CALGARY, AB,
July 27,
2022 /CNW/ - Surge Energy Inc. ("Surge" or the
"Company") (TSX: SGY) is pleased to announce the Company's
financial and operating results for the quarter ended June 30, 2022, an update on Surge's shareholder
returns framework, an operations update, and revisions to the
Company's 2022 capital and operating budget.
Q2 2022 FINANCIAL & OPERATING
HIGHLIGHTS
An extremely tight physical market for crude oil has manifested
from continued growth in demand, supply disruptions stemming from
years of global underinvestment in oil projects, and ongoing
geopolitical tensions. These factors have led to a favourable
commodity pricing environment for Canadian producers.
During the second quarter of 2022 Surge delivered record cash
flow from operating activities of $75.8
million, an increase of 818 percent, as compared to Q2/21
cash flow from operating activities of $8.3
million. Additionally, the Company delivered adjusted funds
flow1 of $78.6 million in
Q2/22, an increase of 479 percent compared to Q2/21 adjusted funds
flow of $13.6 million.
In Q2/22, the Company generated cash flow from operations before
realized gains or losses on financial contracts of $121.8 million (with an average oil price of
US$108.41 WTI per barrel during the
period), an increase of 318 percent as compared to $29.2 million in Q2/21 (with an average oil price
of US$66.07 WTI per barrel during the
period). Surge reported a realized loss on financial contracts of
$46.0 million in Q2/22, primarily due
to mandated fixed price oil hedging relating to the corporate
acquisitions that closed in 2H/21. These fixed price hedging
volumes wind down significantly over the second half of 2022, and
expire at the end of the year.
Prior to the $121.8 million
generated in Q2/22, the single best quarter in Surge's 12 year
corporate history for cash flow from operations before realized
gains or losses on financial contracts was Q3/14 at $77.5 million.
During the quarter, Surge generated $36 million of
free cash flow1, reducing net debt significantly from
$315.8 million at March 31, 2022 to $280.1
million at June 30, 2022.
Additionally, on June 15, 2022
Surge reinstated its base cash dividend of $0.42 per share per annum (paid monthly).
Annualized, the Company's base cash dividend represents 12 percent
of Q2/22 cash flow from operating activities.
Additional highlights from the Company's Q2 2022 financial and
operating results include:
- Reduced net debt1 by $35.6
million as compared to March 31,
2022 while concurrently completing the successful Q2/22
capital program for $36.9
million;
- Achieved average daily production of 21,003 boepd (85 percent
liquids) during Q2/22, an increase of 39 percent over Q2/21
production of 15,132 boepd (84 percent liquids);
- Successfully drilled 9 net wells with activity focused in the
Company's Sparky, SE Saskatchewan
and Valhalla conventional, light
and medium gravity crude oil core areas; and
- As previously released, the Company was successful at a highly
competitive Saskatchewan Crown land sale at Steelman, adding more than 40 net highly
economic light oil Frobisher
drilling locations, directly offsetting Surge's recent successful
drilling results.
