CALGARY, July 21, 2016 /CNW/ - Surge Energy Inc. ("Surge"
or the "Company") (TSX: SGY) announces excellent development
drilling results in each of the Company's three core areas at
Shaunavon, Valhalla, and Eyehill (Sparky). This 14
well drilling program has added production of more than 2,000 boepd
(85 percent oil; IP/180 day), at an "all-in" on-stream
cost1 of $19.75 million -
providing a production efficiency of less than $9,875 per flowing boepd.
Spring 2016 weather conditions in Surge's three operating areas
were extremely dry. Accordingly, Surge was able to initiate the
Company's second half 2016 drilling program approximately six weeks
early – beginning in mid-May.
As a result of these accelerated drilling results, together with
continued successful waterflood results at Shaunavon, Eyehill, Nipisi, Silver and Doe,
Surge's current production has now exceeded the Company's
previously announced 2016 production exit rate target of 13,000
boepd.
OPERATIONAL UPDATE – EXCELLENT DRILLING RESULTS IN ALL CORE
AREAS
Shaunavon
At Shaunavon, Surge drilled
eight consecutive wells driving the cost of drilling, completing,
and tying-in a well down to an average of less than $1.25 million – which is down 43 percent from the
cost of $2.2 million per well 20
months ago. The final two wells of the program were successfully
drilled utilizing a monobore configuration, realizing a further
capital reduction of approximately $100,000 per well.
Sustainable primary production added from this eight well
program is more than 1,200 bopd (IP/180 day). Operating costs at
Shaunavon are now below
$7.75 per barrel, and this high
quality, operated, sandstone reservoir has netbacks2 of
over $30 per barrel at July strip
crude oil pricing. Primary recovery from this drilling program is
estimated to be 1.2 million barrels of oil3, providing
an "all-in" finding cost4 of $8.33 per barrel.
The Company's Upper Shaunavon waterflood project is delivering
excellent, measurable results. The current 200 meter in-fill well,
which offsets a recent injector, has shown stabilized production
significantly above the primary production type curve5,
at more than 100 bopd after 10 months. On this basis, Surge will be
immediately converting two additional wells to injection in the
waterflooded area, increasing total injection to four wells (two
initial pilot wells were converted in September of 2015). The
Company now anticipates booking up to 300,000 barrels of oil for
wells receiving waterflood support in this large, 54 (net) section
oil pool.
Surge has over 200 Upper Shaunavon drilling locations in
inventory. Type-curve wells for this 250 million barrel,
internally-generated, original oil in place ("OOIP") pool generate
a 74 percent risked rate of return (for primary production only) at
July strip oil prices.6
The Upper Shaunavon formation on Surge lands has a cumulative
recovery factor of less than one percent to date, and is currently
booked at less than a four percent recovery factor in Surge's
year-end 2015 external engineering report. Similar Upper Shaunavon
waterflood analogues immediately offsetting Surge's land at Rapdan
and Dollard, which have shown
recoveries of 22 percent and 56 percent, respectively7.
Surge expects to ultimately realize a recovery factor of more than
20 percent at Shaunavon based on
risked development drilling and waterflood activities.
Valhalla
As previously disclosed, at Valhalla, Surge has completed the Company's
strategic infrastructure project, tying in approximately 12 MMcfd
of Surge's associated gas to nearby sweet gas processing plants.
Compression added this spring has now significantly dropped
pressures in the field, and processing fees have dropped from
$1.25 per Mcf to $0.45 per Mcf. Run times for the Valhalla field are now close to 100 percent
(compared with historical run times of 80-85 percent).
On May 25, 2016 Surge brought
onstream the Company's latest development well at Valhalla which is performing at Surge's type
curve of 550 boepd (IP/180 day). The all-in on-stream cost of the
latest well was $3.6 million, and
Surge anticipates recovering over 450,000 boe8 for this
high quality, light oil well. Valhalla netbacks are approximately
$25 per boe at July strip prices.
Type curve wells at Valhalla
generate over 150 percent risked rate of return at strip
pricing.6 Based on the large 140 million barrels of net
OOIP, combined with excellent reservoir pressure data from the 30
meter thick Doig sandstone reservoir, Surge now sees over 50
drilling locations at Valhalla, up
from management's previous estimate of 37 locations.
