CALGARY, May 10, 2017 /CNW/ - Surge Energy Inc.
("Surge" or the "Company") (TSX: SGY) announces its operating and
financial results for the quarter ended March 31, 2017.
Surge's quarterly operating and financial results continue to
exceed management's budgeted expectations based on excellent
drilling and waterflood results at the Company's three core areas,
rigorous ongoing cost cutting initiatives, and strategic capital
allocation decisions designed to create balance sheet
flexibility.
HIGHLIGHTS
- Increased production per share in Q1 of 2017 by 8 percent over
Q4 of 2016;
- Q1/17 production of 13,866 boepd achieved management's budgeted
production estimates - without any contribution from four
successful Valhalla wells (2.5
net) drilled during the quarter (and early into Q2/17). These four
wells have now been completed and brought on stream in Q2/17;
- Increased unhedged funds from operations by 574 percent from
$3.5 million in Q1/16 to $23.6 million in Q1/17;
- Increased unhedged funds from operations per share by 550
percent from $0.016 per share in
Q1/16 to $0.104 per share in
Q1/17;
- Increased funds from operations by 189 percent from
$7.5 million in Q1/16 to $21.6 million in Q1/17.
- Increased funds from operations per share more than 233 percent
from $0.03 per share in Q1/16 to
$0.10 per share in Q1/17;
- On February 23, 2017 Surge
announced record low all-in FD&A costs for 2016 of $3.74 per boe, and a recycle ratio of 4.61 times
on a proven plus probable basis; providing an increase in the
Company's proved developed producing reserves of more than 25
percent;
- Increased Surge's independently engineered net asset value per
share, on a proven plus probable basis, by 12 percent to
$5.47.
- Late in 2016 Surge revised upward the Company's 2017 average
daily production estimate to 14,000 boepd from 13,500 boepd, and
Surge's 2017 exit production target to 14,450 boepd from 14,000
boepd;
- Increased the Company's dividend on February 8, 2017 as a result of continued
excellent drilling and waterflood results in the Company's three
core areas providing significant excess free cash flow, while
maintaining a conservative simple payout ratio of approximately 15
percent of forecast 2017 funds flow;
- Subsequent to the end of Q1/17, on April
19, 2017 Surge announced:
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- A strategic $37 million
acquisition of low decline, high netback, waterflooded, crude oil
producing assets in the Company's core Sparky area in Central Alberta, which included two key
sections of undeveloped land in Surge's core operated Eyehill
asset;
- A further upward revision to the Company's 2017 average daily
production estimate to 14,450 boepd, and Surge's 2017 production
exit rate target to 15,150 boepd from 14,450 boepd;
- A further planned increase in the Company's annual dividend to
$0.095 per share ($0.00792 per share per month), while maintaining
a conservative simple payout ratio of 16 percent of forecast
annualized 2H/17 funds flow; and
- A large increase to the Company's bank line from $250 million to $285
million, providing the Company with over $85 million of unutilized credit
availability.
