CALGARY, Nov. 9, 2015 /CNW/ - Surge Energy Inc. ("Surge"
or the "Company") (TSX: SGY) announces its operating and financial
results for the quarter ended September 30,
2015. This quarter represents the first full quarter of
operating and financial results for Surge post the $430 million sale of the Company's SE Saskatchewan and Manitoba assets. This asset disposition
closed on June 15, 2015.
Business Strategy – Prepare for a "Lower for Longer"
Scenario
Given the significant drop in world crude oil prices from US WTI
$108 per barrel in June of 2014, to a
low of $38 per barrel in August of
2015, together with OPEC's stated change of strategy in November of
2014 (i.e. to protect market share rather than the price of crude
oil), Surge management has acted decisively and aggressively to
properly position the Company for a "lower for longer" crude oil
price scenario.
Accordingly, in the first half of 2015 the Company sold 5,300
boepd in two transactions for combined gross proceeds of
$465 million to completely reposition
Surge's balance sheet to grow and prosper in a significantly lower
crude oil price environment. In addition, in the first half of 2015
Surge management unwound the Company's fixed price crude oil hedges
for 2015, and realized a significant gain of over $35 million. These proceeds were also utilized to
pay down debt and enhance the Company's balance sheet.
As a result of these, and other capital allocation strategies
and business decisions (including disciplined capital spending and
rigorous cost cutting), Surge now enjoys a strong balance sheet,
and is uniquely positioned to grow and pay dividends in virtually
any reasonable crude oil price scenario.
Impact of Third Quarter Outages
During the third quarter of 2015, the Company had approximately
5,000 boepd shut in at Valhalla
for over five weeks due to two downstream industry pipeline
outages. Based on continued strong drilling results at the
Company's core properties of Shaunavon and Valhalla, Surge still met consensus
expectations with third quarter production levels of 13,522
boepd. Had these industry outages not occurred, Surge
estimates third quarter 2015 production would have averaged over
15,000 boepd.
These excellent drilling results, coupled with lower corporate
declines, position Surge to exceed management's 2015 production
exit rate target of 14,500 boepd. Contributing to the lower
corporate declines are successful waterflood projects at
Wainwright, Silver, Eye Hill, Nipisi, Sunset, Nevis, Westerose, Chip
Lake, Windfall, and Valhalla (Doe Creek).
As a result of the industry pipeline outages referred to above,
Surge's third quarter 2015 cash flow was reduced by approximately
$2.6 million. In addition, Surge
incurred an additional $1.2 million
charge in the third quarter in relation to acquiring alternate gas
gathering options. Had the industry outages not occurred, proforma
cash flow for Surge in the third quarter of 2015 is estimated to
have been approximately $21 million.
This provides a proforma third quarter 2015 debt to cash flow of
1.7 times.
FINANCIAL AND
OPERATING SUMMARY
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($000s except per
share amounts)
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Three Months Ended
September 30,
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Nine Months Ended
September 30,
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2015
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2014
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%
change
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2015
|
2014
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%
change
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Financial
highlights
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Oil and NGL
sales
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43,210
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135,548
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(68)%
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185,640
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357,536
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(48)%
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Natural gas
sales
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|
2,569
|
8,161
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(69)%
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11,360
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21,888
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(48)%
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Total oil, natural
gas, and NGL revenue
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45,779
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143,709
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(68)%
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197,000
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379,424
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(48)%
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Funds from
Operations1
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17,009
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71,298
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(76)%
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103,571
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190,593
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(46)%
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Per share basic
($)
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0.08
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0.33
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(76)%
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0.47
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0.98
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(52)%
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Per share diluted
($)
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0.08
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0.32
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(75)%
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0.47
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0.98
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(52)%
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Net income
(loss)
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(34,820)
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34,655
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nm4
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(149,294)
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76,004
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nm
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Per share basic
($)
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(0.16)
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0.16
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nm
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(0.68)
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0.39
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nm
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Per share diluted
($)
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(0.16)
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0.16
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nm
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(0.68)
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0.39
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nm
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Capital expenditures
- petroleum & gas properties2
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17,653
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32,473
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(46)%
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58,422
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109,799
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(47)%
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Capital expenditures
- acquisitions & dispositions2
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(3,735)
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(52,473)
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nm
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(464,685)
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529,350
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nm
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Total capital
expenditures2
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13,918
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(20,000)
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nm
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(406,263)
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639,149
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nm
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Net debt at end of
period3
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143,200
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503,004
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(72)%
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143,200
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503,004
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(72)%
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Operating
highlights
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Production:
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Oil and NGL (bbls per
day)
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11,234
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17,180
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(35)%
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14,402
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14,723
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(2)%
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Natural gas (mcf per
day)
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13,731
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18,879
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(27)%
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16,955
