CALGARY, Jan. 14, 2019 /CNW/ - Surge Energy Inc.
("Surge" or the "Company") (TSX: SGY) announces that its Board of
Directors has formally approved the Company's 2019 capital budget,
production and operation guidance. Surge's 2019 budget is
consistent with its stated goal of delivering consistent
shareholder returns through disciplined per share growth, as well
as a sustainable dividend.
2019 GUIDANCE; SUSTAINABLE PRODUCTION WITH FLEXIBILITY TO
GROW
Given the recent extreme volatility in both West Texas
Intermediate ("WTI") crude oil prices, and Canadian crude oil
differentials, Surge has reduced its previously-announced
preliminary 2019 capital budget from $160
million to $135 million. This
reduction provides substantial flexibility to react to changing
commodity prices, while allowing the Company to continue to deliver
its sustainable dividend to shareholders. Surge's first half 2019
capital budget targets an all-in payout ratio1 of less
than 100 percent at current strip commodity prices2.
The Company's 2019 capital budget will be focused on the
continued development of its extensive portfolio of low-risk,
large-OOIP3, light and medium gravity crude oil assets.
Surge will execute this plan, while maintaining the Company's low
23 percent corporate decline rate, and Surge's estimated
$130 million4 of
credit availability. On the Company's approved 2019 capital program
of $135 million, Surge expects to
deliver more than 20 percent growth in average production over
2018, with an average production rate of 22,000 boepd for 2019.
Surge will continue to monitor the impact of Canadian crude oil
prices, the Alberta government
production curtailments, as well as the advancement of export
pipelines, and will be prepared to adjust the Company's 2H 2019
capital program, as required.
Surge's 2H 2019 capital spending forecast has further
flexibility to be increased by an additional $25 million of exploration and development
capital, if the outlook for Canadian crude oil pricing and egress
improves. The decision to spend this incremental capital will be
made by Surge's Board of Directors prior to the end of Q2 2019. The
additional capital would allow Surge to achieve a five percent exit
growth rate for the year, exiting 2019 at over 23,000 boepd.
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|
1 This is
a capital management measure which is defined in the Non-GAAP
Financial Measures and Capital Management Measures section of this
document
2 Strip pricing reflects the following for January
through June, 2019: US$52 WTI; 0.75 CAD/USD FX; US$15 WCS
differential; US $6.75 EDM differential
3 See Reserves Data in the Forward Looking Statement
section of this document
4 Calculated as follows: $550 million credit
facility less $420 million in estimated bank debt as of December
31, 2018
|
2019 CAPITAL EXPENDITURE DETAILS
Capital
Category
|
2019
Total
|
Drilling and
completions
|
$100
million
|
Facilities, equipment
and pipelines
|
$25
million
|
Other (land, seismic,
G&A)
|
$10
million
|
Total exploration
and development capital
|
$135
million
|
PRODUCTION AND COST GUIDANCE
2019e Average
Production
|
22,000 boepd (84%
liquids)
|
2019e Exit
Production*
|
22,000 boepd (84%
liquids)
|
2019e Operating
Costs
|
$15.45-$15.95 per
boe
|
2019e
Transportation Costs
|
$1.50-$1.75 per
boe
|
2019e General
& Administrative Costs
|
$1.75-$1.90 per
boe
|
*Note:
Exit 2019 production growth would increase by five
percent if the Company elects to increase its total 2019 capital
budget by $25 million, and add an estimated 1,000 boepd of
production in Q4 2019
|
OPERATIONAL HIGHLIGHTS
During the fourth quarter of 2018, the Company drilled 14 (net)
wells distributed across Surge's four core areas. Eight (net)
of these wells were completed in Q4 2018, while the remainder will
be coming on production early in Q1 2019.
Of note, the Company drilled and rig released its first two
light oil wells in the newly acquired Greater Sawn area. In
the Sparky core area, Surge drilled its first infill horizontal
well in the operated Sparky MM pool. This well was in close
proximity to multiple legacy vertical producers, and is currently
onstream at 130 boepd after 30 days. This exciting result further
supports Surge's large Sparky core area drilling inventory of over
400 (net) internally estimated drilling locations5.
With the significant decline in commodity prices in Q4 2018, the
Company has taken proactive measures to manage its assets and
maximize cash flow from operating activities. As such,
approximately 600 boepd of production has been restricted due to
individual well economics, or delayed maintenance activities. These
restrictions are expected to be in place until commodity prices
recover to normalized levels.