The re-determination of the applicable Crown royalty pursuant to
the recent Alberta royalty review
is expected to increase Surge's net present value for each
un-drilled Valhalla well by more
than 20 percent, effective January
1st, 20179.
Sparky; Eyehill
At Surge's Sparky core area, the Company is presently drilling
five consecutive wells at Eyehill to add more than 500 boepd of
risked production (IP/180 day), at an "all-in" on-stream cost of
less than $5.8 million (i.e.
$1.15 million per well). Surge
anticipates recovering 140,000 boe10 for each Eyehill
development well. Eyehill netbacks are over $23 per boe utilizing July strip pricing. These
wells are being drilled as monobores, which will result in further
operational improvements and capital reductions. Internally
generated Eyehill type curve wells generate a risked rate of
return of 43 percent at strip crude oil pricing11
(for primary production).
The Eyehill waterflood project is also delivering excellent,
measurable results with two recent producing oil wells (offsetting
Surge's latest injector) now stabilizing at approximately 100 boepd
after nine months.
This high quality, operated reservoir has over 90 million
barrels of OOIP net to Surge. Cumulative recovery factors to date
at Eyehill are less than one percent, and Surge has currently
booked less than four percent of the Sparky OOIP in the Company's
year-end 2015 external engineering report. Surge expects to
ultimately realize a recovery factor of over 20 percent at Eyehill
based on risked development drilling and waterflood activities.
Surge has over 150 low risk, development drilling locations in
the Company's greater Sparky core area.
Through two recent Crown purchases in the Sparky area, Surge has
acquired nine contiguous sections of 100 percent working interest
land (with prior vertical Sparky well control) prospective for
Sparky production. The acquired lands have an estimated OOIP of
more than 65 million barrels. Surge will be drilling this exciting
new Sparky reservoir (utilizing modern horizontal and completion
technology) in 2017.
Current Production Exceeds 2016 Exit Rate
As a result of Surge's excellent development drilling results
discussed above, together with continued successful waterflood
results at Shaunavon, Eyehill,
Nipisi, Silver, and Doe, Surge's current production has now
exceeded the Company's previously announced 2016 production exit
rate target of 13,000 boepd. This spot rate reflects a
portion of flush production, but only partial contribution from the
recent 14 well drilling program.
Management now believe the Company is well positioned to exceed
Surge's 13,000 boepd exit rate target for 2016.
BANK LINE REDETERMINATION
Surge has completed its semi-annual borrowing base review with
the Company's syndicated group of lenders. As expected, the
Company's borrowing base has now been renewed at $250 million. The revolving period on Surge's
entire credit facility expires on May 29,
2017, and the Company's bank line has no non-conforming
portion.
Based on preliminary estimated net debt at June 30, 2016 of less than $135 million, Surge is approximately 54 percent
drawn on the renewed credit facility, providing the Company with
sufficient liquidity and financial flexibility to execute on its
business plan.
As a result of carrying less unutilized credit capability on the
Company's bank line, Surge will be saving approximately
$1.0 million per year in standby
charges.
OUTLOOK – POSITIONING FOR SOLID PER SHARE GROWTH
For more than 85 weeks during the downturn in world crude oil
prices, Surge management has strategically positioned the Company
for the inevitable turnaround in oil prices.
During this period, Surge created over $750 million of liquidity for its shareholders -
without issuing a single common share from treasury. Importantly,
this has preserved the Company's ability to grow its reserves,
production, and cash flow, on a per share basis, as crude oil
prices recover. The strategic capital allocation decisions
undertaken by management have also preserved Surge's conservative,
independently engineered net asset value of $4.79 per share for shareholders.
Furthermore, rigorous cost cutting initiatives at Surge (opex,
G&A and interest expense) have created over $8 per boe of additional netback for the
Company.
Operationally, over the last 21 months, management have
highgraded Surge's asset base into three, operated core areas, with
a deep inventory of low risk, development drilling locations. These
locations generate excellent rates of return at strip crude oil
prices, and have very low cost production efficiencies.
Accordingly, today Surge has a 12-14 year, 750 well development
drilling inventory in the Company's large OOIP, waterflooded, light
and medium gravity crude oil pools.
