CALGARY, May 12, 2015 /CNW/ - Surge Energy Inc.
("Surge" or the "Company") (TSX: SGY) announces record operating
results for the three month period ended March 31, 2015.
Surge reports record average production of 20,585 boe per day in
the first quarter of 2015 on a significantly reduced capital
expenditure program. These record results were also achieved
despite the sale of over 500 boepd of non-core Viking production in
SW Saskatchewan during the
quarter.
FINANCIAL AND
OPERATING SUMMARY
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($000s except per
share amounts)
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Three Months Ended
March 31,
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2015
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2014
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%
change
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Financial
highlights
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Oil and NGL
sales
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64,937
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99,783
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(35)%
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Natural gas
sales
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5,416
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7,784
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(30)%
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Total oil, natural
gas, and NGL revenue
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70,353
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107,567
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(35)%
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Funds from
Operations1
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51,072
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53,770
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(5)%
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Per share basic
($)
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0.23
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0.31
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(26)%
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Per share diluted
($)
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0.23
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0.31
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(26)%
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Net income
(loss)
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(104,705)
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3,422
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nm4
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Per share basic
($)
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(0.48)
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0.02
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nm
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Per share diluted
($)
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(0.48)
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0.02
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nm
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Capital expenditures
- petroleum & gas properties2
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25,812
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58,351
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(56)%
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Capital expenditures
- acquisitions & dispositions2
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(31,155)
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108,712
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(129)%
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Total capital
expenditures2
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(5,343)
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167,063
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(103)%
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Net debt at end of
period3
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552,110
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356,744
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55 %
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Operating
highlights
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Production:
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Oil and NGL (bbls per
day)
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17,171
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12,694
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35 %
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Natural gas (mcf per
day)
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20,484
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13,980
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47 %
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Total (boe per day)
(6:1)
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20,585
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15,024
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37 %
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Average realized
price (excluding hedges):
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Oil and NGL ($per
bbl)
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42.02
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87.32
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(52)%
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Natural gas ($ per
mcf)
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2.94
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6.19
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(53)%
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Net back
(including hedges) ($ per boe)
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Oil, natural gas and
NGL sales
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37.97
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79.55
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(52)%
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Realized gain (loss)
on commodity contracts
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19.62
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(5.06)
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nm
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Royalties
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(5.73)
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(14.08)
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(59)%
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Operating
expenses
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(17.78)
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(14.35)
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24 %
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Transportation
expenses
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(1.41)
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(1.92)
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(27)%
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Operating
netback
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32.67
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44.14
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(26)%
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G&A
Expense
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(2.14)
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(2.15)
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(0)%
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Interest
Expense
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(2.95)
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(2.23)
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32 %
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Corporate
netback
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27.58
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39.76
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(31)%
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Common shares
(000s)
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Common shares
outstanding, end of period
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220,060
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179,501
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23 %
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Weighted average
basic shares outstanding
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220,060
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173,070
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27 %
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Stock option dilution
(treasury method)
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—
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828
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nm
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Weighted average
diluted shares outstanding
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220,060
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173,898
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27 %
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1
Management uses funds from operations (cash flow from operating
activities before changes in non-cash working capital,
decommissioning expenditures, cash settled stock- based
compensation and transaction costs) 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.
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2 Please
see capital expenditures discussion within the accompanying
MD&A.
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3 The
Company defines net debt as outstanding bank debt plus or minus
working capital, however, excluding the fair value of financial
contracts and other current obligations.
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4 The
Company views this change calculation as not meaningful, or
"nm".
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HIGHLIGHTS
- Achieved record average production of 20,585 boe per day in
the first quarter of 2015, an increase of 37 percent from
15,024 boe per day in the same period of 2014, and an increase over
the fourth quarter 2014 production rate of 20,448 boe per day.
These results were achieved with the drilling only 4.6 net wells
in the quarter (100 percent success rate), and despite the sale of
over 500 boepd of non-core Viking production in the
quarter.
- The Company's first quarter capital program of
$25.8 million, (which does not
include acquisitions and divestitures) represented only 50
percent of funds from operations for the quarter.
- The Company achieved an operating netback of $32.67 per boe in the first quarter.
- The Company achieved a debt to cash flow ratio of 2.7 times
for the first quarter of 2015. This was achieved while the
average US$ WTI price decreased 53%; from an average of
$102.99 in the second quarter of 2014
to an average of $48.63 in the first
quarter of 2015.
- Subsequent to the end of the first quarter, Surge executed a
binding purchase and sale agreement to sell the Company's assets in
SE Saskatchewan and Manitoba for $430
million, which has provided the Company with a pro-forma
debt to forward cash flow ratio forecast to be 1.2 times at strip
pricing.
- Approximately 92 percent of Surge's revenue
resulted from oil and natural gas liquids production in the
first quarter of 2015.
RECORD OPERATIONAL PERFORMANCE IN A CHALLENGING
ENVIRONMENT
Continued Success in the Upper Shaunavon
The Company's Upper Shaunavon crude oil discovery in
SW Saskatchewan has continued to
expand.
