CALGARY, June 24, 2015 /CNW/ - Surge Energy Inc.
("Surge" or "the Company") announced today that the Company's
management and Board are maintaining a conservative capital
spending program for the second half of 2015, which is designed to
both protect the Company's net asset value ("NAV") at $6.28 per share, and the Company's excellent
balance sheet. While there has been a meaningful recovery in world
crude oil prices in the first half of 2015, Surge management and
Board will continue to assess market conditions on a weekly basis,
and maintain strict discipline with respect to protecting the
Company's balance sheet, and allocating capital.
The Board of Directors has approved the Company's capital
expenditure program for the second half of 2015 as set forth
below.
This budget forecasts maintaining Surge's dividend at
$0.30 per share per year
($0.025 per share per month).
In the second half of 2015 the Company will strategically
allocate capital towards the drilling and waterflooding of Surge's
large, 250 million barrel net original oil in place
("OOIP"1) Upper Shaunavon discovery in SW Saskatchewan, to the continued development
of the Company's 130 million barrel net OOIP, high quality Doig
light oil pool at Valhalla in
NW Alberta, and to the continued
development and waterflooding of Surge's 400 million barrel net
OOIP Sparky trend crude oil assets in Central Alberta.
In the second half of 2015 Surge will spend a budgeted
$42.6 million, and deliver the
following:
- A high quality, low risk, development drilling program of 11
net wells for light and medium gravity crude oil (selected out of
Surge's large inventory of over 700 net drilling locations);
- Exit 2015 production of more than 14,500 boepd (representing
more than three percent annualized growth);
- A production mix of 76 percent light and medium gravity crude
oil;
- A low corporate base decline of 23 percent;
- A 2015 "all-in" payout/sustainability ratio of 99 percent based
on second half 2015 US$65 WTI per
barrel flat pricing;
- A fourth quarter 2015 cash flow netback of $26.40 per boe – with no impact from
hedging;
- Top quartile operating costs of $14.45 per boe (with G&A costs of
$2.15 per boe in the fourth
quarter);
- "All-in" capital efficiencies of approximately $22,000 per boepd;
- A 2015 exit debt to funds flow from operations ("FFO") ratio
of less than one times (with approximately $300 million of unutilized credit availability on
the Company's bank line); and
- A portion of the second half of 2015 capital spending will be
strategically focused to waterflood projects relating to Surge's
high quality, large OOIP reservoirs, including initiating a
waterflood in the Company's expanding Upper Shaunavon pool. By the
end of 2015 Surge anticipates that more than 75 percent of the
Company's producing assets will be under waterflood.
___________________
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.
|
Capital Spending Breakdown
In the second half of 2015, Surge is planning to spend
$42.6 million focused to high
quality, light and medium gravity crude oil projects.
The breakdown for the second half of 2015 capital expenditures
is set forth below:
Capex for
2015
|
($mm)
|
Development Drilling
and Completions
|
24.0
|
Equipment/Facilities/Workovers
|
12.2
|
Waterflood
Implementation
|
2.1
|
Land/Seismic/Corporate/G&A
|
4.3
|
TOTAL
|
42.6
|
Production in Second Half of 2015
Surge is budgeting average production of 14,250 boepd in the
second half of 2015 – with an exit rate of more than 14,500 boepd.
This represents annualized production growth of more than three
percent.
Given Surge's high quality, crude oil reservoirs, disciplined
capital spending program, and diligent focus on waterflood
activities, management estimates that the Company's corporate
decline rate is 23 percent – a key attribute for any growth and
dividend paying company.
Excellent Sustainability; Financial Flexibility
Surge has a 2015 "all-in" payout/sustainability ratio of 99
percent based on second half of 2015 US$65 WTI per barrel flat pricing. The Company
has no dividend reinvestment plan.
The Company has an excellent balance sheet with a 2015 exit debt
to FFO ratio of less than one times at US$65 WTI per barrel flat pricing, and
approximately $300 million of credit
availability on Surge's bank lines.
