Surge Energy Inc. Announces Record 2014 Year-End Results and Files Annual Information Form

Surge Energy, Inc. news release with annotations

CALGARY, March 19, 2015 /CNW/ - Surge Energy Inc. ("Surge" or the "Company") (TSX: SGY) is pleased to announce its financial and operating results for the year ended December 31, 2014 and has filed its Annual Information Form ("AIF") for the year ended December 31, 2014 on SEDAR.

HIGHLIGHTS

  • Surge's NAV per share increased from $6.95 per share on December 31, 2013 to $7.36 per share on December 31, 2014 (despite the large reduction in Sproule's 2015 crude oil commodity price deck);

  • Surge's net debt, pro-forma the non-core asset disposition and the crude oil swap reconfiguration, as discussed below, as at December 31, 2014 was less than $520 million resulting in pro-forma debt to fourth quarter annualized funds from operations of 2.38 times, with more than $155 million of availability on the Company's bank line.

  • Funds from operations increased 83 percent to $245.3 million in 2014 as compared to $ 134.1 million in 2013.

  • Achieved record fourth quarter average production rate of 20,448 boe per day, an increase of 70 percent from 12,014 boe per day in the same period of 2013.

  • Based on better than anticipated development drilling results at Surge's core areas of Valhalla, Shaunavon, Midale and SE Alberta (Sparky), combined with two smaller core area top-up acquisitions, Surge exceeded the Company's 2014 production exit rate target of 21,350 boe per day (85 percent oil) achieving daily production for the week of January 18 to January 25 of more than 22,000 boe per day.

  • Approximately 94 percent of Surge's revenue resulted from oil and natural gas liquids production in 2014.

  • Increased Surge's corporate netback by seven percent from $36.25 per boe for the year ended December 31, 2013 to $38.70 per boe for the year ended December 31, 2014.

  • Reduced G&A per boe by 21 percent in the fourth quarter of 2014 as compared to the same period in 2013 and 37 percent in 2014 as compared to 2013. G&A was $1.72 per boe in the fourth quarter of 2014.

  • During 2014, Surge completed two significant accretive acquisitions that added approximately 6,850 bbls of high netback, low decline, light and medium gravity crude oil production, as well as, high quality concentrated reserves, land and operations that are contiguous with Surge's three existing core areas.

  • Increased Surge's oil and natural gas liquids production weighting by eight percent to 85 percent in 2014 from 79 percent in 2013.

  • Maintained a consistent, ongoing risk management program, which protects Surge's balance sheet and cash flows during weak crude oil pricing environments similar to the present. Surge management monetized the Company's 2015 forward swap positions at a profit of approximately $35 million, and "re-hedged" in the first quarter of 2015 (see below).

  • Achieved a 99 percent success rate during 2014 drilling 73 gross (43 net) wells.

  • Further reduced the Company's corporate decline rate from 24 percent in 2013 to less than 22 percent in 2014, as a result of Surge's low risk operating strategy, accretive, large OOIP oil acquisitions, and successful waterflood initiatives.

  • Expanded Surge's low risk crude oil drilling inventory to 939 gross (903 net) locations, and significantly increased the Company's internally estimated OOIP[1] to greater than 2.1 billion net barrels.

  • Increased Proved plus Probable reserves by 52 percent to 112.0 million boe as compared to December 31, 2013 reserves of 73.5 million boe.

  • Increased Proved plus Probable reserves per share by 15 percent as compared to December 31, 2013.

  • Achieved "all in" Proved plus Probable finding, development and acquisition costs (FD&A) of $19.55 per boe, including the change in future development capital.

  • Achieved an "all-in" Proved plus Probable recycle ratio of more than 2.2, including the change in future development costs, based on Surge's 2014 operating netback of $43.22 per boe.

  • Increased Proved plus Probable Oil and NGLs reserves by 58 percent to 90.2 million barrels as compared to December 31, 2013 reserves of 57.1 million barrels.

  • Proved Developed Producing reserves account for over 52 percent of Total Reserves net present value.

  • Oil and NGLs made up 80 percent of the Company's total Proved plus Probable reserves.

  • Increased Net Present Value discounted at 10 percent Before Tax ("NPV10 BT") of Proved plus Probable reserves by 42 percent to $2.0 billion compared to $1.4 million as at December 31, 2013.

__________________________________

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.

STRATEGIC ACQUISITION OF ELITE, OPERATED, LOW DECLINE, LIGHT OIL ASSETS IN Q4/14

During the fourth quarter, Surge acquired a high quality, large OOIP, operated, low decline, producing light oil property immediately north of the Company's existing Valhalla Doig light oil pool. The strategic acquisition also included a working interest in an existing, sweet, natural gas plant which is capable of processing associated gas volumes from the north end of Surge's Doig oil pool. This acquisition results in increased solution gas production reliability, and reduced processing costs for Surge's core Doig pool at Valhalla.

