CALGARY, May 11, 2016 /CNW/ - Surge Energy Inc. ("Surge"
or the "Company") (TSX: SGY) announces its operating and financial
results for the quarter ended March 31,
2016.
POSITIONING FOR THE TURNAROUND
In the first quarter of 2016, one of the lowest commodity price
quarters for both crude oil and natural gas in many years, Surge
management continued to focus on disciplined, conservative balance
sheet management, and corporate cost cutting initiatives.
In the first quarter, Surge negotiated and closed the
$28 million sale of non-core assets
at Sunset in NW Alberta, and the
sale of facilities at Valhalla for
$15 million. Proceeds from these two
transactions were used to again reduce debt.
In terms of cost cutting initiatives, Surge has continued to
experience success in reducing corporate operating expenses,
interest expense and G&A expenses. Management estimates that
cost cutting initiatives implemented for the three expense
categories mentioned above, now cumulatively total over
$8.00/boe of expense savings. This
has had a significant and positive impact on Surge's netback and
profitability.
In the last 23 months, Surge has generated over $760 million of liquidity for the Company and its
shareholders - without issuing a single treasury share. This has
preserved significant cash flow per share growth potential for
shareholders. In addition, as crude oil prices rally, Surge
management will now look to strategically re-introduce a meaningful
production per share growth component back into the Company's
business model - to further enhance shareholder returns.
Surge has been patient, disciplined and conservative during the
downturn, as oil prices bottomed out at US $26.75 WTI per barrel in February of this year,
and management has continued to work hard to be one of the best
positioned crude oil growth and dividend paying companies in
Canada - when crude oil prices
recover.
As a result of the implementation of Surge's strategic capital
allocation decisions, as well as managements rigorous cost cutting
measures, Surge is now 100 percent sustainable as a growth and
dividend paying oil company (capital and dividend), based on the
May 5, 2016 forward twelve month
strip for crude oil pricing.
With oil prices rising over 65 percent in the last nine weeks,
over $250 million of credit
availability on the Company's current bank facility, and with a
large 12 to 14 year drilling inventory of over 700 net locations,
Surge is in the enviable and flexible financial position of being
able to add a meaningful production per share growth component to
the Company's second half of 2016 production estimates (continuing
on into 2017), should crude oil prices continue to rally.
FINANCIAL AND
OPERATING SUMMARY
|
|
|
|
|
($000s except per
share amounts)
|
|
|
|
|
|
|
Three Months
Ended
|
|
|
Mar 31,
2016
|
Dec 31,
2015
|
%
change
|
Financial
highlights
|
|
|
|
|
Oil sales
|
|
26,166
|
36,509
|
(28)%
|
NGL sales
|
|
769
|
1,250
|
(38)%
|
Natural gas
sales
|
|
2,211
|
3,183
|
(31)%
|
Total oil, natural
gas, and NGL revenue
|
|
29,146
|
40,942
|
(29)%
|
Funds from
operations1
|
|
7,491
|
15,302
|
(51)%
|
Per share basic
($)
|
|
0.03
|
0.07
|
(57)%
|
Per share diluted
($)
|
|
0.03
|
0.07
|
(57)%
|
Capital expenditures
- petroleum & gas properties2
|
|
12,873
|
18,309
|
(30)%
|
Capital expenditures
- acquisitions & dispositions2
|
|
(41,141)
|
1,117
|
nm4
|
Total capital
expenditures2
|
|
(28,268)
|
19,426
|
nm
|
Net debt at end of
period3
|
|
133,816
|
160,375
|
(17)%
|
|
|
|
|
|
Operating
highlights
|
|
|
|
|
Production:
|
|
|
|
|
Oil (bbls per
day)
|
|
9,821
|
10,297
|
(5)%
|
NGLs (bbls per
day)
|
|
615
|
795
|
(23)%
|
Natural gas (mcf per
day)
|
|
17,829
|
18,570
|
(4)%
|
Total (boe per day)
(6:1)
|
|
13,408
|
14,187
|
(5)%
|
Average realized
price (excluding hedges):
|
|
|
|
|
Oil ($ per
bbl)
|
|
29.28
|
38.54
|
(24)%
|
NGL ($ per
bbl)
|
|
13.75
|
17.08
|
(19)%
|
Natural gas ($ per
mcf)
|
|
1.36
|
1.86
|
(27)%
|
|
|
|
|
|
Netback ($ per
boe)
|
|
|
|
|
Oil, natural gas and
NGL sales
|
|
23.89
|
31.37
|
(24)%
|
Realized gain (loss)
on commodity contracts
|
|
3.26
|
3.49
|
nm
|
Royalties
|
|
(3.14)
|
(5.89)
|
(47)%
|
Operating
expenses
|
|
(12.27)
|
(12.57)
|
(2)%
|
Transportation
expenses
|
|
(2.33)
|
(1.75)
|
33 %
|
Operating
netback
|
|
9.41
|
14.65
|
(36)%
|
G&A
expense
|
|
(1.96)
|
(1.69)
|
16 %
|
Interest
expense
|
|
(1.32)
|
(1.19)
|
11 %
|
Corporate
netback
|
|
6.13
|
11.77
|
(48)%
|
|
|
|
|
|
|
|
|
|
|
Common shares
outstanding, end of period
|
|
221,047
|
221,033
|
— %
|
Weighted average
basic shares outstanding
|
|
221,042
|
221,001
|
— %
|
Stock option
dilution
|
|
—
|
—
|
nm
|
Weighted average
diluted shares outstanding
|
|
221,042
|
221,001
|
— %
|
1
Management uses funds from operations (cash flow from operating
activities before changes in non-cash working capital,
decommissioning expenditures, transaction costs and cash settled
stock-based compensation) 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 the capital expenditures note in the 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".
