CALGARY, May 15, 2018 /CNW/ - Surge Energy Inc. ("Surge"
or the "Company") (TSX: SGY) is pleased to announce the execution
of a formal purchase and sale agreement for the acquisition (the
"Acquisition") of high netback, waterflooded, crude oil producing
assets (the "Assets") in the Company's core Sparky area of
Central Alberta for a purchase
price of $28.4 million, which is
expected to close on or about May 31,
2018.
Current production from the Assets is more than 620 boepd
(83 percent oil), with over 75 percent of the production focused in
Surge's large original oil in place ("OOIP"1), high
netback, core Sparky crude oil properties at Eyehill and Macklin.
The Assets have an annual decline of less than 27 percent, and a
netback of more than $30 per boe at
US $65 WTI2 per barrel oil
prices. The Acquisition is accretive to Surge on all key debt
adjusted per share metrics. Surge has identified more than 35 net
low-risk Sparky development drilling locations on the Assets. The
Assets have a large internally estimated OOIP of over 85 million
barrels, and an average gravity of 27o API.
In conjunction with the Acquisition, Surge is also revising
upward the Company's 2018 exit production guidance from 16,650
boepd to 17,175 boepd (82 percent oil).
In addition, as a result of better than anticipated Q1 2018
drilling and waterflood results (as Press Released on May 8, 2018), the Sparky core area Acquisition,
significantly higher strip crude oil prices than estimated, and the
narrowing of WCS differentials to near historical levels, Surge is
generating substantial free adjusted funds flow, (resulting in an
estimated dividend simple payout ratio of less than 15 percent) at
current strip crude oil prices. Accordingly, Surge's Board of
Directors has approved an increase to the Company's annual dividend
from $0.095 per share per year
($0.0079 per share per month) to
$0.10 per share per year
($0.0083 per share per month).
______________________
1
|
Original Oil in Place
("OOIP") is the equivalent to Discovered Petroleum Initially In
Place ("DPIIP") for the purposes of this press release.
|
2
|
2018 guidance and
Acquisition metrics are based off of US$65/bbl WTI, US$47/bbl WCS,
0.78 CAD/USD FX, $1.40/GJ AECO.
|
THE SPARKY ACQUISITION
The Acquisition is consistent with Surge's business strategy of
acquiring high quality, operated, large OOIP, conventional crude
oil, sandstone reservoirs with low recovery factors.
The Assets are located in the Company's Sparky core area trend
in which Surge currently has over 700 million barrels of internally
estimated net OOIP. The Eyehill and Macklin properties included in
the Acquisition represent over 75 percent of the current production
from the Assets, and directly offset Surge's current production and
drilling operations. Surge has identified over 35 net low-risk
drilling locations, with additional waterflood upside on these two
key properties. The Assets are characterized by the following
attributes:
- More than 85 million barrels of internally estimated OOIP with
current recovery factors of less than 2 percent at Eyehill and
Macklin (and an internally estimated recovery factor of 10 percent
on primary, and up to 30 percent with waterflood);
- 620 boepd (83 percent oil) of 100 percent operated, high
working interest, low decline, oil-weighted production;
- Long life reserves – over 2.9 mmboe of internally estimated
proved plus probable reserves (i.e. 13 year RLI);
- A portion of the production is under successful, active
waterflood (with additional waterflood upside at both Eyehill and
Macklin);
- More than 35 net low-risk, development drilling locations, of
which 11 are included in Surge's internal reserve estimates
above;
- Operating netbacks of more than $30 per boe at US $65 WTI;
- Sustaining capital of $3.25
million, with anticipated 2H 2018 annualized adjusted funds
flow of more than $6.0 million;
and
- Implied free cash flow yield of approximately 45 percent.
ATTRACTIVE DEAL METRICS
The $28.4 million Acquisition has
the following transaction metrics:
Current Production
Multiple
|
620 boepd (83 percent
oil);
$46,000 per flowing boepd
|
2H 2018 Annualized
Adjusted Funds Flow Multiple3
|
4.7x
|
Total Proved Plus
Probable Reserves Multiple (Internally Estimated)
4
|
$9.79/boe
|
Recycle
Ratio
|
3.1x
|
Reserve Life Index
(RLI)
|
13 years
|
______________________
3
|
2018 guidance and
Acquisition metrics are based off of US$65/bbl WTI, US$47/bbl WCS,
0.78 CAD/USD FX, $1.40/GJ AECO.
|
4
|
RLI defined in
Reserves Data/Oil and Gas Metric
|
This Acquisition is accretive on all key debt adjusted per share
metrics.