EXCELLENT START TO 2015

  • As a result of the excellent drilling results experienced in late 2014, Surge's daily production for the week of January 18 to January 25 was more than 22,000 boe per day (85 percent oil and NGL's) – well above management's stated 2014 exit rate target of 21,350 boe per day. In accordance with the Company's Press Release dated January 7th, 2015 Surge anticipates average production of 20,000 boe per day for the first half of 2015.

  • In early February 2015, the Company reconfigured its 2015 crude oil swap positions by monetizing the Company's 2015 crude oil swaps for proceeds of more than $35 million, and re-hedging on a "costless collar" basis, at a floor of over C$62 WTI per barrel and a ceiling of over C$82 WTI per barrel, for the remainder of 2015 on approximately 45% of Surge's net crude oil production. The proceeds of this hedge reconfiguration have since been utilized to reduce bank indebtedness.

  • On February 11, 2015, Surge closed the sale of certain non-core producing oil assets in the Dodsland area of SW Saskatchewan for a purchase price of $35.6 million. This sale represents a flowing per barrel metric of approximately $75,000 boe per day based on Surge's expected average production rate from these non-core assets in 2015.

  • Surge's net debt, pro-forma the non-core asset disposition and the crude oil swap reconfiguration, as discussed above, as at December 31, 2014 was less than $520 million resulting in pro-forma debt to fourth quarter annualized funds from operations of 2.38 times, with more than $155 million of availability on the Company's bank line. The bank line was finalized including the reduction based on the non-core asset disposition and the crude oil swap reconfiguration and using the large drop in the 2015 crude oil price deck utilized by Surge's lenders.

  • To provide Surge shareholders with a more conservative Net Asset Value ("NAV") assessment, management has now separately evaluated the Company's December 31, 2014 independent year-end reserves at a US$68 WTI per barrel flat price deck2, which results in a NAV equal to $5.37 per Surge common share.

______________________________

2 Price deck assumes US$68 WTI per barrel, escalating 2 percent annually; USD/CAD FX rate of $0.80; Natural gas pricing of $3.25per mmbtu Henry hub, escalating 2% annually.

FINANCIAL AND OPERATING SUMMARY




























($000s except per share amounts)
















Three Months Ended December 31,



Years Ended December 31,



2014


2013


% change



2014


2013


% change

Financial highlights














Oil and NGL sales


99,431


69,739


43 %



456,967


253,782


80 %

Natural gas sales


6,831


3,778


81 %



28,719


18,150


58 %

Total oil, natural gas, and NGL revenue


106,262


73,517


45 %



485,686


271,932


79 %

Funds from Operations3


54,670


37,268


47 %



245,264


134,131


83 %

Per share basic ($)


0.25


0.26


(4)%



1.22


1.32


(8)%

Per share diluted ($)


0.25


0.26


(4)%



1.22


1.32


(8)%

Net loss


(109,181)


(2,848)


nm6



(33,177)


(9,886)


nm

Per share basic ($)


(0.50)


(0.02)


nm



(0.17)


(0.10)


nm

Per share diluted ($)


(0.50)


(0.02)


nm



(0.17)


(0.10)


nm

Capital expenditures - petroleum & gas properties4


39,753


40,318


(1)%



149,551


125,546


19 %

Capital expenditures - acquisitions & dispositions4


85,098


369,216


(77)%



575,713


571,471


1 %

Total capital expenditures4


124,851


409,534


(70)%



725,264


697,017


4 %

Net debt at end of period5


590,168


305,349


93 %



590,168


305,349


93 %















Operating highlights














Production:














Oil and NGL (bbls per day)


17,223


10,354


66 %



15,353


8,489


81 %

Natural gas (mcf per day)


19,349


9,958


94 %



16,297


13,679


19 %

Total (boe per day) (6:1)


20,448


12,014


70 %



18,069


10,769


68 %

Average realized price (excluding hedges):














Oil and NGL ($per bbl)


62.75


73.17


(14)%



81.54


81.87


-

Natural gas ($ per mcf)


3.84


4.12


(7)%



4.83


3.64


33 %

Realized gain (loss) on financial contracts ($ per boe)


5.40


(1.26)


 nm 



(1.45)


(2.13)


 nm 















Net back (excluding hedges) ($ per boe)














Oil, natural gas and NGL sales


56.49


66.52


(15)%



73.64


69.18


6 %

Royalties


(11.14)


(12.13)


(8)%



(13.18)


(12.64)


