CALGARY, Aug. 7, 2013 /CNW/ - Surge Energy Inc. ("Surge" or the "Company") (TSX: SGY) is pleased to announce an increase to its dividend, the Company's financial and operating results for the three and six month periods ended June 30, 2013 and a reiteration of 2013/2014 guidance.
Based upon: 1) better than anticipated drilling results at Valhalla, Silver and Nipisi South; 2) better than anticipated early waterflood response at Nipisi; 3) significantly better than forecasted North American crude oil prices; and 4) continued execution of Surge's ongoing hedging/risk management program, the Company is increasing its dividend by five percent.
Surge's Board of Directors (the "Board") has approved an increase in the Company's annual dividend from CAD$0.40 per share ($0.0333 per share per month) to CAD$0.42 per share ($0.035 per share per month).
Accordingly, on September 16, 2013 the Company will be paying its first monthly dividend of CAD $0.035 per share ($0.42 per share annually) for August production.
CHANGES TO SENIOR MANAGEMENT/NON-CORE ASSET SALE
On May 9, 2013, the Board announced the appointment of Mr. Paul Colborne as the President and CEO of Surge on that date. In addition, Mr. Murray Bye was appointed the Vice President of Production of Surge.
The Board also announced Mr. Dan O'Neil's retirement from his role as CEO and President of the Company. The Board thanks Mr. O'Neil for his efforts and service on behalf of Surge shareholders. Mr. O'Neil will continue as a director of the Company and will provide technical assistance.
On May 9, 2013 Surge also announced the sale of its non-core, primarily non-operated assets in North Dakota for a purchase price of approximately USD$42.75 million. This transaction closed on May 31, 2013.
The non-core assets sold comprised production of approximately 650 barrels of oil per day, with independently proved plus probable reserves of 2.2 million boe, and a net present value of $36.8 million (discounted at ten percent before tax as of December 31, 2012).
STRATEGIC TRANSITION TO SUSTAINABLE GROWTH + DIVIDEND MODEL
On June 11, 2013, Surge announced the orderly transition of the Company to a sustainable, moderate growth dividend paying oil and gas company with high quality, focused, operated light and medium gravity crude oil assets.
Surge has a high quality, high netback, reserves, production and cash flow base focused primarily in just four operated, crude oil properties. Over 95 percent of the Company's assets are concentrated in these four elite properties at Valhalla and Nipisi in western Alberta, the Silver area in SE Alberta, and the Shaunavon area of SW Saskatchewan. These core assets are characterized by large Original Oil in Place ("OOIP")1 reservoirs, low recovery factors, significant upside from infill and step-out development drilling, and successful waterflood implementation.
In addition, in the first half of 2013, Surge delivered the best drilling program in the Company's history, with three significant exploration discoveries at its core properties of Valhalla, Nipisi and Silver, respectively.
In spite of these very positive developments, Surge continued to trade at a significant discount to the Company's net asset value. At year-end 2012, Surge's independent engineering report provided an estimate net asset value of $8.21 per basic share2, before tax, based on proved plus probable reserves (PV10).
Consequently, given that Surge has an elite, high quality crude oil asset and opportunity base, and that the Company's true value as a growth junior was being significantly discounted, Surge's Board and management approved an orderly transition to a sustainable growth plus dividend business model for the Company on a go-forward basis.
On this basis, Surge will now:
Grow, cost effectively, 3 to 5 percent per year on a reserves,
production and cash flow per share basis; and
Provide a sustainable, resilient, annual dividend to shareholders
payable monthly; and
- Provide additional growth through accretive acquisitions of new, high quality, large OOIP assets with low recovery factors.
$240 MILLION ACQUISITION OF AN ELITE, LARGE OOIP, CRUDE OIL ASSET; $247.5 MILLION BOUGHT DEAL FINANCING
On June 11, 2013, Surge also announced an accretive acquisition of an operated, medium gravity crude oil producing asset in the Southwest area of Saskatchewan (the "Acquisition") with OOIP of more than 250 million barrels and a recovery factor of less than 1.4 percent. Surge estimates over 260 (net) lower risk development drilling locations on the acquired assets, together with full waterflood upside.
In conjunction with the Acquisition, Surge entered into a $247.5 million
bought deal equity financing (the "Equity Financing") with a syndicate
of underwriters. The Acquisition and the Equity Financing closed on
July 3, 2013.
1 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, plus those estimated quantities in accumulations yet to be discovered. 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.
2 Based on Sproule's independent engineering report as at December 31, 2012 (pre-Acquisition/Disposition, and pre-equity financing).
