CALGARY, Sept. 5, 2018 /CNW/ - Surge Energy Inc. ("Surge"
or the "Company") (TSX: SGY) and Mount Bastion Oil and Gas Corp.
("Mount Bastion" or "MBOG") have announced that they have
entered into an arrangement agreement (the "Arrangement
Agreement"), pursuant to which Surge has agreed to acquire all of
the issued and outstanding common shares of MBOG ("MBOG Shares") by
way of a statutory arrangement (the "Transaction").
The Transaction is 11 percent accretive to Surge's forecast 2019
adjusted funds flow per share1, and adds over 600
million barrels of net internally estimated light original oil in
place ("OOIP"2), concentrated reserves, production,
land, and operations. The addition of the MBOG assets (the "MBOG
Assets") increases Surge's operating netback per boe by 12 percent,
and is forecast to add over $85
million of net operating income1 in 2019.
Surge anticipates increasing its dividend by 25 percent, from
$0.10 per share annually
($0.00833 per month) to $0.125 per share annually ($0.0104 per month), while improving Surge's
all-in payout ratio from 89 percent to 87 percent. Any dividend
increase will be subject to the approval of Surge's Board of
Directors with consideration given to the business environment upon
closing of the Transaction.
The MBOG Assets include 5,500 boepd (98 percent liquids) of
operated, light oil production from the structural reef complexes
within the geological Beaverhill Lake Group - with a corporate
decline of 23 percent. The Transaction results in a 22,500 boepd
(85 percent oil-weighted), light and medium gravity, intermediate,
growth and dividend paying company. The MBOG Assets are located
near Surge's core, waterflooded, light oil pools at Nipisi and
Nipisi South in Western
Alberta.
TRANSACTION HIGHLIGHTS
The Transaction has the following key benefits to Surge
shareholders:
- 11 percent accretive to Surge's forecast 2019 adjusted funds
flow per share;
- Increases oil and liquids weighting from 81 percent to 85
percent;
- Increases Surge's light oil weighting to 55 percent;
- Increases Surge's operating netback by 12 percent to over
$31 per boe3;
- Lowers Surge's corporate decline to below 24 percent;
- Surge's all-in payout ratio1 improves to 87 percent
from 89 percent, after accounting for the anticipated 25 percent
increase to the annual dividend;
- Adds over 600 million barrels of net combined internally
estimated OOIP under management; and
- Increases Surge's December 31,
2017 independently engineered net asset value (Sproule) from
$6.06 per share to an estimated
$6.52 per share4.
___________________________
|
1 Adjusted funds
flow, adjusted funds flow per share, net operating income, and
all-in payout ratio are non-IFRS measures. See the Non-IFRS
Measures section in this press release.
|
2 Original Oil in
Place (OOIP) is the equivalent to Discovered Petroleum Initially In
Place (DPIIP) for the purposes of this press release. "Internally
estimated" means an estimate that is derived by Surge's internal
APEGA certified Engineers and Geologists (who are also Qualified
Reserve Evaluators) and prepared in accordance with National
Instrument 51-101.
|
3 Based on pricing
averaging as follows: US$65.00WTI/bbl; CAD$86.67WTI/bbl; EDM
CAD$77.33/bbl; WCS CAD $60.00/bbl; AECO $1.95/mcf
|
Paul Colborne, President and CEO
of Surge stated: "We believe that this Transaction is an exciting
opportunity for both Surge and MBOG shareholders. Shareholders in
the combined Company will participate in the newest, intermediate
crude oil, growth and dividend paying company in Canada, while benefitting from Surge's
exciting growth opportunities, our top tier all-in payout ratio,
and Surge's excellent balance sheet; together with Mount Bastion's
light oil netbacks, and its long life asset base".
The Transaction will be funded through a combination of cash,
common shares of Surge, and the assumption of positive working
capital from MBOG, structured to minimize dilution to Surge
shareholders while improving Surge's balance sheet. The cash
portion of the Transaction will be funded from the projected,
revised credit facility and does not require any external
financing.
