CALGARY, April 27, 2015 /CNW/ - Surge Energy Inc. ("Surge"
or the "Company") (TSX: SGY) announces that its previously
disclosed Upper Shaunavon crude oil discovery in SW Saskatchewan is continuing to expand with
excellent on-going delineation drilling results. Surge now believes
that this high quality, conventional sandstone pool is over 250
million barrels of net original oil in place ("OOIP"1),
with over 200 (net) low risk development drilling locations, and
full waterflood upside.
Surge management believes that the Company needs to
strategically allocate capital towards the drilling and
waterflooding of this exciting new Upper Shaunavon discovery, to
the continued development of the Company's large OOIP, high quality
Valhalla Doig light oil pool in NW
Alberta, and to the continued development and waterflooding
of Surge's large OOIP Sparky crude oil assets in SE Alberta. Accordingly, Surge management and
Board have agreed to sell the Company's SE Saskatchewan and Manitoba assets (the "Assets") for a purchase
price of $430 million (the
"Transaction").
Proceeds from the sale of the Assets will be used initially to
reduce indebtedness, which will improve the Company's pro forma
debt to forward cash flow ratio to 1.25 times (based on
April 23rd, 2015 strip
pricing), and ultimately be redeployed in accordance with
managements capital allocation strategy.
The Transaction is forecast to be greater than 20 percent
accretive to production per share, 15 percent accretive to cash
flow per share, and 15 percent accretive to proven plus probable
reserves per share, to Surge shareholders on a debt-adjusted
basis.
Surge confirms that the Company is maintaining its current
dividend of $0.30 per share per
annum.
________________________________
|
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.
|
I. OVERVIEW
A. Upper Shaunavon Discovery
Expanding
For five consecutive quarters Surge management have advised
shareholders that the Company's Upper Shaunavon crude oil discovery
in SW Saskatchewan has continued
to expand. In mid-2013, Surge estimated its 100 percent working
interest Upper Shaunavon lands (54 net sections) had approximately
30-40 million barrels of net OOIP, and up to 30 development
drilling locations.
Today, after 15 months of excellent delineation drilling results
from 11 consecutive successful wells, Surge now estimates that the
play has over 250 million barrels of net OOIP, and over 200 (net)
development drilling locations. This exciting discovery is a
shallow, low risk, conventional sandstone reservoir located in a
proven 2 billion barrel OOIP corridor, comprising the largest Upper
Shaunavon fields in Saskatchewan
history.
Surge's Upper Shaunavon discovery is now more than 12 miles
long, and more than seven miles wide, with average net pay
estimated at more than six meters.
The Upper Shaunavon play has risked, "all-in", drilling and
on-stream production efficiencies of less than $15,000 per flowing bopd. At current oil prices,
Surge's Upper Shaunavon wells pay out in less than 13 months, and
generate a risked rate of return of over 80 percent. These results
provide some of the best all-in production efficiencies and rates
of return of any crude oil play in Canada.
Netbacks are very high at Shaunavon due to low operating costs of less
than $9 per barrel, and low
royalties. Another significant factor as to why the Shaunavon play has such high rates of return
is that Surge controls a 10,000 bopd oil battery (and associated
gathering and waterflood systems), owns 54 sections of contiguous
land, and possesses a large 3-D seismic program over the Company's
lands.
In addition to the primary development drilling upside discussed
above, this conventional sandstone reservoir also provides
significant, low risk, waterflood upside to Surge shareholders.
Virtually all of the other Upper Shaunavon reservoirs in this
proven 2 billion barrel OOIP trend, including such large pools as
Rapdan (143 mm bbls OOIP), Dollard
(180 mm bbls OOIP) and Instow (152 mm bbls OOIP), have all
experienced excellent waterflood results over the last 50 years -
with many of these high quality reservoirs still producing at
attractive rates - on recovery factors of well over 30 percent.
With full field development and waterflood implementation, Surge
management now estimate an ultimate pool recovery factor of more
than 20 percent of the OOIP for the Upper Shaunavon alone.
Surge has booked only 37 Upper Shaunavon locations in its
external engineering report. No waterflood upside is booked for the
Upper Shaunavon in Surge's external engineering report.
B. Lower Oil Price
Environment; Capital Allocation Strategy
In the strong equity markets from May of 2013 through September
of 2014, Surge transitioned from a high growth junior to a modest
growth/dividend paying model, acquiring over $1.2 billion of high quality, large OOIP assets,
focused in just four main operating areas. Surge management grew
the Company's OOIP from approximately 300 million barrels to over
2.1 billion barrels today.
Production increased from 8,300 boepd (65 percent oil) in May of
2013, to over 20,000 boepd (85 percent oil) today. Surge's drilling
inventory grew from approximately 175 development drilling
locations to over 1,000 low risk locations. The Company's corporate
decline dropped from 38 percent, as a high growth junior, to less
than 22 percent today (and 23% pro forma the Transaction).
During this period of higher oil prices, the trading price for
Surge common shares increased over 190 percent from approximately
$3.00 per share to $8.80 per share, and Surge also returned over
$0.60 per share of dividends to
shareholders. This was one of the best total rates of return of any
dividend paying oil and gas company in Canada over this 16 month period.
