CALGARY, AB, Jan. 27, 2021 /CNW/ - Surge Energy Inc. ("Surge"
or the "Company") (TSX: SGY) is pleased to announce its 2021 budget
guidance, as approved by the Company's Board of Directors, as well
as an update on Surge's ongoing Environmental, Social and
Governance ("ESG") program.
2021 BUDGET – CONTINUED FOCUS ON SUSTAINABILITY
Surge's focus in 2021 continues to be on disciplined capital
allocation, with cash flow strategically allocated between capital
projects, net bank debt1 repayment, and the Company's
substantial abandonment and reclamation program. As a result of
Surge's very low 19 percent annual corporate decline, and focusing
drilling operations to the top tier production efficiencies
associated with the Company's core Sparky play, Surge can grow its
production in 2021 while continuing to pay down net bank debt at
current prices.
In 2021, the Company is budgeting to spend $55 million of exploration and development
capital (including corporate overhead charges), which includes
bringing on production 32 gross (32 net), wells of which 9 gross (9
net) wells were rig released in late Q4/20. The 2021 capital budget
is primarily focused on Surge's Sparky core area. Additionally,
Surge intends to drill a well at Valhalla, offsetting the Company's prolific
Montney well that came on
production in late 2019, which has produced over 200,000 barrels of
oil to date. This medium/light oil focused drilling program is
fully funded by cash flow, increases Surge's production by six
percent, from 17,000 boepd exit 2020 to 18,000 boepd on average for
2021, and pays down net bank debt at current prices.
2021 BUDGET HIGHLIGHTS
The Company's 2021 budget:
- Increases production from 17,000 boepd currently, to over
19,250 boepd at the conclusion of the 1H/21 drilling program, with
average production for 2021 currently forecast at 18,000
boepd;
- Maximizes 2H/21 free cash flow, through a Q1/21 weighted,
returns focused capital program;
- Continues to pay down net bank debt at current prices;
- Maintains operational flexibility to adjust to changes in the
commodity price environment; and
- Provides disciplined capital allocation, with cash flow
strategically allocated between capital projects, net bank debt
repayment and the Company's substantial abandonment and reclamation
program.
With the emphasis on free cash flow generation in 2H/21, the
Company's 2021 budget provides for a second half maintenance
capital program. However, as global crude oil prices continue to
strengthen, Surge anticipates providing an update on the size and
scope of a potential, more substantial second half drilling program
in early Q3/21.
Further details relating to the 2021 budget are set
forth below:
2021
Guidance:
|
|
Total 2021(e)
exploration & development capital
|
$55
million
|
Exit 2020(e)
production
|
17,000 boepd (84%
liquids)
|
Q2/21(e)
production
|
19,000 boepd (85%
liquids)
|
Average 2021(e)
production
|
18,000 boepd (84%
liquids)
|
2021(e) Net operating
expenses2
|
$14.75 - $15.25
per boe
|
2021(e)
Transportation expenses
|
$1.40 - $1.60 per
boe
|
2021(e) General &
administrative expenses
|
$1.95 - $2.05 per
boe
|
CAPITAL PROGRAM HIGHLIGHTS
- This program is anticipated to add over 3,575 boepd of
production on an IP180 basis, for drilling and completions
expenditures of $39 million
(inclusive of Q4/20 costs of approximately $9 million), generating top-tier production
efficiencies3 of $10,900
per flowing boe;
- The program involves drilling 31 net highly economic, operated
locations in 5 separate, large OOIP3, shallow,
conventional Sparky reservoirs;
- An additional follow-up well will be drilled at Valhalla, offsetting Surge's initial
horizontal Montney well, which
came on production at over 1,250 boepd and is currently producing
at approximately 400 boepd; and
- The capital program continues to focus on Surge's extensive, 14
year drilling inventory3 of over 500 Sparky locations -
across multiple large OOIP, shallow, conventional Sparky
reservoirs.
FINANCING INITIATIVES
As previously announced on November 17,
2020, Surge executed definitive agreements with the Business
Development Bank of Canada
("BDC"), in partnership with the Company's syndicate of lenders
(the "Syndicate"), for a non-revolving facility of $40 million, providing attractive interest rates
over a four-year term.
Additionally, Surge also announced an extension of the Company's
existing $335 million first-lien
credit facility ("Credit Facility"). Maturity of the Credit
Facility has been extended from March 31,
2021 to December 31, 2021 and
the Company's next semi-annual borrowing base redetermination has
been extended to June 30, 2021.