The Company estimates that Q4 2019 net debt to annualized
adjusted funds flow ratio will be 1.62 times. Surge estimates bank
debt for the combined entity of $390
million at closing on a projected bank line of $525 million. The Company estimates that it will
have approximately $135 million of
undrawn credit avaibility at closing. All of the directors and
officers of MBOG and its largest shareholder, collectively
representing approximately 70 percent of the outstanding MBOG
Shares, have entered into support and lock-up agreements to vote in
favor of the Transaction and have agreed to certain escrow
agreements with respect to any Surge Shares received from the
Transaction for a period of nine months following the completion of
the Transaction, subject to certain exceptions.
PROFORMA HIGHLIGHTS
Operational platform to continue to execute on sustainable
growth plus income model:
- Over 2.4 billion barrels of net combined, internally estimated,
conventional OOIP - with a 6.9 percent recovery factor to
date;
- Combined proven plus probable year end 2017 reserves of over
120 million boe (90 percent oil);
- 22,500 boepd light and medium gravity oil producer (85 percent
oil and liquids weighted);
- Combined forecasted 2019 adjusted funds flow of $230 million;
- Corporate base decline of less than 24 percent;
- Development drilling upside: >800 locations5
(internally estimated); provides drilling inventory of more than 10
years; and
- >14 year reserve life index (proved plus probable).
___________________________
|
4 Based on the
independently evaluated total proved plus probable value presented
in the Surge December 31, 2017 reserve report, and the Mount
Bastion December 31, 2017 reserve report titled "Evaluation of the
P&NG Reserves of Mount Bastion Oil & Gas Corp. (as of
December 31, 2017) for Surge Energy Inc. using Surge Energy Inc.'s
Development Plan", dated August 31, 2018.
|
5 See Drilling
Locations section of this press release.
|
Financial platform to deliver low to mid double digit, all-in
annual per share returns:
- Proforma operating netbacks of over $31 per boe at US $65 WTI per bbl;
- Forecasted full cycle corporate capital efficiencies of less
than $25,000 per flowing boepd;
- Anticipated annual return components to include five to six
percent growth in production per share, five percent dividend
yield, and four to five percent free adjusted funds flow
yield6 - for an estimated total annual shareholder
return of approximately 15 percent;
- Liquidity – in excess of $135
million in undrawn capacity forecast on the expected
combined bank line of $525
million;
- Post-closing, Surge estimates that the Company will have
approximately $31 million of free
adjusted funds flow in 2019 (i.e. over and above exploration and
development capital expenditures and the anticipated, upwardly
revised dividend) at US $65 WTI crude
oil prices.
TRANSACTION METRICS
The Transaction has the following key characteristics:
Purchase
Price
|
$320
million
|
Current
Production
|
5,500 boepd (98% light
oil)
|
Base Production
Decline
|
23%
|
Proved plus probable
reserves1
|
25 MMboe (98%
oil)
|
Proved plus probable
RLI
|
12.5 years
|
2019 estimated
operating netback2
|
>
$42/boe
|
Liability Management
Rating ("LMR")
|
2.71
|
Notes:
|
1: Based upon
Sproule's reserve report titled "Evaluation of the P&NG
Reserves of Mount Bastion Oil & Gas Corp. (As of December 31,
2017) for Surge Energy Inc. Using Surge Energy Inc.'s Development
Plan", dated August 31, 2018.
|
2: Based on 2018
pricing averaging as follows: US$65.00WTI/bbl; CAD$86.67WTI/bbl;
EDM CAD$77.33/bbl; WCS CAD $60.00/bbl; AECO $1.95/mcf
|
The Transaction metrics are as follows:
2019 Net operating
income multiple
|
3.8x
|
Production
|
$58,182 /
boepd
|
Proved plus probable
reserves
|
$12.80 /
boe
|
Proved plus probable
Recycle Ratio[7]
|
> 3.2x
|
___________________________
|
6 Free adjusted funds
flow yield is calculated as free adjusted funds flow divided by the
current number of basic shares outstanding. The resulting
number is then divided by the current share price.
