CALGARY, March 16, 2016 /CNW/ - Surge Energy Inc.
("Surge" or the "Company") (TSX: SGY) announces its operating and
financial results for the year and quarter ended December 31, 2015.
FINANCIAL AND
OPERATING SUMMARY
|
($000s except per
share amounts)
|
|
Three Months
Ended
|
Years Ended
December 31,
|
|
Dec 31,
2015
|
Sep 30,
2015
|
% Change
|
2015
|
2014
|
% Change
|
Financial
highlights
|
|
|
|
|
|
|
Oil sales
|
36,509
|
42,560
|
(14)%
|
218,761
|
447,794
|
(51)%
|
NGL sales
|
1,250
|
650
|
92%
|
4,600
|
9,173
|
(50)%
|
Natural gas
sales
|
3,183
|
2,569
|
24%
|
14,542
|
28,719
|
(49)%
|
Total oil, natural
gas, and NGL revenue
|
40,942
|
45,779
|
(11)%
|
237,903
|
485,686
|
(51)%
|
Funds from
operations1
|
15,302
|
17,009
|
(10)%
|
118,873
|
245,264
|
(52)%
|
Per share basic
($)
|
0.07
|
0.08
|
(13)%
|
0.54
|
1.22
|
(56)%
|
Per share diluted
($)
|
0.07
|
0.08
|
(13)%
|
0.54
|
1.22
|
(56)%
|
Capital expenditures
- petroleum & gas properties2
|
18,309
|
17,653
|
4%
|
76,731
|
149,551
|
(49)%
|
Capital expenditures
- acquisitions & dispositions2
|
1,117
|
(3,735)
|
nm
|
(463,568)
|
575,713
|
nm
|
Total capital
expenditures2
|
19,426
|
13,918
|
nm
|
(386,837)
|
725,264
|
nm
|
Net debt at end of
period3
|
160,374
|
143,200
|
12%
|
160,374
|
590,168
|
(73)%
|
|
|
|
|
|
|
|
Operating
highlights
|
|
|
|
|
|
|
Production:
|
|
|
|
|
|
|
Oil (bbls per
day)
|
10,297
|
10,635
|
(3)%
|
12,871
|
14,801
|
(13)%
|
NGLs (bbls per
day)
|
795
|
599
|
33%
|
697
|
552
|
26%
|
Natural gas (mcf per
day)
|
18,570
|
13,731
|
35%
|
17,362
|
16,297
|
7%
|
Total (boe per day)
(6:1)
|
14,187
|
13,523
|
5%
|
16,462
|
18,069
|
(9)%
|
Average realized
price (excluding hedges):
|
|
|
|
|
|
|
Oil ($ per
bbl)
|
38.54
|
43.49
|
(11)%
|
46.57
|
82.89
|
(44)%
|
NGL ($ per
bbl)
|
17.08
|
11.80
|
45%
|
18.09
|
45.53
|
(60)%
|
Natural gas ($ per
mcf)
|
1.86
|
2.03
|
(8)%
|
2.29
|
4.83
|
(53)%
|
|
|
|
|
|
|
|
Netback ($ per
boe)
|
|
|
|
|
|
|
Oil, natural gas and
NGL sales
|
31.37
|
36.80
|
(15)%
|
39.60
|
73.64
|
(46)%
|
Realized gain (loss)
on commodity contracts
|
3.49
|
1.70
|
nm
|
7.18
|
(1.45)
|
nm
|
Royalties
|
(5.89)
|
(6.47)
|
(9)%
|
(6.34)
|
(13.18)
|
(52)%
|
Operating
expenses
|
(12.57)
|
(13.35)
|
(6)%
|
(15.03)
|
(15.52)
|
(3)%
|
Transportation
expenses
|
(1.75)
|
(1.90)
|
(8)%
|
(1.60)
|
(1.72)
|
(7)%
|
Operating
netback
|
14.65
|
16.78
|
(13)%
|
23.81
|
41.77
|
(43)%
|
G&A
expense
|
(1.69)
|
(1.76)
|
(4)%
|
(1.83)
|
(1.96)
|
(7)%
|
Interest
expense
|
(1.19)
|
(1.35)
|
(12)%
|
(2.20)
|
(2.56)
|
(14)%
|
Corporate
netback
|
11.77
|
13.67
|
(14)%
|
19.78
|
37.25
|
(47)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares
outstanding, end of period
|
221,033
|
220,851
|
—%
|
221,033
|
220,060
|
—%
|
Weighted average
basic shares outstanding
|
221,001
|
221,259
|
—%
|
220,661
|
200,317
|
10%
|
Stock option
dilution
|
—
|
—
|
nm
|
—
|
—
|
nm
|
Weighted average
diluted shares outstanding
|
221,001
|
221,259
|
—%
|
220,661
|
200,317
|
10%
|
1
|
Management uses funds
from operations (cash flow from operating activities before changes
in non-cash working capital, decommissioning expenditures,
transaction costs and cash settled stock-based compensation) 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.