FINANCIAL AND OPERATING SUMMARY:
|($000s except per share amounts)|
|Three Months Ended June 30,||Six Months Ended June 30,|
|2013||2012||% change||2013||2012||% change|
|Oil and NGL sales||52,624||45,610||15%||100,840||92,977||8%|
|Natural gas sales||5,342||3,308||61%||10,698||6,986||53%|
|Total oil, natural gas, and NGL revenue||58,004||48,927||19%||111,586||99,987||12%|
|Funds from Operations3||26,812||24,315||10%||52,049||48,322||8%|
|Per share basic ($)||0.38||0.34||12%||0.73||0.68||7%|
|Per share diluted ($)||0.38||0.34||12%||0.73||0.67||9%|
|Net income (loss)6||(15,004)||13,273||nm||(16,358)||15,930||nm|
|Per share basic ($)||(0.21)||0.19||nm||(0.23)||0.23||nm|
|Per share diluted ($)||(0.21)||0.18||nm||(0.23)||0.22||nm|
|Capital expenditures - petroleum & gas properties4||25,166||27,707||(9%)||65,231||82,605||(21%)|
|Capital expenditures - acquisitions & dispositions4||(39,377)||9,347||nm||(40,184)||113,745||nm|
|Total capital expenditures4||(14,212)||37,054||nm||25,046||196,350||(87%)|
|Net debt at end of period5||193,597||171,692||13%||193,597||171,692||13%|
|Oil and NGL (bbls per day)||6,966||6,568||6%||6,910||6,339||9%|
|Natural gas (mcf per day)||14,442||16,246||(11%)||15,559||16,822||(8%)|
|Total (boe per day) (6:1)||9,373||9,275||1%||9,504||9,142||4%|
|Average realized price (excluding hedges):|
|Oil and NGL ($ per bbl)||83.01||76.31||9%||80.62||80.59||0%|
|Natural gas ($ per mcf)||4.06||2.24||81%||3.80||2.28||67%|
|Realized loss on financial contracts ($ per boe)||(2.12)||(0.29)||nm||(1.28)||(0.61)||nm|
|Net back (excluding hedges) ($ per boe)|
|Oil, natural gas and NGL sales||68.00||57.97||17%||64.87||60.09||8%|
|Common shares (000s)|
|Common shares outstanding, end of period||71,918||71,065||1%||71,918||71,065||1%|
|Weighted average basic shares outstanding||71,358||71,058||0%||71,288||70,766||1%|
|Stock option dilution (treasury method)||-||1,080||(100%)||-||1,403||(100%)|
|Weighted average diluted shares outstanding||71,358||72,138||(1%)||71,288||72,169||(1%)|
3 Management uses funds from operations (cash flow from operations before changes in non-cash working capital, legal settlement expenses, transaction costs and current tax on disposition) 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.
4 Please see capital expenditures note in the Management Discussion and Analysis dated June 30, 2013.
5 The Corporation defines net debt as outstanding bank debt plus or minus working capital, including the deposit on acquisition and excluding the fair value of financial contracts.
6 The Corporation views this change calculation as not meaningful, or "nm".
FINANCIAL ACHIEVEMENTS & HIGHLIGHTS:
Highlights for the quarter include:
Increased Surge's operating netback by 17 percent to $41.01 per boe for the second quarter of 2013 as compared to $35.06
in the second quarter of 2012.
Increased Surge's operating netback by 14 percent to $41.01 per boe for the second quarter of 2013 as compared to $36.02
in the first quarter of 2013.
Funds from operations increased 10 percent to $26.8 million during the second quarter of 2013 from $24.3 million
during the same period of 2012.
Funds from operations per fully diluted share increased 12 percent during the second quarter of 2013 to $0.38 compared to the same period
Reduced operating costs by five percent to $11.97 per boe for the second quarter of 2013 as compared to $12.58
per boe in the first quarter of 2013.
Achieved a 100 percent drilling success rate investing a total of $25.2 million in the second quarter, $17.4 million
of which was allocated to drilling six gross (5.47 net) oil wells.
Surge realized a 74 percent oil and natural gas liquids production weighting in the second quarter
Approximately 91 percent of Surge's revenue resulted from oil and
natural gas liquids production, in the second quarter of 2013 with approximately nine percent derived
from natural gas production.
- Ongoing risk management program which ensures the sustainability of future cash flows and protects Surge's balance sheet. The Corporation has 54 percent of its forecast second half 2013 oil and NGL production (after royalties) hedged with an average WTI floor price of approximately $95.79 CAD per barrel.
