CALGARY, Nov. 9, 2016 /CNW/ - Surge Energy Inc. ("Surge"
or the "Company") (TSX: SGY) announces its operating and financial
results for the quarter ended September 30,
2016.
As world crude oil prices rallied from their February lows, in
late May of 2016 Surge management moved to add a substantial,
organic production per share growth component back into the
Company's growth and dividend business model – all sustainable at
less than current strip pricing for crude oil.
Accordingly, based on continued excellent drilling results at
the Company's Shaunavon, Sparky,
and Valhalla core areas, Surge's
recent 14 well drilling program added over 2,000 boepd (>85
percent oil) for a total capital expenditure of $19.75 million. This successful, low cost
drilling program, combined with ongoing waterflood activities,
allowed Surge to deliver production per share growth in the third
quarter of 2016 of eight percent over the second quarter of
2016.
On this basis, in the third quarter of 2016 Surge production
averaged more than 13,120 boepd (79 percent oil) – which is higher
than the Company's original 2016 production exit rate target of
13,000 boepd.
In addition, on September 6, 2016
Surge management announced an upward revision to the Company's 2016
exit rate target from 13,000 boepd to 13,500 boepd.
THIRD QUARTER HIGHLIGHTS
- Surge's average production (and production per share) increased
eight percent in the third quarter of 2016 to 13,120 boepd, as
compared to an average of 12,182 boepd in the second quarter of
2016;
- Funds flow from operations was $19.1
million in the third quarter ($0.09 per share), up 13 percent over the third
quarter of 2015 at $17.0 million
($0.08 per share);
- Unhedged funds flow per share increased by 39 percent in the
third quarter of 2016, as compared to the third quarter of 2015 -
at similar US$ WTI crude oil prices;
- Operating costs dropped 16 percent in the third quarter of 2016
to $11.27 per boe, as compared to
$13.35 per boe in the third quarter
of 2015;
- Surge achieved an unhedged corporate netback of $17.23 per boe in the quarter, an increase of 44
percent from $11.97 per boe in the
third quarter of 2015;
- Surge achieved a debt to cash flow ratio of 1.84 times
annualized cash flow for the quarter;
- During the third quarter, Surge drilled and completed 13 net
wells (7 Shaunavon and 6 Sparky),
for total drilling and completion capital of $16.1 million. Surge set individual cost
reduction records for both plays, with leading edge drilling and
completion well costs in Shaunavon
of $1 million, and Sparky of
$0.85 million;
- Surge reduced its general and administration expense by 16
percent in the third quarter to $1.66
per boe, as compared to the second quarter of 2016 in which G&A
expense was $1.98 per boe;
- During the third quarter of 2016 the Company reduced interest
expense by seven percent to $1.28 per
boe, as compared to the second quarter of 2016 where interest
expense was $1.38 per boe; and
- On September 6th, Surge released
preliminary 2017 financial guidance. In 2017 the Company plans to
grow production 5 percent per share, and pay its current dividend,
all within cash flow at less than US $50 WTI per barrel pricing.
