CALGARY, Jan. 7, 2015 /CNW/ - Surge Energy Inc. ("Surge"
or "the Company") announced today that, until such time as the
Company receives tangible clarity with respect to world oil prices,
Surge's management and Board are adopting a very conservative
capital spending program for the first half of 2015, which is
designed to protect both the Company's net asset value ("NAV"), and
Surge's balance sheet. This conservative capital expenditure
program in the first half of 2015, however, will still allow the
Company to deliver average daily production more than 27 percent
higher than the first half of 2014, pay debt down aggressively, and
pay Surge's dividend.
Given the extreme volatility, significant downward pressure, and
uncertainty relating to world crude oil prices, Surge's management
and Board have decided to project capital spending only until
July 1, 2015, at which time Surge
will reassess the current environment, and provide a capital
spending program for the second half of 2015.
Surge's management and Board assesses market conditions on a
weekly and monthly basis with respect to protecting the Company's
balance sheet, weighing the efficacy of capital expenditures, and
assessing the appropriate level of the Company's dividend. In this
regard, until such time as Surge's management and Board see a
sustainable recovery in world crude oil prices, Surge is
immediately reducing the Company's dividend from $0.60 per share per year ($0.05 per share per month) to $0.30 per share per year ($0.025 per share per month). Accordingly, the
Company anticipates its January 2015
dividend, payable in February 2015,
shall be $0.025 per share.
Macro Outlook for 2015
In spite of fairly balanced supply/demand data, crude oil prices
have dropped precipitously from US $106 WTI per barrel in June of 2014, to below
$48 WTI per barrel in early January
of 2015.
The US IEA estimates world oil demand at record highs in 2015,
at more than 93.3 million barrels per day, which is up from 77
million barrels of world oil demand in 2001. On this basis, the IEA
also estimates that world crude oil demand will grow by 900,000
barrels per day in 2015 over 2014. Furthermore, the largest user of
crude in the world is the United
States - at over 20 million barrels per day of demand - an
economy which is now in an expansionary growth mode.
OPEC is producing at close to full capacity at over 30 million
barrels of oil per day. Excess oil supply in the world has been
repeatedly estimated to be as little as 1.5-2.0 million barrels per
day. In addition, numerous analysts and commentators have projected
that world oil demand will be as high as 111 million barrels per
day by 2040. An additional factor for consideration is that there
is significant geo-political risk present in a number of oil
producing regions in the world.
Furthermore, at the November 2014
meeting, OPEC members chose not to pursue a cut to their production
quotas. A number of analysts and commentators have taken the
position that the US, at over 9 million barrels per day of
production, is challenging OPEC (and Saudi Arabia) for the role as the "swing"
producer in world oil markets.
Significant production growth rates from a number of US shale
plays, including the Permian, Eagleford and Bakken plays have
pushed US crude oil production to record levels. Wells drilled on
these plays, however, are known to have high drilling costs and
very high declines in the first several years of production. Many
analysts and commentators have written that a large number of US
shale plays do not generate economic rates of return below US
$75 WTI per barrel pricing.
With crude oil prices now dropping below US $48 WTI per barrel, capital expenditures relating
to drilling for crude oil reserves and production are being
aggressively reduced world-wide – by virtually ALL producers.
Against the backdrop of this fairly balanced supply/demand
situation, Saudi Arabia has also
chosen to start reducing the price for its crude oil to Asian
customers, driving world crude oil prices down further. Numerous
OPEC members, however, have repeatedly stated that they need Brent
pricing of $100 per barrel or greater
to fund their economies and social programs.
Historically, a number of analysts have noted that crude oil
price declines of greater than 30 percent have an average length of
six months from peak to bottom, and they result in a price decrease
of 48 percent per barrel. This is the sixth drop in WTI crude oil
prices of greater than 30 percent since 1997. In the present case,
WTI crude oil prices peaked at $106
per barrel in June of 2014.
Given the macro supply/demand picture discussed above, and the
significant volatility, uncertainty, and downward pressure
regarding world crude oil prices, Surge's management and Board have
chosen a very conservative capital spending program for the first
half of 2015.