______________________________
|
5 See
Drilling Locations in the Forward Looking Statement section of this
document. Of the 400 net internally estimated drilling locations 97
net locations are booked
|
2019 OUTLOOK - SUSTAINABLE GROWTH, LONG TERM VALUE,
INCOME
Management's stated goal is to be the best positioned
light/medium gravity crude oil growth and dividend paying public
company in our peer group in Canada.
Over the last two and a half years Surge has continued to build
and maintain the Company's track record, delivering:
- consistent successful drilling and waterflood results;
- timely and accretive core area acquisitions;
- increased production over the last 10 financial quarters by
more than 80 percent (84 percent oil and NGL's);
- increased cash flow from operating activities per share by over
125 percent; and
- increased Surge's dividend three times by a cumulative 33
percent, while maintaining a dividend payout
ratio6 of under 20 percent.
On a very positive note, following the completion of
several large refinery turn-arounds in the US refining complex in
late 2018, significant increases in crude-by-rail exports from
Canada, as well as the
Alberta government curtailment
order, Canadian crude oil prices have increased dramatically in the
last few weeks. Western Canadian Select crude oil prices have now
increased by over 550 percent, rising from an average of
C$8.00 per barrel in December 2018, to over C$55/bbl7 recently.
Furthermore, following the December
2018 OPEC production cuts of 1.2 million barrels per day,
WTI crude oil prices have shown significant strength of late;
rising over US$9 per barrel, up from
low of US$42.46 per barrel in
December 2018 to over US$52 per barrel currently.
During these times of volatile commodity prices, the Company
continues to focus on sustainability, balance sheet management, and
cost controls to deliver consistent returns to Surge shareholders.
Surge will also continue to manage its asset base in order to be
positioned for growth when commodity prices recover to normalized
levels.
FORWARD LOOKING STATEMENTS:
More particularly, this press release contains statements
concerning: Surge's stated goals, objectives and focus; Surge's
2019 exploration and development capital expenditure program and
budget (the "2019 Budget"); the ability of Surge to execute
the 2019 Budget; the potential to increase Surge's 2H 2019
exploration and development capital by up to $25 million and the anticipated increase in
production resulting therefrom; Surge's dividend payout ratio and
targeted all-in payout ratio; the sustainability of Surge's
dividend; anticipated 2019 guidance, including with respect to
average and exit production rates and operating, transportation and
general and administrative costs; Surge's ongoing review of
commodity prices and the ability of Surge to adjust to any changes
thereto; and the availability of undrawn capacity with respect to
Surge's credit facility.
________________________________
|
6 This is
a capital management measure which is defined in the Non-GAAP
Financial Measures and Capital Management Measures section of this
document
7 Spot WCS price in CAD$, as at January 11th,
2019 for WCS crude oil
|
The forward-looking statements are based on certain key
expectations and assumptions made by Surge, including 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; 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. 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 September 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
Any reserves disclosed in this press release are derived from a
third party external evaluation done by Sproule using standard
practices as prescribed in the Canadian Oil and Gas Evaluations
Handbook and account for associated proved and/or probable
reserves, as applicable. Reserves referenced in this presentation
account for all of Surge's Acquisitions and Divestiture activity to
date, reflecting the bookings that existed (from the respective 3rd
party evaluator), as of January 1,
2018 (the "Surge Report").
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. Bbl means
barrel of oil. NGLs means natural gas liquids.
For the purpose of this press release, Original Oil in Place
("OOIP") means Discovered Petroleum Initially In Place ("DPIIP") as
at Oct 31st, 2018. DPIIP is derived
by Surge's internal Qualified Reserve Evaluators ("QRE") and
prepared in accordance with National Instrument 51-101 and the
Canadian Oil and Gas Evaluations Handbook ("COGEH"). DPIIP, as
defined in COGEH, is that quantity of petroleum that is estimated,
as of a given date, to be contained in known accumulations prior to
production. The recoverable portion of DPIIP includes production,
reserves and Resources Other Than Reserves (ROTR). The OOIP/DPIIP
and potential recovery rate estimates are as at Oct 31st, 2018 and are based on current recovery
technologies and have been prepared by Surge's internal Qualified
Reserve Evaluators. There is significant uncertainty as to the
ultimate recoverability and commercial viability of any of the
resource associated with the OOIP/DPIIP estimates, and as such a
recovery project cannot be defined for this volume of OOIP/DPIIP at
this time.
