CALGARY, AB, March 5, 2021 /CNW/ - Surge Energy Inc. ("Surge"
or the "Company") (TSX: SGY) is pleased to announce its successful
32 well 1H/21 drilling program, a strategic $106 million asset sale (the "Sale"), and a
positive re-determination of its first lien and second lien credit
facilities.
SURGE ENERGY - VALUE CREATION AND DEBT REDUCTION
Very Positive Macro Environment for Canadian Crude
Oil
2020 was an extremely difficult year for the Canadian oil and
gas industry managing through the COVID crisis, and the
Saudi-Russia oil price war, which sent oil prices plunging from a
high of over US$63 WTI per barrel in
January, 2020 to a low of US$11.57
WTI per barrel in April, 2020. Consequently, Surge Management spent
much of 2020 working hard to both protect stakeholder's capital,
and to position Surge to be a top performer when crude oil prices
recovered.
However, in just the last 4 months, oil prices have rallied by
over 85%, from a low of US$33.64 per
barrel on November 3, 2020 to over
US$63 WTI per barrel today.
Furthermore, WCS differentials have traded significantly below the
long-term average of approximately US$17 per barrel, to less than US$12 per barrel today. Light oil differentials
are also trading well below their long-term average of
approximately US$6 per barrel, to
less than US$2.75 per barrel
today.
In conjunction with the improving macroeconomic environment, a
number of large investment banks have recently announced
significant upward revisions to their crude oil price forecasts,
based on expectations for an extremely tight physical oil market in
2021 and 2022. The current (very tight) physical crude oil market,
combined with sizable reductions in capital spending on large-scale
oil projects, has created a structural daily supply deficit in the
oil market, resulting in oil price projections of greater than
US$65 WTI per barrel by mid-year
2021.
Positioning Surge for the Turn in Oil Prices
Surge is well positioned to take advantage of the current, very
positive, macro environment for crude oil, as follows:
- In 1H/21 Surge is completing an exciting, 32 well drilling
program in the Sparky and Valhalla
(Montney) core areas; the Company
anticipates adding more than 3,200 boepd (>90% medium/light oil)
from the program for an all-in drill, complete, equip and tie-in
("DCET") cost of $39.0 million with
this program;
- Concurrent with the addition of 3,200 boepd from the 1H/21
drilling program, Surge has executed a binding Purchase and Sale
Agreement for the sale of 2,700 boepd for total gross proceeds of
$106 million (before customary
adjustments); the Sale is set to close on or before March 25, 2021;
- Post-closing of the Sale, Surge has a high quality, low
decline, medium and light oil asset base – with large original oil
in place ("OOIP")1 reservoirs, high netbacks, and a
large internally estimated drilling inventory of over 750
locations2 (>14 year inventory);
- As a result of crude oil prices spiking, differentials
dropping, and the large production additions from the Company's
exciting 1H/21 drilling program, Surge has significant positive
financial 'torque' to its operating netback;
- Over the last six years, Surge has amassed a dominant position
in its core Sparky crude oil play, which is proving to be one of
the most economic, conventional, medium/light oil growth plays in
Canada; and
- In late 2020, Surge injected over
$100 million of new capital into the
Company's capital structure and balance sheet, including the
previously announced BDC financing ($40 million second
lien) and a $51 million commitment from
EDC into Surge's existing first lien credit facility.
Additionally, Surge has received over $12 million to date
under Alberta's Site
Rehabilitation Program ("SRP"), which is quickly
reducing Surge's decommissioning liability.
Management believes that Surge is uniquely positioned to take
advantage of the recent, very positive macro
changes to the oil industry in
Canada. In
1H/21, Surge is forecasting
the addition of over 3,200
boepd from the Company's 32 well drilling program at
a cost of $39 million,
while selling
2,700 boepd for gross
proceeds of $106 million pursuant to
the Sale, all in the same
quarter.
Accretive Asset Sale
Proceeds from the Sale will have a significant immediate,
positive impact on the Company, reducing Surge's bank indebtedness
by over $100 million, and generating
annual interest expense savings of approximately $10 million. On this basis, Surge
anticipates receiving a "corporate" cash flow multiple of 5.3
times3 on the Sale.
Post-closing of the Sale, Surge retains a large,
highly economic drilling inventory of more than 750 net
internally estimated locations4. This provides the
Company with a deep, low risk, development drilling
inventory of over 14 years, at a pace of approximately 50
wells per year.
As a result of Management's strategic, proactive, capital
allocation decisions in 2020 and early 2021, Surge provides
investors with exposure to significant growth in cash flow, AND a
deep value opportunity to invest in a low risk, conventional,
medium/light gravity, public crude oil company. Further, Surge's
Sparky play is turning out to be one of the top medium/light oil
growth plays in all of Canada, and
is completely unique within Surge's Canadian peer group.