This program will allow the Company to deliver average daily
production more than 27 percent higher than the first half of 2014
(at US $58 WTI per barrel pricing),
pay down debt aggressively, and pay Surge's dividend.
On or before July 1st,
2015, Surge's management and Board will reassess the current
environment and will provide a capital spending program for the
second half of 2015. In addition, Surge's management and Board will
continue to assess market conditions on a weekly and monthly basis
with respect to protecting the Company's balance sheet, weighing
the efficacy of capital expenditures, and assessing the appropriate
level of the Company's dividend. In this regard, until such time as
Surge's management and Board see a sustainable recovery in world
crude oil prices, Surge is immediately reducing the Company's
dividend from $0.60 per share per
year ($0.05 per share per month) to
$0.30 per share per year
($0.025 per share per month).
Accordingly, the Company anticipates its January 2015 dividend, payable in February 2015, shall be $0.025 per share.
2014 Fourth Quarter Operations – Excellent Drilling Results
Continue
Today, as a high quality, growth and dividend paying light oil
company, Surge has:
- Over 2 billion barrels of original oil in place ("OOIP"[1])
under its ownership and management;
- Over 1,000 low risk, development drilling locations;
- A very low base production decline of 21.6 percent;
- Excellent drilling production efficiencies;
- High netbacks per boe which continue to be resilient at current
prices;
- A balance sheet with significant unutilized credit
availability on its bank lines;
- An ongoing risk management program designed to protect cash
flows (current mark to market for Surge's crude oil and natural gas
hedges is over $40 million);
- A very long reserve life of over 15 years; and
- A suite of excellent waterflood projects.
Based on better than anticipated development drilling results at
Surge's core areas of Shaunavon,
Midale, Central Alberta (Sparky), and NW Alberta, combined with two smaller core
area top-up acquisitions, Surge has exceeded the Company's 2014
production exit rate target of 21,350 boepd (85 percent oil).
In the fourth quarter, Surge experienced some of the best
drilling results in the Company's history, drilling 11.3 net wells
with 100 percent success rate.
Upper Shaunavon –Development
and Step Out Drilling Success
At Shaunavon in SW Saskatchewan, during the fourth quarter
Surge successfully drilled and brought on production five net Upper
Shaunavon oil wells. Four of the wells were development wells
offsetting existing production established earlier in 2014. These
wells all averaged over 200 bopd during their best initial 30 day
production period. Excitingly for Surge shareholders, the fifth
well was a step out well to evaluate the potential of another
significant Upper Shaunavon trend identified by Surge. This well is
currently producing at over 210 bopd. Surge is very pleased with
this result and the additional Upper Shaunavon potential it
confirms.
Pinto/Northgate- Midale Trend
In the Pinto/Northgate area of SE Sakatchewan, Surge
successfully fracced two (100 percent WI) Midale wells during the fourth quarter. The
best 30 day initial production from each of the wells averaged over
160 bopd. At Northgate, Surge also participated as to a 30 percent
WI with a joint operator in another Midale well, which was fracced and brought on
production in December.
Eyehill/Wainwright-Sparky Trend
At Eyehill, during the fourth quarter Surge successfully fracced
and brought on production a Sparky step out well. The well
initially produced at a high gas /oil ratio, and it was necessary
to tie the well in to existing infrastructure in order to conserve
the solution gas. The well is now producing and cleaning up the
initial frac treatment load fluid.
The initial waterflood injection well at Eyehill, also commenced
injection in the fourth quarter. Surge is encouraged with its
injectivity and is monitoring the offset 200 m and 400 m producing
wells for a waterflood response.
At Wainwright, during the fourth quarter Surge continued to
evaluate and optimize the 16-23-004-05W4 Sparky horizontal oil well
brought on production early in the quarter. The well is producing
on type-curve at over 100 boepd.
Nipisi
At Nipisi, in Northwest
Alberta, Surge successfully drilled, fracced and brought on
production a horizontal, Slave Point oil well which directly
offsets the most recently converted water flood injection well.
