CALGARY, AB, Jan. 17, 2022 /CNW/ - Surge Energy Inc. ("Surge"
or the "Company") (TSX: SGY) is pleased to announce its 2022 budget
guidance, as approved by the Company's Board of Directors, an
update on Surge's anticipated reinstatement of Management's
shareholder returns focused business model, and an operations
update.
2022 BUDGET GUIDANCE – CONTINUED FOCUS ON SHAREHOLDER RETURNS
& SUSTAINABILITY
Surge's focus in 2022 continues to be on disciplined capital
allocation, with cash flow strategically allocated between capital
projects, net debt1 repayment, and a fundamental goal of
reinstating the Company's dividend and shareholder returns focused
business model. The Company's 2022 capital budget will see 85
percent of the expenditures focused in its two, top-tier core
medium and light gravity conventional crude oil plays in the Sparky
and SE Saskatchewan, which now
comprise two thirds of Surge's current production.
In 2022, the Company can maintain its current production levels
of 21,500 boepd, while continuing to increase shareholder's net
asset value2 by generating more than $130 million of free cash flow1 at
US$75 WTI3 – providing
investors with an estimated free cash flow
yield1,4 of over 25 percent.
2022 BUDGET HIGHLIGHTS
Surge's disciplined 2022 capital expenditure budget:
- Maximizes free cash flow through a returns focused,
$124 million exploration and
development capital program;
- Generates forecasted 2022 annual cash flow from operating
activities in excess of $255 million
($3.06 per share) at US$75 WTI crude oil pricing;
- Generates free cash flow1 of over $130 million ($1.57
per share1) at US$75 WTI
crude oil pricing;
- Reduces the Company's exit 2022 net debt to cash flow from
operating activities1 to an estimated 0.75 times at US$75 WTI crude oil pricing;
- Targets 65 of the Company's most capital efficient drilling
locations - focused predominately in its Sparky and SE Saskatchewan core areas;
- Uses less than seven percent of the Company's internally
estimated drilling locations (i.e. over 950 net estimated locations
currently in inventory)5; and
- Cost effectively maintains production of 21,500 boepd (86%
liquids), maximizing free cash flow.
Further details relating to the 2022 budget are set forth
below:
Guidance
|
@ US $70
WTI6
|
@ US $75
WTI6
|
@ US $80
WTI6
|
Exit 2021
production
|
21,500 boepd (86%
liquids)
|
Average 2022
production
|
21,500 boepd (86%
liquids)
|
2022(e) Exploration and
development expenditures
|
$124 million
|
2022(e) Cash flow from
operating activities ($MM)*
|
$230
|
$255
|
$275
|
Per
share
|
$2.76/sh
|
$3.06/sh
|
$3.30/sh
|
2022(e) Free cash flow
($MM)
|
$106
|
$131
|
$151
|
Per
share
|
$1.27/sh
|
$1.57/sh
|
$1.81/sh
|
2022(e) All-in payout
ratio7
|
54%
|
49%
|
45%
|
2022(e) Exit net debt
to 2022(e) cash flow from operating activities ratio**
|
0.98x
|
0.75x
|
0.64x
|
2022(e) Royalties as %
of petroleum and natural gas revenue
|
14.0% -
16.0%
|
2022(e) Net operating
expenses7
|
$15.75 - $16.50 per
boe
|
2022(e) Transportation
expenses
|
$1.00 - $1.25 per
boe
|
2022(e) General &
administrative expenses
|
$1.95 - $2.05 per
boe
|
|
* Cash flow from
operating activities assumes a nil change in non-cash working
capital.
|
**2022(e) exit net debt
is prior to any contemplated allocation of 2022(e) free cash flow
to shareholder returns through dividends or share
buybacks.
|
CORPORATE UPDATE –TIMELINE FOR REINSTATEMENT OF SURGE'S
MULTI-FACETED SHAREHOLDER RETURNS MODEL
Management's stated goal is to position the Company as a
well-financed energy producer with a significant free cash flow
profile that supports consistent shareholder returns through: 1)
net asset value per share increases through ongoing debt repayment;
2) sustainable dividends; 3) modest production per share growth;
and 4) opportunistic share buybacks.
