Surge Energy Inc. Announces Record First Quarter Production

Surge Energy, Inc. news release with annotations

CALGARY, May 12, 2015 /CNW/ - Surge Energy Inc. ("Surge" or the "Company") (TSX: SGY) announces record operating results for the three month period ended March 31, 2015.

Surge reports record average production of 20,585 boe per day in the first quarter of 2015 on a significantly reduced capital expenditure program. These record results were also achieved despite the sale of over 500 boepd of non-core Viking production in SW Saskatchewan during the quarter.

FINANCIAL AND OPERATING SUMMARY





($000s except per share amounts)







Three Months Ended March 31,



2015

2014

% change

Financial highlights





Oil and NGL sales


64,937

99,783

(35)%

Natural gas sales


5,416

7,784

(30)%

Total oil, natural gas, and NGL revenue


70,353

107,567

(35)%

Funds from Operations1


51,072

53,770

(5)%

Per share basic ($)


0.23

0.31

(26)%

Per share diluted ($)


0.23

0.31

(26)%

Net income (loss)


(104,705)

3,422

nm4

Per share basic ($)


(0.48)

0.02

nm

Per share diluted ($)


(0.48)

0.02

nm

Capital expenditures - petroleum & gas properties2


25,812

58,351

(56)%

Capital expenditures - acquisitions & dispositions2


(31,155)

108,712

(129)%

Total capital expenditures2


(5,343)

167,063

(103)%

Net debt at end of period3


552,110

356,744

55 %






Operating highlights





Production:





Oil and NGL (bbls per day)


17,171

12,694

35 %

Natural gas (mcf per day)


20,484

13,980

47 %

Total (boe per day) (6:1)


20,585

15,024

37 %

Average realized price (excluding hedges):





Oil and NGL ($per bbl)


42.02

87.32

(52)%

Natural gas ($ per mcf)


2.94

6.19

(53)%






Net back (including hedges) ($ per boe)





Oil, natural gas and NGL sales


37.97

79.55

(52)%

Realized gain (loss) on commodity contracts


19.62

(5.06)

 nm 

Royalties


(5.73)

(14.08)

(59)%

Operating expenses


(17.78)

(14.35)

24 %

Transportation expenses


(1.41)

(1.92)

(27)%

Operating netback


32.67

44.14

(26)%

G&A Expense


(2.14)

(2.15)

(0)%

Interest Expense


(2.95)

(2.23)

32 %

Corporate netback


27.58

39.76

(31)%






Common shares (000s)





Common shares outstanding, end of period


220,060

179,501

23 %

Weighted average basic shares outstanding


220,060

173,070

27 %

Stock option dilution (treasury method)


828

nm

Weighted average diluted shares outstanding


220,060

173,898

27 %

1 Management uses funds from operations (cash flow from operating activities before changes in non-cash working capital, decommissioning expenditures, cash settled stock-   based compensation and transaction costs) 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.

2 Please see capital expenditures discussion within the accompanying MD&A. 

3 The Company defines net debt as outstanding bank debt plus or minus working capital, however, excluding the fair value of financial contracts and other current obligations.

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

HIGHLIGHTS

  • Achieved record average production of 20,585 boe per day in the first quarter of 2015, an increase of 37 percent from 15,024 boe per day in the same period of 2014, and an increase over the fourth quarter 2014 production rate of 20,448 boe per day. These results were achieved with the drilling only 4.6 net wells in the quarter (100 percent success rate), and despite the sale of over 500 boepd of non-core Viking production in the quarter.
  • The Company's first quarter capital program of $25.8 million, (which does not include acquisitions and divestitures) represented only 50 percent of funds from operations for the quarter.
  • The Company achieved an operating netback of $32.67 per boe in the first quarter.
  • The Company achieved a debt to cash flow ratio of 2.7 times for the first quarter of 2015. This was achieved while the average US$ WTI price decreased 53%; from an average of $102.99 in the second quarter of 2014 to an average of $48.63 in the first quarter of 2015.
  • Subsequent to the end of the first quarter, Surge executed a binding purchase and sale agreement to sell the Company's assets in SE Saskatchewan and Manitoba for $430 million, which has provided the Company with a pro-forma debt to forward cash flow ratio forecast to be 1.2 times at strip pricing.
  • Approximately 92 percent of Surge's revenue resulted from oil and natural gas liquids production in the first quarter of 2015.