STRATEGIC FIT WITH SURGE'S CORE SPARKY ASSETS
Production in Surge's Sparky core area has increased 145 percent
over the last 2 years, from 2,850 boepd to over 7,000 boepd (85
percent oil) today. Each of Surge's core assets depicted below
can be characterized as a high quality, low risk, operated, large
OOIP, conventional sandstone reservoirs.
SPARKY AREA – CONTINUED GROWTH
MOMENTUM
Over the last 2 years, Surge has successfully grown production
in the Company's Sparky core area by more than 145 percent –
turning its key producing Sparky asset base into a low cost, high
netback, conventional sandstone resource play.
Over the past 12 months Surge has successfully completed three
separate accretive Sparky core area acquisitions, purchasing over
2,200 boepd (90 percent oil) combined, for an average of less than
five times forward adjusted funds flow from the acquired assets.
The combination of these transactions, together with Surge's highly
successful development drilling program, have allowed the Company
to amass an exciting core growth area with the following
characteristics:
- Since year end 2016, Surge has increased the Company's
internally estimated net OOIP in the Sparky core area to over 700
million net barrels, and added more than 125 internally estimated
drilling locations;
- Surge's proved plus probable oil reserves in the Sparky core
area have grown by more than 75 percent from 18 million boe
(independently evaluated year end 2015 Sparky area reserves), to an
internal estimate of more than 32 million boe today;
- Production from Surge's Sparky core area has increased by over
145 percent in the last 2 years from approximately 2,850 boepd to
over 7,000 boepd today (85 percent oil);
- Today Surge has more than 340 internally estimated, low risk,
Sparky area, development drilling locations – providing
shareholders with a 12-year inventory of high rate of return (and
excellent profit to investment ratio) locations at strip oil
prices; and
- In addition, Surge is now experiencing significant economies of
scale based upon regional dominance in this key growth area in
terms of services, land, infrastructure, and existing
production.
Management sees further opportunity to both expand and
consolidate Surge's position in the Sparky core area, utilizing the
following strategies: 1) organically grow through land acquisitions
and follow-up development drilling; and 2) actively pursue,
evaluate, and transact on accretive acquisitions of large OOIP,
long life, low decline, conventional sandstone reservoirs.
Surge has now identified and delineated several distinct assets
in its Sparky core area that will underpin growth in the area for
the foreseeable future. The Company's key operated, large OOIP,
sandstone reservoirs at Eyehill, Lakeview, Sounding Lake, Sounding
Lake East, Betty Lake, Provost, and
Macklin all possess multi-year development drilling inventories,
exciting growth prospects, and waterflood upside.
Overall, the Company anticipates its Sparky core area to grow
from 7,000 boepd currently, to over 10,000 boepd over the next
three to four years.
UPWARD REVISION TO 2018 EXIT GUIDANCE
Based on better than anticipated drilling and waterflood
results, (as Press Released on May 8,
2018), Surge's Q1 2018 production of 16,027 boepd again
exceeded managements budgeted expectations.
In accordance with the Acquisition, Surge is now revising upward
the Company's 2018 production exit rate from 16,650 boepd to more
than 17,175 boepd. Surge has now revised upward the Company's
production estimates five times in the last 2 years (i.e. two times
organically and three times pursuant to core area
acquisitions).
Surge's upwardly revised guidance for 2018 is set forth
below:
OPERATIONAL
|
US $65 WTI
2018
GUIDANCE5
|
US $75 WTI
2018
GUIDANCE6
|
2018 Average
Production (boe/d)
|
16,585
|
16,585
|
2018 Exit Production
(boe/d) (82 percent oil)
|
17,175
|
17,175
|
Total 2018 Capital
Spending
|
$105
million
|
$105
million
|
Operating Expenses -
2H 2018 ($/boe)
|
$13.95/boe
|
$13.95/boe
|
Transportation
Expenses – 2H 2018 ($/boe)
|
$1.50/boe
|
$1.50/boe
|
Royalties as a % of
Revenue – 2H 2018
|
14-15%
|
15-16%
|
FINANCIAL
|
|
|
Estimated 2H 2018
Annualized Adjusted Funds Flow
|
$149
million
|
$190
million
|
Estimated 2H 2018
Annualized Adjusted Funds Flow per Share
|
$0.65
|
$0.82
|
Estimated Q4 2018 Net
Debt to Adjusted Funds Flow
|
1.66x
|
1.2x
|
Annualized
Dividend
|
$23.1
million
|
$23.1
million
|
Sustainability Ratio
– 2H 2018 Annualized
|
86%
|
67%
|
Simple Payout Ratio –
2H 2018 Annualized
|
16%
|
12%
|
*Note:
|
In 2017 Surge
budgeted WCS differentials at US$12.75 per bbl. Surge has now
increased its WCS differential
assumption by 41 percent in 2018, to US$18 per bbl in its US$65 WTI
budget on a go forward basis.