|
2
|
Please see capital
expenditures note.
|
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.
|
4
|
The Company views
this change calculation as not meaningful, or "nm".
|
2015 HIGHLIGHTS
- Completed $465 million in
accretive asset sales (at $90,000/boed in 1H/15), setting the stage for a
"lower for longer" scenario for crude oil prices, via top tier
balance sheet strength.
- Further delineation of the Upper Shaunavon field solidified
years of visible drilling inventory. Realized a 30 percent annual
reduction for drilling and completion costs for this key
asset.
- Delineated a large northern extension at Valhalla which resulted in the top three oil
wells in Alberta for both
cumulative production, and initial 90 day average rates, in
2015.
- Identified and implemented a facilities solution at
Valhalla that has provided firm
service processing capacity and de-bottlenecked the field. This
strategic investment will provide for a more stable production
profile going forward, and reduce the Valhalla processing fee by 50 percent for
Surge's sweet solution gas.
- Implemented a horizontal monobore well design at Eyehill
Sparky, and realized a 17 percent reduction in drilling and
completion costs.
- Further reduced the Company's corporate decline rate from 22
percent to 19 percent in 2015, as a result of Surge's low risk
operating strategy and successful waterflood initiatives in the
Company's three core areas.
- Reduced operating expenses in the quarter ended December 31, 2015 to $12.57 per boe from $15.72 per boe for the same period in 2014.
- Gross G&A expense was reduced 36 percent since the fourth
quarter of 2014, representing $7.3
million in annualized gross G&A savings.
- Reported "all-in" Proved plus Probable finding and development
costs for 2015 of $6.08/boe.
- Utilizing Sproule's much lower independent engineering price
deck – Surge's 2015 year-end net asset value ("NAV") per share is
$4.88.
Q4/15 HIGHLIGHTS
- Achieved a fourth quarter average production rate of 14,187 boe
per day, a 5 percent increase from the previous quarter.
- Surge's production mix for the quarter was 78 percent liquids,
trending towards 2016 guidance of 76 percent.
- Capital expenditures excluding A&D totaled $18.3 million for the fourth quarter. This
includes $8.7 million to drill 5
gross (5 net) wells. Total capital also includes $7.7 million in facilities expenditures,
including completion of the pipeline to connect Valhalla associated gas production to a sweet
gas processing plant located to the north of the field.
- Subsequent to the quarter, Surge signed a definitive agreement
to divest its non-core Sunset property in Northern Alberta for proceeds of $28 million.
- Subsequent to the quarter, Surge also agreed on terms for a
facilities sale on select Valhalla
facilities. Proceeds of this transaction are expected to be
$15 million.
- Pro-forma the $43 million in
gross proceeds from the two asset divestures mentioned above,
Surge's net debt as at December 31,
2015 was $117.4 million, which
provides for a pro-forma Q4 debt-to-cash flow of 1.9 times.
OPERATIONS OVERVIEW
Shaunavon Results Continue to Outperform; Early Waterflood
Response Detected
Highlights from the fourth quarter drilling program include two
wells in the southern portion of Surge's 54 section land block,
both of which encountered high quality reservoir. These wells
have averaged 235 bopd over a 90 day period, and ranked in the top
five oil wells drilled in Saskatchewan for 2015. As a follow up to the
two fourth quarter Upper Shaunavon wells in the south, Surge
subsequently drilled two more wells in the same area in the first
quarter of 2016. Both of these wells also encountered high
quality reservoir, with excellent porosity levels reaching 18
percent. Early results indicate that these wells are similar
in productive capacity to the two fourth quarter wells.
