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(Idea) Logan Energy

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HFI Research
Jan 11, 2024
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(Idea) Logan Energy
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Logan Energy (LGN:CA) was spun out of Spartan Delta (SDE:CA) in a transaction that closed on July 13, 2023. Logan shares trade on the TSX Venture Exchange under the ticker LGN.

Logan was formed to develop SDE’s early-stage Montney assets. It was formed in a transaction in which Spartan Delta transferred approximately 137,000 acres of its Montney acreage that was producing 4,000 boe/d and an additional 55,769 acres of undeveloped Montney land. In the transaction, Logan issued 173.2 million shares and 173.2 million non-transferable warrants to Spartan Delta in consideration of the assets. The transaction netted Logan $60.6 million. It also received $53.8 million from the exercise of the warrants.

In a separate private placement transaction, Logan raised another $48.5 million in exchange for the issuance of 64.3 million units and 74.3 million shares. Each unit was comprised of one Logan share and one non-transferable warrant to purchase Logan stock at $0.35 per share.

Spartan Delta’s Executive Chairman, Richard McHardy, is leading Logan as President and CEO. McHardy, a lawyer by training, has founded several E&Ps, including the various Spartan-related entities since 2011 and Titan Exploration before that.

We assume McHardy and his team will grow Logan in a manner similar to how they grew Spartan Delta. They grew Spartan Delta from less than 5,000 boe/d in 2019 to 30,000 boe/d in 2023 by increasing organic production and executing 12 deals to add producing acreage. The largest deal was the $743 million acquisition of private equity-backed Velvet Energy in August 2021. The deal made Spartan Delta the largest producer in the Montney at the time.

Recent Results Show Progress

In the third quarter, Logan produced 5,394 boe/d. Production was split 75.9% natural gas, 19.0% crude oil and condensate, and 5.1% NGLs. The company drilled three new wells and was in the process of bringing additional wells online to accelerate production growth into year-end.

Logan generated $5.2 million of adjusted funds flow during the quarter and spent $33.5 million on capex. Due to its equity financings, it ended the third quarter with $90 million in cash. It also had an undrawn credit facility of $15 million.

The company is currently consuming cash to fund its drilling program. Management is guiding to $120 million of capex in 2024, including infrastructure and various contingencies. Assuming its cash balance stands at $65 million today, cash flow from operations plus cash on hand will be barely enough to fund its 2024 drilling program at current commodity prices.

Logan’s management has experience operating in the company’s producing regions. It is targeting three regions of the Montney: Flatrock, Pouce Coupe, and Simonette. In each region, its acreage is adjacent to other established Canadian E&Ps, as can be seen in the map below.

Source: Logan Investor Presentation, Nov. 2023.

Pouce Coupe and Simonnet were among Spartan’s bread-and-butter acreage, with repeatable drilling prospects that will generate most of Logan’s cash flow. These are Logan’s primary growth assets and will receive most of its capex over at least the next three years. Of the eight wells planned to be drilled in 2024, six will come from these areas. In both regions, new well results have so far exceeded management’s expectations.

Flatrock is a natural gas and condensate-rich region that is undeveloped but that management believes is highly prospective. This is where most of Logan’s undeveloped acreage lies. Management expects to drill two Flatrock wells this year. It is likely to accelerate Flatrock’s development in 2026 and thereafter, once Logan has enough scale to invest greater sums into exploration.

Over the next few quarters, management plans to invest significant capital in funding rapid production growth to increase the company’s scale and, eventually, obtain additional financing. The financing variable remains the biggest unknown, as terms will depend on its successful execution and how much cash flow it generates in 2024. The company doesn’t hedge, so rising commodity prices would provide a welcome tailwind.

Too Speculative to Value

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