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15,269
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11 %
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Total (boe per day)
(6:1)
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13,523
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20,327
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(33)%
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17,228
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17,268
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(0)%
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Average realized
price (excluding hedges):
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Oil and NGL ($per
bbl)
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41.81
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85.76
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(51)%
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47.22
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88.95
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(47)%
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Natural gas ($ per
mcf)
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2.03
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4.70
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(57)%
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2.45
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5.25
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(53)%
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Netback ($ per
boe)
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Oil, natural gas and
NGL sales
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36.80
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76.85
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(52)%
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41.89
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80.49
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(48)%
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Realized gain (loss)
on commodity contracts
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1.70
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(2.47)
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nm
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8.20
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(4.18)
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nm
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Royalties
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(6.47)
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(13.61)
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(52)%
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(6.46)
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(14.00)
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(54)%
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Operating
expenses
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(13.35)
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(16.02)
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(17)%
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(15.71)
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(15.44)
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2 %
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Transportation
expenses
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(1.90)
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(1.82)
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4 %
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(1.55)
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(1.82)
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(15)%
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Operating
netback
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16.78
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42.93
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(61)%
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26.37
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45.05
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(41)%
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G&A
Expense
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(1.76)
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(1.99)
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(12)%
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(1.87)
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(2.06)
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(9)%
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Interest
Expense
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(1.35)
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(2.81)
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(52)%
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(2.47)
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(2.48)
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(0)%
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Corporate
netback
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13.67
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38.13
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(64)%
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22.03
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40.51
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(46)%
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|
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Common shares
(000s)
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Common shares
outstanding, end of period
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220,851
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217,713
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1 %
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220,851
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217,713
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1 %
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Weighted average
basic shares outstanding
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221,259
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217,689
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2 %
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220,540
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193,739
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14 %
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Stock option dilution
(treasury method)
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|
—
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1,718
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nm
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—
|
1,279
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nm
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Weighted average
diluted shares outstanding
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|
221,259
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219,407
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1 %
|
220,540
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195,018
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13 %
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1
|
Management uses funds
from operations (cash flow from operating activities before changes
in non-cash working capital, decommissioning expenditures,
transaction costs and cash settled stock-based compensation) to
analyze operating performance and leverage. Funds from operations
as presented does not have any standardized meaning prescribed by
IFRS and, therefore, may not be comparable with the calculation of
similar measures for other entities.
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2
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Please see capital
expenditures note.
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3
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The Company defines
net debt as outstanding bank debt plus or minus working capital,
however, excluding the fair value of financial contracts and other
current obligations.
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4
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The Company views
this change calculation as not meaningful, or "nm".
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OPERATIONS OVERVIEW
Excellent Q3 Shaunavon Drilling Results; Waterflood
Initiated
In the third quarter of 2015, Surge drilled four of the
Company's originally planned seven well program at Shaunavon, Saskatchewan. Production
additions from the four new Upper Shaunavon oil wells contributed
over 800 boepd for the first 45 days of production. This result
exceeds Surge's type curve expectations for the Upper Shaunavon
play. Drilling and completion costs for Surge's Upper Shaunavon
wells have now dropped from $2.1
million in 2014 to less than $1.7
million today.
Surge's operating costs for the Shaunavon field are now $9 per barrel, with new production volumes coming
on at less than $5 per barrel.
Surge's type curve Upper Shaunavon wells deliver a risked rate of
return of 65 percent (on primary recovery only), based on
November 2015 strip pricing.
In late August, Surge initiated the Company's waterflood in the
Upper Shaunavon formation by converting two producing wells to
injectors. Surge anticipates an early response for this exciting
waterflood project. The Upper Shaunavon is amenable to
waterflood due to its current low recovery factors and excellent
rock qualities.
Valhalla Drilling Success Continues; Infrastructure Options
Resolved
As previously disclosed, Surge has developed a large northern
extension of the Company's operated light oil pool at
Valhalla. This Doig sandstone reservoir is 30 – 40 meters
thick, and has more than 150 million barrels of OOIP. Three
recent 100 percent wells drilled into the northern extension have
now qualified as the top producing oil wells in Alberta in 2015. These wells have come
onstream significantly above type curve at more than 2,300 boepd
each on 60-day IP rates. In their first four months of
production, the wells have delivered cumulative production of more
than 175,000 boe each (over 70 percent liquids).
