CALGARY, Nov. 7, 2017 /CNW/ - Surge Energy Inc. ("Surge"
or the "Company") (TSX: SGY) announces its operating and financial
results for the quarter ended September 30,
2017.
Surge's low risk, development drilling and waterflood results at
the Company's Sparky, Shaunavon
and Valhalla core areas continue
to exceed managements budgeted expectations. Production averaged
15,007 boepd in Q3 2017 - approximately two percent above budget –
with only a small contribution from Surge's recently announced
Sparky acquisition (please refer to Surge's October 26, 2017 Press Release).
Surge has now revised upward production guidance four times in
the last 17 months – two times organically, and two times in
relation to high quality, long life, Sparky core area
acquisitions.
Detailed information regarding Surge's preliminary guidance
for 2018 is set forth in the Company's Press Release dated
October 26, 2017.
HIGHLIGHTS
Surge's Q3 2017 results include only 23 days of operational and
financial contribution from its recently announced Sparky core area
acquisition.
The Company's Q3 2017 financial and operating highlights are
summarized below:
- Surge's average production increased by 14 percent in Q3 2017
to 15,007 boepd, as compared to an average of 13,120 boepd in Q3
2016;
- Production per share increased by 11 percent in Q3 2017, as
compared to Q3 2016;
- Adjusted funds flow from operations was $23.0 million in Q3 ($0.10 per share), up 20 percent (up 17 percent on
a per share basis) over Q3 2016 at $19.1
million ($0.09 per share);
- Unhedged adjusted funds flow from operations per share
increased by six percent in Q3 2017, as compared to the Q3 2016 -
at similar US$ WTI crude oil prices;
- Increased oil production 16 percent from 9,807 barrels per day
in Q3 2016 to 11,380 barrels per day in Q3 2017;
- On September 8, 2017, Surge
closed a $37.2 million acquisition of
a low decline, high netback, waterflooded, crude oil producing
asset in the Company's Sparky core area in central Alberta; this strategic acquisition also
includes key undeveloped land directly offsetting Surge's core,
operated Sounding Lake and Eyehill assets, and provides Surge with
up to 38 net additional internally estimated low risk, development
drilling locations;
- Subsequent to the end of Q3 2016, Surge completed a 3D seismic
program and successfully drilled its first well at the Company's
core Sparky Betty Lake asset; the
Company estimates that this play has potential for more than 80
million of net OOIP[1] (with an internally estimated recovery
factor of 10 percent on primary, and up to 30 percent with
waterflood), and more than 35 additional internally estimated
drilling locations;
- Subsequent to the end of the quarter on October 26, 2017 Surge announced a $40 million bought deal, five-year, unsecured,
convertible debt financing with a syndicate of underwriters, with a
coupon of 5.75 percent per annum, and a conversion price of
$2.75 per Surge common share;
proforma this strategic financing Surge expects to have
approximately $75 million under its
current credit facility (prior to receiving any lending value
attributed to the acquisition); and
- On October 26, 2017 Surge
announced an upward revision to the Company's 2017 production exit
rate target to 15,850 boepd from 15,150 boepd.
______________________________
1 Original Oil in Place (OOIP) is the equivalent to
Discovered Petroleum Initially In Place (DPIIP) for the purposes of
this press release.