Concurrent with the above Credit Facility reconfirmation, Export
Development Canada ("EDC") provided $50.6
million in funding into Surge's existing $335 million credit facility. This large capital
injection provides the Company with a significant new Syndicate
banking partner in the Credit Facility.
This addition of more than $90
million in new credit commitments provides Surge with
significant additional long-term liquidity at reasonable interest
rates, allowing the Company to pursue attractive development
opportunities, with a view to generating net asset value growth for
its stakeholders.
ESG AND ALBERTA SITE
REHABILITATION PROGRAM UPDATE
As part of the Company's commitment to ESG stewardship, Surge
and its service providers submitted more than 1,700 applications
under the Government of Alberta's
Site Rehabilitation Program ("SRP") to abandon and reclaim well
bores, pipelines and well sites. The Government of Alberta is administering the SRP in various
phases, providing grant funding through service providers for the
abandonment or remediation of oil and gas sites.
To date, the Company has received more than $11 million in grant funding from the Alberta
Site Rehabilitation Program. Surge's abandonment budget,
complimented by this grant funding, will significantly increase the
number of inactive wells, pipelines, and facilities the Company can
abandon in 2021. In addition, Surge has received funding from the
Saskatchewan Accelerated Site Closure Program to complete
abandonments on the Company's Saskatchewan properties. Through these
programs, Surge expects to receive the benefit of additional
funding in subsequent grants.
Surge's internal ongoing abandonment program, together with
the enhanced SRP abandonment program, will significantly reduce the
Company's decommissioning liability over the next 12 months. The
Company has already abandoned over 260 wells over the past four
months, and anticipates abandoning an additional 60 wells by March,
2021. Once completed, this will result in the abandonment of over
26 percent of Surge's total inactive wells.
Surge remains actively engaged with the Government of
Alberta regarding additional SRP
developments, as well as new developments in both Federal and
Government of Saskatchewan
programs, in order to accelerate the decommissioning of the
Company's asset retirement obligations.
Surge strives to be a leader in reducing the impact of its
operations on the environment. The Company is committed to
producing energy in a safe, responsible, and sustainable
manner.
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: Surge's declared focus and primary goals; management's
expectations and plans with respect to the development of its
assets and the timing thereof; Surge's annual exploration and
development capital expenditure program and budget and its
flexibility to make adjustments thereto; Surge's drilling program
and inventory, and the risk associated therewith; management's
expectations regarding production growth, 2021 Q2 and 2021 average
production; management's expectations regarding net bank debt
repayment at current prices; management's expectations regarding
2021 estimated operating expenses, transportation expenses and
general and administrative expenses; commodity prices and
management's ability to react to changes thereto; Surge's
abandonment and reclamation program and management's expectations
regarding reductions in Surge's decommissioning liability; and
liquidity under Surge's credit facility.
The forward-looking statements are based on certain key
expectations and assumptions made by Surge, including expectations
and assumptions 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; the availability and costs
of capital, labour and services; and the creditworthiness of
industry partners.
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 condition of the global economy, including trade, public health
(including the impact of COVID-19) and other geopolitical risks;
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; and
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 AIF dated March 9,
2020 and in Surge's MD&A for the period ended
December 31, 2019, 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.
Oil and Gas Advisories
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") means Discovered Petroleum
Initially In Place ("DPIIP"). DPIIP is derived by Surge's internal
Qualified Reserve Evaluators ("QRE") and prepared in accordance
with National Instrument 51-101 and the Canadian Oil and Gas
Evaluations Handbook ("COGEH"). DPIIP, as defined in COGEH, is that
quantity of petroleum that is estimated, as of a given date, to be
contained in known accumulations prior to production. The
recoverable portion of DPIIP includes production, reserves and
Resources Other Than Reserves (ROTR). OOIP/DPIIP and potential
recovery rate estimates are based on current recovery technologies.
There is significant uncertainty as to the ultimate recoverability
and commercial viability of any of the resource associated with
OOIP/DPIIP, and as such a recovery project cannot be defined for a
volume of OOIP/DPIIP at this time.
Production efficiencies are calculated by dividing capital
expenditures of a project by the average production from that
project for a given period of time. IP180 is the average production
rate of a well over the first 180 days on production.
This press release contains certain oil and gas metrics and
defined terms which do not have standardized meanings or standard
methods of calculation and therefore such measures may not be
comparable to similar metrics/terms presented by other issuers and
may differ by definition and application.
Drilling Locations
This press release discloses drilling locations in two
categories: (i) booked locations; and (ii) unbooked locations.
