NOT FOR DISTRIBUTION TO U.S. NEWS WIRE SERVICES OR DISSEMINATION IN THE UNITED
STATES
Surge Energy Inc. ("Surge" or the "Company") (TSX:SGY) announced today that it
has entered into an agreement to acquire (the "Acquisition") a high quality, low
decline, operated, crude oil producing asset strategically located near
Wainwright in the Company's core area of Central Alberta (the "Assets"). The
Assets include over 980 barrels per day of primarily medium gravity crude oil
production (with a historical 9 percent annual decline), producing from the
Sparky Formation. The purchase price for the Assets is $76.8 million, payable in
cash (the "Purchase Price").
As a result of the Acquisition, Surge will again be revising upward the
Company's 2013 exit guidance and 2014 full year guidance, as set forth below.
In addition, based on the Acquisition which is expected to be accretive and
better than anticipated operational and drilling results, Surge will now be
increasing the Company's annual dividend four percent from $0.50 per share per
year ($0.04166 per share per month), to $0.52 per share per year ($0.04333 per
share per month).
The closing of the Acquisition is subject to customary conditions including
receipt of applicable regulatory approvals and is expected to occur on or about
December 3rd, 2013 (the "Closing").
In conjunction with the Acquisition, Surge has entered into a $55 million bought
deal financing (the "Equity Financing") with a syndicate of underwriters led by
Macquarie Capital Markets Canada Ltd., which is described in further detail
below. Members of the Surge team will be participating in the Equity Financing.
The Equity Financing is subject to customary conditions including receipt of
applicable regulatory approvals and is expected to close on or about November
28, 2013.
ACQUISITION OVERVIEW
The Acquisition comprises an elite, operated, low decline crude oil property
strategically located within Surge's core operating area of Central Alberta. The
production is focused in a large, medium gravity crude oil Sparky reservoir -
with over 210 million barrels of original oil in place ("OOIP")(1).
The Assets are under waterflood and currently possess a very low annual decline
of 9 percent, which is expected to provide significant annual free cash flow to
Surge. The Acquisition fits well with the Company's focused business strategy
and with Surge's modest growth/dividend business model.
Surge management has identified significant upside with respect to the Assets,
primarily from waterflood optimization and infill drilling.
ACQUISITION METRICS
The following sets forth the metrics with respect to the Acquisition:
1. Purchase Price:
The Purchase Price for the Acquisition is $76.8 million, which will be payable
in cash at Closing.
2. Long Life Oil Reserves:
The Acquisition adds Proven and Probable (P+P) reserves of 5.4 million boe (98
percent crude oil), as assessed internally by Surge utilizing NI 51-101
guidelines.
On this basis, Surge is paying approximately $14.25 per barrel for P+P reserves.
No reserves have been assigned in the engineering assessment for drilling
upside.
Based on current production, the Assets have a long reserve life index of more
than 15 years (P+P).
3. Production Metrics:
Current production relating to the Acquisition is approximately 980 boe per day,
composed of more than 98 percent medium gravity crude oil (23 degree API).
On this basis, Surge is paying approximately $78,367 per flowing barrel of
production with respect to the Acquisition.
4. Solid Netbacks and Strong Recycle Ratio:
Operating netbacks for the Assets are over $42 per barrel, based on guidance
pricing (as set out below), resulting in a recycle ratio of approximately 2.9
times in relation to the Acquisition.
5. Annual Cash Flow:
Annual cash flow from the Assets, based on guidance pricing (as set out below)
and using current production levels, is estimated to be more than $15 million.
Based on current production and using guidance pricing (as set out below), Surge
estimates that the Company is paying approximately 5.1 times annualized cash
flow for the Acquisition.
6. Producing Infrastructure:
The Acquisition possesses key producing infrastructure, including batteries,
pipelines, and waterflood facilities.
7. Operatorship and High Working Interests:
The Assets have an average working interest of 77 percent, and the net
production acquired is greater than 96 percent operated.