|
Q1/16 Highlights
- Maintained superior balance sheet flexibility with over
$250 million in undrawn credit
availability.
- Achieved a first quarter average production rate of 13,408 boe
per day, which reflects approximately 500 boe/d of shut-in
production due to economic conditions. This has resulted in
approximately $2 million in savings
in the first quarter as compared to budget.
- Drilling and completion capital expenditures were $12.9 million during the quarter, which were
lower than originally expected by nearly eight percent - resulting
in savings of over $0.5 million as
compared to budget. Current pricing for oil industry services
remains favorable as compared to 2016 budgeted levels.
- Operating expenses in the Company's three main operating areas
have dropped over 36 percent from the first quarter of 2015 to the
first quarter of 2016.
- Corporate operating expenses continue to trend lower
($12.27/boe), partially supported by
prior period recoveries.
- Transportation expenses were $2.33/boe for the first quarter, which reflects
higher than expected utilization of sour gas processing facilities
at Valhalla. Transportation
expenses are expected to trend to the guidance range of
$1.75-1.85/boe for the second quarter
and balance of 2016.
- Surge closed the sale of its non-core Sunset property in
NW Alberta for proceeds of
$28 million.
- Surge also closed a mid-stream facilities sale, on select
Valhalla facilities, for proceeds
of $15 million.
OPERATIONS OVERVIEW
Valhalla
Surge completed a new well in the large northern extension of
the Company's operated Valhalla
light oil pool in mid-January of 2016. The 400 meter
down-spaced well encountered virgin reservoir pressure, is
currently tracking Surge's Valhalla type curve. Recently available
public data establishes this light oil well as the second best oil
well in Alberta for the month of
February, 2016.
In mid-April of 2016, Surge spud a 100 percent working interest
well at 103/16-7-75-8W6. Early results confirm Surge's geological
model, and management is pleased with the drilling progress to
date.
In addition to this drilling activity, the Company is currently
performing an artificial lift review at Valhalla. With recent
facilities re-configurations, high pressure sweet gas service is
now available at Valhalla. A gas lift pilot has also been
initiated in the field.
The Valhalla light oil property
accounted for 32 percent of Surge's corporate operating cash
flow5 in the first quarter of 2016. Valhalla's first quarter unhedged operating
netbacks were $7.38/boe, and
operating expenses were $7.93/boe,
down 36 percent year over year, from $12.47/boe in the first quarter of 2015. At
current US$45 WTI per barrel pricing,
operating netbacks at Valhalla are
estimated at $19/boe.
The new Modernized Royalty Framework introduced by the Alberta
Government has been designed to encourage and accelerate new
drilling in Alberta. Surge
management anticipates this new framework will reduce the royalty
impacts on Surge's prolific Doig light oil reservoir at
Valhalla.
______________________
5 "Corporate operating cash flow" is defined
as the Company's Funds from Operations, less corporate
expenditures.
Shaunavon
In the first quarter of 2016, Surge drilled two wells in the
southern portion of Surge's 54 section land block. Both of these
wells encountered high quality reservoir, with excellent porosity
levels that reached 18 percent. Based off available public
data, these two wells have now proven to be two of the top oil
wells drilled in Saskatchewan this
year.
Surge is now experiencing a successful waterflood response (at
200 meter inter-well spacing) in the Company's Upper Shaunavon
horizontal waterflood pilot. After 8 months of injection, the
production from the well offsetting the injector has flattened at a
rate more than 50 percent above the wells expected type curve, and
gas/oil ratios have stabilized. Management has not yet observed a
response at the 400 meter pilot, after the same period and volume
of injection. This confirms the requirement for 200 meter drilling
spacing in the Upper Shaunavon for full waterflood implementation.
The Upper Shaunavon zone has over 250 million barrels of net
original oil in place ("OOIP"6), and Surge now expects
that development drilling and waterflood implementation will more
than double the expected recovery factor from 10 percent on
primary, to more than 20 percent on full field development (current
Upper Shaunavon recovery is less than one percent, with reserves
booked to approximately three percent as per Surge's 2015 Sproule
reserve report).
