CALGARY, June 24, 2015 /CNW/ - Surge Energy Inc. ("Surge" or "the Company") announced today that the Company's management and Board are maintaining a conservative capital spending program for the second half of 2015, which is designed to both protect the Company's net asset value ("NAV") at $6.28 per share, and the Company's excellent balance sheet. While there has been a meaningful recovery in world crude oil prices in the first half of 2015, Surge management and Board will continue to assess market conditions on a weekly basis, and maintain strict discipline with respect to protecting the Company's balance sheet, and allocating capital.
The Board of Directors has approved the Company's capital expenditure program for the second half of 2015 as set forth below.
This budget forecasts maintaining Surge's dividend at $0.30 per share per year ($0.025 per share per month).
In the second half of 2015 the Company will strategically allocate capital towards the drilling and waterflooding of Surge's large, 250 million barrel net original oil in place ("OOIP"1) Upper Shaunavon discovery in SW Saskatchewan, to the continued development of the Company's 130 million barrel net OOIP, high quality Doig light oil pool at Valhalla in NW Alberta, and to the continued development and waterflooding of Surge's 400 million barrel net OOIP Sparky trend crude oil assets in Central Alberta.
In the second half of 2015 Surge will spend a budgeted $42.6 million, and deliver the following:
- A high quality, low risk, development drilling program of 11 net wells for light and medium gravity crude oil (selected out of Surge's large inventory of over 700 net drilling locations);
- Exit 2015 production of more than 14,500 boepd (representing more than three percent annualized growth);
- A production mix of 76 percent light and medium gravity crude oil;
- A low corporate base decline of 23 percent;
- A 2015 "all-in" payout/sustainability ratio of 99 percent based on second half 2015 US$65 WTI per barrel flat pricing;
- A fourth quarter 2015 cash flow netback of $26.40 per boe – with no impact from hedging;
- Top quartile operating costs of $14.45 per boe (with G&A costs of $2.15 per boe in the fourth quarter);
- "All-in" capital efficiencies of approximately $22,000 per boepd;
- A 2015 exit debt to funds flow from operations ("FFO") ratio of less than one times (with approximately $300 million of unutilized credit availability on the Company's bank line); and
- A portion of the second half of 2015 capital spending will be strategically focused to waterflood projects relating to Surge's high quality, large OOIP reservoirs, including initiating a waterflood in the Company's expanding Upper Shaunavon pool. By the end of 2015 Surge anticipates that more than 75 percent of the Company's producing assets will be under waterflood.
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1 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, plus those estimated quantities in accumulations yet to be discovered. 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. |
Capital Spending Breakdown
In the second half of 2015, Surge is planning to spend $42.6 million focused to high quality, light and medium gravity crude oil projects.
The breakdown for the second half of 2015 capital expenditures is set forth below:
|
Capex for 2015 |
($mm) |
|
Development Drilling and Completions |
24.0 |
|
Equipment/Facilities/Workovers |
12.2 |
|
Waterflood Implementation |
2.1 |
|
Land/Seismic/Corporate/G&A |
4.3 |
|
TOTAL |
42.6 |
Production in Second Half of 2015
Surge is budgeting average production of 14,250 boepd in the second half of 2015 – with an exit rate of more than 14,500 boepd. This represents annualized production growth of more than three percent.
Given Surge's high quality, crude oil reservoirs, disciplined capital spending program, and diligent focus on waterflood activities, management estimates that the Company's corporate decline rate is 23 percent – a key attribute for any growth and dividend paying company.
Excellent Sustainability; Financial Flexibility
Surge has a 2015 "all-in" payout/sustainability ratio of 99 percent based on second half of 2015 US$65 WTI per barrel flat pricing. The Company has no dividend reinvestment plan.
The Company has an excellent balance sheet with a 2015 exit debt to FFO ratio of less than one times at US$65 WTI per barrel flat pricing, and approximately $300 million of credit availability on Surge's bank lines.
Surge has "all-in" production efficiency metrics estimated at approximately $22,000 boepd for the second half 2015 capital program, with a fourth quarter cash flow netback of $26.40 per boe - with no impact from hedging.
The following summarizes Surge's second half 2015 guidance pricing estimates, and the Company's 2015 hedging activities:
Guidance Pricing Assumptions:
|
WTI USD |
$65.00 |
|
CAD/USD FX |
$0.81 |
|
WTI CAD |
$80.25 |
|
WTI-to-EDM Differential CAD |
$3.70 |
|
EDM Light CAD |
$76.55 |
2015 Hedging Activities:
Surge has a disciplined, ongoing risk management program with over 60% of the second half of 2015 net crude oil volumes locked in - on a "costless collar" basis - at an attractive floor price of C$62 WTI per barrel, and a ceiling of C$82 WTI per barrel. This program helps to secure the availability of cash flow for capital expenditures and dividends.
Focused Business Strategy; Exciting Outlook for Second Half of 2015
Conservative Strategy:
Surge will continue to implement the Company's disciplined business strategy of allocating capital towards high quality, large OOIP, light and medium gravity, crude oil reservoirs. The Company will also continue to pursue year over year increases in recovery factors from these high quality assets through low risk development activities, including:
- In-fill and step-out development drilling;
- Up to date completion techniques, including horizontal frac technology;
- Production optimizations; and
- Waterfloods.
Pursuant to this focused business strategy, Surge targets conservative annual per share growth in reserves, production and cash flow of three to five percent. In addition, Surge provides an attractive cash yield of approximately eight percent based on the current trading price of the Company's shares.
