Summary
Spartan Delta has a new management that has experience building and selling companies.
That makes the pace of acquisitions and rapid growth less risky than one would normally expect.
This management joins a trend of industry insiders grabbing control of a company to make purchases and acquisitions.
Management is projecting some excellent cash flow at the current price of the stock.
With an enterprise value now exceeding C$1 billion, this company will attract market attention.
This idea was discussed in more depth with members of my private investing community, Oil & Gas Value Research. Learn More »
Artem_Egorov/iStock via Getty Images Spartan Delta ( OTC:DALXF )(SDE:TSX) is the renamed Return Energy . This is yet another case where insiders of the industry gained control of a company in an effort to build a company that will likely be sold in the future. Back in 2019, Richard McHardy (who became Executive Chairman), and Fotis Kalantzis (who became President and CEO), along with a private investment of C$25 million , effectively recapitalized the company and changed the name to the present name. This of course led to a completely new board and new upper management. Since then, the company has gone on a shopping spree that effectively “rolls up” other properties into what is hoped to be a profitable combination.
The third quarter earnings came out for this Canadian company in November. So far costs appear to be under control and the “roll-ups” are performing as planned. Furthermore, this company intends to continue growing in addition to the consolidation strategy. This is going to make quarterly comparisons a little challenging and the valuation of the enterprise could suffer some.
Funds flow from operations is up nicely. But then again the currently strong commodity price market (compared to last year even after the recent decline) still makes for great comparisons well into the future. Once things settle down, then let’s see how all the pieces perform.
The two main movers of this new company, Mr. McHardy and Mr. Kalantzis, both have built and sold companies in the past. That makes the rapid growth of the company and the small company risk far lower than would typically be the case.
What is also interesting is that this company joins John Goff, the Chairman of Contango ( MCF ), and the current management of Headwater Exploration ( OTCPK:CDDRF ) as a movement of industry insiders to gain control of companies so they can buy up opportunities at perceived bargain prices in a buyers market.
I am often asked about target prices when I talk about an investment. But the actions of industry insiders are telling investors that it is too soon to worry about target prices. Most of the experienced managements are now buying properties. Therefore, investors should plan accordingly. Now when these insiders sell, then it’s probably time to lighten the exposure to oil and gas.
Most of these insiders tend to think in terms of years and they do not worry about 20% or even 50% fluctuations in price. They also tend to sell when they have a large gain. This is in contrast to a lot of investors that tend to sell with a 20% to 50% profit and then wonder if they should get back in when the price still goes up.
So my answer to all the questions I receive about price targets is that I will consider price targets when these insiders that build and sell companies are selling the companies they built. Their timing is not perfect. But they usually make more profits than most investors I know. Therefore, I tend to follow their lead.
(Canadian Dollars Unless Otherwise Stated) Source: Spartan Delta November 2021, Investor Presentation.
After the latest acquisition, the metrics of the company are shown above. One of the common themes of these acquiring companies that feature experienced management is the continual use of stock to keep the debt levels under control.
Such a strategy keeps debt ratios low while focusing on operational leverage to make shareholders a lot of money. So many investors believe that financial leverage is necessary for a large return. That is in contrast to company builders like this management that make above average returns without financial leverage.
(Canadian Dollars Unless Otherwise Stated) Source: Spartan Delta September 29, 2021, Investor Presentation . (Note: the original presentation has disappeared from the website. So I referenced the original news release which has mostly the same detail.) To get an idea of the relative metrics of the acquisition, let’s compare […]
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