|
7 Recycle ratio is
calculated as operating netback of $42/boe divided by the cost of
proved plus probably reserves of $12.80/boe.
|
TRANSACTION DETAILS
The aggregate purchase price payable by Surge under the
Transaction will be $320 million, to
be paid, at the election of each holder of MBOG Shares, (i) in
cash; (ii) common shares of Surge ("Surge Share"); or (iii)
a combination of cash and Surge Shares as elected by such holder,
subject in each case to proration, such that the aggregate
consideration to be paid to holders of MBOG Shares will be
$145 million in cash and 75,431,034
Surge Shares.
In addition, Surge anticipates that it will assume approximately
$3 million of MBOG positive working
capital8 (after transaction costs) upon completion
of the Transaction.
All of the directors and officers of MBOG as well as MBOG's
largest shareholder, collectively holding approximately 70 percent
of the outstanding MBOG Shares, have entered into support and
lock-up agreements pursuant to which they have agreed to vote their
MBOG Shares in favor of the Transaction and have agreed to certain
escrow agreements with respect to any Surge Shares received from
the Transaction for a period of nine months following the
completion of the Transaction, subject to certain exceptions.
__________________________
|
8 Working capital is calculated as
current assets minus current liabilities, including transaction
costs.
|
STRATEGIC RATIONALE FOR TRANSACTION
Surge management has positioned the Company over the last three
years of the crude oil price downturn to be able to identify and
acquire complementary, large OOIP crude oil assets - as oil prices
recover.
The Transaction is consistent with Surge's defined business
model of acquiring operated, light and medium gravity crude oil
reservoirs, with large OOIP and low recovery factors. MBOG's Assets
include 5,500 boepd of which 98 percent is light crude oil
production, located in Surge's NW
Alberta core area, with an estimated 23 percent base
decline. The business combination will result in a new intermediate
company with over 22,500 boepd (85 percent oil and liquids), and
annual base decline rate of less than 24 percent.
Production from the MBOG Assets is primarily from the structural
reef complexes of the Beaverhill Lake Group – specifically the
Slave Point formation. These structural reef build-ups (as opposed
to the lower reservoir quality found in the regional Slave Point
carbonate platform) have pay thicknesses of up to 22 meters, and
porosity and permeability of up to 15 percent and 100 milliDarcy's
respectively. The MBOG Assets have an internally estimated net OOIP
of over 600 million barrels, with a low 6.6 percent recovery factor
to date.
The MBOG Assets are focused in NW
Alberta, located near Surge's core, waterflooded, light oil
pools at Nipisi and Nipisi South. The MBOG Assets are over 90
percent operated, with over 80 percent working interests, and
possess a reserve life index of 12.5 years (proved plus probable).
In addition, a portion of the MBOG Assets are under waterflood.
Approximately 3,500 boepd of the MBOG Assets daily light oil
production (i.e. greater than 55 percent) is generated from the 91
percent working interest, operated Sawn asset. The Sawn asset is a
structural reef complex containing 208 million barrels of (net)
internally estimated OOIP; it has a 6.6 percent recovery factor to
date; and it is under waterflood.
Sawn currently has a 25 percent decline, a 15 percent royalty,
and a netback of $45 per barrel at
prices of US $65 WTI per barrel.
Surge management recognizes significant additional upside at Sawn
through full implementation of the waterflood across the entire
field, together with infill and step-out development drilling.
Post-closing, Surge will have an internally estimated net
OOIP of over 2.4 billion barrels of operated light and medium
gravity crude oil under the Company's ownership and management. The
current recovery factor on the combined internally estimated 2.4
billion barrels of net OOIP is approximately 6.9 percent, with over
800 internally estimated development drilling locations in
inventory (>10 year drilling inventory). The MBOG Assets have
extensive infrastructure in place to facilitate further development
drilling and waterflood.