Surge was very encouraged by the reservoir quality encountered
during the drilling of the well and its initial formation pressure.
The well was brought on production in mid- December and is
currently recovering load fluid, and cleaning up. Surge is very
encouraged by the inflow exhibited by the well.
Valhalla-Doig
At Valhalla in Northwest Alberta, Surge drilled and cased a
Doig horizontal development well at 5-07-075-08W6. The well
encountered 1,035 m of well developed, excellent Doig reservoir.
The well is scheduled to be fracced immediately in 2015.
During the fourth quarter, Surge acquired a high quality, large
OOIP, operated, low decline, producing, light oil property
immediately north of its existing Valhalla Doig light oil pool. The
acquisition also included a working interest in an existing, sweet,
natural gas plant which is capable of processing associated gas
volumes from the north end of Surge's Doig oil pool. This strategic
acquisition results in increased solution gas production
reliability, and reduced processing costs for Surge's Doig
pool.
Manson-Bakken/Torquay
At Manson, during the fourth quarter Surge converted another
horizontal Bakken well to water injection in section 12, with a
response expected in the second quarter of 2015.
Surge Capex Program First Half of 2015
With a net asset value ("NAV") of $8.25 per share (based on 2014 Sproule pricing)
Surge will, in all likelihood, see a reduction in the Company's NAV
per share based on a decline in Sproule's 2015 crude oil price
forecast. The significant drop in the Canadian dollar, however,
will provide a meaningful increase to Sproule's new 2015 crude oil
price forecast in Canadian dollar terms. In addition, the Company
has experienced excellent drilling reserve additions in 2014 at
Shaunavon, Midale, East Central Alberta (Sparky),
Valhalla, and Nipisi, together
with excellent waterflood results at Nipisi, Manson, Wainwright and
Silver.
On this basis, Surge anticipates that the Company's NAV for
January 1, 2015 will be significantly
above the current trading price of Surge's common shares.
Consequently, in the present environment, Surge's management and
Board view their primary responsibilities to be the protection of
the Company's NAV, balance sheet and dividend.
As a result of Surge's excellent fourth quarter drilling results
in 2014, discussed above; for the first half of 2015, Surge
management is now projecting:
- Capital spending of $22 million –
including the drilling of 3.8 net wells;
- Average daily production of over 20,000 boepd, which is more
than 27 percent higher than the first half of 2014;
- Debt reduction of $33 million at
US$58 WTI per barrel pricing;
and
- An all-in sustainability ratio of 65 percent at US$58 WTI per barrel pricing. (85 percent all-in
sustainability ratio at strip pricing).
Surge is in a strong position where approximately 35 percent of
the Company's net crude oil production is locked in at over
C$100 per barrel until July of 2015.
If crude oil prices continue to fall, Surge has the option to
liquidate its crude oil and natural gas hedge positions and reduce
debt; these hedge positions are now more than $40 million in the money. Surge's ongoing
strategic hedging program is designed to protect and lock in a
significant portion of the Company's cash flow for capital
expenditures and payment of the Company's dividend.
A large ancillary benefit of management's conservative first
half capital program is that Surge's corporate decline drops to
below 21 percent by July 1, 2015,
which is one of the best in its peer group, and further strengthens
the Company's position as a dividend paying company.
Outlook – Strategically Positioned For A Recovery in Oil
Prices
The oil industry involves a 93 million barrel per day declining
commodity – which is a global economic necessity.
As previously stated, the present market for crude oil is now
reasonably balanced. OPEC is producing at close to full capacity,
and the largest economy in the world, the
United States, is in an expansionary growth mode. The recent
precipitous drop in world crude oil prices is causing a significant
world-wide reduction in capital spending for crude oil reserves and
production. This will ensure a significant, and swift, supply
response downward.
Surge's management team reacted quickly and proactively to
falling world crude oil prices - reducing drilling capital spending
in the fourth quarter of 2014 several weeks BEFORE the November 27, 2014 OPEC meeting.