EQUITY FINANCING
In connection with the Acquisition, Surge has entered into an agreement on a
"bought-deal" basis with a syndicate of underwriters (the "Underwriters") led by
Macquarie Capital Markets Canada Ltd., and including GMP Securities LP, National
Bank Financial Inc., CIBC World Markets Inc., Scotia Capital Inc., Dundee
Securities Ltd., FirstEnergy Capital Corp., Cormark Securities Inc., TD
Securities Inc., and Raymond James Ltd. for an offering of 8,400,000
subscription receipts ("Subscription Receipts") of the Company at a price of
CDN$6.55 per Subscription Receipt (the "Offering Price") with each Subscription
Receipt entitling the holder to receive one common share of the Company ("Common
Share") for aggregate gross proceeds of $55,020,000. The Underwriters will have
an option to purchase up to an additional 15 percent of the Subscription
Receipts, on the same terms, exercisable in whole or in part at any time up to
the 30th day following initial closing of the Equity Financing.
The net proceeds from the issuance of Subscription Receipts will be used to
partially fund the Acquisition.
The Equity Financing will be completed by way of short form prospectus in all of
the provinces of Canada except Quebec and on a private placement basis in the
United States pursuant to exemptions from the registration requirements of the
U.S securities laws. The Equity Financing is subject to customary conditions
including receipt of applicable regulatory approvals and is expected to close on
or about November 28, 2013.
The gross proceeds from the sale of Subscription Receipts will be held in escrow
pending the satisfaction of all conditions to the completion of the Acquisition,
provided that the closing date of the Acquisition is on or before December 30,
2013, upon which time each Subscription Receipt will entitle the holder to
receive a Common Share, without further payment or action on the part of the
holder, upon the closing of the Acquisition. If the Acquisition is not completed
on or before December 30, 2013 or is terminated at an earlier time, holders of
Subscription Receipts will receive, for each Subscription Receipt held, a cash
payment equal to the Offering Price and any interest earned thereon during the
term of the escrow.
UPWARD REVISION TO GUIDANCE
The Acquisition is expected to be accretive to Surge's 2014 guidance estimates
on a reserves and production per share basis and neutral on a funds from
operations per share basis.
The following sets forth Surge's upwardly revised guidance for exit 2013
estimates, and for full year 2014 estimates.
Operational:
Surge 2014E Guidance
Surge 2014E Guidance (After the Acquisition
(Prior to the and the Equity
Acquisition)(3) Financing)(3)
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14,200boe/d (82% 15,000boe/d (83%
2013E Exit Production Oil/NGLs) Oil/NGLs)
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2014E Average Production 14,450boe/d (82% 15,250boe/d (83%
(boe/d) Oil/NGLs) Oil/NGLs)
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2014E Exit Production
(boe/d) 14,750 (82% Oil/NGLs) 15,500 (83% Oil/NGLs)
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2P Reserves(2) 64.3 mmboe 69.7 mmboe
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RLI (based on 2013E exit
production) greater than 12.4 years greater than 12.5 years
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2014E Capital Spending $109 million $112 million
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2014E Wells Drilled 46.5 wells 48 wells
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2014 Decline 25% 24%
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Financial:
Surge 2014E Guidance
Surge 2014E Guidance (After the Acquisition
(Prior to the and the Equity
Acquisition)(3) Financing)(3)
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2014E Funds from $203 million ($1.30 per
Operations ("FFO")(3)(4) share) $214 ($1.30 per share)
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2014E Operational Netback $42.88/boe $42.85/boe
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2014E Cash Flow Netback $38.54/boe $38.48/boe
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Basic Shares
Outstanding(4) 156 million 164 million
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Annual Dividend(4) $78 million $85 million
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Yield(5) 7.6% 7.9%
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Basic Payout Ratio 2014E 39% 40%
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"All-in" Payout Ratio 93% 93%
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2014E Exit Net Debt(4) $271 million $301 million
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2014E Net debt / 2014
FFO(4) 1.33x 1.41x
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INCREASED DIVIDEND
As a result of the anticipated accretive Acquisition, together with better than
expected operational and drilling results, Surge's Board of Directors has
approved a four percent increase in the Company's annual dividend from $0.50 per
share per year ($0.04166 per share per month) to $0.52 per share per year
($0.04333 per share per month).