Type curve wells at Valhalla
now cost less than $4 million to
drill and complete. Based on November
2015 strip pricing, type curve wells pay out in less than
ten months, and they generate a risked rate of return of
approximately 150 percent. Surge has more than 35 (net) wells to
drill at Valhalla (north and
south) based on 300 meter spacing.
Surge has now identified and implemented several long term
solutions for processing the Company's associated natural gas at
Valhalla. During the third
quarter, the Company completed a connection to the Wembley gas processing plant. Surge now
has the ability to flow natural gas to both the nearby Wembley and Sexsmith processing plants.
In addition, Surge has initiated the construction of a pipeline
to strategically connect to a nearby gas plant that will take up to
10 mmcf/d of Surge's associated Valhalla natural gas from the north end of the
field. Surge estimates the cost of this pipeline to be
approximately $4.2 million. The
Company expects this pipeline to be completed by early-to-mid
December, 2015.
Finally, Surge has executed a $2
million offer to acquire an increased facility participation
interest (and operatorship) in the Company's nearby owned Doe gas
plant at 8-30-075-09W6. Surge will ultimately take a
significant portion of its associated gas production to the 8-30
plant. This strategic acquisition is set to close in early
January, 2016.
Surge holds strategic firm transportation at Valhalla (with both area service
providers). Current transportation commitments are aligned
with the Company's outlook for sustained production at
Valhalla.
Disciplined Q4/15 Capital Expenditure Program
In addition to the Valhalla
pipeline project mentioned above, Surge plans to drill five net
wells in the fourth quarter. This budget includes two net
wells in the Company's Central Alberta Sparky core area, and three
net wells in the Upper Shaunavon formation.
The two Sparky wells are to be drilled at Surge's operated
Eyehill asset. These wells are strategically designed to
validate the efficacy of lower cost mono-bore drilling technology,
and to offset competitive drainage. The Company is pleased to
report that both wells have been successfully drilled and cased,
and are awaiting frac stimulation. This success will lead to
significant cost reductions for future wells.
The three Shaunavon drills are
low risk, strategic development wells designed to further delineate
and develop this expanding, high netback crude oil asset.
Hedging Update
Subsequent to the third quarter, Surge implemented new hedge
positions for WTI, oil differentials, natural gas, electric power,
and foreign exchange. These hedges are summarized in the
table below:
Commodity
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Time
Frame
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Volume
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Value
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WTI oil collars
(put/call)
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Calendar
2016
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1,000
bbl/d
|
CAD $60.00 x
$80.30
|
Edmonton light oil
differentials
|
Calendar
2016
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2,000
bbl/d
|
USD
$3.55/bbl
|
Natural gas Chicago
index swap
|
Calendar
2016
|
10,000
mcf/d
|
CAD
$3.50/mcf
|
FX variable rate
collar (USD/CAD)
|
Calendar
2016
|
USD $2 million per
month
|
$1.295 x $1.370
($1.3155 cap)
|
FX forward
(USD/CAD)
|
Calendar
2017
|
USD $2 million
per month
|
$1.3125
|
Electric
Power
|
Calendar
2016
|
35,136 MWh
|
CAD $41.00 per
mwh
|
Electric
Power
|
Calendar
2017
|
17,520 MWh
|
CAD $41.77 per
mwh
|
The natural gas position provides Surge with 100% coverage under
its Alliance Pipeline volume commitments at Chicago for 2016.
Bank Redetermination Update, Dividend Reduction and
Outlook
Surge's bank line has recently been renewed by the Company's
bank syndicate at $400 million.
This line provides excess credit availability of more than
$250 million on the Company's bank
lines.
During the third quarter, Surge re-purchased approximately
740,000 common shares under its existing normal course issuer bid
("NCIB"). The Surge management team continues to evaluate
capital allocation alternatives on a weekly basis. Given the
current outlook, a lower level of participation in the NCIB is
expected in the fourth quarter as compared to third quarter levels.
The NCIB remains in effect, however, Surge has ceased making
purchases under the automatic share purchase plan which it had
entered into for the purpose of facilitating repurchases of its
common shares under the NCIB.
The Company's long term financial strategy is to maintain a
dividend level at or near an all-in 100 percent sustainability
ratio in any given calendar year. Implicit in this strategy
are reasonable assumptions for commodity prices, realized
differentials, and FX rates. Surge will be providing 2016
budget guidance before year-end, and intends to communicate its
financial and commodity price outlook for 2016 at that
time.
As discussed above, world crude oil prices have stayed "lower
longer" than many analysts and investors expected. Consequently,
Surge management and Board have determined to reduce the Company's
dividend from $0.30 cash per share
per year, to $0.15 cash per share per
year, effective immediately.