OUTLOOK; PROFORMA SURGE
Growth Strategy
Upon the completion of the Transaction, Surge's projected 2018
production exit rate is now expected to increase to more than
22,500 boepd (85 percent crude oil and liquids). Post-closing,
Surge's corporate decline is expected to drop below 24 percent. The
Company will have an estimated $31
million of free adjusted funds flow in 2019, over and above
its annual exploration and development capital expenditure program
and the upwardly revised dividend.
Surge management anticipate capital efficiencies to average less
than $25,000 per flowing boepd across
the proforma asset base.
In 2019 Surge will continue to focus growth capital towards high
quality, large OOIP, light and medium gravity crude oil reservoirs.
Management's primary goals for Surge include achieving five to six
percent organic annual per share growth in reserves, production,
and adjusted funds flow, maintaining and growing a sustainable
dividend, continued debt reduction from the Company's free adjusted
funds flow, together with the pursuit of high quality, accretive
acquisitions.
Surge will also continue to maintain balance sheet flexibility
with an effective risk management program that looks to protect the
Company's capital program and dividend, and to pursue the Company's
waterflood program. Management will continue to evaluate hedging up
to 50 percent of Surge's net after royalty crude oil production for
periods of up to 18 months.
An integral part of Surge's ongoing business strategy is to
increase oil reserves and recovery factors throughout the Company's
extensive crude oil portfolio through the continued implementation
of waterflood projects, lowering corporate decline rates and
maximizing shareholder value. The Company will also pursue
continued, year over year increases in recovery factors from its
portfolio of conventional light and medium crude oil assets through
continued development activities, including in-fill and step out
development drilling.
Dividend
Surge's dividend policy will continue to target a dividend
payout ratio of 20 to 30 percent, and an all-in payout ratio in the
range of 80 to 90 percent. Additional free adjusted funds flow
beyond Surge's targeted five to six percent annual production
growth will be allocated to an expanded capital program, debt
repayment, dividend increases, or share buybacks.
Surge anticipates increasing its dividend by 25 percent, from
$0.10 per share annually
($0.00833 per month) to $0.125 per share annually ($0.0104 per month), while improving Surge's
all-in payout ratio from 89 percent to 87 percent. Any dividend
increase will be subject to the approval of Surge's Board of
Directors with consideration given to the business environment upon
closing of the Transaction. This increase represents a dividend
payout ratio of 17 percent of estimated 2019 adjusted funds flow at
US $65 WTI crude oil
pricing9.
The Transaction improves Surge's all-in payout ratio from
approximately 89 percent to 87 percent. Post-closing, Surge
estimates that the Company will have approximately $31 million of free adjusted funds flow (above
exploration and development capital expenditures and Surge's
upwardly revised dividend) at a crude oil price of US $65 WTI per bbl in 2019.
___________________________
|
9 Dividend payout
ratio of 17 percent is calculated as follows: $39 million in
estimated 2019 annual dividend expense divided by $230 million of
forecast 2019 adjusted funds flow.
|
Upward Revision to 2018 Exit Rate & Preliminary 2019
Guidance
The following is the Company's increased guidance for Surge's
2018 production exit rate target, as well as, preliminary guidance
for 2019 (after giving effect to the
Transaction):
Upwardly Revised
Guidance
|
Proforma the
Transaction
@ US $65
WTI
|
Proforma the
Transaction
@ US $75
WTI
|
Exit 2018 production
(boepd)
|
22,500
|
22,500
|
Average 2019
production (boepd)
|
23,000
|
23,000
|
Exit 2019 production
(boepd)
|
23,500
|
23,500
|
% oil and
NGL's
|
85%
|
85%
|
2019 Adjusted Funds
flow ($MM)
|
$230
|
$287
|
Per basic share
($/sh)
|
$0.74
|
$0.93
|
2019 Exploration and
Development Capital Expenditures ($MM)
|
$160
|
$160
|
2019 Dividend
($MM)
|
$39
|
$39
|
2019 Free adjusted
funds flow ($MM)
|
$31
|
$88
|
2019 All-in payout
ratio
|
87%
|
69%
|
Q4 2019 Net debt to
annualized adjusted funds flow
|
1.62x
|
1.16x
|
___________________________
|
9 Dividend payout
ratio of 17 percent is calculated as follows: $39 million in
estimated 2019 annual dividend expense divided by $230 million of
forecast 2019 adjusted funds flow.
