CALGARY, Aug. 3, 2016 /CNW/ - Surge Energy Inc.
("Surge" or the "Company") (TSX: SGY) announces its operating and
financial results for the quarter ended June
30, 2016.
SECOND HALF DRILLING PROGRAM ACCELERATED
"Due to the record drilling efficiencies and cost savings Surge
has achieved so far in 2016, management chose to use a portion of
the proceeds from the Company's first quarter non-core asset sale
to accelerate its second half 2016 drilling program.
Favorable weather conditions in Southwest
Saskatchewan allowed for the mobilization of a rig to the
Upper Shaunavon field in early May. This decision was largely
based on the desire to replace the divested volumes, and was
further supported by a historically low service cost environment,
drilling program improvements and efficiencies", stated
Paul Colborne, President and Chief
Executive Officer of Surge.
"These factors allowed the Company to add production at less
than $9,875 per flowing barrel from
the 14 well program. Significantly lower service costs and
record drilling efficiencies have allowed for Surge to increase the
scope of its drilling program within the original capital budget of
approximately $55 million. Surge
management continues to monitor the commodity price environment,
and retains the optionality to expand the 2016 budget
accordingly."
SECOND QUARTER HIGHLIGHTS
- Funds flow from operations ("FFO") was $22.1 million in the second quarter of 2016, or
$0.10 per share.
- Surge delivered an all-in sustainability ratio of 95 percent
for the quarter, with oil prices averaging US$45.59 WTI per barrel.
- The Company achieved a debt to cashflow ratio of 1.53 times
annualized cashflow for the quarter.
- The Company's recent 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 cost of $19.75
million - providing a production efficiency of less than
$9,875 per flowing boepd.
- 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 continues to
exceed the Company's previously announced 2016 production exit rate
target of 13,000 boepd.
- 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.
- Surge achieved an operating netback of $23.27 per boe and a corporate netback of
$19.91 per boe in the quarter, an
increase of 147 percent and 225 percent respectively from the first
quarter of 2016.
- Operating expenses were $12.69
per boe, down 16 percent as compared to the same period in 2015, as
Surge operations personnel continue to execute on optimization
projects.
- Transportation expenses were reduced by 50 percent as compared
to the first quarter of 2016, as the benefits from facilities
optimization projects at Valhalla
were realized for a full quarter.
- Production volumes for the quarter reflect the $28 million non-core asset sale of Sunset, a 700
boepd divestiture that closed at the end of the first quarter of
2016. Volumes were impacted by approximately 350 boepd of unplanned
downtime at a third party processing facility, and approximately
300 boepd of uneconomic shut-in production.
- Surge's banking facility was re-determined at $250 million subsequent to the quarter. With net
debt of $134.6 million at
June 30, 2016, the facility is
approximately 54 percent drawn, providing the Company with ample
liquidity to continue to execute on Surge's business plan. The
reduction in stand-by fees should result in a $1 million savings in annual interest
expense.
OPERATIONS UPDATE
Surge provided a detailed operations update highlighting the
Company's recent drilling results dated July
21, 2016. Please refer to this release for detailed
operational results in Surge's key operating properties.
FINANCIAL UPDATE
As discussed above, Surge has elected not to change guidance at
this time. The Company will continue to monitor commodity
prices and its ability to drill and pay the dividend within cash
flow during the second half of 2016. Based on the Company's
excellent balance sheet and low-cost structure, management retains
the flexibility to potentially increase Surge's 2016 capital budget
– when crude oil prices firm up above US$50 WTI per barrel for a sustainable
period.
Strong cash flow during the second quarter allowed the Company
to accelerate its low-risk development drilling program, and to
capitalize on a period of historically low service costs, while
maintaining lower debt levels. The Company remains well
positioned to accelerate production growth into 2017 as volumes
from Surge's successful drilling program will support higher cash
flow in the second half of the year.
Funds flow in the quarter was positively impacted by a prior
period adjustment to operating expenses, and a reduction in
Alberta Crown royalties relating to
an adjustment of Surge's 2015 Gas Cost Allowance ("GCA").
HEDGING UPDATE
Surge intends to maintain a hedging policy that allows for
management to opportunistically add volumes concurrent with a
disciplined approach designed to ensure a minimum hedge level.
Accordingly, the Company executed an additional contract
during the second quarter 2016 as follows:
Commodity
|
Time Frame
|
Volume
|
Value
|
WTI oil collars
(put/call)
|
2H
2017
|
500
bbl/d
|
CAD $60 x
$80.25
|
Surge now has approximately 20 percent of oil volumes hedged via
collars in 2017.
BANK LINE UPDATE
Subsequent to the quarter, Surge closed on the redetermination
of its banking facility. The borrowing base has been renewed
at $250 million. The revolving period
on the entire credit facility expires on May
29, 2017, and the Company's bank line has no non-conforming
portion. The new capacity will provide the Company with
significant liquidity to execute on its business plan while
allowing for substantial savings in stand-by fees.
The Company is also pleased to announce that it retained all
lenders in the syndicate, and also added an additional lender
during the process. The Company is well positioned to add
capacity for future growth.