FINANCIAL AND OPERATING
HIGHLIGHTS
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
Six Months Ended
June 30,
|
($000s except per
share amounts)
|
2022
|
2021
|
%
Change
|
2022
|
2021
|
%
Change
|
Financial
highlights
|
|
|
|
|
|
|
Oil sales
|
196,470
|
76,411
|
157 %
|
353,910
|
146,367
|
142 %
|
NGL sales
|
4,939
|
1,827
|
170 %
|
8,992
|
3,775
|
138 %
|
Natural gas
sales
|
11,590
|
2,646
|
338 %
|
19,221
|
11,436
|
68 %
|
Total oil, natural gas,
and NGL revenue
|
212,999
|
80,884
|
163 %
|
382,123
|
161,578
|
136 %
|
Cash flow from
operating activities
|
75,798
|
8,254
|
818 %
|
127,980
|
23,804
|
438 %
|
Per share - basic
($)
|
0.91
|
0.19
|
379 %
|
1.54
|
0.58
|
166 %
|
Per share diluted
($)
|
0.88
|
0.19
|
363 %
|
1.49
|
0.56
|
166 %
|
Adjusted funds
flowi
|
78,561
|
13,557
|
479 %
|
141,454
|
29,314
|
383 %
|
Per share - basic
($)i
|
0.94
|
0.32
|
194 %
|
1.70
|
0.71
|
139 %
|
Per share diluted
($)
|
0.91
|
0.31
|
194 %
|
1.64
|
0.69
|
138 %
|
Net income
(loss)iii
|
72,027
|
307,113
|
nmii
|
50,159
|
297,128
|
nm
|
Per share basic
($)
|
0.86
|
7.24
|
nm
|
0.60
|
7.21
|
nm
|
Per share diluted
($)
|
0.83
|
7.01
|
nm
|
0.58
|
7.03
|
nm
|
Expenditures on
property, plant and equipment
|
36,890
|
15,500
|
138 %
|
79,858
|
47,398
|
68 %
|
Net acquisitions and
dispositions
|
(32)
|
-
|
nm
|
(32)
|
(102,591)
|
nm
|
Net capital
expenditures
|
36,858
|
15,500
|
138 %
|
79,826
|
(55,193)
|
nm
|
Net debti,
end of period
|
280,131
|
292,806
|
(4) %
|
280,131
|
292,806
|
(4) %
|
|
|
|
|
|
|
|
Operating
highlights
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Production:
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|
|
|
|
|
|
Oil (bbls per
day)
|
17,110
|
12,202
|
40 %
|
16,936
|
12,809
|
32 %
|
NGLs (bbls per
day)
|
799
|
521
|
53 %
|
745
|
552
|
35 %
|
Natural gas (mcf per
day)
|
18,565
|
14,456
|
28 %
|
18,579
|
14,956
|
24 %
|
Total (boe per day)
(6:1)
|
21,003
|
15,132
|
39 %
|
20,778
|
15,854
|
31 %
|
Average realized price
(excluding hedges):
|
|
|
|
|
|
|
Oil ($ per
bbl)
|
126.19
|
68.81
|
83 %
|
115.45
|
63.13
|
83 %
|
NGL ($ per
bbl)
|
67.95
|
38.53
|
76 %
|
66.67
|
37.79
|
76 %
|
Natural gas ($ per
mcf)
|
6.86
|
2.01
|
241 %
|
5.72
|
4.22
|
36 %
|
|
|
|
|
|
|
|
Netback ($ per
boe)
|
|
|
|
|
|
|
Petroleum and natural
gas revenue
|
111.44
|
58.74
|
90 %
|
101.61
|
56.31
|
80 %
|
Realized gain (loss) on
commodity and FX contracts
|
(24.05)
|
(15.19)
|
58 %
|
(19.88)
|
(13.15)
|
51 %
|
Royalties
|
(19.74)
|
(8.04)
|
146 %
|
(17.59)
|
(6.81)
|
158 %
|
Net operating
expensesi
|
(19.16)
|
(17.87)
|
7 %
|
(19.22)
|
(17.98)
|
7 %
|
Transportation
expenses
|
(1.62)
|
(0.94)
|
72 %
|
(1.56)
|
(0.99)
|
58 %
|
Operating
netbacki
|
46.87
|
16.70
|
181 %
|
43.36
|
17.38
|
149 %
|
G&A
expense
|
(2.19)
|
(2.21)
|
(1) %
|
(2.19)
|
(2.09)
|
5 %
|
Interest
expense
|
(3.58)
|
(4.65)
|
(23) %
|
(3.56)
|
(5.07)
|
(30) %
|
Adjusted funds
flowi
|
41.10
|
9.84
|
318 %
|
37.61
|
10.22
|
268 %
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares
outstanding, end of period
|
83,357
|
44,658
|
87 %
|
83,357
|
44,658
|
87 %
|
Weighted average basic
shares outstanding
|
83,357
|
42,445
|
96 %
|
83,357
|
41,216
|
102 %
|
Stock based
compensation dilution
|
2,917
|
1,348
|
116 %
|
2,666
|
1,078
|
147 %
|
Weighted average
diluted shares outstanding
|
86,274
|
43,793
|
97 %
|
86,023
|
42,294
|
103 %
|
|
|
|
|
|
|
|
i
This is a non-GAAP and other financial
measure which is defined in the Non-GAAP and Other Financial
Measures section of this document.
