CALGARY, Dec. 9, 2015 /CNW/ - Surge Energy Inc.
("Surge" or the "Company") is pleased to provide corporate guidance
for its 2016 operating and capital budget. Given the
continued weakness and uncertainty in energy commodity prices, the
Company's initial 2016 plans reflect a minimal amount of capital
and activity in order to maintain stability in the Company's
corporate base production and balance sheet. Going forward,
Surge intends to update corporate guidance on a quarterly basis and
make adjustments according to the market outlook at that
time.
The following table provides 2016 guidance ranges for key
financial operating items. Assumptions behind these values
are based on strip pricing as of December 1,
2015.
Operating
Category
|
2016
Guidance
|
Annual production
avg. (boe/d)
|
14,000 with 76%
liquids mix
|
Total capital net of
acq/disp (M$)
|
49,000-51,000
|
Corporate oil price
discount as % of Edmonton light
|
18-20%
|
Royalties as % of
revenue
|
17-18%
|
Operating expenses,
$/boe
|
13.75-14.25
|
Transportation
expense, $/boe
|
1.45-1.55
|
G&A,
$/boe
|
1.75-1.80
|
The formal capital budget and production guidance outlined above
represents a slight reduction in activity compared to previously
estimated 2016 levels. This downward revision is a result of
the sharp drop in crude oil prices over the past month. The
following table provides further breakdown for guidance of
$50 million in 2016 all-in
capital:
Capital
Category
|
Amount
(M$)
|
Drill & Complete,
Tie-in
|
26,850
|
Waterflood
|
1,500
|
Facilities
|
6,205
|
Workover
|
7,700
|
Land, Capitalized
G&A, other
|
7,745
|
Total
|
50,000
|
Important to note is that 75 percent of the facilities budget
above is to be deployed in the first half of 2016. The
majority of these costs are one time capital expenditures
associated with directing a significant portion of Surge's solution
gas at Valhalla to firm capacity
at a sweet processing facility. This will allow the Company to
maximize the oil production from its large, light oil pool at
Valhalla.
2016 Planned Activity
Surge is cognizant of the pending announcement of the results of
the Alberta Royalty review and has allocated 2016 capital
predicated on the assumption of minimal impact to the existing
fiscal environment in Alberta.
Should that not be the case, Surge will re-evaluate and adjust
expenditures accordingly.
For reference, the following table summarizes the updated
economic assumptions utilizing strip pricing as of December 1, 2015, and as such are considered
conservative numbers by Surge management. The economics
underpin the capital allocation decisions for each property and
reflect budgeted well costs for 2016.
Property
|
Shaunavon
|
Valhalla
|
Eye Hill
Sparky
|
Well cost
(M$)
|
1,600
|
3,600
|
1,400
|
BT ROR (%)
|
66%
|
171%
|
42%
|
Capital efficiency
(180 day IP)
|
$11,200
|
$6,500
|
$12,700
|
|
|
|
|
Upper Shaunavon
Surge currently plans to drill seven wells in the Upper
Shaunavon in 2016. One of the key developments for the Upper
Shaunavon play in 2016 will be the results of the waterflood pilot
implemented in late August of 2015. Surge management expect a
favorable response to the waterflood pilot early in 2016 for
several reasons, including 1) successful offset Upper Shaunavon
analogue waterfloods, 2) early implementation, 3) conventional
sandstone reservoir, 4) low gas/oil ratio, and 5) low water
saturation.
The Company plans to continue to delineate both the northern and
southern portions of the Upper Shaunavon field in 2016. Very
little capital is required to tie in additional wells or implement
new waterflood pilots as extensive existing infrastructure is
already in place. Continued investment at Shaunavon is underpinned by low operating
expenses, favorable royalty rates, and excellent well results.
The Company is also pleased to report positive preliminary
drilling results for the three wells drilled at Shaunavon in the fourth quarter of 2015.
Average total fluid deliverability for the three wells reflects the
current type curve, while production continues to clean up
delivering an increasing oil cut.
Valhalla
Surge expects to continue benefitting from excellent drilling
results, and a new firm processing facility at Valhalla in 2016. The pipeline to
connect to the new sales point is now completed, and remains on
schedule for an in-service date in mid-December. The Company
will also install compression at the southern end of the new
pipeline, which is anticipated to be in service mid-March.
The compression will facilitate the direction of approximately 75%
of Surge's associated solution gas to this firm capacity. This
infrastructure solution is expected to significantly reduce the
volume curtailments experienced in the past at Valhalla, which were primarily related to lack
of firm processing capacity. It will also remove any constraint
with respect to potential pool expansion and development in the
northern half of the Doig light oil pool.