|
LEGAL TERMS OF THE TRANSACTION
The Transaction is expected to close in October 2018. Completion of the Transaction is
subject to the approval of at least 66 2/3 percent of the MBOG
shareholders and the issuance of Surge Shares to MBOG shareholders
pursuant to the Transaction will be subject to the approval of at
least a simple majority of the Surge shareholders. The meeting of
Surge shareholders is currently expected to be held in mid-October 2018 and, in connection therewith, it
is currently expected that a management information circular and
proxy statement will be sent to Surge shareholders in mid-September 2018. Completion of the Transaction
is also subject to, among other things, the receipt of court
approval and other customary closing conditions.
All of the directors and officers of MBOG as well as MBOG's
largest shareholder, collectively holding approximately 70 percent
of the outstanding MBOG Shares, have entered into support and
lock-up agreements pursuant to which they have agreed to vote their
MBOG Shares in favor of the Transaction and have agreed to certain
escrow agreements with respect to any Surge Shares received from
the Transaction for a period of nine months following the
completion of the Transaction, subject to certain exceptions.
Each of MBOG and Surge has agreed to pay a termination fee of
$10.5 million to the other party in
certain circumstances, including in the case of MBOG, if MBOG
recommends, approves or enters into an agreement with respect to a
superior proposal. MBOG has agreed not to solicit or initiate any
discussions regarding any other acquisition proposals or sale of
material assets. MBOG has also granted Surge a five business day
right to match any superior proposal.
ADVISORS
Macquarie Capital Markets Canada Ltd. is acting as exclusive
financial advisor to Surge with respect to the
Transaction. McCarthy Tétrault LLP is acting as legal advisor
to Surge with respect to the Transaction. GMP FirstEnergy and BMO
Capital Markets have also been appointed strategic advisors to
Surge.
CONFERENCE CALL DETAILS
A conference call hosted by Paul
Colborne, President and CEO of Surge, will be held for the
investment community to discuss the Transaction. Details of the
conference call are as follows:
Date:
|
Thursday, September 6,
2018
|
Time:
|
6:45 am MT (8:45 am
ET)
|
Dial-In:
|
1-888-241-0326 (toll
free)
|
International
Dial-In
|
647-427-3411
|
Conference
ID:
|
7978867
|
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 Transaction, the impact of the Transaction on Surge
and its results and development plans; MBOG and the MBOG Assets;
anticipated Transaction consideration and form thereof; the
expected closing date of the Transaction; mailing of the
information circular related to the Surge shareholder meeting and
the expected timing thereof; the expected timing of the Surge
shareholder meeting; management's expectations with respect to the
working capital of MBOG at closing; Surge's pro-forma operational
and financial platform as a result of the Transaction; anticipated
benefits of the Transaction, including but not limited to increased
operating netbacks and other economies, capital efficiencies,
increased free adjusted funds flow, adjusted funds flow and
adjusted funds flow per share; increases in Surge's oil and liquids
weighting and light oil weighting; Surge's all-in payout ratio;
estimated Q4 net debt to annualized adjusted funds flow ratio;
availability of free cash flow; expected increase to Surge's bank
line post-closing; improvement of payout ratios; increased reserves
and resources other than reserves; increased reserves life index;
increased production exit rate and 2019 estimated production and
growth in production per share, dividend yield, free adjusted funds
flow yield, and estimated total annual shareholder return; forecast
2019 net operating income and 2019 net operating income multiple;
recycle ratios; recovery factors; estimated future drilling
locations and lowering of corporate decline rate; reserve life
index; the anticipated LMR of Surge post-closing; management's
expectations with respect to the development of the Sawn asset and
other MBOG Assets; the fit and efficiencies of the MBOG Assets with
Surge's existing assets; Surge's estimated total net debt
post-closing; Surge's declared focus and primary goals; Surge's
annual exploration and development capital expenditure program;
potential for debt repayment or share buybacks; potential for
continued cost-cutting; management's ability to maintain balance
sheet flexibility; the effectiveness of Surge's risk management
program; expectations of Surge's management with respect to Surge's
waterflood program and results therefrom; and Surge's dividend
policy and the expectations of management with respect to an
increase to Surge's dividend upon completion of the
Transaction.
