CALGARY, AB, June 22, 2020 /CNW Telbec/ - Surge
Energy Inc. ("Surge" or the "Company") (TSX: SGY) provides a
corporate update, confirmation of a redetermination under the
Company's reserves-based credit facility (the "Credit Facility"),
and a technical update in regards to the Company's Sparky core
area.
CORPORATE UPDATE – MACRO ENVIROMENT FOR OIL IMPROVING
In 2019, with US WTI crude oil prices averaging US$57 WTI per bbl, Surge successfully maintained
the Company's annual production (cost effectively), paid its prior
dividend (using just 17 percent of the Company's adjusted funds
flow1), and reduced net debt1 by
$79 million (adding significantly to
the net asset value and liquidity of the Company).
In early 2020, crude oil prices rallied to over US$63 WTI per bbl. Accordingly, pursuant to
Surge's strategic hedging program, the Company locked-in a
significant portion of its 2020 oil production at these attractive,
pre-COVID, price levels.
In March and April of 2020, massive crude oil demand destruction
from the COVID-19 pandemic, together with increased oil production
from OPEC and Russia, contributed to a dramatic decrease in
the price of oil. On this basis, Surge's management and Board acted
decisively to protect the Company's balance sheet and net asset
value ("NAV") during this period as follows:
- On March 9, 2020, Surge was the first public oil company
in Canada to reduce its dividend (by 90 percent);
- In early March the Company suspended all major capital
expenditures providing operational and financial flexibility for
the balance of 2020;
- Prior to suspending Q1/20 capital expenditures, Surge completed
its previously-announced Q1 development drilling program, drilling
19 consecutive successful Sparky oil wells (i.e. of a budgeted 26
well program). The Company added more than 2,500 boepd (>90
percent medium/light oil) with this reduced program at an all-in
cost of $22 million, providing top tier capital
efficiencies2 of $8,800 per boepd;
- On April 14, 2020, the Company was one of the first oil
companies in Canada to implement temporary production
curtailments. This curtailment included up to 4,400 boepd (~21
percent of March volumes, 96 percent liquids) of lower netback
production in order to maximize corporate cashflows;
- On April 14, 2020, Surge suspended the Company's dividend
in its entirety until market conditions improve; and
- The Company identified approximately $40 million of
annualized operating and G&A cash reductions through, workforce
optimizations, temporary production curtailments, as well as the
minimization and elimination of discretionary corporate costs.
Crude oil prices have now increased over 225 percent, from a low
of US$11.57 per bbl WTI on
April 21, 2020 to over US$39 per bbl WTI currently. Furthermore,
positive May, 2020 employment numbers in the US and Canada, historic OPEC+ production
curtailments, rising US gasoline demand, rapidly increasing Chinese
oil demand, combined with massive global production curtailments,
capital expenditure reductions, and significant US shale oil
declines, have all led to crude oil prices recovering much faster
than management anticipated.
Management's proactive capital allocation decisions set forth
above, along with the Company's strategic hedging program, have
worked very well to protect both Surge's balance sheet, and the
Company's December 31, 2019
independently engineered Sproule proved developed producing NAV of
$1.08 per share, as well as Surge's
total proved NAV of $2.37 per
share.
CREDIT FACILITY REDETERMINATION – REVOLVER EXTENDED TO
DECEMBER 15, 2020
The Company, in partnership with its syndicate of lenders
("Syndicate"), has completed the redetermination of its Credit
Facility. Surge's Credit Facility has been confirmed at
$335 million, with the revolving
period extended to December 15, 2020
and the term period amended to March 31,
2021.
The Company has agreed to a maintenance capital budget for 2020
of approximately $45 million, with
the ability to expand this budget with Board and unanimous
Syndicate approval. Surge anticipates the Credit Facility will
provide sufficient liquidity to execute on its business plan
through the balance of 2020, with the Company drawn approximately
$305 million as of June 19, 2020 and having spent $32.5 million in capital as at March 31, 2020.
As a result of the Company's very low, 23 percent, corporate
decline, its strategic hedging program, and management's proactive
decisions detailed above, Surge anticipates reducing net debt
meaningfully over the rest of the year at strip oil
prices3. This will continue to both enhance the
Company's balance sheet and increase Surge's NAV per share.
SPARKY TECHNICAL UPDATE
Over the past five years in Surge's Sparky core area, the
Company has amassed a dominant, conventional, low cost, low risk,
medium/light oil play that has the following
characteristics4:
- >1 billion bbls of net internally estimated OOIP;
- An extensive, low risk, 500 net location, >12 year drilling
inventory - with waterflood upside; and
- Per well economics that deliver quick payouts and excellent
rates of return at US$40 WTI per bbl
flat pricing.