Surge's high quality, asset and opportunity base are
outperforming management's expectations. The Company's conventional
low decline, high netback, large OOIP reservoirs deliver solid,
stable cash flow well below US $48
WTI per barrel.
The Company's top tier drilling production efficiency costs at
Shaunavon, Midale, Valhalla, and Sparky are each less than
$19,000 per flowing boepd.
Surge has 1,000 low risk development drilling locations for
light and medium gravity crude oil. Of these, however, over 425 net
are high quality, type "A" (non-infill) locations. This provides
significant low risk upside of over 35,000 bopd that Surge
shareholders will realize over the coming months and years.
As discussed above, Surge's management and Board will continue
to assess market conditions on a weekly and monthly basis with
respect to protecting the Company's balance sheet, weighing the
efficacy of capital expenditures, and assessing the appropriate
level of the Company's dividend.
Corporate Governance
The Board of Directors of Surge ("Board") fully complies with
the existing corporate governance guidelines for Canadian issuers
and remains committed to further enhancing it's corporate
governance practices. As such Mr. Paul
Colborne, President and CEO of Surge has stepped down as
Chairman of the Board of Surge, and Mr. Jim
Pasieka has assumed the role as Chairman of the Board.
In addition, Mr. Murray Smith has
replaced Mr. Pasieka as Chairman of the Compensation Committee, and
Mr. Daryl Gilbert has joined the
Compensation Committee. Mr. Pasieka has resigned from the
Compensation Committee.
The Board also announced today that Mr. Rob Leach has become Lead Director in a
situation where Mr. Pasieka is conflicted. All of these
corporate governance enhancements will be implemented
immediately.
FORWARD LOOKING STATEMENTS:
This press release contains forward-looking statements. More
particularly, this press release contains statements concerning
Surge's expectations regarding its average daily production; the
impact of the commodity pricing; its balance sheet, ability to
reduce debt; bank line availability; its capital spending program
for 2015 and ability to be flexible in its capital budgeting over
the course of 2015; forecast decline rates; reserve life; drilling
inventory; drilling and development plans and enhanced recovery
projects and the timing and results to be expected thereof;
net-asset-value and net-asset-value/share; netbacks; the Company's
declared focus and primary goals;; anticipated services cost
savings and other cost reduction initiatives; the ability of the
Company to weather the present commodity price environment; the
Company's ability to liquidate hedge positions; the reduction in
the Company's dividend to $0.30 per
share per year; and the timing, amount and sustainability of future
dividend payments.
The forward-looking statements are based on certain key
expectations and assumptions made by Surge, including expectations
and assumptions concerning the performance of existing wells and
success obtained in drilling new wells, anticipated expenses, cash
flow and capital expenditures, the application of regulatory and
royalty regimes, prevailing commodity prices and economic
conditions, worldwide supply and demand for oil and natural gas;
development and completion activities, the performance of new
wells, the successful implementation of waterflood programs, the
availability of 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, exchange rates, licensing
requirements, the successful completion of the disposition
transactions, the impact of completed facilities on operating costs
and the availability, costs of capital, labour and services, the
creditworthiness of industry partners and the approval of the
lenders under Surge's bank line.
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 constraint in the
availability of services, adverse weather or break-up conditions,
uncertainties resulting from potential delays or changes in plans
with respect to exploration or development projects or capital
expenditures or failure to obtain required approvals from the
lenders under Surge's bank line to increases thereto. Certain of
these risks are set out in more detail in Surge's Annual
Information Form dated March 19, 2014
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.
Test Results and Initial Production Rates
Any references in this news release to initial, early and/or
test production/performance rates are useful in confirming the
presence of hydrocarbons, however, such rates are not determinative
of the rates at which such wells will continue production and
decline thereafter. While encouraging, readers are cautioned
not to place reliance on such rates in calculating aggregate
production. The initial production rate may be estimated based on
other third party estimates or limited data available at this
time. Initial production or test rates are not necessarily
indicative of long-term performance of the relevant well or fields
or of ultimate recovery of
hydrocarbons.
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
SOURCE Surge Energy Inc.