Surge Announces Upward Revision to 2014 Guidance, and 11
Percent Increase in Dividend
CALGARY,
June 5, 2014 /CNW/ - Surge Energy
Inc. ("Surge" or the "Company") (TSX: SGY) and Longview Oil Corp.
("Longview") (TSX: LNV) are pleased to announce that they have
completed their previously announced business combination whereby
Surge has acquired all of the issued and outstanding common shares
of Longview pursuant to an arrangement under the Business
Corporations Act (Alberta)
(the "Arrangement"). Surge is one of the best positioned
intermediate light and medium gravity crude oil asset growth and
dividend paying companies in Canada, with high quality, low decline, high
netback crude oil assets strategically focused in just three
operating areas, namely the Williston Basin, Central Alberta and NW Alberta.
Under the Arrangement, which was approved by
Longview shareholders by a 99.9%
majority, Longview shareholders
received 0.975 of a Surge common share for each Longview common share resulting in the
issuance of approximately 38 million Surge common shares (Surge
share price of $6.14 at March 31, 2014). In addition, Surge assumed
$155 million of Longview net debt (including transaction
costs). Accordingly, the transaction implies a value of
approximately $430 million for
Longview, including Surge's
previously announced acquisition of 9.3 million (19.8 percent)
Longview common shares at a price
of $4.45 per share. It is anticipated
that the Longview common shares
will be delisted from trading on the TSX in the next few days.
As a result of the highly accretive Longview acquisition, Surge's Board of
Directors have now approved an 11 percent increase in the Company's
annual dividend from $0.54 per share
per year ($0.045 per share per month)
to $0.60 per share per year
($0.05 per share per month),
effective for Surge's next declared dividend.
STRATEGIC, ACCRETIVE TRANSACTION
The Longview
acquisition fits squarely within Surge's defined operating strategy
of investing growth capital to acquire high quality, operated,
light and medium gravity crude oil reservoirs, with large original
oil in place ("OOIP"1) and low recovery factors. Surge
now has over 1.9 billion barrels of light and medium gravity OOIP
under the Company's ownership and management, more than 1,000 lower
risk development drilling locations, and a portfolio of high
quality waterflood projects.
The Longview
acquisition also fits very well with Surge's dividend-paying growth
business model, as Longview's high
netback properties possess a low annual decline of 19 percent,
which provides significant annual free cash flow to Surge for
distribution to shareholders.
Longview's
assets fit seamlessly into Surge's core areas, including: the
Midale Marly light oil play trend in SE
Saskatchewan; and in Central
Alberta, the Sparky medium gravity oil play trend as well as
Longview's several large oil
resource pools categorized by high netbacks and low decline
production. This complementary production base creates an excellent
operational platform for additional drilling and waterflood growth
on these proven trends. With the seamless fit of the Longview assets into Surge's core areas, Surge
expects to see substantial operating cost reductions on the
Longview properties.
The Longview
acquisition is highly accretive to Surge shareholders on all
metrics, including funds flow, production and reserves per share
basis. In particular, this transaction was 22 percent accretive
to Surge's proved plus probable reserves per share, based on each
parties' December 31, 2013
independent engineering reports.
As a result of the closing of the
Arrangement, based upon the parties' December 31, 2013 independent engineering
reports, Surge's net asset value per share has now increased 18
percent - from $6.95 at December 31, 2013, to $8.23 per share today2.
ACQUISITION METRICS
The following sets forth the metrics with respect to the
acquisition of Longview:
1. Purchase Price:
The purchase price for Longview
is $430 million (the "Purchase
Price"), which is comprised of the following:
a) 38 million shares of Surge (Surge share
price of $6.14 as at the time of the
announcement)
b) $155 million net
debt assumption; and
c) 9.3 million shares of Longview purchased at
$4.45 per share;
2. Long Life Oil Reserves:
Longview's assets provide
independently engineered Proven and Probable (P+P) reserves of:
37.6 million boe (80 percent oil and NGLs).
Reserve acquisition metrics for the Longview acquisition are: $11.41 per barrel (P+P).
Based on current production, the Longview reserves have a long reserve life
index of approximately 18 years (P+P).
3. Light/Medium Oil Production:
Current production relating to the Longview acquisition is greater than 5,700
boepd, comprised of more than 80% oil.