|
ii
The Company views this change calculation
as not meaningful, or "nm".
|
iii
The three and six months ended June 30,
2021 include a non-cash impairment reversal of $323.6
million.
|
RETURN OF CAPITAL FRAMEWORK
Surge is poised to deliver strong operational results in
2H/22 and beyond with more than 2.6 billion of net (internally
estimated) original oil in place ("OOIP")2, an
approximate 6.5 percent recovery factor to date, and dominant
operational positions in two top tier light and medium gravity
crude oil growth plays in the Sparky and SE Saskatchewan core areas. Further, with
over $1.3 billion in tax pools, the
Company is well positioned to deliver its shareholders a
combination of:
- Continued net debt repayment, increasing Surge's net asset
value ("NAV")2 per share;
- A sustainable base monthly cash dividend (currently a 4.7
percent yield based on a $9.00/share
price);
- Strategic share buybacks;
- Potential for variable or special dividends; and
- A modest production growth wedge.
On this basis, Surge's Board and Management are pleased to
announce the implementation of the Company's return of capital
framework. This return of free cash flow will follow a phased
approach, based on achieving certain net debt targets, as set forth
below:
- Phase 1: Return approximately 25 percent of free cash
flow to shareholders through the Company's existing base dividend
of $0.42 per share per annum. The
remainder of free cash flow will be allocated to debt reduction
until net debt is reduced to $200
million;
- Phase 2: Return approximately 50 percent of free cash
flow to shareholders, with 25 percent allocated to the base
dividend, and 25 percent allocated to strategic share buybacks,
acquisitions, and/or variable or special dividends, until net debt
is reduced below $125 million;
and
- Phase 3: Return approximately 75 percent of free cash
flow to shareholders once net debt is reduced below $125 million. 25 percent of free cash flow will
be allocated to the base dividend, 50 percent allocated to
strategic share buybacks, a modest growth wedge, and/or variable or
special dividends, and 25 percent will be allocated to strategic
acquisitions and/or further net debt repayment.
![RETURN OF CAPITAL FRAMEWORK (CNW Group/Surge Energy Inc.) RETURN OF CAPITAL FRAMEWORK (CNW Group/Surge Energy Inc.)](https://mma.prnewswire.com/media/1867655/Surge_Energy_Inc__SURGE_ENERGY_INC__ANNOUNCES_RECORD_SECOND_QUAR.jpg)
Strategic, opportunistic acquisitions continue to be a key focus
for Surge as Management looks to increase sustainable free cash
flow on a per share basis for shareholders. Surge's approach to
acquisitions will continue to be disciplined with a focus on
acquiring high quality, large OOIP, low cost, conventional
reservoirs that provide free cash flow per share accretion.
OPERATIONS UPDATE: SUCCESSFUL 1H/22
DRILLING PROGRAMS AT SPARKY, SE
SASKATCHEWAN, AND VALHALLA
During Q2/22, Surge began its post spring break-up Sparky and
SE Saskatchewan drilling programs,
drilling 9 net wells in the quarter, with 7 net horizontal wells in
Sparky, 1.5 net horizontal wells in SE
Saskatchewan, and 0.5 net wells targeting the Doig formation
at the Company's large OOIP, light oil pool in the Valhalla area. The Company continues to be
active in its two primary core areas in 2H/22, with two drilling
rigs operating in the Sparky area, and one in SE
Saskatchewan.