National Bank Financial Inc. is acting as financial advisor to
Surge with respect to the Sale. McCarthy Tétrault LLP is acting as
legal advisor to Surge with respect to the Sale. BMO Capital
Markets and Scotiabank have also been appointed strategic advisors
to Surge in connection with the Sale.
Positive Credit Facility Re-Determination
In combination with the Sale, the Company is pleased to announce
that it has reached an agreement in principle with its respective
lender syndicates to re-determine its first and second lien credit
facilities.
At the closing of the Sale, Surge anticipates the first lien
credit facilities will be re-determined at $215 million, with the Company's next bank review
scheduled on or before November 30,
2021. In addition, the previous obligation to conduct an
asset sale solicitation process in 2021 is eliminated. This
re-determination is forecast to provide the Company with over
$25 million of available
liquidity5 upon the closing of the Sale, and to
significantly reduce Surge's annual interest expense.
The Company appreciates the support and partnership of its
lenders through the COVID crisis.
Outlook; Guidance 2021/2022
In just the last 4 months, oil prices have rallied over 85%,
from a low of US$33.64 per barrel on
November 3, 2020 to over US$63 WTI per barrel today. Furthermore, WCS
differentials are trading well below their long-term average of
approximately US$17 per barrel at
less than US$12 per barrel today.
Light oil differentials are also trading below their long-term
average of approximately US$6 per
barrel to less than US$2.75 per
barrel today.
In 1H/21, the Company is completing a low risk $39 million development drilling capital
program, adding estimated production of more than 3,200 boepd
(>90% medium/light oil) from 32 gross (32.0 net) wells. In
addition, prior to the end of Q1/21 Surge anticipates receiving
gross proceeds of $106 million from
the Sale of 2,700 boepd.
On a go forward basis, Surge is planning a disciplined capital
allocation strategy with an emphasis on free cash flow generation
in 2H/21. The Company is currently budgeting for a 2H/21
maintenance drilling program, allocating the incremental free cash
flow to continued reduction of bank indebtedness.
Surge will be reforecasting 2021, and providing 2022 guidance,
after the closing of the Sale on March 25,
2021.
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: Management's expectations and plans with respect to the
development of its assets and the timing thereof; Surge's declared
focus and primary goals; Surge's planned drilling program for 2H/21
and the potential for revisions thereto; Surge's drilling inventory
and locations; management's expectations regarding commodity
prices; the Sale and the terms, timing and anticipated proceeds and
benefits therefrom; the anticipated metrics associated with the
Sale, including the cash flow multiple; the expected impact of the
Sale on Surge's bank indebtedness and liquidity; management's
expectations regarding 2021 production and management's
expectations regarding DCET costs; the expectation that the Sale
will further enhance the Company's financial flexibility; and the
anticipated terms and benefits of the re-determination of Surge's
credit facilities and the timing thereof.
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
The term "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" mean barrel of oil equivalent per day. Bbl
means barrel of oil and "bopd" means barrels of oil per day.
NGLs means natural gas liquids.
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. All oil and gas
metrics/terms used in this document are defined below:
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. "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, 2021.
Drilling Inventory
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.
Assuming a Mar 31, 2021 reference
date, the Company will have over >750 gross (>750 net)
drilling locations identified herein, of these >400 gross
(>400 net) are unbooked locations. Of the 316 net booked
locations identified herein, 251 net are Proved locations and 65
net are Probable locations based on Sproule's 2020YE reserves.
Assuming an average number of wells drilled per year of 50, Surge's
>750 locations provide 14 years of drilling.
Surge's internally used type curves were constructed using a
representative, factual and balanced analog data set, as of
January 1, 2021. 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
Qualified Reserve Evaluators. All type curves fully comply with
Part 5.8 of the Companion Policy 51 – 101CP.
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 See
the Oil and Gas Advisories section of this document for further
details.
|
2 See
Drilling Inventory in Forward Looking Statements
|
3 For the
purposes of this press release, "cash flow multiple" is calculated
as total gross proceeds from the Sale of $106 million divided by
estimated forward 12-month cash flow generated by the disposed
assets, less corporate interest savings resulting from the Sale,
primarily as a result of reduced outstanding bank
indebtedness..
|
4 See
Drilling Inventory in Forward Looking Statements.
|
5 Calculated as $215 million Credit
Facilities less $189 million in forecast post-closing bank
indebtedness as at April 1, 2021.
|
SOURCE Surge Energy Inc.