FINANCIAL AND OPERATING SUMMARY
The Q3 2017 financial and operating highlights are summarized
below:
|
|
|
|
Three Months
Ended
|
Nine Months Ended
September 30,
|
|
Sep 30,
2017
|
June 30,
2017
|
%
Change
|
2017
|
2016
|
%
Change
|
Financial
highlights
|
|
|
|
|
|
|
Oil sales
|
50,563
|
54,216
|
(7)%
|
152,973
|
104,345
|
47 %
|
NGL sales
|
2,158
|
2,282
|
(5)%
|
6,680
|
3,391
|
97 %
|
Natural gas
sales
|
3,704
|
4,275
|
(13)%
|
11,995
|
7,597
|
58 %
|
Total oil, natural
gas, and NGL revenue
|
56,425
|
60,773
|
(7)%
|
171,648
|
115,333
|
49 %
|
Adjusted funds from
operations2
|
22,985
|
27,018
|
(15)%
|
71,643
|
48,692
|
47 %
|
Per share basic
($)
|
0.10
|
0.12
|
(17)%
|
0.32
|
0.22
|
45 %
|
Capital expenditures
- petroleum & gas properties3
|
26,652
|
15,064
|
77 %
|
75,757
|
50,447
|
50 %
|
Capital expenditures
- acquisitions & dispositions3
|
36,650
|
35,716
|
nm(5)
|
72,097
|
(41,141)
|
nm
|
Total capital
expenditures3
|
63,302
|
50,780
|
nm
|
147,854
|
9,306
|
nm
|
Net debt at end of
period4
|
246,398
|
208,061
|
18 %
|
246,398
|
141,155
|
75 %
|
|
|
|
|
|
|
|
Operating
highlights
|
|
|
|
|
|
|
Production:
|
|
|
|
|
|
|
Oil (bbls per
day)
|
11,380
|
11,522
|
(1)%
|
11,071
|
9,529
|
16 %
|
NGLs (bbls per
day)
|
627
|
678
|
(8)%
|
663
|
592
|
12 %
|
Natural gas (mcf per
day)
|
17,997
|
17,547
|
3 %
|
17,618
|
16,693
|
6 %
|
Total (boe per day)
(6:1)
|
15,007
|
15,125
|
(1)%
|
14,670
|
12,903
|
14 %
|
Average realized
price (excluding hedges):
|
|
|
|
|
|
|
Oil ($ per
bbl)
|
48.29
|
51.71
|
(7)%
|
50.62
|
39.96
|
27 %
|
NGL ($ per
bbl)
|
37.42
|
36.99
|
1 %
|
36.92
|
20.91
|
77 %
|
Natural gas ($ per
mcf)
|
2.24
|
2.68
|
(16)%
|
2.49
|
1.66
|
50 %
|
|
|
|
|
|
|
|
Netback ($ per
boe)
|
|
|
|
|
|
|
Oil, natural gas and
NGL sales
|
40.87
|
44.16
|
(7)%
|
42.86
|
32.62
|
31 %
|
Realized gain (loss)
on commodity contracts
|
0.12
|
(0.75)
|
nm
|
(0.71)
|
1.74
|
nm
|
Royalties
|
(5.27)
|
(5.58)
|
(6)%
|
(5.49)
|
(3.73)
|
47 %
|
Operating
expenses
|
(13.73)
|
(12.98)
|
6 %
|
(13.54)
|
(12.06)
|
12 %
|
Transportation
expenses
|
(1.40)
|
(1.48)
|
(5)%
|
(1.48)
|
(1.60)
|
(8)%
|
Operating
netback
|
20.59
|
23.37
|
(12)%
|
21.64
|
16.97
|
28 %
|
G&A
expense
|
(1.94)
|
(1.95)
|
(1)%
|
(1.94)
|
(1.87)
|
4 %
|
Interest
expense
|
(2.01)
|
(1.79)
|
12 %
|
(1.81)
|
(1.32)
|
37 %
|
Corporate
netback
|
16.64
|
19.63
|
(15)%
|
17.89
|
13.78
|
30 %
|
|
|
|
|
|
|
|
Common shares
outstanding, end of period
|
232,920
|
225,766
|
3 %
|
232,920
|
222,278
|
5 %
|
Weighted average
basic shares outstanding
|
228,309
|
225,766
|
1 %
|
226,623
|
221,236
|
2 %
|
Stock option
dilution
|
—
|
3,790
|
nm
|
6,357
|
—
|
nm
|
Weighted average
diluted shares outstanding
|
228,309
|
229,556
|
(1)%
|
232,980
|
221,236
|
5 %
|
|
|
2
|
Management uses
adjusted 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.
Adjusted 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.
|
3
|
Please see capital
expenditures discussion in the MD&A.
|
4
|
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.
|
5
|
The Company views
this change calculation as not meaningful, or "nm".
|
OPERATIONAL MOMENTUM CONTINUES - HIGHLIGHTS
Surge's low risk, development drilling and waterflood results at
the Company's Sparky, Shaunavon
and Valhalla core areas continue
to exceed management's budgeted expectations. Production averaged
15,007 boepd in Q3 2017 - approximately two percent above budget –
with only a small contribution from Surge's recent Sparky
acquisition.
