CALGARY, AB, May 14, 2021 /CNW/ - Surge Energy Inc.
("Surge" or the "Company") (TSX: SGY) is pleased to
announce its financial and operating results for the quarter ended
March 31, 2021.
MACRO OVERVIEW – CRUDE PRICES CONTINUE TO STRENGTHEN
Pre-COVID-19, world oil demand was more than 100 million barrels
per day; growing by approximately one million barrels per day each
year. Without significant capital investment, world oil production
has been estimated to have an annual decline of 5-6 million barrels
per day. The COVID-19 pandemic, the Saudi/Russia oil price
war, and the subsequent collapse of world crude oil prices in 2020
triggered significant, world-wide upstream capital spending
reductions for crude oil drilling and associated projects both
large and small. In this regard, US and Canadian oil rig counts
plunged to multi-decade lows in the summer of 2020.
As world oil demand continues to return to pre-COVID-19 levels,
crude oil prices have risen by more than 450 percent in just the
last 13 months; from a low of US$11.57 WTI per barrel in April of 2020, to over
US$65 WTI per barrel today.
Against this backdrop of quickly improving crude oil price
fundamentals, Surge possesses 4 of the key operational
indicia for highly successful oil companies, namely:
- A very low annual corporate decline (less than 21 percent per
year);
- Top tier production efficiencies1 (Sparky PE's are
~$13,000 boepd on an IP180
basis);
- A large drilling location inventory (>750
locations2, providing a deep 14 year drilling
inventory); and
- High operating netbacks3.
Accordingly, rapidly improving crude oil prices, combined with
these 4 key operational indicia, provide Surge with significant
adjusted funds flow per share3 growth, and free
cash flow3, at current strip pricing.
Q1 2021 FINANCIAL & OPERATING HIGHLIGHTS
As previously announced on April 28,
2021, the Company achieved production levels of 16,582 boepd
in Q1/21, and generated cash flow from operating activities in the
quarter of $15.6 million (after
realized hedging losses of $16.8
million).
Given the impact of the COVID-19 pandemic, and the significant
commodity price volatility that resulted, Surge entered into
certain fixed crude oil hedges over the course of 2H/20, ensuring
the Company's ability to continue deploying capital into its low
decline, low cost, large OOIP1, conventional asset base. While the
resulting realized losses on commodity contracts had a large
negative impact on Q1/21 cash flow, Surge expects the impact will
moderate over the remainder of 2021 as these crude oil hedges
expire.
During the first quarter, Surge completed a successful 32 well
winter drilling program. The Company anticipates it will bring on
an estimated 3,400 boepd of production from this drilling program,
with results to date meeting or exceeding management's
expectations. This program was completed for "all-in" drilling and
completion expenditures of $38
million, delivering excellent estimated production
efficiencies of $11,175 per flowing
boe.
The Company's significant 3,400 boepd production addition in
Q1/21 was completed in the same quarter as Surge strategically sold
2,700 boepd of production, for gross proceeds of $106 million.
Commodity prices continued to strengthen over the quarter, with
petroleum and natural gas revenue per boe increasing by 57 percent,
from $34.39 per boe in Q1/20, to
$54.07 per boe in Q1/21. The
improving crude oil price environment, combined with the Company's
successful winter drilling program and strategic Q1/21 asset sale,
resulted in a significant $124
million, or 39 percent reduction in net bank
debt4 from Q1/20 through Q1/21. The Company also
meaningfully reduced net debt4 by $81 million from Q1/20 through Q1/21, a 21
percent reduction in the last four quarters.
Subsequent to the first quarter, as previously announced on
May 13th, 2021, Surge
successfully closed its bought deal public offering of 39.0 million
flow-through common shares (the "Offering") for gross proceeds of
$23.0 million. Accordingly, with the
closing of the Offering, Surge has significantly reduced net debt
and repositioned the Company's balance sheet over the past 6
months, with the completion of the following financing activities
totaling more than $230 million:
- $40 million, 4-year term,
2nd Lien BDC credit facility;
- $50 million credit commitment by
Export Development Canada into Surge's 1st Lien credit
facility;
- Over $14 million in grants under
the Alberta Government's Site Rehabilitation program;
- Gross proceeds of $106 million
from the Company's previously announced strategic asset sale;
and
- Gross proceeds of $23 million
from Surge's over-subscribed, upsized flow-through common share
financing.
