CALGARY, AB, Dec. 9, 2021 /CNW/ - Surge Energy Inc. ("Surge"
or the "Company") (TSX: SGY) is pleased to announce that it has
closed a $130 million 5-year term
debt facility (the "Term Debt Facility") and a new normal course
$150 million first lien credit
facility with a revised syndicate of five lenders (the "First Lien
Credit Facility"). Concurrent with the closing of the Term Debt
Facility and First Lien Credit Facility, the Company has repaid its
$42 million, non-revolving BDC term
loan (the "BDC Term Facility").
NEW 5-YEAR TERM DEBT FACILITY
On December 9, 2021 Surge closed a
new 5-year, $130 million senior
secured second lien Term Debt Facility with an annual coupon of
8.85%. The lenders under the $130
million Term Debt Facility have the option through 2022 to
lend an additional $30 million to
Surge on the same terms and conditions.
The Term Debt Facility provides the Company with long term
stable capital, to facilitate the continued development of Surge's
high quality, conventional, light and medium gravity crude oil
asset base. Furthermore, the Term Debt Facility also represents a
significant step forward toward the Company's goal of returning to
a shareholder returns-based business model focused on a combination
of 1) debt repayment; 2) sustainable dividends; 3) modest
production per share growth; and 4) share buybacks.
Surge has directed the majority of the $130 million Term Debt Facility proceeds towards
the repayment of existing first lien revolving bank debt, the
repayment of the $42 million owing
under the BDC Term Facility, and the acquisition of certain oil
infrastructure previously leased by the Company.
NEW FIRST LIEN CREDIT FACILITY
In conjunction with the Term Debt Facility, Surge has also
closed a new first lien secured credit facility for a total of
$150 million with a syndicate of five
supportive banks. The First Lien Credit Facility is a normal
course, reserve based credit facility available on a revolving
basis through November 30, 2022, with
bi-annual borrowing base redeterminations and term maturity of
November 30, 2023.
REPAYMENT OF BDC TERM FACILITY
The closing of the Term Debt Facility and First Lien Credit
Facility has facilitated the repayment of the Company's
non-revolving, $42 million BDC Term
Facility, created by the Business Development Bank of Canada.
This strategic repayment allows the Company to exit the Business
Credit Availability Program ("BCA Program") that governed the BDC
Term Facility. Participation in the BCA Program placed certain
restrictions on Surge's capital allocation options, including the
payment of dividends.
The Company would like to thank the Business Development Bank of
Canada for the capital provided
under the BCA Program during a period of unprecedented commodity
price volatility.
REVISED DEBT CAPITAL STRUCTURE AND LIQUIDITY
With the closing of the Term Debt Facility, the new First Lien
Credit Facility, and the repayment of the BDC Term Facility, the
Company's debt capital structure benefits from significantly
improved term and enhanced stability.
The Company now forecasts that it will be drawn approximately
$100 million on the First Lien Credit
Facility as at December 31, 2021,
providing Surge with approximately $50
million in undrawn credit capacity and significant available
liquidity.
"Surge's attractive conforming first lien credit facility and
new second lien credit facility are the culmination of the many
strategic steps taken by Management and the Board over the past 12
months to reposition Surge for the current business environment,"
said Paul Colborne, President and
CEO. "We have now positioned Surge to thrive in the current
environment, and provided the Company with significant financial
flexibility going forward. Surge remains committed to our goal of
returning to a dividend and shareholder returns based business
model in 2022".
Surge will continue to focus on reducing debt leverage over the
next six months and is targeting the reinstatement of its
sustainable dividend model in mid-2022, subject to market
conditions and the approval of Surge's Board of Directors.
STRATEGIC OUTLOOK: FINANCIAL DISCIPLINE AND SHAREHOLDER
RETURNS MODEL
The Company has seen significant, structural changes regarding
the availability of conventional debt capital for Canadian energy
companies, due primarily to the Redwater decision of the Supreme Court of
Canada, as well as the global
COVID-19 pandemic.
Consequently, in late 2020 Surge Management strategically
assessed and analyzed the Company's strong competitive corporate
advantages including, its long (15 year) reserve life index, low
conventional corporate decline, high crude oil netbacks, top tier
production efficiencies, large 13 year drilling inventory, and
substantial $1.0 billion tax pool
base.
