Spartan Energy Corp. announced on Jan. 11 that its development capital budget for 2018 is $183 million. This capital budget reflects Spartan’s continuing commitment to its business plan of delivering attractive, sustainable per share production growth through its drilling program, while managing its declines and generating excess funds flow to be deployed in projects that further enhance value for its shareholders.
This program includes the drilling of approximately 140 net development oil wells and is anticipated to deliver annual average production of 23,400 barrels of oil equivalent (boepd) and 2018 exit production of 25,000 boepd, representing average production growth of six per cent and exit production growth of 11 per cent over 2017.
Based upon a WTI price assumption of US$60.00 and a Cdn/US exchange rate of $0.80, Spartan expects to generate funds flow from operations of approximately $267 million in 2018, yielding excess funds flow (funds flow from operations less total development capital expenditures) of approximately $84 million. Consistent with its business strategy, Spartan intends to invest a portion of its excess funds flow in projects that add incremental growth and long term value for Spartan shareholders, including waterflood projects, land and seismic and strategic acquisitions.
Spartan’s 2018 drilling program will be primarily focused on its high rate of return, low risk open-hole Mississippian wells in southeast Saskatchewan. Greater than 80 per cent of its budget will be directed to drilling, completions, equipping and tie-ins, with the remainder allocated to facilities, environmental, workovers, capitalized G&A and costs associated with non-operated interests in the Weyburn and Midale CO2 units.
Spartan plan to spend approximately 35 per cent of its drilling budget to drill 64 net open-hole wells. These wells deliver top tier economics, with its internal type curve well delivering a half cycle rate of return of 135 per cent – 227 per cent and paying out in 8-11 months (Sproule December 2017 pricing with return and payout ranges based on whether well is drilled on Crown or freehold acreage). Spartan has brought approximately 200 net open-hole wells on production since 2014, with average production rates on these wells exceeding its internal type curve. In 2017, IP90 production rates on open-hole wells with greater than 90 days of production history exceeded its type curve by greater than 15 per cent. Spartan continues to have a multi-year inventory of open-hole locations, as its 64 net wells planned for 2018 represent approximately 5 per cent of its open-hole drilling inventory.
In addition to its open-hole program, Spartan’s 2018 program will advance the development of its conventional Ratcliffe opportunity at Oungre, where Spartan commenced drilling in the second half of 2017. Spartan will allocate approximately 22 per cent of its 2018 drilling budget to drill 29 net Ratcliffe wells, including 1 net single leg and 11 net dual leg wells in the Oungre unit. These unit wells will provide long term value to Spartan shareholders as part of its waterflood project at Oungre, which is further detailed below.
Spartan will also continue to develop its frac Midale unconventional resource play in 2018, with approximately 33 per cent of its drilling budget allocated to drill 30 net wells on its lands at Alameda, Pinto and Elcott. Its internal type curve well delivers a half cycle rate of return of 55 per cent – 82 per cent and pays out in 13 - 17 months (type well at Alameda using Sproule December 2017 pricing with return and payout ranges based on whether well is drilled on Crown or freehold acreage). Spartan’s frac Midale wells drilled in 2017 delivered IP90 oil rates in excess of 20 per cent above its type curve. Its 2018 budget represents approximately 11 per cent of its net identified frac Midale inventory.
The remaining 10 per cent of its drilling budget will be directed to the continued development of its newly discovered Viking play at Plato. Due to spring breakup, its budget is weighted towards the second half of the year. The timing of its capital spend and its investment in waterflood projects will contribute to its strong exit to exit growth rate and leave Spartan well positioned to deliver attractive growth rates again in 2019.
Spartan has budgeted $5 million on land and seismic acquisitions for 2018.
Waterflood Projects
In 2018, Spartan intends to invest a significant portion of its excess funds flow to advance waterflood projects on its southeast Saskatchewan asset base. Spartan is budgeting to spend approximately $17 million on waterflood, with the majority allocated to injector conversions and pipelines on its core Oungre property.
Its Oungre unit total development plan includes 25 dual and 26 single leg horizontal wells, 53 injector conversions and 10 new injection wells, for total capital of $87 million. Based on internal management estimates and certain timing assumptions, the project is forecasted to yield F&D costs of less than $5.00 per boe and a net present value in excess of $300 million (before tax discounted at 10 per cent and based on Sproule December 2017 pricing). Inclusive of the drilling of horizontal wells, Spartan will invest approximately $30 million in the Oungre unit in 2018, with the majority of the production response to be realized in 2019 and beyond.
Strategic Acquisitions
Spartan was successful in completing tuck-in acquisitions in 2017, as Spartan spent approximately $34 million to further consolidate its core Oungre and Winmore areas. In the first quarter Spartan added approximately 30 boepd and 13.2 net sections of land prospective for Ratcliffe and Torquay drilling in the Oungre area for consideration of $6.5 million. In the third quarter Spartan increased its working interest in the Oungre unit to 100 per cent for consideration of $4.4 million, adding production and reserves while strategically facilitating the implementation of its Oungre waterflood project. More recently, late in the fourth quarter Spartan completed a strategic acquisition in its core Winmore area for total consideration of approximately $22.8 million, comprised of $15.8 million in cash and 1.1 million Spartan shares. This acquisition added approximately 250 barrels of oil per day of low decline production and 45 net open-hole drilling locations at Winmore. Its Winmore property has consistently delivered the best results in the company, with average IP90 rates on wells drilled to date exceeding its internal open-hole type curve by greater than 100 per cent.