On December 9, 2021, the Company
announced the successful closing of a $130
million, 5-year term debt facility, injecting a significant
amount of stable, long term debt into the Company's capital
structure, with the strategic objective of reducing Surge's
reliance on volatile, shorter term debt. Surge will continue to
focus on providing shareholder returns through further reductions
in net debt over the coming months.
On this basis, Surge is initially targeting a reduction of net
debt to a range of $250 to
$265 million, at which point the
Company will look to resume its historical, shareholder returns
focused business model, including the reinstatement of a dividend.
Management will also evaluate the potential for opportunistic share
buybacks. A reduction of net debt to the targeted range will also
add approximately $0.60 to
$0.75 per share to the net asset
value of the Company (based on approximately 83.4 million shares
outstanding).
At current commodity price levels, Management estimates that
Surge will be within its targeted net debt range before mid-year in
2022.
OPERATIONS UPDATE – UNLOCKING SIGNIFICANT INCREMENTAL VALUE
IN SPARKY AND SE
SASKATCHEWAN
Surge finished 2021 on a strong operational note. The Company
continued to successfully develop its dominant land position in its
core Sparky asset, using its traditional low risk single-leg
multi-stage frac design, with results continuing to outperform
internal type curve expectations8. In addition, Surge
has now successfully tested multi-leg, open hole lateral
development in portions of its Sparky core area where the
multi-stage frac design is not optimal.
To date, Surge has drilled four multi-leg laterals in the Sparky
formation with the average of the four wells exceeding the
Company's internal type curve expectations. Encouragingly, two of
the wells have been brought on production with rates over 220 bopd
each on an IP30 basis. At current pricing these two wells paid out
in just 115 days.
Additionally, given that the rock properties of the Sparky
formation are analogous to that of the Clearwater formation, Surge is testing
drilling mud systems that have proven to be effective in the
Clearwater play, in three separate
multi-leg Sparky wells. On this basis, the Company is piloting an
oil based mud system, offsetting wells drilled with variations of
KCL brine-based mud systems. Initial results on the oil based pilot
well are encouraging, and as such, Surge will expand the pilot of
this oil based mud system in its 2022 drilling program.
Going forward, Surge views multi-leg lateral development as
complimentary to its existing single-leg multi-frac drilling
program. The addition of the multi-leg design will upgrade a
meaningful portion of the Company's existing Sparky core area
drilling inventory, which currently consists of over 425 internally
estimated locations8. Based on the strong initial well
results, Surge is now budgeting eight additional multi-leg Sparky
wells in its 2022 drilling program, along with 27 single-leg
multi-frac Sparky wells.
In Surge's newly acquired, high operating netback, light oil
core area of SE Saskatchewan,
recent development drilling has yielded impressive results. In the
Minard area, two wells drilled in August had initial production
rates over 320 bopd and have already produced a total of 30,000
barrels of oil each. These wells each paid out in less than 55
days. In 2022 SE Saskatchewan will
be an important component of the Company's drilling activity, with
36 gross (27.7 net) wells budgeted.
Surge has continued its Q4/21 operational momentum by securing
services, having commenced its 2022 drilling program in December of
2021. The Company currently has 3 drilling rigs operating in its
core areas: one rig drilling single-leg multi-frac Sparky wells,
one drilling multi-leg open hole Sparky wells, and one drilling
horizontal wells in SE
Saskatchewan. To date, the Company has rig released eight
net wells of its planned 27.1 net well Q1/22 drilling
program.
OUTLOOK – POSITIONED FOR OUTPERFORMANCE IN 2022
Surge's Management and Board are excited about the Company's
outlook for 2022, as previous lender mandated fixed price crude oil
hedging contracts expired at the end of 2021. Management continues
to strategically assess, analyze and position the Company based on
its strong competitive corporate advantages, including Surge's long
15 year reserve life index9, low conventional corporate
decline, high crude oil operating netbacks, top tier production
efficiencies, large 13 year drilling inventory10, and
the Company's substantial $1.0
billion tax pool base.