The guidance for 2019 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 and projected operational 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
financial information for 2019, including 2019 adjusted funds funds
and on a per basic share basis, exploration and development capital
expenditures, 2019 dividend, 2019 free adjusted funds flow, 2019
all-in payout ratio and Q4 2019 net debt to annualized adjusted
funds flow. This press release also contains certain projected
operational information, including 2018 exit production, average
2019 production and % oil and NGLs weighting. The future-oriented
financial information and financial outlooks and projected
operational information contained in this press release have been
approved by management as of the date of this press release.
Readers are cautioned that any such future-oriented financial
information, financial outlooks and projected operational
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 timing of receipt of court,
regulatory and shareholder approvals for the Transaction; the
ability of Surge to execute and realize on the anticipated benefits
of the Transaction; the satisfaction of all conditions for closing
of the Transaction; the availability of capital to pay the cash
portion of the purchase price at closing; 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 geological
characteristics of the MBOG Assets; 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; the ability of Surge to increase its
dividend post-closing; the availability and costs of capital,
labour and services; and the creditworthiness of industry
partners.
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. Completion of the Transaction
could be delayed if parties are unable to obtain the necessary
regulatory, stock exchange, shareholder and court approvals on the
anticipated timeline. The Transaction may not be completed if all
of these approvals are not obtained or some other condition of
closing is not satisfied. Accordingly, there is a risk that the
Transaction will not be completed within the anticipated time or at
all. Certain of these risks are set out in more detail in
Surge's Annual Information Form dated March
14, 2018 and in Surge's MD&A for the period ended
June 30, 2018, 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. Bbl means barrel of oil. NGLs means natural
gas liquids.
Drilling Locations
This press release discloses drilling locations in two
categories: (i) booked locations; and (ii) unbooked locations.
Booked locations are proved locations and probable locations
derived from an internal evaluation using standard practices as
prescribed in the Canadian Oil and Gas Evaluations Handbook and
account for drilling locations that have associated proved and/or
probable reserves, as applicable. Booked locations referenced in
this press release account for all of Surge's Asset Acquisitions
and Divestiture activity up to and including the date of the
subject acquisition, reflecting the bookings that existed (from the
respective 3rd party auditor), as of January 1, 2018. Booked locations referenced for
Mount Bastion corporate acquisition are based upon Sproule's
reserve report titled "Evaluation of the P&NG Reserves of Mount
Bastion Oil & Gas Corp. (as of December
31, 2017) for Surge Energy Inc. using Surge Energy Inc.'s
Development Plan", dated August 31,
2018; this sensitivity run removed 73 gross (54.0 net)
economic locations from Sproule's original 2017 year end reserves,
leaving 67 gross (60.7 net) economic locations booked as of
December 31, 2017.
Unbooked locations are internal estimates based on prospective
acreage and assumptions 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.
Unbooked locations have been identified by Surge's internal APEGA
certified Engineers and Geologists (who are also Qualified Reserve
Evaluators) as an estimation of our multi-year drilling activities
based on evaluation of applicable geologic, seismic, engineering,
production and reserves information. There is no certainty that the
Company will drill all unbooked drilling locations and if drilled
there is no certainty that such locations will result in additional
oil and gas reserves, resources or production. The drilling
locations on which the Company actually drills wells will
ultimately depend upon the availability of capital, regulatory
approvals, seasonal restrictions, oil and natural gas prices,
costs, actual drilling results, additional reservoir information
that is obtained and other factors. While certain of the unbooked
drilling locations have been de-risked by drilling existing wells
in relative close proximity to such unbooked drilling locations,
the majority of other unbooked drilling locations are farther away
from existing wells where management has less information about the
characteristics of the reservoir and therefore there is more
uncertainty whether wells will be drilled in such locations and if
drilled there is more uncertainty that such wells will result in
additional oil and gas reserves, resources or production.