FINANCIAL AND OPERATING
SUMMARY
|
($000s except per share
amounts)
|
|
|
|
|
|
|
|
|
|
Three Months
Ended
|
Six Months Ended June
30,
|
|
|
Jun 30,
2016
|
Mar 31,
2016
|
%
Change
|
2016
|
2015
|
%
Change
|
Financial
highlights
|
|
|
|
|
|
|
|
Oil
sales
|
|
37,523
|
26,166
|
43 %
|
63,689
|
139,724
|
(54)%
|
NGL
sales
|
|
1,367
|
769
|
78 %
|
2,136
|
2,706
|
(21)%
|
Natural gas
sales
|
|
2,053
|
2,211
|
(7)%
|
4,264
|
8,791
|
(51)%
|
Total oil, natural gas, and NGL
revenue
|
|
40,943
|
29,146
|
40 %
|
70,089
|
151,221
|
(54)%
|
Funds from
operations1
|
|
22,063
|
7,491
|
195 %
|
29,554
|
86,562
|
(66)%
|
Per share basic
($)
|
|
0.10
|
0.03
|
233 %
|
0.13
|
0.39
|
(67)%
|
Per share diluted
($)
|
|
0.10
|
0.03
|
233 %
|
0.13
|
0.39
|
(67)%
|
Capital expenditures - petroleum & gas
properties2
|
|
16,810
|
12,873
|
31 %
|
29,683
|
40,769
|
(27)%
|
Capital expenditures - acquisitions &
dispositions2
|
|
—
|
(41,141)
|
nm4
|
(41,141)
|
(460,950)
|
nm
|
Total capital
expenditures2
|
|
16,810
|
(28,268)
|
nm
|
(11,458)
|
420,181
|
nm
|
Net debt at end of
period3
|
|
134,613
|
133,816
|
1 %
|
134,613
|
125,478
|
7 %
|
|
|
|
|
|
|
|
|
Operating
highlights
|
|
|
|
|
|
|
|
Production:
|
|
|
|
|
|
|
|
Oil (bbls per
day)
|
|
8,958
|
9,821
|
(9)%
|
9,389
|
15,315
|
(39)%
|
NGLs (bbls per
day)
|
|
564
|
615
|
(8)%
|
589
|
696
|
(15)%
|
Natural gas (mcf per
day)
|
|
15,959
|
17,829
|
(10)%
|
16,894
|
18,594
|
(9)%
|
Total (boe per day)
(6:1)
|
|
12,182
|
13,408
|
(9)%
|
12,794
|
19,110
|
(33)%
|
Average realized price (excluding
hedges):
|
|
|
|
|
|
|
|
Oil ($ per
bbl)
|
|
46.03
|
29.28
|
57 %
|
37.27
|
50.40
|
(26)%
|
NGL ($ per
bbl)
|
|
26.64
|
13.75
|
94 %
|
19.91
|
21.47
|
(7)%
|
Natural gas ($ per
mcf)
|
|
1.41
|
1.36
|
4 %
|
1.39
|
2.61
|
(47)%
|
|
|
|
|
|
|
|
|
Netback ($ per
boe)
|
|
|
|
|
|
|
|
Oil, natural gas and NGL
sales
|
|
36.94
|
23.89
|
55 %
|
30.10
|
43.72
|
(31)%
|
Realized gain (loss) on commodity
contracts
|
|
3.45
|
3.26
|
nm
|
3.35
|
10.54
|
nm
|
Royalties
|
|
(3.27)
|
(3.14)
|
4 %
|
(3.20)
|
(6.46)
|
(50)%
|
Operating
expenses
|
|
(12.69)
|
(12.27)
|
3 %
|
(12.47)
|
(16.55)
|
(25)%
|
Transportation
expenses
|
|
(1.16)
|
(2.33)
|
(50)%
|
(1.77)
|
(1.43)
|
24 %
|
Operating
netback
|
|
23.27
|
9.41
|
147 %
|
16.01
|
29.82
|
(46)%
|
G&A
expense
|
|
(1.98)
|
(1.96)
|
1 %
|
(1.97)
|
(1.91)
|
3 %
|
Interest
expense
|
|
(1.38)
|
(1.32)
|
5 %
|
(1.35)
|
(2.88)
|
(53)%
|
Corporate
netback
|
|
19.91
|
6.13
|
225 %
|
12.69
|
25.03
|
(49)%
|
|
|
|
|
|
|
|
|
Common shares outstanding, end of
period
|
|
221,047
|
221,047
|
—%
|
221,047
|
221,147
|
—%
|
Weighted average basic shares
outstanding
|
|
221,047
|
221,042
|
— %
|
221,045
|
220,174
|
— %
|
Stock option
dilution
|
|
—
|
—
|
nm
|
—
|
—
|
nm
|
Weighted average diluted shares
outstanding
|
|
221,047
|
221,042
|
— %
|
221,045
|
220,174
|
— %
|
|
|
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".
|
OUTLOOK
Surge looks forward to realizing the full impact of its
accelerated drilling program in the near future. The Company
remains well positioned both financially and operationally to add a
growth component to shareholder return in the near
future.
As set forth in Surge's press release dated July 21, 2016, as a result of calculated actions
taken by management over the last 21 months, Surge will be one of
the few in its peer group in Canada 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.
Today Surge has the following corporate fundamentals:
- Reserves: 80.7 mmboe Total Proven plus Probable
(77 percent oil and liquids)
- Reserve Life Index: 17 years
- Decline: less than 23 percent (including 2016 drilling
program)
- Production: >13,000 boepd (78 percent oil and
liquids)
- Net Debt: $135 million as
at June 30, 2016
- Forward Debt to Cash flow: 1.53 times (based on
annualized Q2 2016 cashflow)
- Bank line: $250 million
(54 percent drawn)
- Drilling Inventory: 747/727 (gross/net) total locations;
202 net locations booked
- NAV: $4.79 per share
(Sproule external engineering report)
FINANCIAL STATEMENTS AND ACCOMPANYING MDA:
Surge has
filed with Canadian securities regulatory authorities its financial
statements and accompanying MD&A for the three and six months
ended June 30th, 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 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 June 30, 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.
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 525 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.