In addition, during the downturn Surge further delineated the
Company's high quality, large OOIP crude oil reservoirs at
Shaunavon, Valhalla, and Eyehill with excellent
development drilling results. Successful waterfloods were also
initiated and optimized at Shaunavon, Eyehill, Nipisi, Silver,
Wainwright, and Doe. Infrastructure solutions were identified and
implemented at Valhalla, Eyehill,
Provost, Nipisi, and Wainwright.
Consequently, as a result of management's strategic capital
allocation decisions, rigorous cost cutting initiatives, and
operational successes, Surge is now 100 percent sustainable at
US$47.75 WTI crude oil prices, based
on management's $55 million 2016
capital expenditure program. This price is less than forward strip
prices for crude oil.
Surge management have also preserved significant per share
growth potential for shareholders. This ensures that the Company
will be one of the few in its peer group who will be able to add a
substantial production per share growth component back into
management's business model – as crude oil prices sustainably firm
up above US$50 WTI per barrel.
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) the availability of Surge's bank line
to fund provide the Company with sufficient liquidity and financial
flexibility; (vii) management's estimates and expectations
regarding production efficiencies, drilling upside, operating
costs, capital expenditures and reductions; growth opportunities,
reserves, recovery factors, rates of return; net present value of
the Company's assets and sustainability; (viii) the impact of cost
savings initiatives; (ix) drilling inventories and locations; *
production and production per share growth; (xii)
management's expectations regarding net debt levels; (xii)
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,
prevailing weather conditions, exchange rates, licensing
requirements, the impact of completed facilities on operating costs
and the availability, costs of capital, labour and services, and
the creditworthiness of industry partners 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. 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.
Financial Outlooks
The estimate of June 30, 2016 net
debt contained in this press release is a financial outlook within
the meaning of applicable securities laws. This financial outlook
has been prepared by management of Surge to provide an outlook of
Surge's anticipated net debt as at June 30,
2016 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 outlook or assurance that such results
will be achieved. The actual results of Surge will likely vary from
the amounts set forth in the financial outlook and such variation
may be material. Surge and its management believe that the
financial outlook has 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, 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. Type curve
economics were calculated using strip oil forecast as of
July 4, 2016 strip price forecast
(first year WTI: US$51.24/Bbl; Henry
Hub: US$3.17/MMbtu; a 1.5 percent per
year inflation rate was applied from end of strip forecast (2024)
to 2064. An inflating CAD/USD exchange rate of $0.78 (to a max of $0.90 by 2055) was assumed.
Non-IFRS Measures
This press release contains the terms "net asset value", "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.
_______________________
1 On-stream
cost is defined as drilling, completion, equipping and tie-in costs
("DCET").
2 Netbacks are defined as revenue, less royalties,
operating, and transportation expenses.
3 Based on internally generated Estimated Ultimate
Recoveries ("EUR").
4 Finding cost is defined as DCET capital, divided by
internally generated EUR.
5 Type curve is defined as internally generated
estimates of well performance, based on analogue well
datasets.
6 July 4, 2016 strip price
forecast (first year WTI: US$51.24/Bbl; Henry Hub: US$3.17/MMbtu; a 1.5 percent per year inflation
rate was applied from end of strip forecast (2024) to 2064. An
inflating CAD/USD exchange rate of $0.78 (to a max of $0.90 by 2055) was assumed.
7 Based on publically available estimates of OOIP and
cumulative recovery to date.
8 Based on internally generated Estimated Ultimate
Recoveries ("EUR").
9 Using the strip pricing in footnote 6, generated using
the most recent publically available estimates of the Alberta
Modern Royalty Framework and applied to internally generated type
curves.
10 Based on internally generated Estimated Ultimate
Recoveries ("EUR").
11 July 4, 2016 strip
price forecast (first year WTI: US$51.24/Bbl; Henry Hub: US$3.17/MMbtu; a 1.5 percent per year inflation
rate was applied from end of strip forecast (2024) to 2064. An
inflating CAD/USD exchange rate of $0.78 (to a max of $0.90 by 2055) was assumed.
SOURCE Surge Energy Inc.