Booked locations are proved locations and probable locations
derived from an internal evaluation using standard practices as
prescribed in the Canadian Oil and Gas Evaluations Handbook and
account for drilling locations that have associated proved and/or
probable reserves, as applicable.
Unbooked locations are internal estimates based on prospective
acreage and assumptions 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.
Unbooked locations have been identified by Surge's internal
certified Engineers and Geologists (who are also Qualified Reserve
Evaluators) as an estimation of our multi-year drilling activities
based on evaluation of applicable geologic, seismic, engineering,
production and reserves information. There is no certainty that the
Company will drill all unbooked drilling locations and if drilled
there is no certainty that such locations will result in additional
oil and gas reserves, resources or production. The drilling
locations on which the Company actually drills wells will
ultimately depend upon the availability of capital, regulatory
approvals, seasonal restrictions, oil and natural gas prices,
costs, actual drilling results, additional reservoir information
that is obtained and other factors. While certain of the unbooked
drilling locations have been de-risked by drilling existing wells
in relative close proximity to such unbooked drilling locations,
the majority of other unbooked drilling locations are farther away
from existing wells where management has less information about the
characteristics of the reservoir and therefore there is more
uncertainty whether wells will be drilled in such locations and if
drilled there is more uncertainty that such wells will result in
additional oil and gas reserves, resources or production.
Of the over 500 net drilling locations identified in the
Company's Sparky core area 184 net are booked locations. Of these
booked locations 137 net are Proved locations and 47 net are
Probable locations based on 2019YE reserves. Assuming an average
number of 35 wells drilled per year in the Sparky area, Surge's
>500 locations provides 14 years of drilling. At US$50 WTI, Surge still has >450 economic
Sparky locations, with a weighted average IRR of 97% and PIR10 of
1.53.Surge's internally used type curves were constructed using a
representative, factual and balanced analog data set, as of
January 1, 2020. All locations were
risked appropriately, and EUR's were measured against OOIP
estimates to ensure a reasonable recovery factor was being achieved
based on the respective spacing assumption. Other assumptions, such
as capital, operating expenses, wellhead offsets, land
encumbrances, working interests and NGL yields were all reviewed,
updated and accounted for on a well by well basis by Surge's
Qualifies Reserve Evaluators. All type curves fully comply with
Part 5.8 of the Companion Policy 51 – 101CP.
"Internally estimated" means an estimate that is derived by
Surge's internal QRE's and prepared in accordance with National
Instrument 51-101 - Standards of Disclosure for Oil and Gas
Activities. All internal estimates contained in this new release
have been prepared effective as of Jan 1,
2020.
Non-GAAP Financial Measures
Certain secondary financial measures in this press release –
namely, "net bank debt" and "net operating expenses" are not
prescribed by GAAP. These non-GAAP financial measures are included
because management uses the information to analyze business
performance, cash flow generated from the business, leverage and
liquidity, resulting from the Company's principal business
activities and it may be useful to investors on the same basis.
None of these measures are used to enhance the Company's reported
financial performance or position. The non-GAAP measures do not
have a standardized meaning prescribed by IFRS and therefore are
unlikely to be comparable to similar measures presented by other
issuers. They are common in the reports of other companies but may
differ by definition and application. All non-GAAP financial
measures used in this document are defined below:
Net Bank Debt
There is no comparable measure in accordance with IFRS for net
bank debt. Net bank debt is calculated as current portion of bank
debt plus or minus working capital (accounts receivable, prepaid
expenses and deposits and accounts payable and accrued
liabilities).
Net Operating Expenses
Net operating expenses are determined by deducting processing
and other revenue primarily generated by processing third party
volumes at processing facilities where the Company has an ownership
interest. It is common in the industry to earn third party
processing revenue on facilities where the entity has a working
interest in the infrastructure asset. Under IFRS this source of
funds is required to be reported as revenue. However, the Company's
principal business is not that of a midstream entity whose
activities are dedicated to earning processing and other
infrastructure payments. Where the Company has excess capacity at
one of its facilities, it will look to process third party volumes
as a means to reduce the cost of operating/owning the facility. As
such, third party processing revenue is netted against operating
costs in the MD&A.
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.
_______________________________
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1
|
This is a non-GAAP
financial measure which is defined in the Non-GAAP Financial
Measures section of this document.
|
2
|
This is a non-GAAP
financial measure which is defined in the Non-GAAP Financial
Measures section of this document.
|
3
|
See the Oil and Gas
Advisories section of this document for further details.
|
SOURCE Surge Energy Inc.