Given the significant recent drop in world crude oil prices from
US $108 WTI per barrel in June of
2014, to a low of US $42 WTI per
barrel in March of 2015, Surge management undertook a number of
aggressive and pro-active steps to protect shareholders capital,
and the Company's net asset value, including:
- Reduced discretionary spending for land and seismic
immediately;
- Reduced drilling capital significantly;
- Reduced G&A from $3.50 per
boe to $1.72 per boe in Q4/14;
- Reduced the Company's dividend on January 7th, 2015;
- Unwound the Company's fixed price hedges to realize a
$35 million gain and reduce
debt;
- Sold certain non-core assets in the Dodsland area of SW
Saskatchewan for $36.5 million
to reduce debt;
- Delivered excellent 2014 all-in FD&A reserve replacement
costs of $19.55 per boe(P+P);
- Exceeded the Company's 2014 production exit rate target of
21,350 boepd;
- Increased Surge's December
31st, 2014 net asset value per share from
$6.95 to $7.36 – despite the large
decrease in the Company's external engineering year end price deck;
and
- Sought an early redetermination of Surge's bank line with the
Company's lenders – wherein Surge's bank line was maintained –
despite the significant drop in the bank syndicate's crude oil
lending price deck.
As a result of these aggressive and proactive steps Surge
management were able to maintain (and even increase) Surge's NAV
per share, and protect shareholders capital, despite the swift and
large drop in world crude oil prices. In addition, Surge has also
maintained over $130 million of
availability on the Company's existing bank lines (and an estimated
$240 million of availability pro
forma the Transaction).
Given the new lower trading range for world crude oil prices,
and Surges rapidly expanding drilling inventory on the Shaunavon play (together with the Company's
expanding Sparky and Valhalla
plays), management have reassessed Surge's capital allocation
strategy going forward.
Accordingly, Surge has determined to sell the Company's
SE Saskatchewan and Manitoba assets as set forth below. Management
believes this will allow the Company to thrive, compete and grow in
the present lower crude oil price environment. It will also allow
Surge shareholders to enjoy the significant per share upside growth
leverage inherent in the Company's Upper Shaunavon (and Lower
Shaunavon), Sparky and Valhalla
plays.
C. Sale of SE Saskatchewan and Manitoba Assets
Based on the above analysis of the current business environment,
Surge has signed a definitive purchase and sale agreement with a
Canadian oil and gas company to sell all of its SE Saskatchewan and Manitoba assets for a purchase price of
$430 million. The closing date for
the sale of the Assets is set for June
15th, 2015.
The Assets comprise over 23 mmboe of independently engineered
Proven plus Probable reserves, and approximately 4,750 bopd of
crude oil production.
Macquarie Capital Markets Canada Ltd. acted as exclusive
financial advisor in connection with the Transaction. GMP
Securities L.P., and Scotia Waterous acted as strategic
advisors.
As discussed above, during the strong equity markets from May of
2013 until September 2014, Surge
acquired a number of high quality, large OOIP crude oil reservoirs,
including the Assets being divested. It is Surge managements view
and experience, that high quality reservoirs attract and provide
quality metrics and returns on an acquisition or on a sale of such
assets – at any point in the commodity price cycle. Accordingly,
Surge's management and Board are of the view that the sale of the
Assets represents excellent value for both Surge and its
shareholders, in the present market place.
The Transaction has the following characteristics:
Total Purchase
Price:
|
C$430.0
million
|
Current
Production:
|
~4,750
boe/d
|
Proved
Reserves:
|
~13.6
mmboe
|
Proved plus Probable
Reserves:
|
~23.0
mmboe
|
The associated Transaction metrics are as follows:
TV / Current
Production:
|
~$90,526/boe/d
|
TV / Proved
Reserves:
|
~$31.60/boe
|
TV / Proved plus
Probable Reserves:
|
~$18.70/boe
|
TV / Cash
Flow:
|
8.8x (April strip
pricing)
|
Recycle Ratio (Proved
plus Probable):
|
1.5x
|
II. PROFORMA SURGE
The Transaction is forecast to be greater than 20 percent
accretive to production per share, 15 percent accretive to cash
flow per share, and 15 percent accretive to proven plus probable
reserves per share, to Surge shareholders on a debt-adjusted
basis.
Following the sale of the Assets, Surge will have the following
corporate characteristics:
- Reserves: 86.3 mmboe Total Proven plus Probable
(76 percent oil)
- RLI: >15 years
- Decline: 23 percent
- Production: >14,250 boepd (77 percent oil)
- Net Debt: $135 million
- Forward Debt to Cash Flow: 1.25 times (based on
April 23rd, 2015 strip
pricing)
- Bank line: > $375
million (E)
- Drilling Inventory: 749/731 (gross/net) total
locations; 146 booked
- Land: 285,000 gross (260,000 net) undeveloped
acres
- Operatorship: 100 percent of Surge's 3 core
areas
- NAV: $6.28 per share (year-end external
engineering report)
- Operating Expenses: $14 per boe
- Dividend: $0.30 per share per annum ($0.025 per share per month)
As previously disclosed, Surge management will be presenting a
budget for the second half of 2015 in late June after reassessing
market conditions at that time.