Surge has now grown its Sparky core area production by more than
650 percent in the last 6 years, from 1,200 boepd to more than
9,000 boepd today (>94% liquids).
The Company has now drilled 138 consecutive successful wells
into its prolific core Sparky asset. Over the last few months
Surge completed an internal technical analysis of the Company's
drilling results in the Sparky area. This analysis confirmed
that the average production from the original 400m primary Sparky wells, were identical to the
subsequent 200m 'infill' wells, on an
IP180 day basis.
Thisexciting verification of Surge's deep Sparky drilling
inventory is due to the high quality, large OOIP per section nature
of the reservoirs. These Sparky reservoirs are shallow,
conventional, sandstones with up to 30 percent porosity. Given the
low drilling costs associated with the play (ie. $1.15MM 'all-in' drilled, completed, on-stream),
the Company's Sparky wells generate top tier production
efficiencies.
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: Management's expectations and plans with respect to the
development of its assets and the timing thereof; Surge's declared
focus and primary goals, including plans to reduce its bank debt
and close certain asset dispositions in 2020; Surge's assets and
the characteristics thereof; Surge's annual exploration and
development capital expenditure program and budget and its
flexibility to make adjustments thereto; Surge's drilling program
and inventory, and the risk associated therewith; commodity prices
and management's ability to react to changes thereto; Surge's
hedging program; maintenance of Surge's decline rate; ability of
Surge to protect its balance sheet and net asset value; production
curtailments; export pipelines; availability of undrawn capacity
with respect to Surge's credit facility; and Surge's dividend
policy.
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,
2020 and in Surge's MD&A for the period ended
December 31, 2019, 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
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.
Capital efficiencies is calculated as total exploration and
development expenditures during the period, divided by an initial
production rate for a specified number of days (i.e., $22 million divided by 2,500 boepd). Management
uses capital efficiency to understand the amount of development and
exploration capital expenditures required to add an additional boe
of production per day.
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.
Of the over 500 net drilling locations identified in the
Company's Sparky core area 184 net are booked locations. Of these
booked locations 137 net are Proved locations and 47 net are
Probable locations based on 2019YE reserves. Assuming an average
number of 40 wells drilled per year in the Sparky area, Surge's
>500 locations provides 12 years of drilling. At
$40 WTI, Surge still has >375
economic Sparky locations, with a weighted average IRR of 41% and
PIR10 of 0.51.Surge's internally used type curves were constructed
using a representative, factual and balanced analog data set, as of
January 1, 2020. All locations
were risked appropriately, and EUR's were measured against OOIP
estimates to ensure a reasonable recovery factor was being achieved
based on the respective spacing assumption. Other assumptions, such
as capital, operating expenses, wellhead offsets, land
encumbrances, working interests and NGL yields were all reviewed,
updated and accounted for on a well by well basis by Surge's
Qualifies Reserve Evaluators. All type curves fully comply
with Part 5.8 of the Companion Policy 51 – 101CP.
"Internally estimated" means an estimate that is derived by
Surge's internal QRE's and prepared in accordance with National
Instrument 51-101 - Standards of Disclosure for Oil and Gas
Activities. All internal estimates contained in this new release
have been prepared effective as of Jan
1, 2020.
Non-GAAP Financial Measures
Certain secondary financial measures in this press release –
namely "adjusted funds flow" and "net debt" are not prescribed by
GAAP. These non-GAAP financial measures are included because
management uses the information to analyze business performance,
cash flow generated from the business, leverage and liquidity,
resulting from the Company's principal business activities and it
may be useful to investors on the same basis. None of these
measures are used to enhance the Company's reported financial
performance or position. The non-GAAP measures do not have a
standardized meaning prescribed by IFRS and therefore are unlikely
to be comparable to similar measures presented by other issuers.
They are common in the reports of other companies but may differ by
definition and application. All non-GAAP financial measures used in
this document are defined below:
Adjusted Funds Flow
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
acquisitions, which management believes do not reflect the ongoing
cash flows of the business, and as such reduces comparability. Each
of these expenditures, due to their nature, are not considered
principal business activities and vary between periods, which
management believes reduces comparability.
Net Debt
There is no comparable measure in accordance with IFRS for net
debt. Net debt is calculated as bank debt plus the liability
component of the convertible debentures plus or minus working
capital, however, excluding the fair value of financial contracts,
decommissioning obligations and lease and other obligations. This
metric is used by management to analyze the level of debt in the
Company including the impact of working capital, which varies with
timing of settlement of these balances.
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.
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1
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This is a non-GAAP
financial measure which is defined in the Non-GAAP Financial
Measures section of this document.
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2
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See Oil & Gas
Advisories
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3
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Based on strip
pricing on June 19th, 2020.
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4
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See Oil & Gas
Advisories
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SOURCE Surge Energy Inc.