Surge is also pleased to report that a waterflood response has
been detected in a 200m offset oil producer in the Upper Shaunavon
waterflood pilot area. Recent production data from offsetting
wells indicates a positive type curve result in the field compared
to Surge's budget.
Surge is currently conducting an internal resource update of the
Upper Shaunavon field. Once definitive waterflood results
have been observed, the Company will provide an update to the
market.
Processing Options Expanded at Valhalla
During the fourth quarter, the pipeline connecting production of
the solution gas from the Valhalla
field to sweet gas processing options in the north was finalized
and operational in mid-December. More recently, Surge commissioned
additional compression capacity in order to maximize delivery to
the Company's firm service and draw down field line
pressures. The Company is currently sending more than 12
mmcf/d of sweet gas to the northern sweet processing
facilities. Surge holds strategic firm transportation at
Valhalla, with both area service
providers. Current transportation commitments are aligned
with the Company's outlook for sustained production at Valhalla.
In early 2016 Surge also completed the acquisition of an
increased working interest (and operatorship) in the Company's
nearby owned Doe Gas Plant at 8-30-075-09W6. Surge could
ultimately take a significant portion of its associated gas
production to the 8-30 plant.
In addition to facilities expansions, Surge recently completed a
new well in the north at Valhalla. The 400m downspaced well
encountered virgin reservoir pressure, and the well is currently
tracking Surge's Valhalla type
curve. Recent well tests are encouraging, with performance
continuing to improve as the well responds to lower operating line
pressures in the field.
Surge anticipates that Valhalla Doig drills will benefit greatly
from the revised Alberta royalty
legislation that is expected to be in place for 2017. This is
largely due to the change from volume based to cost based
calculations during the capital recovery phase of the well
life. A lower overall royalty rate is expected at
Valhalla moving forward.
Updated Type Curve at Eyehill Sparky
As previously reported, Surge drilled two new wells at Eyehill
in the Sparky formation during the fourth quarter. These
wells were successfully completed with a new horizontal monobore
well design. The Company's development plan now calls for
1200-1400m lateral length wells at Eyehill. The two new wells
at Eyehill have averaged 112 boe/d (75% oil) over a 90 day
period.
Based on a data set of seven longer lateral wells, Surge now
expects to recover reserves of 140 mboe on primary recovery,
compared to 120 mboe previously. Coupled with the expectation
of lower well costs at Eyehill, Surge now expects this core area to
compete for more capital within the Company.
BUSINESS DEVELOPMENT UPDATE
Subsequent to the fourth quarter, Surge signed a definitive
agreement divesting the Company's non-core Sunset property in
Northern Alberta. Recent production rates at Sunset were
approximately 700 boe/d, and gross proceeds are $28 million.
The second transaction involves the sale of certain Valhalla area production facilities to a third
party. Surge will maintain control of the facilities as operator
and will pay the purchaser an annual tariff for the life of the
agreement, but will also retain all third party processing revenues
generated. Gross proceeds from this transaction are expected
to be $15 million. The modest
increase in operating costs associated with this deal are expected
to be completely offset by the decrease in Valhalla processing costs associated with
moving Surge's gas to lower cost sweet processing plants. In
this regard, Surge has monetized the operating cost savings
associated with the recent facilities re-configuration at
Valhalla.
Surge anticipates the closing of these two transactions to occur
prior to the end of the first quarter 2016, contingent upon final
bank approval. The $43 million
in gross proceeds will be used to pay down the Company's existing
debt facility.
FINANCIAL UPDATE
2016 Guidance
Surge intends to provide updated 2016 financial guidance post
the closing of the two transactions discussed above. In
addition to the closing of these deals, the Company is monitoring
an increased production environment at Valhalla due to reduced field pressure as the
recently added compression is optimized. The Company expects to
have a clearer picture of a stable production profile at
Valhalla over the next several
weeks.
Liquidity; Bankline
Pro-forma the $43 million in gross
proceeds from the two asset divestures mentioned above, Surge's net
debt as at December 31, 2015 was
$117.4 million, which provides for a
pro-forma Q4 debt-to-cash flow of 1.9 times.