All 21.5 net wells drilled and completed by the Company during
the first quarter of the year in the Sparky and SE Saskatchewan core areas were on production
during the second quarter and added over 2,550 boepd to Q2/22.
These drilling results are consistent with Surge's type curve
expectations.
Additionally, Surge has executed attractive fixed forward hedges
for both power costs and WCS differentials, which provide stability
in both operating costs and revenue.
2022 CAPITAL AND OPERATING BUDGET
UPDATE
Surge's high quality conventional asset base is characterized by
shallow reservoirs, which means that the Company's drilling program
is less susceptible to inflationary pressures. Shallow,
conventional reservoirs can be drilled faster than deeper
unconventional reservoirs, which reduces drilling days, the amount
of steel used and, in many cases, the need to frac wells.
The Company will continue to monitor costs and manage capital
expenditures for the balance of 2022 as they relate to the impact
of supply constraints, cost inflation, and labour shortages that
are being experienced across the energy industry and around the
globe. Surge has secured the services necessary to execute
its planned capital program for the balance of 2022 and into 2023,
having contracted drilling rigs for operations in its Sparky and
SE Saskatchewan core areas.
As previously released, the Company was successful at a highly
competitive Saskatchewan Crown land sale at Steelman in Q2/22, which added more than 40
net, highly economic, light oil Frobisher drilling locations, directly
offsetting recent successful drilling results. In addition, Surge
has also been successful in adding to its Sparky core area land
position through both Crown land sales and freehold leasing. To
date in 2022, the Company has spent approximately $15 million in expenditures related to strategic,
core area land acquisitions.
After completing a review of the impact of inflationary factors
as well as land expenditures to date, Surge has increased its
estimate for 2022 expenditures on property, plant, and equipment by
approximately 12 percent, as compared to the Company's original
budget released on January 17,
2022.
On this basis, Surge is revising its 2022 capital guidance, as
detailed below. The new capital expenditure estimates for 2022
include approximately $15 million of
previously unbudgeted core area Crown and freehold land
acquisitions.
Previous guidance for
2022(e) expenditures on property, plant, and equipment
|
$124 million
|
Strategic core area
land acquisitions
|
$15 million
|
Incremental facility
and infrastructure capital
|
$5 million
|
Inflation estimate
increase for drilling and completions
|
$15 million
|
Revised guidance for
2022(e) expenditures on property, plant, and equipment
|
$159 million
|
Given the impact of the aforementioned inflationary pressures, as
well as above average power costs experienced year-to-date, the
Company is also revising its 2022 operational costs and
expenditures as follows:
2022(e) Royalties as
percentage of petroleum and natural gas revenue
|
17.5 percent -
18.5 percent
|
2022(e) Net operating
expenses
|
$17.75 - $18.75 per
boe
|
2022(e) Transportation
expenses
|
$1.25 - $1.50 per
boe
|
2022(e) General &
administrative expenses
|
$2.05 - $2.25 per
boe
|
OUTLOOK - ASSET QUALITY DRIVES
OUTPERFORMANCE
Surge is a high quality, intermediate publicly traded oil
company focused on enhancing shareholder returns through free cash
flow generation. The Company's defined operating strategy is based
on acquiring and developing high quality, light and medium grade
crude oil conventional oil reservoirs, using proven technology to
enhance ultimate oil recoveries.
Surge's December 31, 2021
independent Sproule net asset value is $24.34 per share3 on a proven plus
probable basis, based on a flat US$80
WTI per barrel crude oil price deck.