Drilling Locations
This presentation discloses drilling locations in two
categories: (i) booked locations; and (ii) unbooked locations.
Booked locations are proved locations and probable locations
derived from a third party external 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. Drilling locations
referenced in this presentation account for all of Surge's
Acquisitions and Divestiture activity to date, reflecting the
bookings that existed (from the respective 3rd party evaluator), as
of January 1, 2018.
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
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 company discussed in this press
release over >400 net drilling locations identified herein, of
these >300 net are unbooked locations. Of the 97 net booked
locations identified herein 78 net are Proved locations and 19 net
are Probable locations.
Non-GAAP Financial Measures and Capital Management
Measures
Certain secondary measures in this press release – namely,
"adjusted funds flow"(included within the definition of all-in
payout ratio, "dividend payout ratio", and "all-in payout ratio"
are disclosed for the purpose of providing investors with
additional insight as to how the Company evaluates the management
of its capital and analyze business performance. Management uses
capital management measures to analyze the Company's capital
management objectives and to assist in capital allocation
decisions. Management believes capital management measures may be
useful to investors on the same basis. Non-GAAP financial measures
are used by management to analyze cash flow generated from the
Company's principal business activities and it may be useful to
investors on the same basis. None of these measures are used to
enhance the Company's reported financial performance or
position.
Non-GAAP financial measures and capital management measures do
not have a standardized meaning prescribed by IFRS and therefore
are unlikely to be comparable to similar measures presented by
other issuers. Furthermore, capital management measures do not have
a corresponding IFRS measure. They are common in the reports of
other companies but may differ by definition and application. The
amounts used in the calculation of the capital management measures
are derived from the financial statements that are prepared in
accordance with IFRS. In some instances, the capital management
measure incorporates a non-GAAP measure, such as adjusted funds
flow which is defined below in this document.
Adjusted Funds Flow
The Company adjusts cash flow from operating activities in
calculating adjusted funds flow for changes in non-cash working
capital, decommissioning expenditures, transaction and other costs,
and cash settled stock-based compensation plans, particularly cash
used to settle withholding obligations on stock-based compensation
arrangements that are settled in shares. Management believes the
timing of collection, payment or incurrence of these items involves
a high degree of discretion and as such may not be useful for
evaluating Surge's cash flows.
Changes in non-cash working capital are a result of the timing
of cash flows related to accounts receivable and accounts payable,
which management believes reduces comparability between periods.
Management views decommissioning expenditures predominately as a
discretionary allocation of capital, with flexibility to determine
the size and timing of decommissioning programs to achieve greater
capital efficiencies and as such, costs may vary between periods.
Transaction and other costs represent expenditures associated with
acquisitions, which management believes do not reflect the ongoing
cash flows of the business, and as such reduces comparability.
Subsequent to the third quarter of 2018, all of the Company's
stock-based compensation plans are equity classified as the Company
has the intention of settling all awards with shares. Cash settled
stock-based compensation currently represents the statutory tax
withholdings required on stock-based compensation awards and is a
discretionary allocation of capital. The Company has the option to
either require the holder to sell shares earned in the stock-based
compensation plan to satisfy tax withholdings, or the Company can
issue less shares to the individual and remit a cash payment to
satisfy tax withholding requirements. Each of these expenditures,
due to their nature, are not considered principal business
activities and vary between periods, which management believes
reduces comparability.
All-in Payout Ratio
All-in payout ratio is calculated using the sum of total
exploration and development capital plus dividends paid divided by
adjusted funds flow. This capital management measure is used by
management to analyze allocated capital in comparison to the cash
being generated by the principal business activities. This measure
is provided to allow readers to quantify the amount of adjusted
funds flow that is being used to either: i) pay dividends; and ii)
deployed into the Company's development and exploration program. A
ratio of less than 100% indicates that a portion of the adjusted
funds flow is being retained by the Company and can be used to fund
items such as asset abandonment, repayment of debt, fund
acquisitions or the costs related thereto, withholding tax
obligations on stock based compensation or other items.
Dividend Payout Ratio
Dividend payout ratio is calculated as the dividends paid for
the respective period divided by adjusted funds flow. This capital
management measure 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 principal business activities.
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.