Surge's lower risk, high operating netback, conventional crude
oil asset and opportunity base matches very well with Management's
conservative returns based business strategy. The Company's large
OOIP9 conventional reservoirs provide top tier
production efficiencies, shallow declines, and significant free
cash flow – underpinning Management's strategic plan to return to a
dividend plus, share buy backs, business model.
At US$75 WTI per barrel, Surge
anticipates delivering a free cash flow yield of over 25 percent to
investors in 2022.
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 Surge's declared focus and primary
goals, including its goal of returning to a shareholder
returns-based business model; management's expectations regarding
increases to Surge's net asset value; 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; Surge's drilling program and
inventory; management's 2022 guidance, including estimated
production levels, exploration and development capital
expenditures, cash flow from operating activities, free cash flow
and free cash flow yield, all-in payout ratio; exit net debt to
cash flow from operating activities ratio, royalties as a
percentage of petroleum and natural gas revenue; net operating
expenses, transportation expenses and general and administrative
expenses; management's expectations regarding net bank debt
repayment at current prices and the timing thereof; commodity
prices; and Surge's reserve life index, corporate decline and tax
pool base.
The forward-looking statements are based on certain key
expectations and assumptions made by Surge. 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.
Reserve life index is calculated as total Company share 2020YE
reserves divided by the annualized fourth quarter 2020
production.
Net asset value is calculated as the total discounted (10%)
value of reserves plus undeveloped land and seismic value, less net
debt, divided by the number of basic shares outstanding.
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 external 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.
Net of Surge's March 25, 2021
disposition, the pro forma Company (Surge + Astra + Fire Sky) will
have over >1,050 gross (>975 net) drilling locations
identified herein, of these >450 gross (>400 net) are
unbooked locations. Of the 562 net booked locations identified
herein, 415 net are Proved locations and 147 net are Probable
locations based on Sproule's 2020YE reserves. Net of 2021 drilling,
Surge estimates a drilling inventory of >950 net locations as of
December 31, 2021. Assuming an
average number of net wells drilled per year of 75, Surge's
>950 net locations provide 13 years of drilling.
Also net of Surge March 25, 2021
disposition, Surge's Sparky Core
area has over >450 gross (>450.0 net) Sparky Core drilling locations identified
herein, of these 296 gross (>293 net) are unbooked locations. Of
the 158 net booked locations identified herein, 114 net are Proved
locations and 45 net are Probable locations based on Sproule's
2020YE reserves. Net of 2021 Sparky core area drilling, Surge
estimates a drilling inventory of >425 net locations as of
December 31, 2021.
Surge's internally developed type curves (for Surge, Astra and
Fire Sky) were constructed using a representative, factual and
balanced analog data set, as of Jan 1,
2021 for Surge type curves, April 15,
2021 for Astra type curves and July
1, 2021 for Fire Sky type curves. 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 and Other Financial Measures
This press release includes references to non-GAAP and other
financial measures used by the Company to evaluate its financial
performance, financial position or cash flow. These specified
financial measures include non-GAAP financial measures and non-GAAP
ratios, are not defined by IFRS and therefore are referred to as
non-GAAP and other financial measures. Certain secondary financial
measures in this press release – namely, "all-in payout ratio",
"free cash flow", "free cash flow yield", "net debt", "net debt to
cash flow from operating activities", "net operating expenses", and
"operating netback" are not prescribed by GAAP. These non-GAAP and
other 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 and other financial 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 and other financial
measures used in this document are defined below, and as
applicable, reconciliations to the most directly comparable GAAP
measure for the year ended December 31,
2020, have been provided to demonstrate the calculation of
these measures:
All-in Payout Ratio
All-in payout ratio is a non-GAAP ratio, calculated as
exploration and development expenditures divided by cash flow from
operating activities. Management uses this measure to determine the
amount of cash from operating activities that is used to reinvest
in the exploration and development of its asset base.
Free Cash Flow and Free Cash Flow
Yield
Free cash flow is a non-GAAP financial measure, 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.
Free cash flow per share is a non-GAAP ratio, calculated using
the same weighted average basic and diluted shares used in
calculating income per share.
Free cash flow yield is a non-GAAP ratio, calculated as free
cash flow divided by the number of basic shares outstanding,
divided by the Company's share price at the date indicated herein.