Proceeds from the Offering, combined with free cash flow, will
be used for an expanded 2H/21 development program, building upon
the Company's 1H/21 drilling program, which targeted the Sparky and
Montney formations. This program
has been strategically designed to allocate capital towards
top-tier production efficiencies in the Company's Sparky core
area.
Concurrent with the close of the Offering, on May 13th the Company also released
preliminary 2022 production and operating guidance. The Company's
preliminary 2022 capital expenditure budget is highly disciplined,
with a continued focus on production maintenance and free cash flow
generation.
Surge anticipates generating approximately $160 million5 ($0.42 per share6) in adjusted funds
flow in 2022 at US$65 WTI per barrel.
With its low decline, large OOIP, conventional asset base, the
Company is budgeting $83 million for
its 2022 exploration and development capital program, which
maintains production at 16,500 boepd (85% liquids).
FINANCIAL AND OPERATING HIGHLIGHTS
|
|
FINANCIAL AND
OPERATING HIGHLIGHTS
|
Three Months Ended
March 31,
|
($000s except per
share amounts)
|
2021
|
2020
|
%
Change
|
Financial
highlights
|
|
|
|
Oil sales
|
69,956
|
61,211
|
14 %
|
NGL sales
|
1,948
|
1,063
|
83 %
|
Natural gas
sales
|
8,790
|
1,432
|
514 %
|
Total oil, natural
gas, and NGL revenue
|
80,694
|
63,706
|
27 %
|
Cash flow from
operating activities
|
15,550
|
43,138
|
(64)%
|
Per share - basic
($)
|
0.05
|
0.13
|
(62)%
|
Adjusted funds
flow1
|
15,757
|
30,028
|
(48)%
|
Per share - basic
($)1
|
0.05
|
0.09
|
(44)%
|
Net loss
|
(9,985)
|
(615,227)
|
(98)%
|
Per share basic
($)
|
(0.03)
|
(1.85)
|
(98)%
|
Total exploration and
development expenditures
|
31,898
|
32,504
|
(2)%
|
Total acquisitions
& dispositions
|
(102,591)
|
-
|
nm2
|
Total capital
expenditures
|
(70,693)
|
32,504
|
(317)%
|
Net debt1,
end of period
|
303,334
|
384,686
|
(21)%
|
|
|
|
|
Operating
highlights
|
|
|
|
Production:
|
|
|
|
Oil (bbls per
day)
|
13,422
|
16,891
|
(21)%
|
NGLs (bbls per
day)
|
583
|
564
|
3 %
|
Natural gas (mcf per
day)
|
15,462
|
17,409
|
(11)%
|
Total (boe per day)
(6:1)
|
16,582
|
20,357
|
(19)%
|
Average realized
price (excluding hedges):
|
|
|
|
Oil ($ per
bbl)
|
57.91
|
39.82
|
45 %
|
NGL ($ per
bbl)
|
37.12
|
20.72
|
79 %
|
Natural gas ($ per
mcf)
|
6.32
|
0.90
|
602 %
|
|
|
|
|
Netback ($ per
boe)
|
|
|
|
Petroleum and natural
gas revenue
|
54.07
|
34.39
|
57 %
|
Realized gain (loss)
on commodity and FX contracts
|
(11.27)
|
7.29
|
(255)%
|
Royalties
|
(5.68)
|
(4.59)
|
24 %
|
Net operating
expenses1
|
(18.09)
|
(14.29)
|
27 %
|
Transportation
expenses
|
(1.03)
|
(1.64)
|
(37)%
|
Operating
netback1
|
18.00
|
21.16
|
(15)%
|
G&A
expense
|
(1.98)
|
(1.84)
|
8 %
|
Interest
expense
|
(5.46)
|
(3.10)
|
76 %
|
Adjusted funds
flow1
|
10.56
|
16.22
|
(35)%
|
|
|
|
|
Common shares
outstanding, end of period
|
339,785
|
335,069
|
1 %
|
Weighted average
basic shares outstanding
|
339,785
|
332,188
|
2 %
|
Weighted average
diluted shares outstanding
|
339,785
|
332,188
|
2 %
|
|
|
|
|
1 This is
a non-GAAP financial measure which is defined in the Non-GAAP
Financial Measures section of this document.