RECORD OPERATIONAL PERFORMANCE IN A CHALLENGING ENVIRONMENT

Continued Success in the Upper Shaunavon

The Company's Upper Shaunavon crude oil discovery in SW Saskatchewan has continued to expand.

During the first quarter of 2015, the Company successfully drilled, completed, and brought on production 2 gross (2 net) Upper Shaunavon wells. The 13-03-006-19W3 is producing at type curve expectations. The 13-18-005-19W3 well confirmed the southwest extension of a second major trend in the Upper Shaunavon. This well continues to produce above type curve expectations at more than 200 boepd.

Today, after 15 months of excellent delineation drilling results from 11 consecutive successful wells, Surge's Upper Shaunavon discovery is now more than 12 miles long, and more than seven miles wide, with average net pay estimated at more than six meters. Surge now estimates that the play has over 250 million barrels of net original oil in place (OOIP1), and over 200 (net) development drilling locations. This exciting discovery is a shallow, low risk, conventional sandstone reservoir located in a proven 2 billion barrel OOIP corridor, comprising the largest Upper Shaunavon fields in Saskatchewan history.

The Upper Shaunavon play has risked, "all-in", drilling and on-stream production efficiencies of less than $15,000 per flowing boepd. At current oil prices, Surge's Upper Shaunavon wells pay out in less than 13 months, and generate a risked rate of return of over 80 percent. These results provide some of the best all-in production efficiencies and rates of return of any crude oil play in Canada.

Netbacks are very high at Shaunavon due to low operating costs of less than $9 per barrel, and low royalties. Another significant factor as to why the Shaunavon play has such high rates of return is that Surge controls a 10,000 boepd oil battery (and associated gathering and waterflood systems), owns 54 sections of contiguous land, and possesses a large 3-D seismic program over the Company's lands.

In addition to the primary development drilling upside discussed above, this conventional sandstone reservoir also provides significant, low risk, waterflood upside to Surge shareholders.

Surge booked only 37 Upper Shaunavon locations in its external engineering report. No waterflood upside is booked for the Upper Shaunavon in Surge's external engineering report. With full field development and waterflood implementation, Surge management now estimate an ultimate pool recovery factor of more than twenty percent of the OOIP for the Upper Shaunavon alone.

___________________

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

Valhalla (NW Alberta)

Surge's 100% working interest Doig well at 5-07-075-08W6 was completed and brought on production in January, 2015, and has continued to produce significantly above type curve expectations. This well has now qualified as the top producing oil well in the Province of Alberta for the past three consecutive months.

During the first quarter of 2015, the Company also successfully drilled another Valhalla light oil well at 4-06-075-08W6 (to the south of the 5-07-075-08W6 well). This well was rig released and fracced early in the second quarter of 2015 and came on production in late April. The Company is pleased to report that this well is performing similarly to 5-7-75-8W6.  The total well cost for the 4-6-75-8W6 well was $4.0 million, providing an approximate twenty percent cost reduction.

Given the exciting large pool extension to the north at Vallhalla, Surge now has more than 35 net additional locations to drill into this 150 million barrel OOIP light oil reservoir. This pool is now approximately 18 kilometers long, 2.5 kilometers wide, and over 30 meters thick.

All-in production efficiencies at Vallhalla are less than $12,000 per flowing boepd.

Sparky (SE Alberta)

At Eyehill during the first quarter, Surge drilled and brought on production 1 (net) Sparky horizontal well. The well is producing at type curve expectations. Surge now has over 400 million barrels of net OOIP on the Sparky play - with more than 140 net development drilling locations in inventory.

All-in production efficiencies for the Sparky play are $19,000 per flowing boepd.

CAPITAL ALLOCATION STRATEGY

Macro Outlook for 2015

Crude oil prices dropped precipitously from US $106 WTI per barrel in June of 2014, to $43 WTI per barrel in March of 2015.