Accretive acquisitions of other high quality assets will provide incremental growth over and above these estimates.
Second Half of 2015 Program:
Surge will begin the second half of 2015 drilling seven consecutive development wells at Shaunavon in SW Saskatchewan, targeting the Upper Shaunavon formation in this 250 million barrel OOIP, conventional sandstone reservoir. Surge has over 220 net low risk development locations to drill for Upper Shaunavon oil. These wells generate a risked rate of return of 74 percent at strip pricing. The Company will also initiate waterflood activities in the third quarter of 2015 in the Upper Shaunavon formation by converting two wells to injection.
Surge will commence drilling at Valhalla in NW Alberta in early July targeting the Company's large 130 million barrel OOIP light oil Doig field. Surge's latest two wells at Valhalla have independently earned the distinction as the two best oil wells drilled in Canada this year. Surge has more than 30 net locations remaining to drill at Valhalla. The Company budgets the drilling of two net wells at Valhalla in the second half of 2015. Type curve wells at Valhalla generate a risked rate of return of 64 percent at strip pricing.
In addition, Surge will invest approximately $5.1 million to build a strategic pipeline as part of a long term infrastructure solution at Valhalla in NW Alberta. With this pipeline the Company will divert up to 12 mmcfd of its Doig solution gas production from the Sexsmith plant to a nearby Surge owned gas plant at Doe - which Surge acquired in the fourth quarter of 2014. This strategic investment will significantly reduce the Company's gas processing fees going forward, and reduce Surge's exposure to third party curtailments and outages at Valhalla. Surge also confirms that it holds strategic firm service (with both area service providers), well above the Company's anticipated volume requirements, going forward.
In this regard, Surge is currently experiencing an unplanned outage at Sexsmith, due to TCPL system curtailments. The Company is working with the Plant Operator to restore curtailed volumes over the next two weeks.
In Central Alberta, Surge will drill two net wells at Eyehill and Provost targeting the Sparky formation in the second half of 2015. These wells generate a risked rate of return of 55 percent at strip pricing for crude.
Sixty percent of Surge's second half 2015 drilling capital expenditures will be at Shaunavon in SW Saskatchewan. The Company's highest growth asset is also at Shaunavon, with over 350 net drilling locations in the Upper and Lower Shaunavon formations, respectively. This large inventory allows Surge to maintain flexibility with respect to allocating capital to the jurisdictions with the highest rates of return.
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 to grow 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 seven percent recovery factor to date;
- A 15 year reserve life index;
- A low 23 percent decline;
- A fourth quarter annualized debt to cash flow ratio of 1.1 times at strip pricing;
- Approximately $300 million of credit available on the Company's bank lines;
- A 14 year, low risk development drilling inventory, with more than 700 net drilling locations;
- Excellent production efficiency plays (adding volumes at approximately $22,000 per boepd in the second half of 2015); and
- A net asset value of $6.28 per share.
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 March 31, 2015. These filings are available for review at www.sedar.com or www.surgeenergy.ca.
ADVISORIES:
Forward Looking Statements
This press release contains forward-looking statements. More particularly, this press release contains statements concerning: (i) management expectations with respect to market and growth positioning within the industry; (ii) Surge's drilling inventory and activity; (iii) Surge's capital allocation plans; (iv) Surge's investment in and completion of a strategic pipeline and the benefits thereof; (v) potential acquisitions and the benefits thereof; (vi) expectations with respect to production, exit rates, corporate decline rates, guidance pricing assumptions, risk management program, the risk levels associated with certain development activities, annual per share growth, cash yield and the risked rate of return of various wells; (vii) the Company's balance sheet and anticipated year ended bank line availability; (viii) forecast decline rates and reserve life index; (ix) management's expectations with respect to the Company's waterflood program, results therefrom and quantity of producing assets that will be placed under waterflood; * Surge's operational guidance, including "all-in" pay-out ratios, estimated year-end net debt to funds from operations and cash flow netback; (xi) the Company's declared focus and primary goals; (xii) the ability of the Company to weather the present commodity price environment; and (xiii) the sustainability of dividends.
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, worldwide supply and demand for oil and natural gas, 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, prevailing weather conditions, exchange rates, licensing requirements, the successful completion of the disposition transactions, the impact of completed facilities on operating costs and the availability, costs of capital, labour and services, the creditworthiness of industry partners and the receipt of required approvals of the lenders under 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 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 required approvals from the lenders under Surge's bank line to increases thereto. Certain of these risks are set out in more detail in Surge's Annual Information Form dated March 19, 2015 which has 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
Note: 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. Bbl means barrels of oil. Boepd means barrel of oil equivalent per day. Mmboe means million barrel of oil equivalent. RLI means reserve life index. PUD means proven undeveloped. NAV means net asset value.
Financial Outlooks
The estimate of forward debt to cash flow ratio contained in this press release may be considered 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 and netbacks 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 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 in three categories: (i) proved locations; (ii) probable locations; and (iii) 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 over 700 net drilling locations identified herein, 121 net are proved locations, 69 net are probable locations and 548 are unbooked 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.
Non-IFRS Measures
This press release contains the terms "funds from operations", "net debt" and "netback", 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. 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.
For further information: Paul Colborne, President & CEO, Surge Energy Inc., Phone: (403) 930-1507, Fax: (403) 930-1011, Email: [email protected]; Max Lof, CFO, Surge Energy Inc., Phone: (403) 930-1021, Fax: (403) 930-1011, Email: [email protected]