During the first quarter of 2015, the Company successfully
drilled, completed, and brought on production 2 gross (2 net) Upper
Shaunavon wells. The 13-03-006-19W3 is producing at type curve
expectations. The 13-18-005-19W3 well confirmed the southwest
extension of a second major trend in the Upper Shaunavon. This well
continues to produce above type curve expectations at more than 200
boepd.
Today, after 15 months of excellent delineation drilling results
from 11 consecutive successful wells, 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. Surge
now estimates that the play has over 250 million barrels of net
original oil in place (OOIP1), 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.
The Upper Shaunavon play has risked, "all-in", drilling and
on-stream production efficiencies of less than $15,000 per flowing boepd. 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 boepd 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.
Surge 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. With full field
development and waterflood implementation, Surge management now
estimate an ultimate pool recovery factor of more than twenty
percent of the OOIP for the Upper Shaunavon alone.
___________________
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
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Valhalla (NW Alberta)
Surge's 100% working interest Doig well at 5-07-075-08W6 was
completed and brought on production in January, 2015, and has
continued to produce significantly above type curve expectations.
This well has now qualified as the top producing oil well in the
Province of Alberta for the past
three consecutive months.
During the first quarter of 2015, the Company also successfully
drilled another Valhalla light oil
well at 4-06-075-08W6 (to the south of the 5-07-075-08W6 well).
This well was rig released and fracced early in the second quarter
of 2015 and came on production in late April. The Company is
pleased to report that this well is performing similarly to
5-7-75-8W6. The total well cost for the 4-6-75-8W6 well was
$4.0 million, providing an
approximate twenty percent cost reduction.
Given the exciting large pool extension to the north at
Vallhalla, Surge now has more than 35 net additional locations to
drill into this 150 million barrel OOIP light oil reservoir. This
pool is now approximately 18 kilometers long, 2.5 kilometers wide,
and over 30 meters thick.
All-in production efficiencies at Vallhalla are less than
$12,000 per flowing boepd.
Sparky (SE Alberta)
At Eyehill during the first quarter, Surge drilled and brought
on production 1 (net) Sparky horizontal well. The well is producing
at type curve expectations. Surge now has over 400 million barrels
of net OOIP on the Sparky play - with more than 140 net development
drilling locations in inventory.
All-in production efficiencies for the Sparky play are
$19,000 per flowing boepd.
CAPITAL ALLOCATION STRATEGY
Macro Outlook for 2015
Crude oil prices dropped precipitously from US $106 WTI per barrel in June of 2014, to
$43 WTI per barrel in March of
2015.
Company management reacted swiftly and aggressively in response
to the downturn in commodity pricing, taking a number of proactive
steps in late 2014 and early 2015 to protect shareholder's capital
and the Company's net asset value, including:
- Drilling capital was significantly reduced 2 weeks prior to the
November 24th, 2014 OPEC
meeting;
- Exceeded management's 2014 production exit rate target of
21,350 boepd – even with reduced drilling capital
expenditures;
- Delivered strong 2014 all-in FD&A reserve replacement costs
of $19.55 per boe (P+P)
- Increased the Company'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.
- Based upon the Company's excellent 2014 reserve addition
results, an early review of the bank line was initiated. The bank
line remained intact, despite a large drop in the 2015 crude oil
price deck utilized by Surge's lenders.
- Reduced discretionary spending on land and seismic;
- G&A per boe was reduced from $3.50 per boe in the first nine months of 2013 to
$2.14 per boe in the first quarter
2015;
- Reduced the Company's dividend on January 7th, 2015;
- Pro-actively monetized Surge's 2015 crude oil swap position to
realize a cash gain of $35 million
and reduce debt. At the same time as the hedges were
monetized, the Company re-hedged approximately 45 percent of its
net oil production with a "costless collar" to protect against
further downside risk; and
- Management sold certain non-core assets in the Dodsland area of SW
Saskatchewan for $35.6 million
to reduce debt.
The US EIA now 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. The EIA also
estimates that world crude oil demand will grow by 1.1 million
barrels per day in 2015 over 2014.
For the first time ever, OPEC is now 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 1-2 million barrels per day. In addition, numerous analysts and
commentators have projected that world oil demand will be as high
as 115 million barrels per day by 2040. An additional factor for
consideration in this supply/demand equation is the significant
degree of geo-political risk present in a number of oil producing
regions in the world.
With the large decrease in crude oil prices, capital
expenditures relating to drilling for crude oil reserves and
production are being aggressively reduced world-wide – by virtually
ALL producers. As a result, North American rig counts and well
licensing have declined significantly since the third quarter of
2014. This has manifested itself in a reduction of EIA-estimated
production in the third quarter of 2015 of nearly a quarter million
barrels a day.
This combination of reduced capital expenditures, EIA-forecasted
production declines, combined with reduced drilling rig counts and
well licenses, are contributing to the current ongoing recovery in
crude oil prices. Oil prices have now rebounded over forty
percent, from a low of US $43 WTI in
March of 2015 to US $62 WTI in May of
2015.