Due to favorable, dry weather conditions, the Company has
mobilized a drilling rig into the Shaunavon field in early May. The
original budget called for a spud date in early July, so the
Company has accelerated four Shaunavon wells in the program by two
months.
The Shaunavon property
accounted for 38 percent of Surge's corporate operating cash flow
in the first quarter of 2016. First quarter unhedged operating
netbacks were $15.54/boe, and
operating expenses were $6.45/boe,
down 37 percent year over year, from $10.25/boe in the first quarter of 2015. Based on
current US$45 WTI per barrel pricing,
operating netbacks at Shaunavon
are estimated to be $25/boe.
Sparky
During the fourth quarter of 2015, Surge expanded the
Company's waterflood at its Eyehill area in Central Alberta, by converting an existing
1,300 meter horizontal well to injection. This new injector offsets
by 200 meters, the two new Sparky wells drilled in the fourth
quarter of 2015. The original waterflood pilot conducted over the
last 18 months confirms the 200 meter spacing requirement for
successful waterflood implementation. Surge has observed full
waterflood support of the production from the two new wells after
five months of injection. The Sparky oil pool at Eyehill contains
over 100 million barrels of net OOIP. Surge now expects to more
than double the recovery factor for the Sparky reservoir at Eyehill
from 10 percent on primary, to over 20 percent with development
drilling and waterflood implementation (current Eyehill
Sparky recovery is less than one percent, with reserves
booked to approximately four percent as per Surge's 2015 Sproule
reserve report).
Surge's Sparky area (comprised of Silver, Wainwright, Eye Hill,
Macklin, & Provost operating assets) accounted for 25 percent
of Surge's corporate operating cash flow in the first quarter of
2016. First quarter unhedged operating netbacks for the Sparky core
area were $8.33/boe and operating
expenses were $11.96/boe, down 36
percent year over year, from $18.58/boe in the first quarter of 2015. Based on
current US$45 WTI per barrel pricing,
operating netbacks are estimated at $17/boe.
Combined, the Company's three core areas contributed 96 percent
of Surge's corporate operating cash flow in the first quarter of
2016.
______________________
6 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. 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
FINANCIAL UPDATE
Surge management has no update to the financial guidance
provided on April 7, 2016. The
Company will monitor drilling results at Valhalla and Shaunavon over the next few months. The
next guidance update, if applicable, will be issued in conjunction
with Surge's second quarter 2016 results release in August of this
year.
Hedging Update
Subsequent to the first quarter, Surge monetized its foreign
exchange ("FX") hedge positions. Proceeds from the 2016
variable-rate collar and 2017 forward swap were approximately
$4.2 million. Originally, the
FX hedges were intended to be matched with USD-denominated WTI
collar/swap positions. After accounting for the existing CAD
WTI hedges, it was determined the FX hedges represented additional
USD WTI hedging volumes that would have exceeded the Company's
desired oil hedging levels. The hedge proceeds will be
recognized in second quarter financial results.
Subsequent to the first quarter, Surge also increased its oil
hedge position via the following contracts:
Commodity
|
Time
Frame
|
Volume
|
Value
|
WTI oil collars
(put/call)
|
2H 2017
|
1,000
bbl/d
|
CAD $50 x
$77.38
|
OUTLOOK
Surge management remain encouraged by recent improvements in the
crude oil markets. World crude oil prices have increased over 65
percent in just nine weeks.
Surge is now 100 percent sustainable as a growth and dividend
paying oil company (capital plus dividend) based on the
May 5, 2016 forward twelve month
strip for crude oil pricing.
As discussed above, the Company remains well positioned to
strategically expand Surge's drilling activity into a higher crude
oil price environment for the remainder of 2016, continuing on into
2017. This will add a meaningful production per share growth
component back into Surge's business model to enhance shareholders
returns, and allow management to aggressively pursue the Company's
new, independently engineered net asset value of $4.79 per share.
The Company looks forward to providing further updates in the
near future.
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 31st,
2016. 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;
(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) expectations with
respect to the Company's ability to operate and succeed in the
current commodity price environment; (v) the Company's declared
focus and primary goals; (vi) management's forecast of debt to cash
flow ratio and the availability of Surge's bank line to fund
Surge's future capital requirements; (vii) management's estimates
and expectations regarding production efficiencies, drilling
upside, operating costs, growth opportunities and reserves; (viii)
the impact of cost savings initiatives; (ix) drilling inventories
and locations; * production and cash flow per share growth; and
(xi) anticipated commodity prices.
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 implementation of the Corporation's normal course issuer
bid, 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 16, 2016 and in Surge's
MD&A for the period ended March 31,
2016, 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.
Reserves Data
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 means barrel of oil equivalent per day. 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. 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. > 1.7 billion bbls gross (1.4 billion
bbls net), 7 percent RF; IP180 means rate at which a well
produces during its first 180 days of production. Bbl means
barrel of oil. Mbbl means thousand barrels. Bbl/d means
barrels of oil per day. NGLs means natural gas liquids.
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, 2015
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 more
than 700 net drilling locations identified herein 527 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.