Company management reacted swiftly and aggressively in response to the downturn in commodity pricing, taking a number of proactive steps in late 2014 and early 2015 to protect shareholder's capital and the Company's net asset value, including:

  • Drilling capital was significantly reduced 2 weeks prior to the November 24th, 2014 OPEC meeting;
  • Exceeded management's 2014 production exit rate target of 21,350 boepd – even with reduced drilling capital expenditures;
  • Delivered strong 2014 all-in FD&A reserve replacement costs of $19.55 per boe (P+P)
  • Increased the Company's December 31st, 2014 net asset value per share from $6.95 to $7.36 – despite the large decrease in the Company's external engineering year end price deck.
  • Based upon the Company's excellent 2014 reserve addition results, an early review of the bank line was initiated. The bank line remained intact, despite a large drop in the 2015 crude oil price deck utilized by Surge's lenders.
  • Reduced discretionary spending on land and seismic;
  • G&A per boe was reduced from $3.50 per boe in the first nine months of 2013 to $2.14 per boe in the first quarter 2015;
  • Reduced the Company's dividend on January 7th, 2015;
  • Pro-actively monetized Surge's 2015 crude oil swap position to realize a cash gain of $35 million and reduce debt.  At the same time as the hedges were monetized, the Company re-hedged approximately 45 percent of its net oil production with a "costless collar" to protect against further downside risk; and
  • Management sold certain non-core assets in the Dodsland area of SW Saskatchewan for $35.6 million to reduce debt.

The US EIA now estimates world oil demand at record highs in 2015, at more than 93.3 million barrels per day, which is up from 77 million barrels of world oil demand in 2001. The EIA also estimates that world crude oil demand will grow by 1.1 million barrels per day in 2015 over 2014.

For the first time ever, OPEC is now producing at close to full capacity at over 30 million barrels of oil per day. Excess oil supply in the world has been repeatedly estimated to be as little as 1-2 million barrels per day. In addition, numerous analysts and commentators have projected that world oil demand will be as high as 115 million barrels per day by 2040. An additional factor for consideration in this supply/demand equation is the significant degree of geo-political risk present in a number of oil producing regions in the world.

With the large decrease in crude oil prices, capital expenditures relating to drilling for crude oil reserves and production are being aggressively reduced world-wide – by virtually ALL producers. As a result, North American rig counts and well licensing have declined significantly since the third quarter of 2014. This has manifested itself in a reduction of EIA-estimated production in the third quarter of 2015 of nearly a quarter million barrels a day.

This combination of reduced capital expenditures, EIA-forecasted production declines, combined with reduced drilling rig counts and well licenses, are contributing to the current ongoing recovery in crude oil prices.  Oil prices have now rebounded over forty percent, from a low of US $43 WTI in March of 2015 to US $62 WTI in May of 2015. 

In addition, Canadian oil pricing differentials have tightened due to upgrader maintenance, and a general upswing in refinery utilization, which also increases realized prices for Canadian oil producers.

$430 MILLION ASSET SALE – PROFORMA SURGE – POSITIONED FOR GROWTH

Based on the above analysis of the current business environment, on April 27, 2015 Surge announced the strategic sale of its SE Saskatchewan and Manitoba assets for $430 million. This transaction is forecast to be greater than twenty percent accretive to production per share, fifteen percent accretive to cash flow per share, and fifteen percent accretive to proven plus probable reserves per share, to Surge shareholders on a debt-adjusted basis.

Surge will receive approximately $90,000 per flowing boepd of production from this disposition, and management will now be redeploying capital into the Company's three top tier, large OOIP plays, including the Upper Shaunavon - at less than $15,000 per flowing boepd; at Valhalla - for less than $12,000 per flowing boepd; and the Sparky play in SE Alberta - at less than $19,000 per flowing boepd.

This strategic disposition confirms management's view that high quality assets will extract a premium valuation at any point in the commodity price cycle – including downturns. This transaction has also completely repositioned the Company for the new lower commodity price environment for crude, with one of the best balance sheets in the industry.