FORWARD LOOKING STATEMENTS:
This press release contains forward-looking statements.
The use of any of the words "anticipate", "continue", "estimate",
"expect", "may", "will", "project", "should", "believe" and similar
expressions are intended to identify forward-looking statements.
These statements involve known and unknown risks, uncertainties and
other factors that may cause actual results or events to differ
materially from those anticipated in such forward-looking
statements. More particularly, it contains forward-looking
statements concerning: (i) Surge's anticipated reserves,
production, cash flow, cash flow per share and net asset value per
share, (ii) ultimate recovery factors at certain of Surge's
properties, (iii) net crude oil production, (iv) planned drilling,
development and water flood activities and the timing thereof, (v)
the potential number of drilling locations at certain of Surge's
properties, (vi) land holdings, (vii) the expected production of
certain non-core assets disposed, (viii) estimates on OOIP, (ix)
production efficiencies and rates of return in respect of certain
of Surge's properties, * debt and bank facilities, (xi) dividends,
(xii) primary and secondary recovery potentials and implementation
thereof, (xiii) decline rates, (xiv) funds from operations, (xv)
operating and cash flow netbacks, (xvi) operating expenses, (xvii)
the anticipated closing date for the sale of the Assets and the
expected use of proceeds therefrom, and (xix) realization of
anticipated benefits of the disposition of the Assets.
Statements relating to "reserves" are also deemed to be forward
looking statements, as they involve the implied assessment, based
on certain estimates and assumptions, that the reserves described
exist in the quantities predicted or estimated and that the
reserves can be profitably produced in the future.
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 water flood 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.
Drilling locations
This press release discloses drilling locations in three
categories: (i) proved locations; (ii) probable locations; and
(iii) unbooked locations. Proved locations and probable locations
are derived from the Company's independent reserves evaluation as
prepared by a qualified reserves evaluator in accordance with
National Instrument 51-101 and account for drilling locations that
have associated proved and/or probable reserves, as applicable.
Unbooked locations are internal estimates based on the Company's
prospective acreage and an assumption as to the number of wells
that can be drilled per section based on industry practice and
internal review. Unbooked locations do not have attributed reserves
or resources. Of the 731 net drilling locations identified herein,
146 are proved and probable and 585 are unbooked locations.
Unbooked locations have been identified by management as an
estimation of our multi-year drilling activities based on
evaluation of applicable geologic, seismic, engineering, production
and reserves information. There is no certainty that the Company
will drill all unbooked drilling locations and if drilled there is
no certainty that such locations will result in additional oil and
gas reserves, resources or production. The drilling locations on
which we actually drill wells will ultimately depend upon the
availability of capital, regulatory approvals, seasonal
restrictions, oil and natural gas prices, costs, actual drilling
results, additional reservoir information that is obtained and
other factors. While certain of the unbooked drilling locations
have been de-risked by drilling existing wells in relative close
proximity to such unbooked drilling locations, other unbooked
drilling locations are farther away from existing wells where
management has less information about the characteristics of the
reservoir and therefore there is more uncertainty whether wells
will be drilled in such locations and if drilled there is more
uncertainty that such wells will result in additional oil and gas
reserves, resources or production.
Non-IFRS measures
This document contains the terms "funds from operations", "
recycle ratio ", " operating netback", and "corporate netback"
which do not have a standardized meaning prescribed by IFRS and,
therefore, may not be comparable with the calculation of similar
measures for other entities. Surge uses these metrics to analyze
financial and operating performance. Surge feels these benchmarks
are key measures of profitability and overall sustainability for
the Company. Each of these terms is commonly used in the oil and
gas industry. Funds from operations is calculated as cash
flow from operating activities before changes in non-cash working
capital, legal settlement expenses, decommissioning expenditures,
transaction costs, cash settled stock-based compensation and
current tax on disposition. Recycle ratio is calculated as
operating netback divided by finding, development and acquisition
costs (proved plus probable). Operating netback is calculated
as revenue (including realized hedging gains and losses) minus
royalties, production and operating expenses and transportation
expenses. Corporate netback is calculated as operating
netback less general and administrative expenses and interest
expense.
Additional IFRS measures
This press release also contains the term net debt. The
reference to the additional IFRS measure of net debt may not be
comparable with the calculation of similar measures for other
entities. The Company's calculation of net debt includes long-term
debt and the net working capital deficiency (excess). The net
working capital deficiency (excess) excludes short-term commodity
contract assets and liabilities, current finance lease obligation,
and current deferred lease inducements.
Oil and Gas Advisories
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. Boepd means barrel of oil equivalent per day.
Test results and initial production rates disclosed herein may
not necessarily be indicative of long term performance or of
ultimate recovery. A pressure transient analysis or well-test
interpretation has not been carried out and thus certain of the
test results provided herein should be considered to be preliminary
until such analysis or interpretation has been completed.
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; * mboe means thousand barrels of oil
equivalent; and (xi) mmboe means million barrels of oil
equivalent.
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.
SOURCE Surge Energy Inc.