FINANCIAL AND
OPERATING SUMMARY
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($000s except per
share amounts)
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Three Months
Ended
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Three Months
Ended
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Mar 31,
2017
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Mar 31,
2016
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%
Change
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Mar 31,
2017
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Dec 31,
2016
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%
Change
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Financial
highlights
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Oil sales
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48,194
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26,166
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84 %
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48,194
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45,356
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6 %
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NGL sales
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2,240
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769
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191 %
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2,240
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1,284
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74 %
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Natural gas
sales
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4,016
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2,211
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82 %
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4,016
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3,595
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12 %
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Total oil, natural
gas, and NGL revenue
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54,450
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29,146
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87 %
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54,450
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50,235
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8 %
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Adjusted funds from
operations1
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21,640
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7,491
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189 %
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21,640
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21,534
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—%
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Per share basic
($)
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0.10
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0.03
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233 %
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0.10
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0.10
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—%
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Capital expenditures
- petroleum & gas properties2
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34,041
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12,873
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164 %
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34,041
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23,515
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45 %
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Capital expenditures
- acquisitions & dispositions2
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(269)
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(41,141)
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(99)%
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(269)
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14,921
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(102)%
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Total capital
expenditures2
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33,772
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(28,268)
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(219)%
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33,772
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38,436
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(12)%
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Net debt at end of
period3
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178,753
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133,816
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34 %
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178,753
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161,735
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11 %
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Operating
highlights
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Production:
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Oil (bbls per
day)
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10,298
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9,821
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5 %
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10,298
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9,832
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5 %
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NGLs (bbls per
day)
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684
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615
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11 %
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684
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504
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36 %
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Natural gas (mcf per
day)
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17,302
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17,829
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(3)%
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17,302
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15,036
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15 %
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Total (boe per day)
(6:1)
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13,866
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13,408
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3 %
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13,866
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12,842
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8 %
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Average realized
price (excluding hedges):
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Oil ($ per
bbl)
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52.00
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29.28
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78 %
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52.00
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50.14
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4 %
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NGL ($ per
bbl)
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36.39
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13.75
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165 %
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36.39
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27.69
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31 %
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Natural gas ($ per
mcf)
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2.58
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1.36
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90 %
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2.58
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2.60
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(1)%
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Netback ($ per
boe)
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Oil, natural gas and
NGL sales
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43.63
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23.89
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83 %
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43.63
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42.52
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3 %
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Realized gain (loss)
on commodity contracts
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(1.59)
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3.26
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(149)%
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(1.59)
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(1.85)
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(14)%
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Royalties
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(5.64)
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(3.14)
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80 %
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(5.64)
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(5.08)
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11 %
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Operating
expenses
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(13.95)
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(12.27)
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14 %
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(13.95)
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(12.69)
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10 %
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Transportation
expenses
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(1.57)
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(2.33)
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(33)%
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(1.57)
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(1.38)
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14 %
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Operating
netback
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20.88
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9.41
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122 %
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20.88
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21.52
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(3)%
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G&A
expense
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(1.93)
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(1.96)
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(2)%
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(1.93)
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(1.79)
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8 %
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Interest
expense
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(1.61)
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(1.32)
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22 %
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(1.61)
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(1.51)
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7 %
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Corporate
netback
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17.34
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6.13
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183 %
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17.34
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18.22
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(5)%
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Common shares
outstanding, end of period
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225,766
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221,047
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2%
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225,766
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225,755
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—%
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Weighted average
basic shares outstanding
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225,764
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221,042
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2%
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225,764
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225,278
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—%
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Stock option
dilution
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3,427
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—
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nm4
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3,427
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—
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nm
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Weighted average
diluted shares outstanding
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229,191
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221,042
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4%
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229,191
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225,278
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2%
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1
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Management uses
adjusted 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.
Adjusted 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
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Please see capital
expenditures note.
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3
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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
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The Company views
this change calculation as not meaningful, or "nm".
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OPERATIONS OVERVIEW
In Q1/17 Surge budgeted an active drilling program with total
capital expenditures of $34.0 million
(including corporate G&A), which involved the drilling of 14
wells (13 net) in the Company's three primary operating areas of
Sparky, Valhalla, and Shaunavon, together with associated capex for
infrastructure, land and seismic. Surge achieved a 100 percent
success rate for the Q1/17 program.
Surge achieved management's budgeted production estimates for
Q1/17 - without any contribution from four successful Valhalla wells (2.5 net) drilled during the
quarter (and early into Q2/17). These wells have now been completed
and brought on stream in Q2/17.
Current production rates already exceed Surge's upwardly revised
average daily production estimate for 2017 of 14,450 boepd (82
percent oil).
In Q1/17 Surge experienced modest cost escalation of
approximately six to eight percent for drilling and completion
services. This increase is reflected in Surge's previously
announced budget capex assumptions. In January and February of
Q1/17, the Company experienced a number of one time workover
expenditures for well reactivations that led to higher operating
expenses than budget. March operating expenses were in line with
management's 2017 budget expectations of $12
to $12.50 per boe.