Management uses this measure as an indication of the cash flow
available for return to shareholders based on current share
prices.
Free Cash
Flow
|
|
|
|
($000's)
|
|
|
|
2020
|
Cash flows from
operating activities
|
72,190
|
Less: Exploration and
development capital expenditures
|
(52,773)
|
Free Cash
Flow
|
|
|
19,417
|
Net Debt and Net Debt to Cash Flow from
Operating Activities
Net debt is a non-GAAP financial measure, calculated as bank
debt, term debt, plus the liability component of the convertible
debentures plus current assets, less current liabilities, however,
excluding the fair value of financial contracts, decommissioning
obligations, and lease and other obligations. There is no
comparable measure in accordance with IFRS for net debt. This
metric is used by management to analyze the level of debt in the
Company including the impact of working capital, which varies with
the timing of settlement of these balances.
Net debt to cash flow from operating activities is a non-GAAP
ratio, calculated as exit net debt divided by cash flow from
operating activities. Management uses this ratio to assess the time
(in years) that it would take to fund net debt based on the
annualized cash flow from operating activities.
Net
debt
|
|
|
|
|
($000's)
|
|
|
|
2020
|
Bank debt
|
|
|
(260,908)
|
Term debt
|
|
|
(32,718)
|
Accounts
receivable
|
|
|
29,796
|
Prepaid expenses and
deposits
|
|
5,253
|
Accounts payable and
accrued liabilities
|
(51,265)
|
Convertible
debentures
|
|
(71,181)
|
Net debt
|
|
|
|
(381,023)
|
Net Operating Expenses
Net operating expenses is a non-GAAP financial measure,
determined by deducting processing income, 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 when analyzed by management.
Net Operating
Expenses
|
|
|
($000's)
|
|
|
|
2020
|
Operating
expenses
|
|
|
101,640
|
Less: processing
income
|
|
(4,772)
|
Net operating
expenses
|
|
96,868
|
Operating Netback
Operating netback is a non-GAAP financial measure, calculated as
petroleum and natural gas revenue and processing and other income,
less royalties, realized gain (loss) on commodity and FX contracts,
operating expenses, and transportation expenses. Operating netback
per boe is calculated as operating netback divided by total barrels
of oil equivalent produced during a specific period of time. There
is no comparable measure in accordance with IFRS. This metric is
used by management to evaluate the Company's ability to generate
cash margin on a unit of production basis.
Operating
Netback
|
|
|
($000's)
|
|
|
|
2020
|
Petroleum and natural
gas revenue
|
59,907
|
Processing
income
|
|
|
1,006
|
Royalties
|
|
|
|
(6,493)
|
Realized gain (loss) on
commodity and FX contracts
|
(6,247)
|
Operating
expenses
|
|
|
(26,531)
|
Transportation
expenses
|
|
(1,892)
|
Operating
netback
|
|
|
19,750
|
Barrels of oil
equivalent (boe)
|
|
1,597
|
Operating netback ($
per boe)
|
|
12.37
|
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 This
is a non-GAAP and other financial measure which is defined in the
Non-GAAP and Other Financial Measures section of this
document.
|
2 See
the Oil and Gas Advisories section of this document for further
information.
|
3 Additional pricing assumptions:
(WCS: US$13.00, EDM US$3.50 differentials), Fx of $0.79 and AECO of
$3.25 per mcf.
|
4 Free
cash flow yield of 25 percent is calculated as $131 million of free
cash flow, divided by 83.4 million basic shares outstanding,
divided by a SGY share price of $6.25/sh.
|
5 See
the Drilling Inventory section of this document for further
information.
|
6 All
additional pricing assumptions (WCS: US$13.00, EDM US$3.50
differentials), Fx of $0.785 and AECO of $3.25 per mcf remain
constant.
|
7 This is a
non-GAAP and other financial measure which is defined in the
Non-GAAP and Other Financial Measures section of this
document.
|
8 See
the Drilling Inventory section of this document for further
information.
|
9 See the
Oil and Gas Advisories section of this document for further
information.
|
10 See the
Drilling Inventory section of this document for further
information.
|
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SOURCE Surge Energy Inc.