FINANCIAL AND
OPERATING SUMMARY
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($000s except per
share amounts)
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|
Three Months
Ended
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|
Three Months
Ended
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Sep 30,
2016
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Sep 30,
2015
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%
Change
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Sep 30,
2016
|
Jun 30,
2016
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%
Change
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Financial
highlights
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Oil sales
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40,656
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42,560
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(4)%
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40,656
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37,523
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8 %
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NGL sales
|
1,255
|
650
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93 %
|
1,255
|
1,367
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(8)%
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Natural gas
sales
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3,333
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2,569
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30 %
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3,333
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2,053
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62 %
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Total oil, natural
gas, and NGL revenue
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45,244
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45,779
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(1)%
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45,244
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40,943
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11 %
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Funds from
operations1
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19,138
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17,009
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13
%
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19,138
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22,063
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(13)%
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Per share basic
($)
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0.09
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0.08
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13 %
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0.09
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0.10
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(10)%
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Per share diluted
($)
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0.09
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0.08
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13 %
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0.09
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0.10
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(10)%
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Capital expenditures
- petroleum & gas properties2
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20,764
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17,653
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18 %
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20,764
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16,810
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24 %
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Capital expenditures
- acquisitions & dispositions2
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—
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(3,735)
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nm4
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—
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—
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nm
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Total capital
expenditures2
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20,764
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13,918
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49 %
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20,764
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16,810
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24 %
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Net debt at end of
period3
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141,155
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143,200
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(1)%
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141,155
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134,613
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5 %
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Operating
highlights
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Production:
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Oil (bbls per
day)
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9,807
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10,635
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(8)%
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9,807
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8,958
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9 %
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NGLs (bbls per
day)
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597
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599
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(0)%
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597
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564
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6 %
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Natural gas (mcf per
day)
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16,296
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13,731
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19 %
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16,296
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15,959
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2 %
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Total (boe per day)
(6:1)
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13,120
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13,523
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(3)%
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13,120
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12,182
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8 %
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Average realized
price (excluding hedges):
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Oil ($ per
bbl)
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45.06
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43.50
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4 %
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45.06
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46.03
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(2)%
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NGL ($ per
bbl)
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22.86
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11.67
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96 %
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22.86
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26.64
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(14)%
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Natural gas ($ per
mcf)
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2.22
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2.03
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9 %
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2.22
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1.41
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57 %
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Netback ($ per
boe)
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Oil, natural gas and
NGL sales
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37.48
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36.80
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2 %
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37.48
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36.94
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1 %
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Realized gain (loss)
on commodity contracts
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(1.38)
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1.70
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nm
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(1.38)
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3.45
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nm
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Royalties
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(4.76)
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(6.47)
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(26)%
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(4.76)
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(3.27)
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46 %
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Operating
expenses
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(11.27)
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(13.35)
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(16)%
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(11.27)
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(12.69)
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(11)%
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Transportation
expenses
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(1.28)
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(1.90)
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(33)%
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(1.28)
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(1.16)
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10 %
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Operating
netback
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18.79
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16.78
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12 %
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18.79
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23.27
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(19)%
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G&A
expense
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(1.66)
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(1.76)
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(6)%
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(1.66)
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(1.98)
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(16)%
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Interest
expense
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(1.28)
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(1.35)
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(5)%
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(1.28)
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(1.38)
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(7)%
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Corporate
netback
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15.85
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13.67
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16 %
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15.85
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19.91
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(20)%
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Common shares
outstanding, end of period
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222,278
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220,851
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1 %
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222,278
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221,047
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1 %
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Weighted average
basic shares outstanding
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221,615
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221,259
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— %
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221,615
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221,047
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— %
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Stock option
dilution
|
—
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—
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nm
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—
|
—
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nm
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Weighted average
diluted shares outstanding
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221,615
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221,259
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— %
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221,615
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221,047
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— %
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|
|
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|
|
|
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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.
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2 Please
see capital expenditures discussion in this MD&A.
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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.
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4 The
Company views this change calculation as not meaningful, or
"nm".
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OPERATIONS UPDATE
Shaunavon
All eight Upper Shaunavon wells drilled in the Company's late
second quarter/early third quarter 2016 drilling program ranked in
the top ten producing oil wells in the Province of Saskatchewan for the month of July, 2016.
Through a recent Crown purchase in Surge's Shaunavon core area, the Company has acquired
more than five contiguous sections of 100 percent working interest
land prospective for Upper Shaunavon production. The acquired lands
have an internally estimated OOIP of more than 15 million barrels,
and directly offset some of Surge's top performing Upper Shaunavon
wells drilled to date.
Drilling, fraccing, and on-stream costs at Shaunavon have now dropped below $1.1 million per well, and the Company
anticipates 150,000 barrels of internally estimated ultimate
recovery per well for primary production.