Sparky – Production Growth Continues
Based on excellent development drilling and waterflood results,
together with the strategic $37
million asset acquisition referred to above (which closed
early in Q2/17 – please refer to the Press Release dated
April 19, 2017), Surge's Sparky core
area continues to be a key growth asset for the Company. Surge's
Sparky core area now comprises over half a billion barrels of net
OOIP of medium and light crude oil, over 5,400 boepd of current
production (90 percent oil), and more than 230 well (10 year)
inventory.
Surge's ongoing Eyehill Sparky drilling and waterflood program
at its operated, 130 million barrel (107 million barrel net) OOIP,
29° API gravity oil asset, has significantly exceeded
expectations. The Company 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 budgeted at less than
$5.00 per boe for 2017, down from
$7.40 per boe in 2016. With over 75
net remaining locations at Eyehill, this area will continue to
underpin Surge's production per share growth for the foreseeable
future. Internal risked rates of return for Sparky development
wells are now over 150 percent at strip pricing for primary
reserves only.
In the second half of 2017 Surge anticipates drilling up to 9
more wells (9 net) in the Sparky area at Eyehill, Betty Lake and Provost.
Valhalla – Four New Wells
Onstream
In Q1 (and early Q2) of 2017 Surge drilled four wells (2.5 net)
at Valhalla with excellent
results. As a result of increased demand for pressure pumping
services in this area Surge elected to delay the completion of
these wells until Q2/17. All of the four (2.5 net) successful
Valhalla wells have now been
completed and are on-stream with production rates at type-curve
levels or better.
As a result of these successful drilling results, together with
field wide optimization activities, Surge's operating expense at
Valhalla for 2017 is now budgeted
to be $8.50 per boe. Internal risked
rates of return for Valhalla
development wells are over 150 percent at strip pricing for primary
reserves only.
Surge plans to drill two additional wells (2 net) at
Valhalla in 2H/17. Surge estimates
a 10 year inventory of more than 45 net development drilling
locations in its Valhalla core
area.
Shaunavon – Development
Drilling and Waterflood Implementation
Surge successfully drilled five Upper Shaunavon wells in Q1 of
2017. Two wells were drilled in the southern Upper Shaunavon core
development area. In Surge's third Upper Shaunavon development
area, the Company has recently completed the drilling of two
extended reach delineation wells, with 39 frac stages completed in
the first well, and 36 stages in the second. Both wells are on
production with the first performing above type curve, and the
second well is currently cleaning up.
In 2H/17 the Company plans to drill up to 15 more Upper
Shaunavon wells. Surge also intends to commence a second pilot
waterflood in the southern development area at Shaunavon, with operations to commence in Q3
of 2017.
As a result of Surge's excellent ongoing development drilling
results, together with the Company's expanding waterflood
activities, operating expenses at Shaunavon are now budgeted to be $5.88 per barrel in 2017. Internal risked rates
of return for Upper Shaunavon development wells are over 150
percent at strip pricing for primary reserves only.
Surge estimates a 10 year inventory of more than 170 net
development drilling locations in its Shaunavon core area.
OUTLOOK – CONTINUED PER SHARE GROWTH
Management's goal is to be the best positioned public
light/medium gravity crude oil growth and dividend paying company
in Canada.
In the last eight months, Surge has upwardly revised the
Company's production per share estimates three times. 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.
Current production rates already exceed Surge's upwardly revised
average daily production estimate for 2017 of 14,450 boepd (82
percent oil).
In addition, Surge has increased the Company's dividend per
share by 26.7 percent since the start of 2017, while maintaining a
conservative simple payout ratio of 16 percent of forecast Q4/17
cash flow annualized, versus a peer group average payout ratio of
approximately 25 percent.
Accordingly, 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;
guidance with respect to 2017 average and exit production and
production per share; Surge's dividend; payout ratio; Surge's
hedging program and the benefits thereof; management's estimates
and expectations regarding capital expenditures, operating and
G&A costs, growth opportunities and strategies, rates of return
and reserves; 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 March 31,
2017, 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 "adjusted funds from
operations", "funds from operations" 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 "adjusted funds from operations" and
"funds from by operations" to analyze operating performance and
leverage. Management believes that in addition to net income,
adjusted funds from operations and funds 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. 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.
SOURCE Surge Energy Inc.