Accordingly, with this announcement today, over the last 12
months Surge Management has now executed over $620 million of debt and equity financings,
re-financings, asset sales, and two corporate acquisitions, to
strategically adapt to changing market conditions, and to
reposition the Company to be a top performer in 2022 and beyond.
Excitingly for shareholders, Surge has also been able to maintain a
dominant operational growth position in the Company's medium
gravity crude oil Sparky core area, while also adding a
significant new core area position in the light gravity crude oil
growth plays in SE
Saskatchewan.
Surge Management's stated goal is to position the Company as a
well financed energy producer with a significant free cash flow
yield that supports consistent shareholder returns through: 1) debt
repayment; 2) sustainable dividends; 3) modest production per share
growth; and 4) share buybacks.
As previously announced, Surge now forecasts a free cash flow
yield of 30%1 in 2022 at crude oil pricing of
US$70 WTI per barrel2.
The Company is currently producing at or above management's
projected 2021 production exit rate of 21,500 boepd (86 percent
liquids), with over 975 net (internally estimated) development
drilling locations3 - providing the Company a 13
year development drilling inventory.
The Company will provide further details to shareholders on
management's shareholder returns-based business model, along with
announcing its Board approved 2022 capital budget, in January of
2022.
ADVISORS
National Bank Financial Inc. acted as exclusive financial
advisor to Surge with respect to the Term Debt Facility. ATB
Capital Markets and BMO Capital Markets have been appointed
strategic advisors to Surge on the Term Debt Facility. McCarthy
Tétrault LLP is acting as legal advisor to Surge with respect to
the Term Debt Facility.
FORWARD LOOKING STATEMENTS:
This press release contains forward-looking statements. The use
of any of the words "anticipate", "continue", "estimate", "expect",
"may", "will", "project", "should", "believe" and similar
expressions are intended to identify forward-looking statements.
These statements involve known and unknown risks, uncertainties and
other factors that may cause actual results or events to differ
materially from those anticipated in such forward-looking
statements. More particularly, this press release contains
statements with respect to Surge's declared focus and primary
goals, including its goal of returning to a shareholder
returns-based business model; Surge's plans regarding the continued
development of its assets; Surge's beliefs regarding the stability
of its revised debt capital structure; Surge's forecast regarding
the amount expected to be drawn under its First Lien Credit
Facility as at December 31, 2021 and
its available liquidity; Surge's reserve life index, corporate
decline, drilling inventory and tax pool base; management's belief
as to Surge's positioning to perform in 2022 and beyond; and
management's projections regarding Surge's 2021 production exit
rate.
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,
2021 and in Surge's MD&A for the period ended
December 31, 2020, both of which have
been filed on SEDAR and can be accessed at www.sedar.com.
The forward-looking statements contained in this press release
are made as of the date hereof and Surge undertakes no obligation
to update publicly or revise any forward-looking statements or
information, whether as a result of new information, future events
or otherwise, unless so required by applicable securities laws.
Oil and Gas Advisories
The term "boe" means barrel of oil equivalent on the basis of 1
boe to 6,000 cubic feet of natural gas. Boe may be misleading,
particularly if used in isolation. A boe conversion ratio of 1 boe
for 6,000 cubic feet of natural gas is based on an energy
equivalency conversion method primarily applicable at the burner
tip and does not represent a value equivalency at the wellhead.
"Boe/d" and "boepd" mean barrel of oil equivalent per day. Bbl
means barrel of oil and "bopd" means barrels of oil per day. NGLs
means natural gas liquids.
This press release contains certain oil and gas metrics and
defined terms which do not have standardized meanings or standard
methods of calculation and therefore such measures may not be
comparable to similar metrics/terms presented by other issuers and
may differ by definition and application. All oil and gas
metrics/terms used in this document are defined below:
Original Oil in Place ("OOIP") means Discovered Petroleum
Initially In Place ("DPIIP"). DPIIP is derived by Surge's internal
Qualified Reserve Evaluators ("QRE") and prepared in accordance
with National Instrument 51-101 and the Canadian Oil and Gas
Evaluations Handbook ("COGEH"). DPIIP, as defined in COGEH, is that
quantity of petroleum that is estimated, as of a given date, to be
contained in known accumulations prior to production. The
recoverable portion of DPIIP includes production, reserves and
Resources Other Than Reserves (ROTR). OOIP/DPIIP and potential
recovery rate estimates are based on current recovery technologies.
