CALGARY, April 19, 2017 /CNW/ - Surge Energy Inc. ("Surge"
or the "Company") (TSX: SGY) announces the acquisition (the
"Acquisition") of a low decline, high netback, waterflooded, crude
oil producing asset in its core Sparky area of Central Alberta. In addition, Surge has
acquired two net undeveloped sections in the Company's core
operated Eyehill asset (collectively the "Assets"). Surge has
identified up to 29 low risk, development drilling locations on the
Assets.
The purchase price for the Assets is $37
million, subject to standard closing adjustments. The
closing of the Acquisition occurred on April
12, 2017 (the "Closing"). The Acquisition is accretive to
Surge on all key per share metrics. In addition, the two
undeveloped sections at Eyehill are strategic to Surge for
continued consolidation of this large, high quality, 130 million
barrel OOIP, 29° API crude oil asset. The purchase of these two
sections will allow the Company to continue its excellent Eyehill
Sparky development drilling program, and the Company's successful
ongoing waterflood activities.
As a result of Surge's successful drilling and waterflood
activities in the Company's three primary operating areas, together
with the core Sparky area asset Acquisition referred to herein,
Surge will now be delivering production growth of more than 24
percent from Q2/16 to the end of Q4/17.
With current core production of more than 745 boepd (97 percent
oil), and an annual decline of less than 12 percent, the Assets
provide Surge with substantial free funds flow. Accordingly,
pursuant to the Company's conservative dividend policy, Surge's
Board of Directors will look to increase the Company's dividend by
11.8 percent from $0.085 per year
($0.00708 per month) to $0.095 per year to ($0.00792 per month).
Surge's increased dividend equates to a simple payout ratio of
16 percent of forecast 2H/17 funds flow, which compares favorably
with the Company's peer group average simple payout ratio of
approximately 25 percent.
STRATEGIC RATIONALE FOR ACQUISITION
Over the last 30 months of the extended crude oil price
downturn, Surge management strategically created financial
liquidity of over $750 million to
reduce debt and position the Company's balance sheet – without
issuing treasury shares in a depressed market.
Management have also materially increased Surge's netbacks over
$8 per boe by focusing on rigorous
cost cutting initiatives for operating costs, G&A, and interest
expenses. Further, the Company has delivered excellent operational
results by delineating Surge's high quality, large OOIP, light and
medium gravity crude oil reservoirs through top tier development
drilling results, combined with successful waterflood
activities.
These capital allocation decisions, cost cutting initiatives,
and excellent operational results have now strategically positioned
Surge to begin deploying growth capital into accretive, core area
acquisitions on very attractive terms.
The Acquisition is entirely consistent with Surge's stated goal
of acquiring high quality, operated, large OOIP, conventional crude
oil assets with low recovery factors. The Assets are located
in the Company's half a billion barrel net OOIP, Sparky/Lloyd play
in Central Alberta, and are
characterized by the following attributes:
- More than 56 million barrels OOIP; 17 percent recovery
factor;
- 745 boepd of low decline, oil-weighted production (i.e. less
than a 12 percent annual decline);
- Long life reserves – over 4.4 mmboe of internally estimated
proved and probable reserves;
- 97 percent oil weighting;
- Production is 100 percent owned and operated;
- Majority of the production is under successful, active
waterflood;
- Up to 29 low-risk developmental drilling locations; and
- Highly accretive operating netbacks (i.e. > $30 per boe netbacks at US$55 WTI).
Surge's ongoing Eyehill Sparky drilling and waterflood program
at its operated, 130 million barrel OOIP, 29° API gravity oil
asset, has significantly exceeded expectations. The Company
recently drilled six consecutive successful development wells in Q1
of 2017. Current production rates at the Eyehill battery recently
exceeded 2,000 bopd net to Surge, up from approximately 385 bopd in
Q2 of 2016.
Operating costs at Eyehill are now budgeted at less than
$5.00 per boe for 2017, down from
$7.40 per boe in 2016. With over 65
net remaining locations at Eyehill, this area will continue to
underpin Surge's production per share growth for the foreseeable
future. Risked rates of return for Sparky development wells are now
over 150 percent at strip pricing for primary reserves only.
ATTRACTIVE DEAL METRICS
The $37 million Acquisition has
the following transaction metrics:
Current Production
Multiple
|
745 boepd (97 percent
oil); $49,600 per boepd
|
2017 Annualized Funds
Flow Multiple1
|
4.5x
|
Total Proved Plus
Probable Reserves Multiple (Internally Estimated)
|
$8.40/boe
|
Recycle
Ratio
|
3.57x
|
Reserve Life Index
(RLI)
|
>16
years
|
In addition, the Assets generate substantial free funds flow,
and further strengthen the sustainability of Surge's production
base and dividend. We estimate the Acquisition will positively
impact Surge's annualized 2017 forecast guidance as follows:
Average Annual
Production
|
745 boepd
|
Funds Flow From
Operations
|
$8.2
million
|
Development Capital
(to maintain production)
|
$1.2
million
|
Surplus Funds
Flow
|
$7.0
million
|
This Acquisition is accretive on all key per share metrics,
including five percent on total proved plus probable reserves, and
five percent on 2017 funds flow and production per share,
respectively.