The Company's waterflood project continues to deliver excellent,
measurable results, and Surge recently expanded the Shaunavon waterflood by converting three
additional wells to injection. The Company has now converted a
total of five wells to water injection in the Upper Shaunavon.
Operating expenses at Shaunavon
are now below $7.50 per barrel.
Surge's high quality, shallow Upper Shaunavon sandstone reservoir
is internally estimated to have more than 250 million barrels of
net OOIP - with a one percent recovery factor to date. The Company
has now drilled 37 wells in the Upper Shaunavon.
In the third quarter of 2016, Surge drilled seven wells of a new
14 well program. Two additional wells have been drilled to date in
the fourth quarter, and operations will continue with the drilling
of the remaining five wells by year end. The Company estimates that
it has a drilling inventory of more than 10 years in relation to
this core asset, comprised of more than 175 Upper Shaunavon
drilling locations, and over 75 Lower Shaunavon locations.
Sparky
Surge's recent six well Eyehill Sparky drilling program exceeded
expectations, adding more than 750 boepd (80 percent oil) at a
total cost of less than $6 million
(i.e. drilling, fraccing, and on-stream costs are now below
$1 million per Sparky well). The
Company anticipates 140,000 barrels of internally estimated
ultimate recovery per well at Eyehill for primary production.
As a result of these excellent drilling results, production at
Eyehill has more than doubled from approximately 500 boepd to over
1,250 boepd (80 percent oil). Operating expenses at Eyehill have
subsequently dropped to less than $5.50 per boe.
Surge's waterflood project at Eyehill continues to deliver
excellent, measurable results, with two water injector conversions
to date. The Company has applied to expand the horizontal
waterflood scheme in 2017 under the Alberta Enhanced Hydrocarbon
Recovery Program in order to obtain the applicable waterflood
royalty incentives.
Surge's high quality, shallow Sparky sandstone reservoir at
Eyehill is internally estimated to have more than 125 million gross
(85 million net) barrels of OOIP - with a one percent recovery
factor to date. Surge estimates that there are over 50 net drilling
locations remaining at Eyehill.
Surge plans to drill up to six more Eyehill Sparky wells in late
2016 and early 2017, increasing production to over 1,500 boepd.
The Company estimates it has more than 150 net drilling
locations in its greater Sparky core area – providing a low risk,
10 year drilling inventory.
Valhalla
In the third quarter Surge continued to optimize its core
Valhalla light oil asset in
NW Alberta, installing additional
artificial lift equipment, significantly dropping field pressures
by adding compression, increasing run times, and lowering
processing costs. These optimization activities have substantially
increased netbacks and flattened production declines. Operating
expenses at Valhalla have now
dropped to less than $9.75 per
boe.
Surge's high quality, Doig sandstone reservoir at Valhalla is estimated to have over 140 million
barrels of net OOIP with a recovery factor of only three percent to
date. The Company estimates it has over 45 low risk drilling
locations at Valhalla - providing
an inventory of more than nine years.
As a result of the "early opt-in" under the new Alberta Royalty framework, Surge will now be
drilling a 100 percent working interest well at Valhalla in the fourth quarter of 2016 into
the large northern extension of the Company's operated, light oil
pool.
Surge plans to drill four to five more wells at Valhalla in 2017, including two net wells in
the first quarter.
OUTLOOK – PRODUCTION PER SHARE GROWTH CONTINUES IN
2017
Upward Revision to 2016 Production Exit Rate
Based on continued excellent development drilling results at the
Company's three core areas, together with consistent, successful
waterflood results at Shaunavon,
Eyehill, Valhalla North, Wainwright, Silver, Nipisi, Windfall, and
Chip Lake, Surge has already
exceeded management's original 2016 production exit rate target of
13,000 boepd.
Accordingly, as disclosed in the Company's September 6, 2016 press release, Surge has now
revised management's 2016 production exit rate estimate upward, to
more than 13,500 boepd.