4 %

Operating expenses


(15.72)


(12.66)


24 %



(15.52)


(12.57)


23 %

Transportation expenses


(1.49)


(2.03)


(27)%



(1.72)


(2.17)


(21)%

Operating netback


28.14


39.70


(29)%



43.22


41.80


3 %

G&A Expense


(1.72)


(2.19)


(21)%



(1.96)


(3.10)


(37)%

Interest Expense


(2.76)


(2.53)


9 %



(2.56)


(2.45)


4 %

Corporate netback


23.66


34.98


(32)%



38.70


36.25


7 %















Common shares (000s)














Common shares outstanding, end of period


220,060


166,543


32 %



220,060


166,543


32 %

Weighted average basic shares outstanding


219,834


142,981


54 %



200,317


101,606


97 %

Stock option dilution (treasury method)




-





-

Weighted average diluted shares outstanding


219,834


142,981


54 %



200,317


101,606


97 %

3   Management uses funds from operations (cash flow from operating activities before changes in non-cash working capital, legal settlement expenses, decommissioning expenditures, transaction costs, cash settled stock-based compensation and current tax on disposition) 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.

4   Please see capital expenditures note.

5   The Company defines net debt as outstanding bank debt plus or minus cash-based working capital and dividends payable, and excluding the fair value of financial contracts and other current obligations

6   The Company views this change calculation as not meaningful, or "nm".

OPERATIONAL UPDATE

During 2014, Surge's low risk, development drilling inventory expanded to 939 gross (903 net) locations, and Surge significantly increased the Company's internally estimated OOIP to greater than 2.1 billion net barrels as follows:





OOIP (MMbbls)




Locations

Property




(gross/net)




(gross/net)

Western Alberta




731/639




187/178

SE Alberta




481/403




152/149

SW Saskatchewan




469/450




362/357

Williston Basin




791/634




238/219

TOTAL




2,472/2,126




939/903

In late 2014 and early 2015 Surge continues to experience excellent operational results as set forth below:

  • At Valhalla: Surge successfully completed a horizontal, multi-frac, Doig, oil well at 5-7-75-8 W6 in early January. The well was on production January 15, 2015 and is one of the Company's most prolific wells to date in this large, high quality light oil pool. Surge is currently drilling an offset well to the south of 5-7, from the same surface pad, which will be brought on production in April.

Production efficiencies at Valhalla are some of the lowest in Canada at less than $14,000 per boepd. With the exciting large northern extension at Valhalla, Surge now has more than 35 additional, low risk development drilling locations into this 160 million OOIP light oil pool.

  • At Shaunavon: Surge has on production, two exciting new Upper Shaunavon development wells .The first well, at 13-18-5-19W3 encountered very good reservoir quality along its entire length. It confirms the Southwest extension of the second major trend on Surge's land. The second well, at 13-3-6-19W3, offsets 4-34-5-19W3 (which was brought on production in the fourth quarter) to the north. It too, encountered very good reservoir throughout and extends the trend further east and north on Surge lands. These wells were both fracced and brought on production in early March, and are currently producing over 200 bbls/d each.

Surge now estimates that the OOIP in the Upper Shaunavon is over 250 million barrels - with over 150 low risk development drilling locations. Production efficiencies are some of the lowest in Canada at less than $14,000 per boepd, and risked rates of return are over 85 percent at US$58 WTI per barrel pricing.

  • At Northgate: In SE Saskatchewan, the Company participated in 2 (0.9 net) successful non- operated, Midale horizontal development oil wells. The wells are currently being completed and expected to be on production by the end of the quarter.

  • At Eyehill: Surge drilled, completed and brought on production one successful horizontal, multi-frac Sparky oil well. The well is on production and is performing above type curve expectations.

  • At Manson: Surge participated in drilling and completing of 1 (0.5 net) Bakken horizontal, development wells. Surge also converted one additional Bakken oil well to water injection. With 8 waterflood injectors now at Manson, the waterflood is experiencing excellent results.

AUDITED FINANCIAL STATEMENTS, MD&A AND AIF:

Surge has filed with Canadian securities regulatory authorities its audited financial statements and accompanying MD&A for the three months and year ended December 31, 2014.  Surge has also filed the Company's Annual Information Form for the year ended December 31, 2014. These filings are available for review at www.sedar.com or www.surgeenergy.ca.

ANNUAL GENERAL MEETING:

Surge's Annual General Meeting is scheduled for 3:00 pm Mountain Standard Time on May 4, 2015 at the Petroleum Club, McMurray Room located at 319 – 5th Avenue SW, Calgary AB.