UPWARD REVISION TO 2017 GUIDANCE
As a result of continued excellent drilling results at the
Company's Shaunavon, Sparky, and
Valhalla core areas, combined with
successful ongoing waterflood activities, on December 13, 2016 Surge revised upward the
Company's 2017 average daily production estimate to 14,000 boepd
from 13,500 boepd, and Surge's 2017 production exit rate target to
14,450 boepd from 14,150 boepd.
Pursuant to the core Sparky area Acquisition referenced herein,
Surge is now revising upward the Company's 2017 guidance as
follows:
OPERATIONAL1
|
PRIOR
GUIDANCE
|
REVISED
GUIDANCE
|
2017 Average
Production (boe/d)
|
14,000
|
14,450
|
2017 Exit Production
(boe/d) (82 percent oil)
|
14,450
|
15,150
|
Total Capital
Spending (including acquisitions)
|
$85
million
|
$124
million
|
Operating Expenses -
2H 2017 ($/boe)
|
$11.45/boe to
$11.95/boe
|
$12.00-$12.50/boe
|
Transportation
Expenses ($/boe)
|
$1.50/boe
|
$1.50/boe
|
Royalties as a % of
Revenue
|
12% to 13%
|
12% to 13%
|
FINANCIAL1
|
|
|
Estimated 2H/17
Annualized Funds Flow from Operations1
|
$129.5
million
|
$136.0
million
|
Estimated 2H/17
Annualized Funds Flow from Operations per Share
($/share)
|
$0.57
|
$0.60
|
Estimated Q4/17 Debt
to Funds Flow
|
1.20 X
|
1.39 X
|
Annualized
Dividend
|
$19.2
million
|
$21.5
million
|
Sustainability
Ratio
|
80%
|
80%
|
Simple Payout
Ratio
|
15%
|
16%
|
Surge's current production rates, pro-forma the Acquisition,
already exceed the Company's upwardly revised 2017 average daily
production guidance rate of 14,450 boepd (82 percent oil and
liquids).
DIVIDEND INCREASE
Surge's conservative dividend policy targets a simple payout
ratio of 20 to 30 percent of annualized cash flow, and an all-in
sustainability ratio in the range of 70 to 90 percent. Additional
free funds flow beyond Surge's targeted six percent annual
production growth target is expected to be allocated to an expanded
capital program, debt repayment, dividend increases, or share
buybacks.
The acquired Assets provide Surge with substantial excess funds
flow, after capital required to maintain production levels, due to
the low decline nature of the Assets (i.e. less than a 12 percent
annual decline). Accordingly, Surge's Board of Directors will look
to increase the Company's dividend by approximately 11.8 percent
per year from $0.085 per year
($0.00708 per month) to $0.095 per year ($0.00792 per month).
The Company's proposed increased dividend equates to a simple
payout ratio of approximately 16 percent of forecast annualized 2H
2017 funds flow, which compares favorably with Surge's peer group
average payout ratio of approximately 25 percent.
It is gratifying for Surge's management and Board to be able to
augment shareholder returns during periods of volatile equity
capital markets, and political uncertainty, through orderly
increases to the Company's dividend, based on Surge's excellent
balance sheet, low corporate decline, low cost structure, and
excellent production efficiencies.
INCREASE TO BANK LINE
As previously disclosed, in 2016 Surge delivered record FD&A
costs of $3.74 per boe, and a recycle
ratio of 4.61 times on a total proved plus probable basis –
with oil prices averaging US$43.32
WTI per barrel. These excellent operational results provided
an increase in the Company's independently engineered, proved
developed producing reserve value of more than 25 percent[2].
On this basis, in accordance with Surge's annual bank line
review process, the Company confirms that its banking syndicate,
led by National Bank of Canada, has increased Surge's bank
line limit (pro-forma the Acquisition) from the previous $250
million to $285 million. The increase
provides Surge with significant financial flexibility to execute
its capital program, as well as, providing ample liquidity for
future core area acquisitions. Surge's next borrowing base review
is scheduled for November 1,
2017.
RISK MANAGEMENT
In connection with the Acquisition, Surge has entered into a
1,250 bbl/d WTI crude oil swap transaction at an average price of
US$55.18 WTI for April, 2017 through
December, 2017. This strategic swap position increases
Surge's second half of 2017 hedge position to 3,750 bbl/d of WTI
crude oil – which has now locked in a floor price of over CAD
$65.20 per bbl.