Surge has "all-in" production efficiency metrics estimated at
approximately $22,000 boepd for the
second half 2015 capital program, with a fourth quarter cash flow
netback of $26.40 per boe - with no
impact from hedging.
The following summarizes Surge's second half 2015 guidance
pricing estimates, and the Company's 2015 hedging activities:
Guidance Pricing Assumptions:
WTI USD
|
$65.00
|
CAD/USD FX
|
$0.81
|
WTI CAD
|
$80.25
|
WTI-to-EDM
Differential CAD
|
$3.70
|
EDM Light
CAD
|
$76.55
|
2015 Hedging Activities:
Surge has a disciplined, ongoing risk management program with
over 60% of the second half of 2015 net crude oil volumes locked in
- on a "costless collar" basis - at an attractive floor price of
C$62 WTI per barrel, and a ceiling of
C$82 WTI per barrel. This program
helps to secure the availability of cash flow for capital
expenditures and dividends.
Focused Business Strategy; Exciting Outlook for Second Half
of 2015
Conservative Strategy:
Surge will continue to implement the Company's disciplined
business strategy of allocating capital towards high quality, large
OOIP, light and medium gravity, crude oil reservoirs. The Company
will also continue to pursue year over year increases in recovery
factors from these high quality assets through low risk development
activities, including:
- In-fill and step-out development drilling;
- Up to date completion techniques, including horizontal frac
technology;
- Production optimizations; and
- Waterfloods.
Pursuant to this focused business strategy, Surge targets
conservative annual per share growth in reserves, production and
cash flow of three to five percent. In addition, Surge provides an
attractive cash yield of approximately eight percent based on the
current trading price of the Company's shares.
Accretive acquisitions of other high quality assets will provide
incremental growth over and above these estimates.
Second Half of 2015 Program:
Surge will begin the second half of 2015 drilling seven
consecutive development wells at Shaunavon in SW
Saskatchewan, targeting the Upper Shaunavon formation in
this 250 million barrel OOIP, conventional sandstone reservoir.
Surge has over 220 net low risk development locations to drill for
Upper Shaunavon oil. These wells generate a risked rate of return
of 74 percent at strip pricing. The Company will also initiate
waterflood activities in the third quarter of 2015 in the Upper
Shaunavon formation by converting two wells to injection.
Surge will commence drilling at Valhalla in NW
Alberta in early July targeting the Company's large 130
million barrel OOIP light oil Doig field. Surge's latest two wells
at Valhalla have independently
earned the distinction as the two best oil wells drilled in
Canada this year. Surge has more
than 30 net locations remaining to drill at Valhalla. The Company budgets the drilling of
two net wells at Valhalla in the
second half of 2015. Type curve wells at Valhalla generate a risked rate of return of
64 percent at strip pricing.
In addition, Surge will invest approximately $5.1 million to build a strategic pipeline as
part of a long term infrastructure solution at Valhalla in NW
Alberta. With this pipeline the Company will divert up to 12
mmcfd of its Doig solution gas production from the Sexsmith plant to a nearby Surge owned gas
plant at Doe - which Surge acquired in the fourth quarter of 2014.
This strategic investment will significantly reduce the Company's
gas processing fees going forward, and reduce Surge's exposure to
third party curtailments and outages at Valhalla. Surge also confirms that it holds
strategic firm service (with both area service providers), well
above the Company's anticipated volume requirements, going
forward.
In this regard, Surge is currently experiencing an unplanned
outage at Sexsmith, due to TCPL
system curtailments. The Company is working with the Plant Operator
to restore curtailed volumes over the next two weeks.
In Central Alberta, Surge will
drill two net wells at Eyehill and Provost targeting the Sparky
formation in the second half of 2015. These wells generate a risked
rate of return of 55 percent at strip pricing for crude.
Sixty percent of Surge's second half 2015 drilling capital
expenditures will be at Shaunavon
in SW Saskatchewan. The Company's
highest growth asset is also at Shaunavon, with over 350 net drilling
locations in the Upper and Lower Shaunavon formations,
respectively. This large inventory allows Surge to maintain
flexibility with respect to allocating capital to the jurisdictions
with the highest rates of return.