During the second quarter of 2022 Surge delivered record cash
flow from operating activities of $75.8
million, an increase of 818 percent, as compared to Q2/21
cash flow from operating activities of $8.3
million. Prior to the $121.8
million of cash flow from operations before realized gains
or losses on financial contracts generated in Q2/22, the single
best quarter in Surge's 12 year corporate history for cash flow
from operations before realized gains or losses on financial
contracts was Q3/14 at $77.5
million.
The Company's fixed price oil hedge volumes will wind down and
expire by the end of 2022, providing incremental cash flow and free
cash flow in 2023 and beyond at current strip oil prices.
On July 15, 2022, Surge paid its
first monthly cash distribution of its $0.42 per share, per annum base dividend. This
base dividend represents 12 percent of annualized Q2/22 cash flow
from operating activities of more than $300
million.
The Company currently anticipates releasing preliminary 2023
guidance on or before the release of its Q3/22 results.
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; the Company's return of capital
framework, including its expectation that it will be positioned to
deliver to its stakeholders a combination of: continued net debt
repayment; a reinstated, sustainable, base monthly dividend; share
buybacks; a modest production growth wedge; and potential for
variable or special dividends, and the anticipated timing thereof;
; Surge's internally estimated oil in place, drilling
inventory and drilling locations; Surge's 2022 capital and
operating budget; Surge's ongoing monitoring of costs and
management of capital expenditures as they relate to the impact of
supply constraints, cost inflation, and labour shortages; Surge's
belief that it has secured the services necessary to execute its
planned capital program for the balance of 2022 and into 2023;
Surge's approach to future acquisition opportunities; Surge's
updated 2022 capital guidance, including in respect of strategic
core area land acquisitions, incremental facility and
infrastructure capital, inflation estimate increase for drilling
and completions and its revised guidance for 2022(e) expenditures
on property, plant, and equipment; Surge's updated 2022 operational
costs and expenditures, including 2022(e) royalties as percentage
of petroleum and natural gas revenue, 2022(e) net operating
expenses, 2022(e) transportation expenses and 2022(e) general &
administrative expenses; and the anticipated timing of release of
Surge's preliminary 2023 guidance.
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,
2022 and in Surge's MD&A for the period ended
December 31, 2021, 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 51-11 - 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.
NAV per share is the Company's Net Asset Value as of 2021YE (on
a Before Tax basis), evaluated by an independent auditor (Sproule)
and in accordance with COGE Handbook, minus net debt, then divided
by the company's basic share count as of Dec
31, 2021. Surge's NAV does not include any value for Land or
Seismic. Surge's Total Proved plus Probable Net Asset Value
on Sproule's 2021YE price deck was $16.94 per share.
February 2022 pricing assumptions
used to generate $24.34/share Total
Proved plus Probable Net Asset Value were: US$80/bbl WTI, US$13.00/bbl WCS Differential, US$3.50/bbl EDM/Cromer Differential, $0.79 FX and $3.25
per mmbtu AECO.
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 Jan 1, 2022 reference
date, the Company will have over >1,050 gross (>975 net)
drilling locations identified herein; of these >550 gross
(>500 net) are unbooked locations. Of the 456 net booked
locations identified herein, 362 net are Proved locations and 95
net are Probable locations based on Sproule's 2021YE reserves.
Assuming an average number of wells drilled per year of 75, Surge's
>1,050 locations provide 13 years of drilling.
Surge's internally used type curves were constructed using a
representative, factual and balanced analog data set, as of
January 1, 2022. All locations were
risked appropriately, and EURs 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 "adjusted funds flow",
"adjusted funds flow per share", "free cash flow", "net debt", "net
operating expenses", "operating netback", and "adjusted funds flow
per boe" 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.