Hedging Update
Subsequent to the fourth quarter, Surge completed several hedge
transactions. In January, the Company elected to monetize a
1,000 bbl/d WTI collar for 2016. Proceeds from this
transaction were $4.7 million, and
will be recognized in the financial statements for the first
quarter 2016.
Surge has recently entered into new WTI collar contracts, which
are summarized below:
Commodity
|
Time
Frame
|
Volume
|
Value
|
WTI oil collars
(put/call)
|
2H 2016
|
2,000
bbl/d
|
CAD $45 x
$64.77
|
WTI oil collars
(put/call)
|
2H 2016 – 1H
2017
|
1,000
bbl/d
|
CAD $45 x
$70.18
|
WTI oil collars
(put/call)
|
1H 2017
|
1,500
bbl/d
|
CAD $50 x
$70
|
2015 RECAP AND OUTLOOK
Despite the volatile commodity price environment, Surge was able
to execute on a number of significant accomplishments in
2015. As stated in the highlights above, the Company's timely
disposition of a significant asset in SE
Saskatchewan/Manitoba in
the first half of 2015 laid the foundation for successfully
operating in a lower commodity price environment. Surge
management also made the proactive decision of reducing the
Company's dividend by a total of 75 percent in 2015. These
strategic decisions proved to be correct and necessary to preserve
capital as lower commodity prices persisted throughout 2015, and
well into 2016.
In addition to significantly bolstering its balance sheet, the
Company advanced development of its three key assets throughout the
year. The significant cost reductions at the Upper Shaunavon
have led to improved economics for the play. Recently, high
porosity reservoir in the southern portion of the play has been
encountered, resulting in delivery of consistent results above type
curve. Surge anticipates encountering more of this high
quality sandstone reservoir as it further delineates the Company's
large, contiguous land base.
Valhalla experienced a
transformational year in 2015, in regards to both well results and
facilities developments. Discovery of a high porosity Coquina
section in the northern extension of the field resulted in three of
the top wells in Alberta for the
year. As the final leg of a facilities expansion is
implemented, the Company looks forward to a more reliable and
stable production profile at Valhalla.
At Eyehill, implementation of a monobore well design and longer
laterals has increased expectations for the Sparky play, and
enhanced economics in this area.
Despite the significant decline in oil prices in 2015, the
Company's business model remains intact. The current
corporate decline rate of 19 percent underpins this business
model. Surge management remains committed to being a moderate
growth, dividend paying company. The Company is encouraged by
the current business development environment, and the prospects for
strengthening its asset base over the balance of the year.
Surge management looks forward to delivering further corporate
updates as the year progresses.
FINANCIAL STATEMENTS AND ACCOMPANYING MDA AND ANNUAL
INFORMATION FORM:
Surge has filed with Canadian securities regulatory authorities
its annual audited consolidated financial statements and
accompanying MD&A for the year and three months ended
December 31st, 2015, as
well as its Annual Information Form. 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;
(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, including the timing
of management updates in connection therewith; (iv) expectations
with respect to the Company's ability to operate and succeed in the
current commodity price environment; (v) the Company's declared
focus and primary goals; (vi) management's forecast of debt to cash
flow ratio and the availability of Surge's bank line to fund
Surge's future capital requirements; (vii) management's estimates
and expectations regarding production efficiencies, drilling
upside, drilling inventory, well costs, growth opportunities,
reserves and reserve life index and decline rates; (viii)
availability and implementation of solutions for the processing and
transportation of crude oil and natural gas production and their
effect on the Company's production profiles going forward; (ix) the
Company's expectations with respect to changes in royalty programs
and the Company's ability to benefit from such changes; * the
successful completion of the Company's proposed disposition and
sale and leaseback transactions, the timing thereof and the use of
proceeds therefrom; and (xi) the timing of the Company's provision
of updated guidance.
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,
prevailing weather conditions, exchange rates, licensing
requirements, the timing and completion of the proposed
dispositions, 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
transactions 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 16, 2016 and in Surge's
MD&A for the period ended December 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.
Reserves Data
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 and boepd means barrel of oil equivalent per day.
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.
Non-IFRS Measures
This press release contains the terms "funds from operations",
"net debt", "netback", and "NAV" 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. NAV is
calculated as set forth above. 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.