Factors relating to this strategic capital allocation decision,
include the following:
- While Surge has one of the best balance sheets in its peer
group in Canada (with over
$250 million of availability on the
Company's bank lines), preserving the Company's balance sheet and
shareholder's equity capital outweighs the higher dividend in this
"lower for longer" scenario.
- Subject to Surges' annual budget process, management
anticipates that the Company can keep production flat and pay its
dividend at current 2016 strip pricing. Surge's low annual
corporate decline (less than 21 percent), excellent production
efficiencies, and low cost structure allow the Company to operate
efficiently in a low oil price environment.
- The dividend reduction allows Surge to continue utilizing (and
possibly expanding) the Company's existing normal course issuer bid
– which allows Surge management to continue returning capital to
its shareholders pursuant to both the dividend and the share
buyback program.
- Strategically, protecting the Company's balance sheet by
maintaining a low payout ratio, allows Surge shareholders to
participate in capital appreciation upside, dividend increases, and
higher per share growth, when crude oil prices recover.
Surge is on track to achieve management's stated goal of being
one of the best positioned light/medium gravity crude oil growth
and dividend paying companies in Canada – uniquely positioned for success at
virtually any reasonable crude oil commodity price assumption. On
this basis, today Surge has the following corporate
fundamentals:
- Three core, high netback, operating areas, which comprise over
1.4 billion barrels of net OOIP, with a recovery factor of seven
percent to date;
- A low debt to 2016 cash flow ratio of approximately 1.7 times
utilizing 2016 pricing of US $55 per
barrel WTI;
- Low operating costs of less than $14 per boe;
- A 15 year reserve life index;
- A low corporate decline of less than 21 percent;
- More than $250 million of credit
availability on the Company's bank lines;
- A 12-14 year, low risk development drilling inventory, with
more than 750 net drilling locations - which generate
excellent production efficiencies and rates of return at strip oil
prices; and
- A net asset value of $4.64 per
share ("NAV") utilizing Sproule's recent third quarter of 2015
engineering price deck (Proved Producing plus Probable Producing
reserves equal to 73 percent of NAV).
FINANCIAL STATEMENTS AND ACCOMPANYING MDA:
Surge has filed with Canadian securities regulatory authorities
its financial statements and accompanying MD&A for the three
months ended September
30th, 2015. These filings are available for
review at www.sedar.com or www.surgeenergy.ca.
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: (i) the Company's expectations with respect to crude
oil prices; (ii) Surge's ability to grow and prosper in the current
and anticipated crude oil price environment; (iii) Surge's ability
to continue to pay a dividend and grow in what management believes
are reasonable crude oil price scenarios; (iv) management's
expectations with respect to 2015 year end exit production; (v)
Surge's operating costs at Shaunavon on new production volumes; (vi)
Surge's type curve wells and estimated risked rates of return;
(vii) number of drilling locations and inventory under various
spacing scenarios; (viii) Surge's estimates as to take up, costs
and timing of Surge's Valhalla
pipeline project; (ix) expectations as to timing of Surge's
strategic acquisition of additional working interests at the Doe
gas plant; * Surge's estimates as to sustained production at
Valhalla; (xi) Surge's drilling
and development plans and enhance recovery projects and the timing
and results to be expected thereof; (xii) estimated sizes,
characteristics, efficiencies, rates of return, netbacks, pool
recovery factors and risk levels of plays and the number of
associated drilling locations, as applicable; (xiii) management's
expectations with respect to the Company's waterflood program,
results therefrom and quantity of producing assets that will be
placed under waterflood; (xiv) expectations as to participation
under Surge's NCIB; and (xv) Surge's strategy to maintain dividend
and payout ratios at sustainable levels; (xvi) the timing of the
provision of Surge's 2016 budget guidance and the contents of such
communication; and (xvii) management's anticipated strategy with
respect to production, dividend levels, and the return of
shareholder capital.
The forward-looking statements are based on certain key
expectations and assumptions made by Surge, including expectations
and assumptions concerning 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, the
continuation of the Corporation's normal course issuer bid,
prevailing weather conditions, exchange rates, licensing
requirements, the impact of completed facilities on operating costs
and the availability, costs of capital, labour and services, 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 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 or 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 Annual Information Form dated
March 19, 2015 and in Surge's
MD&A for the period ended March 31,
2015, 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.
Reserves Data
Boe means barrel of oil equivalent on the basis of 1 boe to
6,000 cubic feet of natural gas. Boe may be misleading,
particularly if used in isolation. A boe conversion ratio of 1 boe
for 6,000 cubic feet of natural gas is based on an energy
equivalency conversion method primarily applicable at the burner
tip and does not represent a value equivalency at the wellhead.