Adjusted Funds Flow & Adjusted
Funds Flow Per Share
Adjusted funds flow is a non-GAAP financial measure. The Company
adjusts cash flow from operating activities in calculating adjusted
funds flow for changes in non-cash working capital, decommissioning
expenditures, and cash settled transaction and other 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 and other costs represent expenditures associated with
property acquisitions and dispositions, and employee severance
costs, 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 a non-GAAP ratio 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:
|
|
|
|
|
|
Three Months Ended
June 30,
|
Six Months Ended
June 30,
|
($000s except per
share amounts)
|
2022
|
2021
|
2022
|
2021
|
Cash flow from
operating activities
|
75,798
|
8,254
|
127,980
|
23,804
|
Change in non-cash
working capital
|
2,198
|
3,355
|
11,259
|
381
|
Decommissioning
expenditures
|
501
|
1,063
|
1,996
|
2,544
|
Cash settled
transaction and other costs
|
64
|
885
|
219
|
2,585
|
Adjusted funds
flow
|
$
78,561
|
$
13,557
|
$
141,454
|
$
29,314
|
Per share -
basic
|
$
0.94
|
$
0.32
|
$
1.70
|
$
0.71
|
Free Cash Flow
Free cash flow is a non-GAAP financial measure, calculated as
cash flow from operating activities less expenditures on property,
plant, equipment and dividends paid. Management uses free cash flow
to determine the amount of funds available to the Company for
future capital allocation decisions.
Net Debt
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.
($000s)
|
As at Jun 30,
2022
|
As at Mar 31,
2022
|
As at Jun 30,
2021
|
Accounts
receivable
|
80,589
|
83,502
|
29,244
|
Prepaid expenses and
deposits
|
4,227
|
3,669
|
4,595
|
Accounts payable and
accrued liabilities
|
(102,172)
|
(97,913)
|
(50,641)
|
Dividends
payable
|
(2,918)
|
-
|
-
|
Bank debt
|
(22,254)
|
(96,780)
|
(162,318)
|
Term debt
|
(162,180)
|
(133,580)
|
(41,164)
|
Convertible
debentures
|
(75,423)
|
(74,668)
|
(72,522)
|
Net Debt
|
(280,131)
|
(315,770)
|
(292,806)
|
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.
Operating Netback & Adjusted
Funds Flow per boe
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 & adjusted funds flow are calculated on a
per unit basis as follows:
|
Three Months Ended
June 30,
|
Six Months Ended
June 30,
|
($000s)
|
2022
|
2021
|
2022
|
2021
|
Petroleum and natural
gas revenue
|
212,999
|
80,884
|
382,123
|
161,578
|
Processing and other
income
|
1,569
|
1,172
|
3,375
|
2,261
|
Royalties
|
(37,734)
|
(11,073)
|
(66,135)
|
(19,550)
|
Realized gain (loss) on
commodity and FX contracts
|
(45,966)
|
(20,911)
|
(74,775)
|
(37,733)
|
Operating
expenses
|
(38,189)
|
(25,785)
|
(75,643)
|
(53,868)
|
Transportation
expenses
|
(3,095)
|
(1,293)
|
(5,872)
|
(2,832)
|
Operating
netback
|
89,584
|
22,994
|
163,073
|
49,856
|
G&A
expense
|
(4,186)
|
(3,041)
|
(8,218)
|
(5,998)
|
Interest
expense
|
(6,837)
|
(6,396)
|
(13,401)
|
(14,544)
|
Adjusted funds
flow
|
78,561
|
13,557
|
141,454
|
29,314
|
Barrels of oil
equivalent (boe)
|
1,911,258
|
1,377,078
|
3,760,687
|
2,869,475
|
Operating netback ($
per boe)
|
$
46.87
|
$
16.70
|
$
43.36
|
$
17.38
|
Adjusted funds flow ($
per boe)
|
$
41.10
|
$
9.84
|
$
37.61
|
$
10.22
|
For more information about Surge, please visit our website
at www.surgeenergy.ca
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 Oil and Gas
Advisories section of this document for further
information
|
3
|
This is a Company
defined fixed price sensitivity and is not NI51-101 compliant. See
the Oil and Gas Advisories section for further
information.
|
SOURCE Surge Energy Inc.