In Q3 2017 Surge executed an active drilling program with total
capital expenditures of $26.7 million
(including corporate G&A), which included the drilling of 13
wells (11.5 net) in the Company's three core operating areas –
together with associated capex for infrastructure, land and
seismic. Surge achieved a 100 percent success rate for the
Company's Q3 2017 drilling program.
With crude oil prices dropping below US$45 WTI per barrel in July, from a disciplined
capital allocation perspective Surge strategically moved to execute
the Company's Q3 2017 drilling program utilizing one-rig (rather
than the two-rig program initially budgeted). This provides Surge
with greater flexibility in terms of the timing of spending capital
throughout the second half of 2017.
Operational highlights from Q3 2017 are summarized below:
Sparky – Conventional Resource Growth Engine:
- Surge's internally estimated net original oil in place ("OOIP")
for its core, operated Eyehill asset have now increased by more
than 40 percent to 145 million barrels of internally estimated OOIP
net to the Company (greater than 190 million barrels internally
estimated OOIP gross); Surge now has more than 70 net internally
estimated drilling locations remaining in inventory at Eyehill.
- Production from Surge's Sparky core area has now increased by
3,500 boepd (123 percent) over the last 18 months, from 2,850 boepd
to over 6,350 boepd today.
- Drilling and waterflood results at Eyehill have exceeded
expectations – providing both excellent internal rates of return
("IRR's"), and very strong, long-term, high profit to investment
ratios ("PIR's").
- In Q3 2017 Surge successfully drilled two development wells at
Eyehill on lands newly acquired pursuant to the Company's
April 12, 2017 Sparky core area
acquisition.
- Operating costs at Surge's 29○ API pool at Eyehill
are less than $4.95 per boe, and
current netbacks are over $34 per
boe.
- In early Q4 2017 Surge converted two additional Eyehill Sparky
wells to injection – effectively doubling the Company's area under
injection; four additional injectors are planned for 2018.
- In the last six months, Surge has added over 90 internally
estimated, low risk, development drilling locations in the
Company's Sparky core area through Crown sales, strategic
acquisitions, and swap transactions.
- Surge completed a 3D seismic program over its nine section
block of land (100 percent working interest) at Betty Lake in the
Sparky core area.
- Subsequent to Q3 2017, the Company successfully drilled and
completed an exciting Sparky well at Betty Lake - management
internally estimates more than 80 million barrels of net OOIP at
Betty Lake (with expected recovery factors of 10 percent on
primary, and up to 30 percent with waterflood) - providing more
than 35 additional internally estimated locations. This well has
been completed, and will be brought onstream in November, 2017.
- In Q3 2017, Surge also successfully drilled and completed a
mile long "step-out" well at the Company's core, operated Provost
asset – extending Surge's large, 45 million net internally
estimated OOIP pool to the southwest; Surge estimates expected
recovery factors at Provost of 10 percent on primary, and up to to
30 percent with waterflood. This well is producing above Surge's
internal Sparky type-curve.
- Subsequent to the end of Q3 2017, Surge completed a swap
transaction, acquiring 1.5 sections of highly prospective lands at
Provost - adding up to 12 additional internally estimated Sparky
locations.
- Surge also acquired highly prospective Crown land at its core
operated Eyehill and Lakeview assets (7.5 net sections) during Q3
2017 – adding 22 internally estimated drilling locations.
- The Company now has more than 250 low risk, internally
estimated, development drilling locations in its Sparky core area –
providing an inventory of more than 10 years.
Shaunavon – Waterflood
Results Exceeding Expectations:
- Surge drilled 7 gross (5.5 net) successful development wells at
Shaunavon in Q3 2017.