|
2 The
Company views this change calculation as not meaningful, or
"nm".
|
UPDATE ON ENVIRONMENTAL, SOCIAL AND GOVERNANCE MATTERS
("ESG")
Surge continues to strive to be a leader in reducing the impact
of its operations on the environment and is pleased to report that
it has abandoned 310 wells between October
1, 2020 and March 31, 2021.
This represents nearly 30 percent of the Company's previously
inactive, unabandoned wells.
The reduction in the Company's environmental footprint has been
funded through a combination of Surge's ongoing internal
abandonment program and approximately $14
million in total grant funding under the Alberta
Government's Site Rehabilitation Program ("SRP"). During the first
quarter of 2021, Surge spent a total of $1.5
million of its own funds and $0.5
million of SRP grants, for a combined $2.0 million going towards abandonment
activities.
Surge anticipates spending a further $8.0 to $10.0
million on abandonment activities in 2021, through a
combination of its internal abandonment program and the SRP
abandonment program, which will continue to significantly reduce
the Company's decommissioning liability.
Surge strives to be a leader in reducing the impact of its
operations on the environment. Surge 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 with respect to 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; Surge's drilling inventory and locations; management's
expectations regarding commodity prices and production levels;
Surge's anticipated funds flow in 2022; and Surge's anticipated
abandonment and reclamation activities in 2021.
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,
2021 and in Surge's MD&A for the period ended
December 31, 2020, 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.
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
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 weighted average internal Sparky type curve economics
have an IRR of greater than 115% and a payout of under one year @
US$55/bbl WTI (C$56 WCS) and are supported by >380 internally
evaluated Sparky locations by Surge's Qualified Reserve Evaluators
(with weighted average metrics of: ~$1.15 MM per well capital, ~100 boe/d IP180 per
well and ~125 mboe Estimated Ultimate Recoverable reserves per
well).
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.
Non-GAAP Financial Measures
Certain secondary financial measures in this press release –
namely, "adjusted funds flow", "adjusted funds flow per share",
"free cash flow", "net debt", "net bank debt", "net operating
expenses", "operating netback", and "adjusted funds flow per boe"
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:
Adjusted Funds Flow & Adjusted Funds Flow per
Share
The Company adjusts cash flow from operating activities in
calculating adjusted funds flow for changes in non-cash working
capital, decommissioning expenditures, and transaction costs.
Management believes the timing of collection, payment or incurrence
of these items involves a high degree of discretion and as such may
not be useful for evaluating Surge's cash flows.
Changes in non-cash working capital are a result of the timing
of cash flows related to accounts receivable and accounts payable,
which management believes reduces comparability between periods.
Management views decommissioning expenditures predominately as a
discretionary allocation of capital, with flexibility to determine
the size and timing of decommissioning programs to achieve greater
capital efficiencies and as such, costs may vary between periods.
Transaction costs represent expenditures associated with
acquisitions, which management believes do not reflect the ongoing
cash flows of the business, and as such reduces comparability. Each
of these expenditures, due to their nature, are not considered
principal business activities and vary between periods, which
management believes reduces comparability.
Adjusted funds flow per share is calculated using the same
weighted average basic and diluted shares used in calculating
income per share.