Pro-forma the disposition, Surge has a high quality, oil-weighted, low decline asset base with over 1.7 billion barrels of OOIP - with an estimated recovery factor of just seven percent. The Company has a 12 year, low risk, development drilling inventory of over 700 locations.

Surge also has a suite of low risk waterflood projects which the Company is aggressively pursuing as part of its plan to continue reducing the corporate decline rate, and improving sustainability. Furthermore, the Company's focus on cost control, improving capital efficiencies, and reducing per boe costs, remains strong. 

Pro-forma first quarter 2015 net debt is now estimated to be $122 million, on a bank line estimated at more than $375 million.  The Company is forecasting a forward debt to cash flow ratio of 1.2 times at strip pricing, with over a quarter billion dollars of credit availability.

In addition, based on better than anticipated drilling results at Valhalla, and Shaunavon, the Company is now positioned to exceed  managements previously stated production guidance of 14,250 boepd - subsequent to the sale of SE Saskatchewan and Manitoba assets discussed above.

Accordingly, Surge remains well positioned to grow, and deliver its annual dividend, in the current commodity price environment.

As previously disclosed, Surge management and Board have determined to project capital spending only until July 1, 2015, at which time Surge will reassess the current environment, and provide a capital spending program for the second half of 2015.

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.

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: (i) Surge's drilling and development plans and enhance recovery projects and the timing and results to be expected thereof; (ii) estimated sizes, characteristics, efficiencies, rates of return, netbacks, pool recovery factors and risk levels of plays and the number of associated drilling locations, as applicable; (ii) expectations on corporate royalty rates applicable to the Company; (iii) management's expectations with respect to the Company's waterflood program, results therefrom and quantity of producing assets that will be placed under waterflood; (iv) US EIA, commentator and analyst expectations regarding the growth of world oil demand, excess world oil supply, the impact of geo-political risk on oil production, world-wide capital expenditure reductions and the recovery of crude oil prices; (v) the successful completion of the sale of the Company's southeast Saskatchewan and Manitoba assets; (vi) the expected closing date of the sale; (vii) the expected benefit of the sale to the Company and its shareholders; (viii) management's expected use of proceeds from the sale; (ix) the estimated recovery factor of the Company's pro-forma asset base after the sale; * expectations with respect to the Company's ability to operate and succeed in the current commodity price environment; (xi) the Company's declared focus and primary goals; (xii) management's forecast of debt to cash flow ratio and the availability of Surge's bank line to fund Surge's future capital requirements; (xiii) Surge's operational guidance and production guidance; (xiv) the sustainability of dividends; (xv) Surge's proposed capital spending budget for the first half of 2015; and (xvi) management's reassessment of its capital spending program during the second half of 2015 and the results thereof

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, 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, the successful completion of the sale of the Company's southeast Saskatchewan and Manitoba assets, prevailing weather conditions, exchange rates, licensing requirements, the impact of completed facilities on operating costs and the availability, costs of capital, labour and services, the creditworthiness of industry partners and the impact of the pending sale on the Company'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 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 19, 2015 and in Surge's MD&A for the period ended March 31, 2015, 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.

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. Boe/d means barrel of oil equivalent per day.

Financial Outlooks

The estimates of 2015 year end net debt, 2015 funds from operations and 2015 operating netback and cash flow netback contained in this press release are 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 but not limited to 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.

Test Results and Initial Production Rates

Any references in this press release to initial, early and/or test production/performance rates are useful in confirming the presence of hydrocarbons, however, such rates are not determinative of the rates at which such wells will continue production and decline thereafter. While encouraging, readers are cautioned not to place reliance on such rates in calculating aggregate production. The initial production rate may be estimated based on other third party estimates or limited data available at this time. Initial production or test rates are not necessarily indicative of long-term performance of the relevant well or fields or of ultimate recovery of hydrocarbons.

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]

Diluted earnings per share means that convertible shares and convertible bonds are taken into consideration.

Considering that the Diluted earning per share and the basic earning per share are equal, this means that there are no or there are only insignificant number of convertible shares/bonds.