This project is also expected to increase total field capacity
at Valhalla. It will serve to reduce field operating
pressures and provide for minor system de-bottlenecking.
Minimal contributions from facilities de-bottlenecking are included
in the 2016 forecast for Valhalla
production.
Surge is currently planning to drill three additional wells in
the prolific northern end of the Valhalla pool in 2016. Due to
outstanding well results in 2015, capital allocation to the play is
well supported by excellent economic returns at lower
prices.
Eye Hill Sparky
Following the success of the two monobore wells at Eye Hill in
the fourth quarter, Surge plans to drill three more wells at Eye
Hill in 2016. As monobore well costs continue to improve,
Surge anticipates Eye Hill Sparky drilling may attract additional
capital in the Company's portfolio of projects as economics become
increasingly competitive.
The two new monobore wells at Eye Hill are currently on-line and
exhibiting overall good fluid deliverability and increasing oil
cut. Importantly, these two wells are longer laterals than
reflected in the current Eye Hill type curve, and they directly
offset a recently converted, horizontal water injection
well.
Financial Update and Outlook
On an annualized basis, Surge's intention is to operate with
three primary financial goals:
- Visible path to maintaining debt/cf < 2.0x
- All-in sustainability ratio = 100-110%
- Dividend payout ratio = 35-40%
Surge intends to continue to add to its 2016-17 financial hedge
position in order to help preserve these operating metrics.
The Company's intent, however, will be to utilize derivative
instruments and price levels that allow for meaningful upside to
price realizations. In a scenario where commodity prices
don't support the above metrics, the Company will continue to
monitor dividend payout levels, asset dispositions, and further
capital reductions as a means to counter the effects of lower
commodity prices.
Conversely, the Company expects to generate free cash above the
100% sustainability ratio as US WTI
oil prices recover. At this point, Surge management
would expect reinvestment of excess cash to be directed towards
either incremental drilling in its Upper Shaunavon play, debt
repayment, or the current normal course issuer bid to support the
stock buy-back program.
Subsequent to the November
9th, 2015 earnings release, Surge has entered
into new financial derivative positions as outlined in the table
below.
Commodity
|
Time
Frame
|
Volume
|
Value
|
WCS oil
differential
|
Calendar
2016
|
2,000
bbl/d
|
USD$WTI less
USD$14.70/bbl
|
Nymex Henry Hub
natural gas
|
Jan – Oct
2017
|
3,500
mcf/d
|
CAD
$3.65/mcf
|
FX variable rate
collar (USD/CAD)
|
Calendar
2016
|
USD $2 million
per
month
|
$1.3175 x $1.3900
($1.3390 cap)
|
FX forward
(USD/CAD)
|
Calendar
2017
|
USD $2 million
per
month
|
$1.3333
|
Despite the current pricing environment, Surge management
remains excited about the continued development and prospects for
its asset base in 2016. The Company remains well positioned
with its attractive balance sheet to sustain further downside in
prices, yet is positioned to benefit tremendously to an upside
pricing scenario. Surge looks forward to providing further
updates in 2016.
FORWARD LOOKING STATEMENTS:
This press release contains forward-looking statements. More
particularly, this press release contains statements concerning
Surge's expectations regarding its average daily production; the
impact of weakness and uncertainty surrounding commodity
pricing; its balance sheet; its capital spending program and
corporate guidance for 2016 and its plan to undertake a minimal
amount of capital activity in order to maintain stability in
Surge's base production and balance sheet; capital allocation
decisions for Surge's properties; drilling and development plans
and enhanced recovery projects and the timing and results to be
expected thereof; netbacks; the Company's declared focus and
primary goals, including financial goals; the Company's ability to
generate cash and plans to reinvest such cash; cost reduction
initiatives; the ability of the Company to weather the present
commodity price environment; the Company's hedging activities; the
timing, amount and sustainability of future dividend payments; and
the Company's available options to counter the effects of lower
commodity prices, including monitoring dividend payout levels,
asset dispositions and further capital reductions.
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,
increases to field capacity, 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
ofand ability to attract capital, labour and services, and the
creditworthiness of industry partners and thecontinued approval 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, 2014
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.All
subsequent forward-looking statements, whether written or oral,
attributable to Surge or persons action on Surge's behalf, are
expressly qualified in their entirety by these cautionary
statements.
Test Results and Initial Production Rates
Any references in this news 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.
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.
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.