The following table reconciles cash flow from operating
activities to adjusted funds flow and adjusted funds flow per share
for the three months ended March 31,
2021:
|
Three Months Ended
March 31,
|
($000s except per
share amounts)
|
2021
|
2020
|
Cash flow from
operating activities
|
15,550
|
43,138
|
Change in non-cash
working capital
|
(2,974)
|
(14,748)
|
Decommissioning
expenditures
|
1,481
|
1,540
|
Transaction
costs
|
1,700
|
98
|
Adjusted funds
flow
|
$
|
15,757
|
$
|
30,028
|
Per share -
basic
|
$
|
0.05
|
$
|
0.09
|
Free Cash Flow
Free cash flow is calculated as cash flow from operating
activities less exploration and development capital expenditures.
Management uses free cash flow to determine the amount of funds
available to the Company for future capital allocation
decisions.
Net Debt
There is no comparable measure in accordance with IFRS for net
debt. Net debt is calculated as bank debt, term debt, dividends
payable plus the liability component of the convertible debentures
plus or minus working capital, however, excluding the fair value of
financial contracts, decommissioning obligations, and lease and
other obligations. This metric is used by management to analyze the
level of debt in the Company including the impact of working
capital, which varies with timing of settlement of these
balances.
($000s)
|
As at Mar
31, 2021
|
As at Dec 31,
2020
|
As at Mar 31,
2020
|
Bank debt
|
(170,650)
|
(260,908)
|
(305,804)
|
Term debt
|
(40,649)
|
(32,718)
|
-
|
Accounts
receivable
|
30,240
|
29,796
|
29,738
|
Prepaid expenses and
deposits
|
5,921
|
5,253
|
4,672
|
Accounts payable and
accrued liabilities
|
(56,354)
|
(51,265)
|
(43,718)
|
Convertible
debentures
|
(71,842)
|
(71,181)
|
(69,295)
|
Dividends
payable
|
-
|
-
|
(279)
|
Total
|
(303,334)
|
(381,023)
|
(384,686)
|
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.
Operating Netback & Adjusted Funds Flow
Netback
Operating netback, operating netback excluding realized gain
(loss) on financial contracts & adjusted funds flow per boe for
the three months ended March 31, 2021
are calculated on a per unit basis as follows:
|
Three Months Ended
March 31,
|
($000s)
|
2021
|
2020
|
Petroleum and natural
gas revenue
|
80,694
|
63,706
|
Processing and other
income
|
1,089
|
1,720
|
Royalties
|
(8,477)
|
(8,505)
|
Realized gain (loss)
on commodity and FX contracts
|
(16,822)
|
13,509
|
Operating
expenses
|
(28,083)
|
(28,199)
|
Transportation
expenses
|
(1,539)
|
(3,046)
|
Operating
netback
|
26,862
|
39,185
|
G&A
expense
|
(2,957)
|
(3,416)
|
Interest
expense
|
(8,148)
|
(5,741)
|
Adjusted funds
flow
|
15,757
|
30,028
|
Barrels of oil
equivalent (boe)
|
1,492,397
|
1,852,414
|
Operating netback ($
per boe)
|
$
|
18.00
|
$
|
21.16
|
Adjusted funds flow
($ per boe)
|
$
|
10.56
|
$
|
16.22
|
Additional information relating to non-GAAP 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 See the
Oil and Gas Advisories section of this document for further
details.
|
2 See
the Drilling Inventory section of this document for further
details.
|
3 This is
a non-GAAP financial measure which is defined in the Non-GAAP
Financial Measures section of this document.
|
4 This is
a non-GAAP financial measure which is defined in the Non-GAAP
Financial Measures section of this document.
|
5 Assuming 16,500 boepd. Pricing as
follows: WTI US$65/bbl; CAD/USD $0.80; WCS $66.25/bbl; MSW $75.62
bbl; AECO $2.55/GJ.
|
6 All
per-share metrics in this release are based on 379.2 million basic
shares outstanding as at close of the Offering.
|
SOURCE Surge Energy Inc.