ADVISOR
Macquarie Capital Markets Canada Ltd. is acting as financial advisor to Surge
with respect to the Acquisition.
FORWARD LOOKING STATEMENTS:
This press release contains forward-looking statements. More particularly, it
contains forward-looking statements concerning: (i) targeted growth in reserves,
production and cash flow per share, (ii) the sustainability of dividends, (iii)
potential growth through acquisitions, (iv) ultimate recovery factors at certain
of Surge's properties, (v) planned drilling, development and waterflood
activities, (vi) the potential number of drilling locations at certain of
Surge's properties, (vii) estimated Q1 2014 production, (viii) estimated 2014
average and exit rates of production, (ix) estimated 2014 capital expenditures,
wells drilled, decline rates, funds from operations, operating netback, cash
flow netback and payout ratio, (x) estimated 2013 year end net debt and net debt
to funds from operations ratio; (xi) the anticipated exceeding by Surge of the
previously estimated 2013 exit rate of production; (xii) timing and completion
of the Acquisitions, including expectations and assumptions concerning timing of
receipt of required regulatory approvals and the satisfaction of other
conditions to the completion of the Acquisitions, (xiii) potential development
opportunities and drilling locations associated with the Acquisitions,
expectations and assumptions concerning the success of future drilling and
development activities, the performance of existing wells, the performance of
new wells, the successful application of technology and the geological
characteristics of the Acquisitions, (xiv) the timing and amount of future
dividend payments, (xvi) debt and bank facilities, (xviii) primary and secondary
recovery potentials and implementation thereof, (xiv) decline rates, (xv) funds
from operations, (xvi) operating and cash flow netbacks, and (xvii) realization
of anticipated benefits of acquisitions.
The forward-looking statements contained in this press release are based on
certain key expectations and assumptions made by Surge, including expectations
and assumptions concerning the success of future drilling, development and
completion activities, the performance of existing wells, the performance of new
wells, the viability of waterflood projects, the availability and performance of
facilities and pipelines, the geological characteristics of Surge's properties,
the successful application of drilling, completion and seismic technology,
prevailing weather conditions, commodity prices, royalty regimes and exchange
rates, the application of regulatory and licensing requirements and the
availability of capital, labour and services.
Although Surge believes that the expectations and assumptions on which the
forward-looking statements are based are reasonable, undue reliance should not
be placed on the forward-looking statements because Surge can give no assurance
that they will prove to be correct. Since forward-looking statements address
future events and conditions, by their very nature they involve inherent risks
and uncertainties. Actual results could differ materially from those currently
anticipated due to a number of factors and risks. These include, but are not
limited to, risks associated with the oil and gas industry in general (e.g.,
operational risks in development, exploration and production; delays or changes
in plans with respect to exploration or development projects or capital
expenditures; the uncertainty of reserve estimates; the uncertainty of estimates
and projections relating to production, costs and expenses, and health, safety
and environmental risks), commodity price and exchange rate fluctuations and
uncertainties resulting from potential delays or changes in plans with respect
to exploration or development projects or capital expenditures. Certain of these
risks are set out in more detail in Surge's Annual Information Form which has
been filed on SEDAR and can be accessed at www.sedar.com.
The forward-looking statements contained in this press release are made as of
the date hereof and Surge undertakes no obligation to update publicly or revise
any forward-looking statements or information, whether as a result of new
information, future events or otherwise, unless so required by applicable
securities laws.