Boe/d and boepd means barrel of oil equivalent per day. Original
Oil in Place (OOIP) is the equivalent to Discovered Petroleum
Initially In Place (DPIIP) for the purposes of this press
release. DPIIP is defined as quantity of hydrocarbons that
are estimated to be in place within a known accumulation. There is
no certainty that it will be commercially viable to produce any
portion of the resources. A recovery project cannot be defined for
this volume of DPIIP at this time, and as such it cannot be further
sub-categorized. IP60 means rate at which a well produces
during its first 60 days of production. Bbl means barrel of
oil. Mbbl means thousand barrels. Bbl/d means barrels of oil
per day. NGLs means natural gas liquids.
Surge's NAV per share is calculated by taking proved plus
probable reserve value NPV10 BT (including future capital), as
evaluated by Sproule and McDaniel, and adjusting for undeveloped
land and net debt and dividing by the then number of issued
and outstanding shares
The reserves data provided in this news release presents only a
portion of the Company's reserve information. Additional
reserves information are contained in Surge's annual information
form dated March 19, 2015, which was
filed on and which may be accessed through the SEDAR website.
Financial Outlooks
The estimates of debt to 2016 cash flow ratio contained in this
press release are financial outlooks within the meaning of
applicable securities laws. These financial outlooks have been
prepared by management of Surge to provide an outlook of Surge's
anticipated funds from operations for a full year of operations
with its current assets and based on management's expectations and
assumptions as to a number of factors, including but not limited to
commodity pricing, production, operating expenses and royalties.
Readers are cautioned that this information may not be appropriate
for any other purpose. Management does not have firm commitments
for all of the costs, expenditures, prices or other financial
assumptions used to prepare the financial outlooks or assurance
that such results will be achieved. The actual results of Surge
will likely vary from the amounts set forth in the financial
outlooks and such variation may be material. Surge and its
management believe that the financial outlooks have been prepared
on a reasonable basis, reflecting the best estimates and judgments,
and represent, to the best of management's knowledge and opinion,
Surge's expected expenditures and results of operations. However,
because this information is highly subjective and subject to
numerous risks, including the risks discussed under the note
regarding Forward Looking Statements, it should not be relied on as
necessarily indicative of future results. Except as required by
applicable securities laws, Surge undertakes no obligation to
update this information.
Drilling Locations
This press release discloses drilling locations that are
booked locations as well as unbooked locations. Proved
locations and probable locations, which are sometimes collectively
referred to as "booked locations", are derived from the Company's
most recent independent reserves evaluation as of December 31, 2014 and account for drilling
locations that have associated proved or probable reserves, as
applicable. Unbooked locations are internal estimates based on the
Company's prospective acreage and an assumption 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. Of the more than 750 net drilling locations
identified herein 570 are unbooked locations. Of the more 35 net
additional locations identified herein at Valhalla, 22 are booked locations.
Unbooked locations have specifically been identified by management
as an estimation of our multi-year drilling activities based on
evaluation of applicable geologic, seismic, engineering, production
and reserves data on prospective acreage and geologic formations.
The drilling locations on which we actually drill wells will
ultimately depend upon the availability of capital, regulatory
approvals, seasonal restrictions, oil and natural gas prices,
costs, actual drilling results and other factors.
Test Results and Initial Production Rates
Any references in this press release to initial, early and/or
test production/performance rates are useful in confirming the
presence of hydrocarbons, however, such rates are not determinative
of the rates at which such wells will continue production and
decline thereafter. While encouraging, readers are cautioned not to
place reliance on such rates in calculating aggregate production.
The initial production rate may be estimated based on other third
party estimates or limited data available at this time. Initial
production or test rates are not necessarily indicative of
long-term performance of the relevant well or fields or of ultimate
recovery of hydrocarbons.
Non-IFRS Measures
This press release contains the terms "funds from operations",
"net debt", "netback", and "NAV" which do not have a standardized
meaning prescribed by International Financial Reporting Standards
("IFRS") and therefore may not be comparable with the calculation
of similar measures by other companies. Management uses funds
generated by operations to analyze operating performance and
leverage. Management believes "net debt" is a useful supplemental
measure of the total amount of current and long-term debt of the
Company. Mark-to-market risk management contracts are excluded from
the net debt calculation. Management believes "netbacks" are a
useful supplemental measures of the amount of revenues received
after royalties and operating and transportation costs and
secondly, the amount of revenues received after the royalties,
operating, transportation costs, general and administrative costs,
financial charges and asset retirement obligations. NAV is
calculated as set forth above. Additional information relating to
these non-IFRS 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.
SOURCE Surge Energy Inc.