Surge achieved a 100 percent success rate drilling and completing 6 gross (5.47 net) horizontal multi-frac wells during the second quarter of 2013. All wells drilled during the quarter were on production by quarter end. Three gross (three net) wells were drilled at Valhalla, two gross (two net) wells were drilled in the Silver area and one gross (0.47 net) well was drilled in North Dakota.
The Company also continued to optimize existing waterfloods at Windfall, Waskada and Silver, applied for a waterflood area expansion at Nipisi, and initiated waterflood plans in the Shaunavon area during the second quarter of 2013.
Surge drilled and completed three gross (three net) horizontal multi-frac Doig wells at Valhalla during the second quarter of 2013. Two of the three wells were step-out wells that were drilled in the northern portion of the Valhalla light oil pool, following the success of the Surge's well at 04/13-7-75-8W6. All three of the wells are now on production and are currently performing to the Company's type curve expectations.
Surge has up to four gross (3.44 net) horizontal multi-frac Doig wells planned for the second half of the year at Valhalla.
Surge commenced a waterflood pilot in the Slave Point formation at Nipisi during the second quarter of 2013, which is currently performing better than management's expectations. Surge has applied for approval for a second injector in an expanded pilot area, which is expected in the third quarter of 2013. Injection in the expanded pilot area is expected to start shortly after the Company receives approval.
Based on successful waterflood implementation, Surge estimates that it will ultimately recover more than 20 percent of the estimated 85 million barrels of OOIP in this northern pool based on offsetting analogous waterflooded pools.
Surge commenced a waterflood pilot at Windfall during the third quarter of 2012 and the Company continues to evaluate its performance. More than 200,000 barrels of water has been injected into the Bluesky formation to date, which is in line with expectations. Surge is preparing for an application to expand the pilot area, and to add a second injector once the initial pilot has proved to be economic.
Based on successful waterflood implementation, Surge estimates potential recoveries of over 20 percent of the 60 million barrels of internally estimated OOIP in this pool.
SE Alberta and Shaunavon
Following the close of the Acquisition on July 3 2013, Surge commenced a pump optimization program on existing producers in the Shaunavon. This work is planned to continue throughout the rest of the year.
Surge has three gross (100 percent WI) horizontal multi-frac Lower Shaunavon wells planned for fourth quarter of 2013, and has also initiated waterflood plans. The Company plans to commence horizontal injection into the Lower Shaunvon formation late in the third quarter or early in the fourth quarter of 2013.
Based on successful waterflood implementation, Surge estimates that it will ultimately recover up to 15 percent of the estimated 250 million barrels of OOIP in the Shaunavon.
Surge drilled a total of two gross (100 percent WI) horizontal multi-frac step-out earning wells in the Silver area during the second quarter of 2013. Both of the wells were completed and on production by quarter end and are performing above the Company's type curve expectations.
Surge has an additional six gross (100 percent WI) horizontal wells budgeted in the Silver area for the remainder of the year.
The Silver area waterflood and production optimization work conducted on existing wells during the first quarter and early in the second quarter of 2013 added approximately 300 barrels of oil per day to the Company's production base. Further waterflood and production optimization work is ongoing for the remainder of the year.
Surge continued to monitor and optimize the pilot waterflood into the Spearfish formation at Waskada during the second quarter of 2012.
Based on successful waterflood implementation, Surge estimates potential recoveries of approximately 18 percent of internally estimated OOIP per section of 10 million barrels at Waskada.
OUTLOOK AND GUIDANCE:
Based on the Acquisition and the Company's continued successful drilling results, Surge reiterates its guidance for 2013 and 2014 below:
|2014E Q1 Production (boe/d)||12,000 (78% Oil/NGLs)|
|2014E Average Production (boe/d)||12,100 (78% Oil/NGLs)|
|2014E Exit Production (boe/d)||12,500 (78% Oil/NGLs)|
|2P Reserves||54.6 mmboe|
|Net Asset Value (NAV) per share||$8.21 P+P NPV108|
|RLI (based on 2013E exit production)||> 12 years|
|2014E Development Capital Spending||$85 million|
|2014E Wells Drilled||30 wells|
|2014 Decline Rate||24%|
|2014E Funds from Operations ("FFO")||$146 million ($1.20 per basic share)|
|2014E Operating Netback||$38.33/boe|
|2014E Cash Flow Netback||$33.94/boe|
|Shares Outstanding||121 million|
|Annual Dividend||$51 million|
|Dividend / Share||$0.42 per share per annum|
|Basic Payout Ratio 2014E||35%|
|"All-in" Payout Ratio||93%|
|2013E Year-end net debt||$205 million|
|2013E Year-end net debt / 2014E FFO||1.4x|
|Bank Line||$350 million|
As a result of the recent continued successful drilling results at Valhalla, and the two new Sparky oil pool discoveries at Silver, Surge now anticipates that the Company will exceed management's estimated 2013 production exit rate of 12,000 boepd (78% Oil/NGLs).