Financial Outlooks
The estimates of 2013 year end net debt, 2014 funds from operations and 2014
operating netback and cash flow netback contained in this press release are
financial outlooks within the meaning of applicable securities laws. These
financial outlooks have been prepared by management of Surge to provide an
outlook of Surge's anticipated funds from operations and netbacks for a full
year of operations with its current assets and based on management's
expectations and assumptions as to a number of factors, including commodity
pricing, production, operating expenses and royalties. Readers are cautioned
that this information may not be appropriate for any other purpose. Management
does not have firm commitments for all of the costs, expenditures, prices or
other financial assumptions used to prepare the financial outlooks or assurance
that such results will be achieved. The actual results of Surge will likely vary
from the amounts set forth in the financial outlooks and such variation may be
material.
Surge and its management believe that the financial outlooks have been prepared
on a reasonable basis, reflecting the best estimates and judgments, and
represent, to the best of management's knowledge and opinion, Surge's expected
expenditures and results of operations following completion of the Acquisitions.
However, because this information is highly subjective and subject to numerous
risks, including the risks discussed under the note regarding Forward Looking
Statements, it should not be relied on as necessarily indicative of future
results. Except as required by applicable securities laws, Surge undertakes no
obligation to update this information.
Note: Boe means barrel of oil equivalent on the basis of 1 boe to 6,000 cubic
feet of natural gas. Boe may be misleading, particularly if used in isolation. A
boe conversion ratio of 1 boe for 6,000 cubic feet of natural gas is based on an
energy equivalency conversion method primarily applicable at the burner tip and
does not represent a value equivalency at the wellhead. Boe/d means barrel of
oil equivalent per day.
In this press release: (i) mcf means thousand cubic feet; (ii) mcf/d means
thousand cubic feet per day (iii) mmcf means million cubic feet; (iv) mmcf/d
means million cubic feet per day; (v) bbls means barrels; (vi) mbbls means
thousand barrels; (vii) mmbbls means million barrels; (viii) bbls/d means
barrels per day; (ix) bcf means billion cubic feet; (x) mboe means thousand
barrels of oil equivalent; and (xi) mmboe means million barrels of oil
equivalent.
NO OFFER IN THE UNITED STATES
This news release does not constitute an offer to sell or a solicitation of an
offer to buy any of the securities in the United States. The securities have not
been and will not be registered under the United States Securities Act of 1933,
as amended (the "U.S. Securities Act") or any state securities laws and may not
be offered or sold within the United States or to U.S. Persons unless registered
under the U.S. Securities Act and applicable state securities laws or an
exemption from such registration is available.
Neither the TSX nor its Regulation Services Provider (as that term is defined in
the policies of the TSX) accepts responsibility for the adequacy or accuracy of
this release.
(1) Original Oil in Place (OOIP) is the equivalent to Discovered Petroleum
Initially In Place (DPIIP) for the purposes of this press release. DPIIP is
defined as quantity of hydrocarbons that are estimated to be in place within a
known accumulation, plus those estimated quantities in accumulations yet to be
discovered. There is no certainty that it will be commercially viable to produce
any portion of the resources. A recovery project cannot be defined for this
volume of DPIIP at this time, and as such it cannot be further sub-categorized.
(2) Based on independent and internally generated engineering reports as of
December 31, 2012 or later.
(3) Management uses funds from operations (cash flow from operations before
changes in non-cash working capital, legal settlement expenses, transaction
costs and current tax on disposition) to analyze operating performance and
leverage. Funds from operations as presented does not have any standardized
meaning prescribed by IFRS and, therefore, may not be comparable with the
calculation of similar measures for other entities.
(4) Assumes that 19.9 million shares of Surge are issued pursuant to the
privateco acquisition announced on October 22, 2013.
(5) Based on a Surge share price of $6.55.
FOR FURTHER INFORMATION PLEASE CONTACT:
Surge Energy Inc.
Paul Colborne
President & CEO
(403) 930-1507
(403) 930-1011 (FAX)
pcolborne@surgeenergy.ca
Surge Energy Inc.
Max Lof
CFO
(403) 930-1021
(403) 930-1011 (FAX)
mlof@surgeenergy.ca
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