estimates on production and cash flow, which should fuel at least 30-per-cent share growth over the next year, Mr. O'Connell said.
While the company has a lower profile among retail investors – it currently trades on the TSX Venture Exchange – Spartan is well known among Calgary's financial ranks. On Thursday, the company said its move to the TSX had been approved.
This is third incarnation of Spartan, all led by the same team and following the same model – generating growth through the acquisition of quality light oil resource plays. The management team first led Spartan Exploration Ltd. to a $228-million buyout in 2011.
After that, they returned to the market with Spartan Oil Corp., a light oil producer in central Alberta, which was eventually sold to Bonterra Energy Corp. for about $480-million in January, 2013.
Both entities were very good to investors, generating compound annual growth rates in share price of 65 per cent and 118 per cent, respectively, Brian Kristjansen, an analyst at Dundee Capital Markets, said in a recent note. He has a "buy" recommendation and a $5.50 target price on the stock.
"This is one of those teams in Calgary that has access to capital and has the confidence of investors," said Mason Granger, a fund manager at Sentry Investments. "We waited a year for the Spartan team to come back with Part 3."
The team did that with the $495-million acquisition of Renegade Petroleum Ltd., which closed in March. Renegade was the owner of some light oil assets primarily in Saskatchewan, which the company was unable to fully exploit after it took on too much debt while paying out a dividend.
"Renegade was a mess," Mr. Granger said. "But there was never an issue with Renegade's assets."
On Thursday, Spartan reported its first-quarter earnings, showing production rates materially higher than previously forecast.
"As we progress through 2014 and into 2015, we anticipate that the development of our extensive inventory of drilling locations in Saskatchewan … will allow us to continue deliver growth in production and cash flow per share while spending less than cash flow," the company said in a release.
That amounts to "real growth," Mr. O'Connell said. "That builds a virtuous cycle of growth and that's what makes a stock go up."
The company is now forecasting that its production will average 5,200 barrels of oil equivalent per day this year. That should rise by one-third next year, Macquarie analyst Ray Kwan said in a note on Thursday. That compares to average production growth of 24 per cent for Spartan's peer group.
Superior growth helps to justify Spartan's valuation premium. Its stock trades at an enterprise value of about 7.3 times estimated 2015 debt-adjusted cash flow. That compares to a peer group median of about 5.8 times, said Mr. Kwan, who has an "outperform" rating and a $5.50 target price. All nine analysts covering the stock rate it a "buy" or equivalent, at an average target of $5.11, representing an almost 40-per-cent premium over Thursday's closing price of $3.70.
Those production growth estimates for Spartan, however, exclude any future acquisitions. But, "they will do more acquisitions," Mr. Granger said. He sees the company expanding to produce around 15,000 or 17,000 barrels a day. "At that point, there are probably half a dozen potential buyers of the company."
Tim Shufelt