On this basis, Surge is paying approximately $75,250 per flowing barrel of production with
respect to the acquisition.
4. Low Decline:
The Longview properties have an
estimated annual corporate production decline rate of 19 percent.
Accordingly, Surge now has an estimated 22 percent annual corporate
decline rate, one of the lowest in its peer group in Canada.
5. Annual Funds Flow:
Annual funds flow for Longview
based on guidance pricing (as set out below) and using current
production levels is estimated to be $90
million.
Based on current production and using guidance pricing (as set
out below), Surge estimates that the Company is paying
approximately 4.8 times annualized funds flow for Longview.
6. Cost Savings and Synergies:
Surge anticipates achieving substantial operating cost
reductions on the Longview
properties. In addition, Surge is now forecasting combined general
and administrative expenses of $1.90/boe, a decrease of five percent from the
Company's previously released guidance on $2.05/boe
7. Exciting Upside:
Surge has identified 166 gross (115 net) low risk development
drilling locations on the Longview
lands, the most significant of which are an additional 60 locations
in the very active, light oil, Midale trend in south east Saskatchewan, as well as the potential
associated with 83 sections of fee lands on this trend.
8. Producing Infrastructure:
The Longview acquisition
includes key producing infrastructure, including batteries,
pipelines, and waterflood facilities.
9. Undeveloped Land:
Longview has approximately
143,600 net acres of undeveloped land, of which 50,800 acres (83
sections) are fee lands located in south east Saskatchewan.
10. Operatorship and High Working Interests:
The Longview production is 83
percent operated, and the average working interest in the assets is
greater than 75 percent.
UPWARD REVISION TO GUIDANCE
The following sets forth Surge's upwardly revised guidance
estimates.
Operational:
|
|
Surge New Guidance |
|
Previous Guidance |
|
|
|
|
|
2014E Exit Production (boe/d) |
|
21,350 (84% Oil/NGLs) |
|
16,550 (84% Oil/NGLs) |
RLI |
|
>15 years based on 2014E exit production |
|
>12.5 years based on 2014E Q1 production |
2014E Capital Spending |
|
$136 million |
|
$116 million |
2014E Wells Drilled |
|
63/40.5 gross/net wells3 |
|
39/37.1 gross/net wells |
2014 Decline |
|
22% |
|
24% |
2014 NAV/Share |
|
$8.23 |
|
$6.95 |
Financial:
|
|
Surge 2014E Guidance4,5,6 |
|
Previous 2014E
Guidance4,7,8 |
|
|
|
|
|
Annualized Funds from Operations
("FFO")9 |
|
$326 million ($1.50 per share) |
|
$244 million ($1.38 per share) |
2014E Operational Netback |
|
$45.37/boe |
|
$45.67/boe |
2014E Cash Flow Netback |
|
$40.60 /boe |
|
$41.38/boe |
Basic Shares Outstanding |
|
217 million |
|
179 million |
Annual Dividend |
|
$130 million |
|
$96 million |
Yield |
|
8.6% |
|
8.6% |
Basic Payout Ratio 2014E |
|
41.9% |
|
40.3% |
"All-in" Payout Ratio |
|
89.8% |
|
88.4% |
2014E Exit Net Debt |
|
$512 million |
|
$309 million |
Annualized Net Debt to FFO10 |
|
1.48x |
|
1.12x |
Bank Line |
|
$725 million |
|
$470 million |
In accordance with Surge's upwardly revised guidance set forth
above, with a low "all-in" payout ratio of less than 90 percent,
the Company's debt will be reduced by a forecast of more than
$31 million on an annualized
basis.
INCREASE DIVIDEND, DIRECTOR ADDITION AND
OUTLOOK
As a result of the accretive Longview acquisition, Surge's Board of
Directors has approved an 11 percent increase in the Company's
annual dividend from $0.54 per share
per year ($0.045 per share per month)
to $0.60 per share per year
($0.05 per share per month).
In conjunction with the Longview transaction, Surge has appointed Mr.
Daryl Gilbert, a current director of
Longview, to the Board of
Directors of Surge.
For the remainder of 2014 Surge will continue to
focus growth capital towards its high quality, large OOIP, light
and medium gravity crude oil reservoirs.