|
______________________
5
|
2018 guidance and
Acquisition metrics are based off of US$65/bbl WTI, US$47/bbl WCS,
0.78 CAD/USD FX, $1.40/GJ AECO.
|
6
|
2018 guidance and
Acquisition metrics are based off of US$75/bbl WTI, US$56/bbl WCS,
0.79 CAD/USD FX, $1.40/GJ AECO.
|
Based on better drilling results than anticipated at the
Company's core Valhalla light oil
property, Surge has added one net Valhalla well in the fall of 2018 to its
capital expenditure budget, plus $1
million of incremental facilities capital to handle the
associated light oil volumes.
5.3 PERCENT INCREASE TO DIVIDEND
As a result of the Sparky core area Acquisition, along with
better than anticipated operational results in Q1 2018,
significantly higher strip WTI oil prices than the Company was
budgeting, as well as WCS crude oil differentials narrowing close
to long term average levels, Surge has much larger free adjusted
funds flow in 2018 than management was projecting.
Accordingly, with the ongoing protection from Surge's strategic
commodity hedging program, the Board and management of Surge intend
to increase the Company's dividend by 5.3 percent, from
$21.9 million annually to
approximately $23.1 million annually,
effective June 15th,
2018.
This equates to a simple payout ratio of less than 16 percent of
forecast 2H 2018 annualized adjusted funds flow at WTI crude oil
prices of US $65 WTI per barrel,
including a WCS differential assumption of US$18 per barrel.
OUTLOOK – SUSTAINABLE GROWTH, LONG TERM VALUE, AND
INCOME
Management's stated goal is to be the best positioned
light/medium gravity crude oil growth and dividend paying public
company in our peer group in Canada.
Over the last seven financial quarters, Surge has now increased
production per share by 25 percent, increased its dividend by 31
percent, and upwardly revised production estimates five times –
twice times organically, and three times pursuant to accretive
Sparky core area acquisitions.
Management attributes the Company's continued quarterly
operational outperformance to be a direct result of applying growth
capital to Surge's high quality, large OOIP, light and medium
gravity crude oil, conventional sandstone reservoirs, and
successful waterflood implementation.
Management believes that Surge offers its shareholders a unique
return based model with multi-faceted, low risk, light and medium
gravity crude oil investment opportunity as follows:
- Sustainable annual production per share growth of five to seven
percent per year pursuant to the Company's strategic Five Year
Business Plan; plus
- Very high internal rate of return drilling locations – with
very quick payouts (11 year drilling inventory; with a weighted
average internal rate of return greater than 90 percent at US
$65 WTI flat pricing); plus
- Significant incremental long-term value from Surge's large OOIP
conventional reservoirs that have very high profit to investment
ratio waterfloods (low risk drilling and waterfloods provide low
harmonic declines, and deliver "annuity-type" annual reserve
bookings); plus
- Current yield of approximately four percent through a
sustainable, increasing, compounding dividend; plus
- Free adjusted funds flow yield (above US $57.50 WTI flat pricing); plus
- Significant financial leverage to higher oil prices; plus
- Significant upside for share price appreciation as Surge common
shares trade up to (and through) the Company's new net asset value
of $6.06 per share (calculated based
on the Company's December 31, 2017
independently estimated (Sproule) reserve report total proved plus
probable value, discounted at 10 percent).
Surge will continue to grow its production base and location
inventory in the Company's three core areas - at Sparky,
Shaunavon, and Valhalla – through, organic, low risk,
development drilling, combined with strategic, high quality, core
area acquisitions.
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: the closing of and anticipated benefits of the
Acquisition; the impact of the Acquisition on the Company and its
results and development plans; the expected characteristics of the
Assets;; management's plans for development in certain core areas
and the expected upside of such development; the fit of the Assets
with the Company's existing assets; the expected closing date of
the Acquisition;; production volumes; expected drilling activities
and locations; Surge's capital expenditure program, including
drilling and development plans and enhanced recovery projects and
the timing and results to be expected thereof; expectations with
respect to the Company's ability to operate and succeed in the
current commodity price environment; the Company's declared focus
and primary goals; the Corporation's Five Year Business Plan;
management's forecast of adjusted funds flow ratio; guidance with
respect to 2018 average and exit production and production per
share; free adjusted funds flow; management's intention to increase
Surge's dividend and the timing thereof the sustainability of the
dividend; simple payout ratio; sustainability; recycle ratios;
recovery factors; estimated reserves multiples; operating netbacks;
management's estimates and expectations regarding capital
expenditures, operating costs, transportation expenses, growth
opportunities and strategies, estimated reserves and estimated
reserve life index and decline rates; the Company's revised 2018
exit guidance; the availability of Surge's bank line to provide the
Company with sufficient liquidity and financial flexibility;
expected shareholder return; the potential appreciation of the
Company's shares; the impact of cost savings initiatives;
production and cash flow per share growth; and anticipated
commodity prices; drilling inventories and locations; and
management's expectations regarding debt levels.