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, it contains forward-looking statements concerning: (i) targeted growth in reserves, production and cash flow per share, (ii) ultimate recovery factors at certain of Surge's properties, (iii) increased processing reliability and cost improvements as a result of certain acquisitions, (iv) net crude oil production, (v) planned drilling, development and water flood activities and the timing thereof, (vi) the potential number of drilling locations at certain of Surge's properties, (vii) estimated 2015 first half average production rate, (viii) the expected production of certain non-core assets disposed, (ix) estimates on OOIP, * production efficiencies to be experienced, (xi) debt and bank facilities, (xii) primary and secondary recovery potentials and implementation thereof, (xiii) decline rates, (xiv) funds from operations, (xv) operating and cash flow netbacks, and (xvi) realization of anticipated benefits of acquisitions.

Statements relating to "reserves" are also deemed to be forward looking statements, as they involve the implied assessment, based on certain estimates and assumptions, that the reserves described exist in the quantities predicted or estimated and that the reserves can be profitably produced in the future.

The forward-looking statements contained in this press release are based on certain key expectations and assumptions made by Surge, including expectations and assumptions concerning the success of future drilling, development and completion activities, the performance of existing wells, the performance of new wells, the viability of water flood projects, the availability 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, commodity prices, royalty regimes and exchange rates, the application of regulatory and licensing requirements and the availability of capital, labour and services.

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 uncertainties resulting from potential delays or changes in plans with respect to exploration or development projects or capital expenditures. Certain of these risks are set out in more detail in Surge's Annual Information Form 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.

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 are derived from the Company's independent reserves evaluation as prepared by a qualified reserves evaluator in accordance with National Instrument 51-101 and account for drilling locations that have associated proved and/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 939 drilling locations identified herein, 261 are proved locations, 74 are probable and 604 are unbooked locations. Unbooked locations have been identified by management 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 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, 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, 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.

Non-IFRS measures

This document contains the terms "funds from operations", " recycle ratio ", " operating netback", and "corporate netback" which do not have a standardized meaning prescribed by IFRS and, therefore, may not be comparable with the calculation of similar measures for other entities. Surge uses these metrics to analyze financial and operating performance. Surge feels these benchmarks are key measures of profitability and overall sustainability for the Company. Each of these terms is commonly used in the oil and gas industry.  Funds from operations is calculated as cash flow from operating activities before changes in non-cash working capital, legal settlement expenses, decommissioning expenditures, transaction costs, cash settled stock-based compensation and current tax on disposition.  Recycle ratio is calculated as operating netback divided by finding, development and acquisition costs (proved plus probable).  Operating netback is calculated as revenue (including realized hedging gains and losses) minus royalties, production and operating expenses and transportation expenses.  Corporate netback is calculated as operating netback less general and administrative expenses and interest expense.

Additional IFRS measures

This press release also contains the term net debt. The reference to the additional IFRS measure of net debt may not be comparable with the calculation of similar measures for other entities. The Company's calculation of net debt includes long-term debt and the net working capital deficiency (excess). The net working capital deficiency (excess) excludes short-term commodity contract assets and liabilities, current finance lease obligation, and current deferred lease inducements.

Oil and Gas Advisories

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.  Boepd means barrel of oil equivalent per day.

Test results and initial production rates disclosed herein may not necessarily be indicative of long term performance or of ultimate recovery.  A pressure transient analysis or well-test interpretation has not been carried out and thus certain of the test results provided herein should be considered to be preliminary until such analysis or interpretation has been completed.

In this press release: (i) mcf means thousand cubic feet; (ii) mcf/d means thousand cubic feet per day (iii) mmcf means million cubic feet; (iv) mmcf/d means million cubic feet per day; (v) bbls means barrels; (vi) mbbls means thousand barrels; (vii) mmbbls means million barrels; (viii) bbls/d means barrels per day; (ix) bcf means billion cubic feet; * mboe means thousand barrels of oil equivalent; and (xi) mmboe means million barrels of oil equivalent.

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]

The System for Electronic Document Analysis and Retrieval (SEDAR) is a filing system developed for the Canadian Securities Administrators. (See: www.sedar.com)

Net Asset Value or NAV is the value of an entity's assets reduced by its liabilities.

The increase in value means that Surge Energy's performance improved. Cost reduction, increase production and efficient management are possible reasons for the increase despite the decreasing rate of commodity prices.

Swap agreements and hedging instruments are means to minimize the effects of declining crude oil prices.

Net present value is the equivalent value today of an asset to be received in the future.

Diluted earnings considers convertible financial instruments. (Ex. Bonds convertible to shares)

Gains or loss from hedging instruments are unrealized and declared under "other Comprehensive Income" until the transaction to which the hedging instrument is related actually transpired.

Material information could have an adverse or positive effect on an individual or entity's decision.