Surge is on track to achieve management's stated goal of being
one of the best positioned light/medium gravity crude oil growth
and dividend paying companies in Canada – uniquely positioned to grow at
virtually any reasonable crude oil commodity price assumption. On
this basis, today Surge has the following corporate
fundamentals:
- Three core, high netback, operating areas, which comprise over
1.4 billion barrels of net OOIP, with a seven percent recovery
factor to date;
- A 15 year reserve life index;
- A low 23 percent decline;
- A fourth quarter annualized debt to cash flow ratio of 1.1
times at strip pricing;
- Approximately $300 million of
credit available on the Company's bank lines;
- A 14 year, low risk development drilling inventory, with more
than 700 net drilling locations;
- Excellent production efficiency plays (adding volumes at
approximately $22,000 per boepd in
the second half of 2015); and
- A net asset value of $6.28 per
share.
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.
ADVISORIES:
Forward Looking Statements
This press release contains forward-looking statements. More
particularly, this press release contains statements concerning:
(i) management expectations with respect to market and growth
positioning within the industry; (ii) Surge's drilling inventory
and activity; (iii) Surge's capital allocation plans; (iv) Surge's
investment in and completion of a strategic pipeline and the
benefits thereof; (v) potential acquisitions and the benefits
thereof; (vi) expectations with respect to production, exit rates,
corporate decline rates, guidance pricing assumptions, risk
management program, the risk levels associated with certain
development activities, annual per share growth, cash yield and the
risked rate of return of various wells; (vii) the Company's balance
sheet and anticipated year ended bank line availability; (viii)
forecast decline rates and reserve life index; (ix) management's
expectations with respect to the Company's waterflood program,
results therefrom and quantity of producing assets that will be
placed under waterflood; * Surge's operational guidance, including
"all-in" pay-out ratios, estimated year-end net debt to funds from
operations and cash flow netback; (xi) the Company's declared focus
and primary goals; (xii) the ability of the Company to weather the
present commodity price environment; and (xiii) the sustainability
of dividends.
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 receipt of required
approvals 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, 2015
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.
Reserves Data
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. Bbl
means barrels of oil. Boepd means barrel of oil equivalent
per day. Mmboe means million barrel of oil
equivalent. RLI means reserve life index. PUD means
proven undeveloped. NAV means net asset value.
Financial Outlooks
The estimate of forward debt to cash flow ratio contained in
this press release may be considered 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.
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.
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,
which are sometimes collectively referred to as "booked locations",
are derived from the Company's most recent independent reserves
evaluation as of December 31, 2014
and account for drilling locations that have associated proved 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 over
700 net drilling locations identified herein, 121 net are proved
locations, 69 net are probable locations and 548 are unbooked
locations. Unbooked locations have specifically been identified by
management as an estimation of our multi-year drilling activities
based on evaluation of applicable geologic, seismic, engineering,
production and reserves data on prospective acreage and geologic
formations. 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 and other factors.
Non-IFRS Measures
This press release contains the terms "funds from operations",
"net debt" and "netback", which do not have a standardized meaning
prescribed by International Financial Reporting Standards ("IFRS")
and therefore may not be comparable with the calculation of similar
measures by other companies. Management uses funds generated by
operations to analyze operating performance and leverage.
Management believes "net debt" is a useful supplemental measure of
the total amount of current and long-term debt of the Company.
Mark-to-market risk management contracts are excluded from the net
debt calculation. Management believes "netbacks" are a useful
supplemental measures of the amount of revenues received after
royalties and operating and transportation costs and secondly, the
amount of revenues received after the royalties, operating,
transportation costs, general and administrative costs, financial
charges and asset retirement obligations. Additional information
relating to these non-IFRS measures can be found in the Company's
most recent management's discussion and analysis MD&A, which
may be accessed through the SEDAR website (www.sedar.com).
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.