Certain measures set forth in this press release may be
considered to be future-oriented financial information or a
financial outlook for the purposes of applicable Canadian
securities laws. Financial outlook and future-oriented financial
information contained in this press release are based on
assumptions about future events based on management's assessment of
the relevant information currently available. In particular, this
press release contains projected operational information for 2018,
including sustaining capital, average production, exit production,
total capital spending, royalties, operating expenses,
transportation expenses, annualized dividend, anticipated annual
cash flow from operating activities, implied cash flow yield,
forward adjusted funds flow, 2018 corporate operating costs, simple
payout ratio, estimated 2018 adjusted funds flow and estimated 2018
adjusted funds flow per share. The future-oriented financial
information and financial outlooks contained in this press release
have been approved by management as of the date of this press
release. Readers are cautioned that any such financial outlook and
future-oriented financial information contained herein should not
be used for purposes other than those for which it is disclosed
herein.
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 closing the Acquisition, 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 and the Assets, 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
and the availability, costs of capital, labour and services and the
creditworthiness of industry partners and the impact of
transactions on Surge's bank line.
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, capital
expenditures or the closing of the Acquisition; 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 14, 2018 and in Surge's MD&A for the
period ended March 31, 2018, 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/Oil and Gas Metric
"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. 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. "Internally estimated" means an estimate that is
derived by Surge's internal APEGA certified Engineers, and
Geologists 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 May 1, 2018
The "recycle ratio", equals the profit per barrel divided by the
total cost of discovering and extracting that barrel. "Total
proved plus probable reserves multiple" is the purchase price of
the Assets ($28.4 million) divided by
the internally estimated total proved plus probable reserves (2.9
mmboe). "Corporate production efficiency" is equal to the total
capital spent divided by the associated production added. "Internal
rate of return" means the discount rate at which the net present
value equals zero. "RLI" means reserve life index and equals the
estimated remaining reserve divided by the current production.
Drilling Inventory
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 independent engineering
evaluation of the oil, natural gas liquids and natural gas reserves
attributable to the Company prepared by Sproule Associates Limited
effective December 31, 2017 and dated
February 9, 2018 (the "Sproule
Report") 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 Company's more than 700 gross (675 net) drilling locations
identified herein 420 gross (404 net) are unbooked locations. Of
the 292 gross (277 net) booked locations identified herein 228
gross (216 net) are proved locations and 64 gross (61.2 net) are
probable locations as of the Sproule Report. 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.
Non-IFRS Measures
This press release contains the terms "adjusted funds flow",
"net debt", "net debt to adjusted funds flow", "operating netback",
"sustainability", "sustaining capital", "payout ratio" "free
adjusted funds flow yield", and "annualized adjusted funds flow
multiple" 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 "adjusted funds flow" (cash flow
from operating activities before changes in non-cash working
capital, decommissioning expenditures, transaction and other costs
and cash settled stock-based compensation) to analyze operating
performance and leverage. Management believes that adjusted funds
flow is a useful supplemental measure as it provides an indication
of the results generated by the Company's principal business
activities before the consideration of how those activities are
financed or how the results are taxed. Management defines net
debt as outstanding bank debt and the liability component of the
convertible debenture plus or minus working capital, excluding the
fair value of financial contracts and other current obligations.
Management uses "net debt to adjusted funds flow" to analyze
leverage and capital structure. Management believes "operating
netback" is a useful supplemental measure 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,
and financial charges. Sustainability is a comparison of a
company's cash outflows (capital investment and dividends) to its
cash inflows (adjusted funds flow) and is used by the Company to
assess the appropriateness of its dividend levels and the long-term
ability to fund its development plans. Sustainability ratio is
calculated using the development capital plus dividends paid
divided by adjusted funds flow. Sustaining capital is the
amount of capital investment required to maintain production at a
current rate. Payout ratio is calculated on a percentage
basis as dividends declared divided by adjusted funds flow. Payout
ratio is used by management to monitor the dividend policy and the
amount of adjusted funds flow retained by the Company for capital
reinvestment. Free cash flow yield is calculated using annualized
adjusted funds less sustaining capital investment divided by
adjusted cash flow. Annualized adjusted funds flow multiple means
the purchase price divided by the annualized adjusted funds
flow. 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.