Surge's ongoing risk management program is designed to lock-in
and protect cash flows to fund capital expenditures, and the
Company's dividend, as well as, protecting Surge's significant free
funds flow forecast at strip crude oil prices.
OUTLOOK – PER SHARE GROWTH CONTINUES
Management's goal is to be the best positioned public
light/medium gravity crude oil growth and dividend paying company
in Canada.
As a result of Surge's successful ongoing drilling and
waterflood activities in the Company's three primary operating
areas, together with the core Sparky area asset Acquisition
referred to herein, Surge will now be delivering production per
share growth of more than 24 percent from Q2/16 to the end of
Q4/17.
Surge's current production rates, pro-forma the Acquisition,
already exceed the Company's upwardly revised 2017 average daily
production guidance rate of 14,450 boepd (82 percent oil and
liquids).
In addition, Surge has increased the Company's dividend per
share by 26.7 percent since the start of 2017, while maintaining a
simple payout ratio of 16 percent of forecast Q4/17 cash flow
annualized, versus a peer group average payout ratio of
approximately 25 percent. Surge is also maintaining an annualized
Q4/17 debt to cash flow ratio of 1.39 times at strip pricing.
As a result of management's strategic capital allocation
decisions, rigorous cost cutting initiatives, and excellent
operational results, we believe that Surge is well positioned to
continue delivering solid per share growth, and to pay the
Company's dividend, on a go-forward basis.
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: production volumes; drilling activities; Surge's
capital expenditure program, including drilling and development
plans and enhanced recovery projects and the timing and results to
be expected thereof; expectations with respect to the Company's
ability to operate and succeed in the current commodity price
environment; the Company's declared focus and primary goals;
management's forecast of debt to funds flow ratio; guidance with
respect to 2017 average and exit production and production per
share; free funds flow; Surge's dividend; payout ratio;
sustainability; recycle ratios; recovery factors; operating
netbacks; Surge's hedging program and the benefits thereof;
management's estimates and expectations regarding capital
expenditures, operating costs, transportation expenses, growth
opportunities and strategies, reserves and reserve life index and
decline rates; the Company 2017 guidance; the availability of
Surge's bank line to fund provide the Company with sufficient
liquidity and financial flexibility; the impact of cost savings
initiatives; production and cash flow per share growth; and
anticipated commodity prices; drilling inventories and locations;
and management's expectations regarding debt levels.
The guidance for 2017 set forth in this press release may be
considered to be future-oriented financial information or a
financial outlook for the purposes of applicable Canadian
securities laws. Financial outlook and future-oriented financial
information contained in this press release are based on
assumptions about future events based on management's assessment of
the relevant information currently available. In particular, this
press release contains projected operational information for 2017,
including exit production, total capital, royalties, operating
expenses, transportation expenses, Surge's dividend, payout ratios
and annualized funds flow from operations and funds flow from
operations per share. The future-oriented financial information and
financial outlooks contained in this press release have been
approved by management as of the date of this press release.
Readers are cautioned that any such financial outlook and
future-oriented financial information contained herein should not
be used for purposes other than those for which it is disclosed
herein.
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 impact of completed facilities on operating costs
and the availability, costs of capital, labour and services and the
creditworthiness of industry partners and the impact of
transactions on 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 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 15, 2017 and in Surge's
MD&A for the period ended December 31,
2016, 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. 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. 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.
Non-IFRS Measures
This press release contains the terms "funds flow", "funds flow
from operations", "net debt", "operating netback", "sustainability"
and "payout ratio" 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 flow from by
operations" to analyze operating performance and leverage.
Management believes that in addition to net income, funds flow from
operations are useful supplemental measures as they provide an
indication of the results generated by the Company's principal
business activities before the consideration of how those
activities are financed or how the results are taxed.
Management believes "operating 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. Sustainability is a comparison of a
company's cash outflows (capital investment and dividends) to its
cash inflows (funds flow) and is used by the Company to assess the
appropriateness of its dividend levels and the long-term ability to
fund its development plans. Sustainability ratio is calculated
using the development capital plus dividends paid divided by funds
flow. Payout ratio is calculated on a percentage basis as
dividends declared divided by funds flow from operations. Payout
ratio is used by management to monitor the dividend policy and the
amount of funds flow from operations retained by the Company for
capital reinvestment. 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.
________________________
1 2017 guidance
and Acquisition metrics are based off of US $55 WTI/bbl; CAD $72.37 WTI/bbl; EDM CAD $68.12/bbl; WCS CAD $52.70/bbl; AECO $2.95/mcf.
2 2015 independently engineered PDP value,
post-dispositions, of $441,363,000,
compared to the 2016 independently engineered PDP value of
$553,046,000.
SOURCE Surge Energy Inc.