2017 Preliminary Guidance
In 2017, at US $50 WTI per barrel
pricing, Surge will deliver five percent production per share
growth, pay its dividend, and generate substantial free cash flow
(i.e. over and above Surge's budgeted 2017 capital expenditure
program, and the Company's current dividend). At these levels Surge
will maintain, a debt to cash flow ratio of less than 1.4 times and
an "all-in" (i.e. capital plus dividend) sustainability ratio of
under 100 percent.
Average production for 2017 is forecast to be 13,650 boepd (81
percent liquids), with an exit rate of 14,150 boepd (82 percent
liquids).
The Company anticipates spending approximately 70 percent of its
preliminary $85 million 2017 capital
expenditure budget on drilling activity. The great majority of
Surge's 2017 drilling activity will be focused towards Surge's
three core areas of Shaunavon,
Sparky and Valhalla.
In the event of commodity prices above the US$50 WTI budget case, Surge management will
evaluate all capital allocation options for the resultant free cash
flow.
Detailed information regarding Surge's preliminary guidance
for 2017 is set forth in the Company's Press Release dated
September 6, 2016.
Positioned for Success
Surge management's stated goal is to be the best positioned
light/medium gravity crude oil growth and dividend paying company
in our peer group in Canada.
Management has been positioning the Company for success at a
lower crude oil price environment for over two years. In the
extended downturn for world crude oil prices, we focused on
creating financial liquidity, balance sheet management, rigorous
cost cutting initiatives, delineation of Surge's high quality,
large OOIP crude oil reservoirs, and the implementation of
successful waterfloods.
Consequently, at strip prices for crude oil, in 2017, Surge can
now grow the Company's production per share aggressively, pay its
current dividend, and generate substantial, incremental, free cash
flow. With a large internally estimated drilling inventory of more
than 10 years, an excellent balance sheet, and a very low cost
structure, the Company is well positioned to deliver continued
future growth in the current commodity price environment.
As a result of our strategic capital allocation decisions, and
the Company's excellent operational performance, we believe Surge
will stand out as a top performer in its peer group over the
upcoming quarters.
FINANCIAL STATEMENTS AND ACCOMPANYING MDA:
Surge has filed with Canadian securities regulatory authorities
its financial statements and accompanying MD&A for the three
and nine months ended September 30,
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: Surge's capital expenditure program, including drilling
and development plans and enhance recovery projects and the timing
and results to be expected thereof; 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; management's
expectations with respect to the Company's waterflood program,
results therefrom and quantity of producing assets that will be
placed under waterflood; expectations with respect to the Company's
ability to operate and succeed in the current commodity price
environment; the Company's declared focus and primary goals;
management's forecast of debt to cash flow ratio; guidance with
respect to 2016 exit and 2017 average production and production per
share, cash flow; Surge's dividend; management's estimates
and expectations regarding production efficiencies, drilling
upside, operating costs, growth opportunities and reserves;
management's expectations respecting the impact of recent
acquisitions; the impact of cost savings initiatives; drilling
inventories and locations; production and cash flow per share
growth; and anticipated commodity prices.The guidance for 2016 and
2017 set forth in this press release may be considered to be
future-oriented financial information or a financial outlook for
the purposes of applicable Canadian securities laws. Financial
outlook and future-oriented financial information contained in this
press release are based on assumptions about future events based on
management's assessment of the relevant information currently
available. In particular, this press release contains projected
operational information for 2016 and 2017, including exit
production, total capital, royalties, operating expenses,
transportation expenses, as well as the applicable discount price
to be received on future production. The future-oriented financial
information and financial outlooks contained in this press release
have been approved by management as of the date of this press
release. Readers are cautioned that any such financial outlook and
future-oriented financial information contained herein should not
be used for purposes other than those for which it is disclosed
herein.
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 (1.5 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 542 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 "sustainability" 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. Sustainability is a
comparison of a company's cash outflows (capital investment and
dividends) to its cash inflows (funds flow) and is used by the
Surge to assess the appropriateness of its dividend levels and the
long-term ability to fund its development plans. Sustainability
ratio is calculated using the development capital plus dividends
paid divided by funds flow. 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.