With world crude oil prices well over US
$100 per barrel WTI, the low Canadian
dollar, low crude oil differentials, increased North American
natural gas prices and recovering equity markets, Surge management
are very positive about the present industry fundamentals in
Canada. We are also excited about
Surge's relative positioning in this marketplace.
Today, Surge has one of the highest-quality
asset bases of any light oil company in Canada, with over 1.9 Billion barrels of OOIP
under its ownership and management. Surge has one of the lowest
corporate declines in the divco peer group at 22 percent, and the
lowest, most sustainable, "all-in" payout ratio at less than
90%.
Surge has high, top decile netbacks, and a very
low, lean cost structure. The Company has an excellent balance
sheet with over $200 million of room
on Surge's bank lines. Surge's bank line has now increased to
$725 million. Management also has a
disciplined hedging strategy designed to protect cash flows for the
Company's dividend, and its capital spending program.
Surge currently has more than a 10 year, low
risk development drilling inventory, together with a suite of
excellent waterflood projects. Management's low-risk business model
and operating strategy calls for 4% per share annual growth in
reserves, production and cashflow, plus a solid, sustainable,
increasing dividend which is currently at 8.6% annually. In
addition, Surge has a very low "all-in" sustainability ratio, which
reduces debt each year and increases net asset value.
Management's goal is to deliver a 12 to 14
percent annualized total rate of return - with an increasing,
compounding dividend - over the long term.
ADVISORS
Macquarie Capital Markets Canada Ltd acted as exclusive
financial advisor to Surge with respect to the transaction.
McCarthy Tétrault LLP acted as legal advisor to Surge with respect
to the transaction.
Scotia Capital Inc., GMP Securities L.P. and National Bank
Financial acted as strategic advisors to Surge with respect to the
transaction.
BMO Capital Markets acted as financial advisor, and Burnet,
Duckworth & Palmer LLP is acted as legal advisor to
Longview with respect to the
transaction.
ABOUT SURGE
Surge is an oil-weighted production and
development company with high quality, large OOIP, crude oil
reservoirs. Management is focused on delivering to its
shareholders solid per share organic growth, sustainable monthly
dividends, and further growth through accretive acquisitions of
additional elite oil reservoirs. For further information
visit our website at www.surgeenergy.ca.
FORWARD LOOKING STATEMENTS:
This press release contains forward-looking
statements. More particularly, this press release includes,
without limitation, forward-looking statements concerning: (i)
anticipated operating cost reductions on the Longview properties; (ii) Surge's number of
drilling locations and drilling, development and waterflood
opportunities, (iii) estimated production decline rates, (iv)
Longview's estimated annual funds
flow; (v) the estimated 2014 exit production rate of Surge; (vi)
estimated 2014 capital expenditures and drilling activity; (vii)
estimated Q4 2014 annualized funds flow from operations, (viii)
estimated 2014 operational and cash flow netback, (ix) estimated
2014 exit net debt, * estimated ratio of 2014 net debt to Q4 2014
annualized cash flow, (xi) forecast annual reductions in Surge's
debt, (xii) targeted rates of growth in reserves, production and
cash flow, (xiii) the sustainability of and potential for increases
in Surge's dividend, and (xiv) targeted annualized rates of total
return.
The forward-looking statements contained in this
press release are based on certain key expectations and assumptions
made by Surge, including, but not limited to, 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.
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.
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 Calculated based on the before tax net present value
of combined reserves, discounted at 10%, plus the estimated value
of undeveloped land and less current net debt and working capital
deficiency.
3 Includes 20 farmed out Viking locations at an average
net working interest of 20%.
4 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.
5 Based on a Surge share price of $7.00
6 Based on 2014 Edmonton Par $101.60/bbl; 2014 AECO gas $4.90/mcf and a 2014
CAD/USD exchange rate of $0.91.
7 Based on 2014 Edmonton Par $96.95/bbl; 2014 AECO gas $3.69/mcf and a 2014
CAD/USD exchange rate of $0.91.
8 Based on a Surge share price of $6.30.
9 Assumes a four percent growth rate on exit 2014
production of 21,350 boe/d and the annualized Q4 2014 FFO of
$313 million.
10 Assumes the annualized FFO per note 9, including
repayment of debt with excess cashflow of $31 million. This results in ending debt of
$481 million.
SOURCE Surge Energy Inc.