- Included in these wells is an exciting Upper Shaunavon
"step-out" well more than six kilometers to the north of the
current development. This is a significant pool extension on
Surge's contiguous 59 section land base. Currently the well is
producing at attractive rates three months after being completed,
and has confirmed numerous follow-up locations. The IP 30 for this
well was over 200 bopd – which meets Surge's internal type
curve.
- Surge drilled its first Lower Shaunavon well in three years –
utilizing new monobore and cemented liner technology. This well is
producing at approximately 150 percent of management's internal
type curve expectations, and well above all directly offsetting
Lower Shaunavon producing wells.
- The Company's extensive Upper Shaunavon waterflood in the west
central portion of the Surge's large, 250 million barrel internally
estimated OOIP, operated, crude oil pool continues to exceed
expectations (with expected recovery factors up to 30 percent on
waterflood).
- The nine producing Upper Shaunavon oil wells, which are being
supported by five injectors, are averaging over 85 bopd each after
approximately 22 months of production. At current strip pricing,
the average of these nine producers would reach 'pay-out' in
approximately seven months.
- In Q3 2017 Surge converted four more Upper Shaunavon wells to
injection, three of which are located at the large Upper Shaunavon
pool extension that Surge discovered two years ago on the southern
portion of the Company's land block.
- Current netbacks at Shaunavon
are over $40 per boe.
- Surge has 200 net internally estimated drilling locations at
Shaunavon, comprised of 130 Upper
Shaunavon, and 70 Lower Shaunavon locations – providing a drilling
inventory of more than 10 years.
- Shaunavon wells provides both
excellent IRR's, and high long term PIR's, for both primary
drilling and waterfloods.
Valhalla – Development
Drilling Success Continues
- At Valhalla, in Q3 2017 Surge
drilled a successful 100 percent working interest well at the
Company's operated, light oil asset. This well is meeting
management's type curve expectations.
- In order to ensure the availability of fraccing services in the
fall of 2017, Surge plans to drill one additional (100 percent
working interest) well this fall at Valhalla with plans to frac in late Q4 2017 –
this well had originally been budgeted for drilling in Q1 2018.
- Surge's high quality, 140 million internally estimated OOIP,
Doig sandstone reservoir at Valhalla (with expected recovery factors of 10
to 15 percent on primary), has been independently analyzed by a
number of firms as having some of the best rates of return for
crude oil drilling in Canada;
Valhalla wells also provide strong
PIR's.
- The Company's exciting multi zone, light oil assets at
Valhalla have over 75 internally
estimated locations, providing an inventory of more than 10 years
(including Doig; Montney; Doe
Creek; and Charlie Lake).
Management attributes the Company's continued quarterly
operational outperformance to be a direct result of strategically
allocating growth capital to Surge's high quality, large OOIP,
light and medium gravity, conventional crude oil reservoirs with
low risk development drilling, and successful waterflood
implementation.
OUTLOOK – SUSTAINABLE GROWTH, LONG TERM VALUE, AND
INCOME
Management's goal is to be the best positioned public
light/medium gravity crude oil growth and dividend paying company
in Canada.
In the last 17 months, Surge has now upwardly revised the
Company's production per share estimates four times. As a result of
Surge's successful ongoing drilling and waterflood activities in
the Company's three primary operating areas, together with its
recent core Sparky area asset acquisitions, Surge will now be
delivering production per share growth of more than 24 percent from
Q2 2016 to the end of Q4 2017.
All three of Surge's core operated assets generate excellent
IRR's, and high, long term PIR's - for both drilling and waterflood
activities.
In addition, Surge has increased the Company's dividend per
share by 26.7 percent since the start of 2017, while
maintaining a conservative simple payout ratio.
Accordingly, as a result of management's strategic capital
allocation decisions, rigorous cost cutting initiatives, and
excellent ongoing operational results, we believe that Surge is
well positioned to continue delivering solid per share growth,
while drilling wells that deliver both high IRR's and PIR's, and
paying the Company's dividend, on a go-forward basis.
Detailed information regarding Surge's preliminary guidance
for 2018 is set forth in the Company's Press Release dated
October 26, 2017.