Assuming the January 1, 2018
reference date outlined above, the proforma company discussed in
this press release will have over >800 gross (>800 net)
drilling locations identified herein, of these >500 are unbooked
locations. Of the 378 gross (345 net) booked locations identified
herein 279 gross (258 net) are Proved locations and 95 gross (88
net) are Probable locations.
Non-IFRS Measures
This press release contains non-IFRS measures 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 these measures to analyze the performance,
liquidity and sustainability of the Company and to compare the
results of the Company with others in the industry. Non-IFRS
measures used in this press release are as follows:
- Adjusted funds flows flow and adjusted funds flow per share –
the Company's MD&A for the year ended December 31, 2017 provides the calculation of
adjusted funds flow and what items are added or subtracted from
cash flow from operations to arrive at adjusted funds flow.
Adjusted funds flow per share is calculated by dividing adjusted
funds flow by the weighted average number of shares outstanding for
the period as used in the determination of earnings per share
amounts. Adjusted funds flow should not be viewed as more relevant
to the IFRS measure of cash flow from operations. This measure is
used by management to analyze the cash flow of the Company and it
is used in other metrics to assess liquidity and sustainability of
the dividend.
- All-in payout ratio is calculated using the sum of development
capital plus dividends paid divided by adjusted funds flow.
Development capital is total capital expenditures in the period
excluding acquisitions and proceeds on disposition.
- Free adjusted funds flow is calculated as adjusted funds flow
less development capital and dividends and represents, in dollars,
the excess of adjusted funds flows above development capital and
dividends. Management uses this metric, along with the all-in
payout ratio to assess whether adjusted funds flow is sufficient to
fund the ongoing capital requirements of the Company whilst
servicing the dividend. There is no IFRS equivalent metric to
compare these calculations against.
- Dividend payout ratio is calculated as the dividend for the
respective period divided by adjusted funds flow. The metric is
used by management to analyze the level of dividends currently
being paid on the stock in comparison to the cash being generated
by the underlying business.
- Net debt is calculated as bank debt plus the liability
component of the convertible debentures plus or minus working
capital, however, excluding the fair value of financial contracts
and other long term liabilities. This metric is used by management
to analyze the level of debt in the Company including the impact of
working capital, which varies with timing of settlement of these
balances. Net debt to adjusted funds flow is calculated as net debt
divided by adjusted funds flow for the period. This metric provides
an indication of leverage and the number of years it would take to
repay the net debt based on the level of adjusted funds flow.
- Q4 net debt to annualized adjusted funds flow is calculated by
dividing net debt at the end of the period by adjusted funds flow
for the respective quarter multiplied by four. Similar to net debt
to adjusted funds flow this metric provides an indication of
leverage and the number of years it would take to repay the net
debt, however, it is based on annualizing the adjusted funds flow
from the most recent quarter.
- Net operating income represents revenue net of royalties and
operating, sales and transportation expenses. The Company believes
that net operating income is a useful supplemental measure to
analyze operating performance and provides an indication of the
results generated by the Company's principal business activities
prior to the consideration of other income and expenses.
- Net operating income multiple is calculated as the purchase
price of an acquisition divided by the net operating income from
the related acquisition. With respect to the MBOG Assets, the net
operating income multiple is calculated as follows: Purchase price
of $320 million divided by 2019
forecast net operating income from MBOG Assets of over $85 million. This non-IFRS measure is used by
management to analyze the metrics of an acquisition. The net
operating income multiple is calculated based on forecasted net
operating income. Management does not forecast cash flow from
operations, in part due to fluctuations in working capital, and
hence there is no equivalent IFRS measure.
Additional information relating to 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.