In addition, Canadian oil pricing differentials have tightened
due to upgrader maintenance, and a general upswing in refinery
utilization, which also increases realized prices for Canadian oil
producers.
$430 MILLION ASSET SALE –
PROFORMA SURGE – POSITIONED FOR GROWTH
Based on the above analysis of the current business environment,
on April 27, 2015 Surge announced the
strategic sale of its SE
Saskatchewan and Manitoba
assets for $430 million. This
transaction is forecast to be greater than twenty percent accretive
to production per share, fifteen percent accretive to cash flow per
share, and fifteen percent accretive to proven plus probable
reserves per share, to Surge shareholders on a debt-adjusted
basis.
Surge will receive approximately $90,000 per flowing boepd of production from this
disposition, and management will now be redeploying capital into
the Company's three top tier, large OOIP plays, including the Upper
Shaunavon - at less than $15,000 per
flowing boepd; at Valhalla - for
less than $12,000 per flowing boepd;
and the Sparky play in SE Alberta
- at less than $19,000 per flowing
boepd.
This strategic disposition confirms management's view that high
quality assets will extract a premium valuation at any point in the
commodity price cycle – including downturns. This transaction has
also completely repositioned the Company for the new lower
commodity price environment for crude, with one of the best balance
sheets in the industry.
Pro-forma the disposition, Surge has a high quality,
oil-weighted, low decline asset base with over 1.7 billion barrels
of OOIP - with an estimated recovery factor of just seven percent.
The Company has a 12 year, low risk, development drilling inventory
of over 700 locations.
Surge also has a suite of low risk waterflood projects which the
Company is aggressively pursuing as part of its plan to continue
reducing the corporate decline rate, and improving sustainability.
Furthermore, the Company's focus on cost control, improving capital
efficiencies, and reducing per boe costs, remains strong.
Pro-forma first quarter 2015 net debt is now estimated to be
$122 million, on a bank line
estimated at more than $375
million. The Company is forecasting a forward debt to
cash flow ratio of 1.2 times at strip pricing, with over a quarter
billion dollars of credit availability.
In addition, based on better than anticipated drilling results
at Valhalla, and Shaunavon, the Company is now positioned to
exceed managements previously stated production guidance of
14,250 boepd - subsequent to the sale of SE Saskatchewan and Manitoba assets discussed above.
Accordingly, Surge remains well positioned to grow, and deliver
its annual dividend, in the current commodity price
environment.
As previously disclosed, Surge management and Board have
determined 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.
FINANCIAL STATEMENTS AND ACCOMPANYING MDA:
Surge has filed with Canadian securities regulatory authorities
its financial statements and accompanying MD&A for the three
months ended March 31, 2015. These
filings are available for review at www.sedar.com or
www.surgeenergy.ca.
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, this press release contains statements
concerning: (i) Surge's drilling and development plans and enhance
recovery projects and the timing and results to be expected
thereof; (ii) estimated sizes, characteristics, efficiencies, rates
of return, netbacks, pool recovery factors and risk levels of plays
and the number of associated drilling locations, as applicable;
(ii) expectations on corporate royalty rates applicable to the
Company; (iii) management's expectations with respect to the
Company's waterflood program, results therefrom and quantity of
producing assets that will be placed under waterflood; (iv) US EIA,
commentator and analyst expectations regarding the growth of world
oil demand, excess world oil supply, the impact of geo-political
risk on oil production, world-wide capital expenditure reductions
and the recovery of crude oil prices; (v) the successful completion
of the sale of the Company's southeast Saskatchewan and Manitoba assets; (vi) the expected closing
date of the sale; (vii) the expected benefit of the sale to the
Company and its shareholders; (viii) management's expected use of
proceeds from the sale; (ix) the estimated recovery factor of the
Company's pro-forma asset base after the sale; * expectations with
respect to the Company's ability to operate and succeed in the
current commodity price environment; (xi) the Company's declared
focus and primary goals; (xii) management's forecast of debt to
cash flow ratio and the availability of Surge's bank line to fund
Surge's future capital requirements; (xiii) Surge's operational
guidance and production guidance; (xiv) the sustainability of
dividends; (xv) Surge's proposed capital spending budget for the
first half of 2015; and (xvi) management's reassessment of its
capital spending program during the second half of 2015 and the
results thereof
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, 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, the determination of decommissioning liabilities, the
successful completion of the sale of the Company's southeast
Saskatchewan and Manitoba assets, prevailing weather
conditions, exchange rates, licensing requirements, the impact of
completed facilities on operating costs and the availability, costs
of capital, labour and services, the creditworthiness of industry
partners and the impact of the pending sale on the Company'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 the continued support of the
lenders under Surge's bank line. Certain of these risks are set out
in more detail in Surge's Annual Information Form dated
March 19, 2015 and in Surge's
MD&A for the period ended March 31,
2015, both of which have 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.
Financial Outlooks
The estimates of 2015 year end net debt, 2015 funds from
operations and 2015 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 but not limited to 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. 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.
Test Results and Initial Production Rates
Any references in this press 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.
SOURCE Surge Energy Inc.