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: the Company's recent acquisitions in the Sparky area
and the impact and anticipated benefits of the acquisitions on the
Company and its results and development plans; the fits of the
recently acquired assets with the Company's existing assets; the
expected closing date of the convertible debenture financing; the
expected terms of the convertible debenture financing; the use of
proceeds from the convertible debenture financing; management's
expectations with respect to the development of its asset base;
production volumes; drilling activities, inventories and locations;
Surge's capital expenditure program, including drilling and
development plans and enhanced recovery projects and the timing and
results to be expected thereof; 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;
2017 exit production and production per share growth; Surge's
dividend; simple payout ratio; operating and corporate netbacks;
management's estimates and expectations regarding capital
expenditures and operating costs, growth opportunities and
strategies, estimated reserves and estimated reserve and resources;
the Company's preliminary 2018 guidance; the availability of
Surge's bank line to fund provide the Company with sufficient
liquidity and financial flexibility; and anticipated commodity
prices; and management's expectations regarding debt levels.
The guidance for 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. 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,
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 and the impact of
transactions on Surge's bank line.
Although Surge believes that the expectations and assumptions on
which the forward-looking statements are based are reasonable,
undue reliance should not be placed on the forward-looking
statements because Surge can give no assurance that they will prove
to be correct. Since forward-looking statements address future
events and conditions, by their very nature they involve inherent
risks and uncertainties. Actual results could differ materially
from those currently anticipated due to a number of factors and
risks. These include, but are not limited to, risks associated with
the oil and gas industry in general (e.g., operational risks in
development, exploration and production; delays or changes in plans
with respect to exploration or development projects or capital
expenditures; the uncertainty of reserve estimates; the uncertainty
of estimates and projections relating to production, costs and
expenses, and health, safety and environmental risks), commodity
price and exchange rate fluctuations and constraint in the
availability of services, adverse weather or break-up conditions,
uncertainties resulting from potential delays or changes in plans
with respect to exploration or development projects or capital
expenditures or failure to obtain 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 15, 2017 and in Surge's
MD&A for the period ended June 30,
2017, 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. "Internally estimated" and similar terms means an
estimate that is derived by Surge's internal APEGA certified
Engineers, and Geologists and prepared in accordance with National
Instrument 51-101 - Standards of Disclosure for Oil and Gas
Activities. All internal estimates contained in this new release
have been prepared effective as of September
8, 2017. IRR means Internal Rate of Return and is the
discount rate required for the net Present Value to equal zero. PIR
means Profit to Investment Ratio and is equal to the present value
of future cashflow divided by the investment capital (a value lower
than 1.0 would indicate that the projects Present Value is less
than the initial investment).
Drilling Inventory
This press release discloses drilling locations that are booked
locations as well as unbooked locations. Proved locations and
probable locations, which are sometimes collectively referred to as
"booked locations", are derived from the independent engineering
evaluation of the oil, natural gas liquids and natural gas reserves
attributable to the Company prepared by Sproule Associates Limited
effective December 31, 2016 and dated
February 17, 2017 (the "Sproule
Report") 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 [525] drilling locations identified herein [349] are unbooked
locations. Of the [176] booked locations identified herein [130]
are proved locations and [46] are probable locations as of the
Sproule Report. 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 "adjusted funds flow",
"adjusted funds flow from operations", "net debt", "operating
netback", "corporate netback" and "payout ratio" 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 "adjusted funds flow 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. Management believes that adjusted funds flow from
operations is a useful supplemental measure as it provides an
indication of the results generated by the Company's principal
business activities before the consideration of how those
activities are financed or how the results are taxed.
Management defines net debt as outstanding bank debt plus or minus
working capital, excluding the fair value of financial contracts
and other current obligations. Operating netback denotes
total sales less royalty expenses, and operating and transportation
costs calculated on a per boe basis. Corporate netback
denotes operating netback less general and administrative, interest
and financing expense, exploration expense plus interest income on
a per boe basis. Surge considers corporate netback as an
important measure to evaluate its overall corporate
performance. Payout ratio is calculated on a percentage basis
as dividends declared divided by adjusted funds flow from
operations. Payout ratio is used by management to monitor the
dividend policy and the amount of adjusted funds flow from
operations retained by the Company for capital reinvestment.
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.