There is significant uncertainty as to the ultimate recoverability
and commercial viability of any of the resource associated with
OOIP/DPIIP, and as such a recovery project cannot be defined for a
volume of OOIP/DPIIP at this time. "Internally estimated" means an
estimate that is derived by Surge's internal QRE's and prepared in
accordance with National Instrument 51-101 - Standards of
Disclosure for Oil and Gas Activities. All internal estimates
contained in this new release have been prepared effective as of
Jan 1, 2021.
Drilling Inventory
This press release discloses drilling locations in two
categories: (i) booked locations; and (ii) unbooked locations.
Booked locations are proved locations and probable locations
derived from an external evaluation using standard practices as
prescribed in the Canadian Oil and Gas Evaluations Handbook and
account for drilling locations that have associated proved and/or
probable reserves, as applicable.
Unbooked locations are internal estimates based on prospective
acreage and assumptions as to the number of wells that can be
drilled per section based on industry practice and internal review.
Unbooked locations do not have attributed reserves or resources.
Unbooked locations have been identified by Surge's internal
certified Engineers and Geologists (who are also Qualified Reserve
Evaluators) as an estimation of our multi-year drilling activities
based on evaluation of applicable geologic, seismic, engineering,
production and reserves information. There is no certainty that the
Company will drill all unbooked drilling locations and if drilled
there is no certainty that such locations will result in additional
oil and gas reserves, resources or production. The drilling
locations on which the Company actually drills wells will
ultimately depend upon the availability of capital, regulatory
approvals, seasonal restrictions, oil and natural gas prices,
costs, actual drilling results, additional reservoir information
that is obtained and other factors. While certain of the unbooked
drilling locations have been de-risked by drilling existing wells
in relative close proximity to such unbooked drilling locations,
the majority of other unbooked drilling locations are farther away
from existing wells where management has less information about the
characteristics of the reservoir and therefore there is more
uncertainty whether wells will be drilled in such locations and if
drilled there is more uncertainty that such wells will result in
additional oil and gas reserves, resources or production.
Net of Surge March 25, 2021
disposition, the pro forma Company (Surge + Astra + Fire Sky) will
have over >1,050 gross (>975 net) drilling locations
identified herein, of these >450 gross (>400 net) are
unbooked locations. Of the 562 net booked locations identified
herein, 415 net are Proved locations and 147 net are Probable
locations based on Sproule's 2020YE reserves. Assuming an average
number of net wells drilled per year of 75, Surge's >975
net locations provide 13 years of drilling.
Surge's internally developed type curves (for Surge, Astra and
Fire Sky) were constructed using a representative, factual and
balanced analog data set, as of Jan 1,
2021 for Surge type curves, April 15,
2021 for Astra type curves and July
1, 2021 for Fire Sky type curves. All locations were
risked appropriately, and EUR's were measured against OOIP
estimates to ensure a reasonable recovery factor was being achieved
based on the respective spacing assumption. Other assumptions, such
as capital, operating expenses, wellhead offsets, land
encumbrances, working interests and NGL yields were all reviewed,
updated and accounted for on a well by well basis by Surge's
Qualified Reserve Evaluators. All type curves fully comply with
Part 5.8 of the Companion Policy 51 – 101CP.
Non-GAAP Financial Measures
Certain secondary financial measures in this press release –
namely, "free cash flow" 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:
Free Cash Flow and Free Cash Flow per Share
Free cash flow is calculated as cash flow from operating
activities less exploration and development capital expenditures.
Management uses free cash flow to determine the amount of funds
available to the Company for future capital allocation
decisions.
Free cash flow per share is calculated using the same weighted
average basic and diluted shares used in calculating income per
share.
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
Calculated as $225 million in 2022 forecast cash flow from
operating activities, less $120 million in exploration and
development capital, for $105MM or $1.26 per share of free cash
flow. $1.26 per share divided by a $4.25 SGY share price results in
a 30% free cash flow yield. See the Non-GAAP Financial Measures
section of this document for further information.
|
2 US$70
WTI per barrel, -US$13.00 per barrel WCS differential, -US$4 per
barrel MSW differential, $3.50 per GJ AECO, $.78 USD/CAD
FX.
|
3 See the
Drilling Inventory section of this document for further
information
|
SOURCE Surge Energy Inc.