7 Based on 2014 Edmonton Par $90.45/bbl; 2014 AECO gas $3.69/mcf and a 2014 CAD/US exchange rate of $0.98.
8 Based on Sproule's independent engineering report as at December 31, 2012 (pre-Acquisition/Disposition, and pre-equity financing).
9 Based on 2014 Edmonton Par $90.45/bbl; 2014 AECO gas $3.69/mcf and a 2014 CAD/US exchange rate of $0.98.
10 Based on a share price $5.40.
MANAGEMENT AND BOARD UPDATE:
Mr. Tee Ong, Vice President of Engineering, has resigned from the Company to pursue other opportunities, effective immediately. Surge thanks Mr. Ong for his contributions over the past three years and wishes him every success in the future.
Mr. Peter Bannister has resigned from his role as a director of the Company to focus on other commitments. Mr. Bannister originally joined the Board of Directors of Surge in April 2010, and also served on the Audit Committee and the Reserves Committee of the Company.
Mr. Bannister's knowledge and expertise in the oil and gas industry has been invaluable over the past three years. Surge thanks Mr. Bannister for his contributions and wishes him all the best in his future endeavours.
AUDITED FINANCIAL STATEMENTS AND ACCOMPANYING MDA:
Surge has filed with Canadian securities regulatory authorities its financial statements and accompanying MD&A for the three and six month periods ended June 30, 2013. These filings are available for review at www.sedar.com or www.surgeenergy.ca.
FORWARD LOOKING STATEMENTS:
This press release contains forward-looking statements. More particularly, it contains forward-looking statements concerning: (i) targeted growth in reserves, production and cash flow per share, (ii) the sustainability of dividends, (iii) potential growth through acquisitions, (iv) ultimate recovery factors at certain of Surge's properties, (v) planned drilling, development and waterflood activities, (vi) the potential number of drilling locations at certain of Surge's properties, (vii) estimated Q1 2014 production, (viii) estimated 2014 average and exit rates of production, (ix) estimated 2014 capital expenditures, wells drilled, decline rates, funds from operations, operating netback, cash flow netback and payout ratio, * estimated 2013 year end net debt and net debt to funds from operations ratio; and (xi) the anticipated exceeding by Surge of the previously estimated 2013 exit rate of production.
The forward-looking statements contained in this press release are based on certain key expectations and assumptions made by Surge, including expectations and assumptions concerning the success of future drilling, development and completion activities, the performance of existing wells, the performance of new wells, the viability of waterflood projects, the availability and performance of facilities and pipelines, the geological characteristics of Surge's properties, the successful application of drilling, completion and seismic technology, prevailing weather conditions, commodity prices, royalty regimes and exchange rates, the application of regulatory and licensing requirements and the availability of capital, labour and services.
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 uncertainties resulting from potential delays or changes in plans with respect to exploration or development projects or capital expenditures. Certain of these risks are set out in more detail in Surge's Annual Information Form which has 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.
The estimates of 2013 year end net debt, 2014 funds from operations and 2014 operating netback and cash flow netback contained in this press release are financial outlooks within the meaning of applicable securities laws. These financial outlooks have been prepared by management of Surge to provide an outlook of Surge's anticipated funds from operations and netbacks for a full year of operations with its current assets and based on management's expectations and assumptions as to a number of factors, including commodity pricing, production, operating expenses and royalties. Readers are cautioned that this information may not be appropriate for any other purpose. Management does not have firm commitments for all of the costs, expenditures, prices or other financial assumptions used to prepare the financial outlooks or assurance that such results will be achieved. The actual results of Surge will likely vary from the amounts set forth in the financial outlooks and such variation may be material.
Note: 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 means barrel of oil equivalent per day.
In this press release: (i) mcf means thousand cubic feet; (ii) mcf/d means thousand cubic feet per day (iii) mmcf means million cubic feet; (iv) mmcf/d means million cubic feet per day; (v) bbls means barrels; (vi) mbbls means thousand barrels; (vii) mmbbls means million barrels; (viii) bbls/d means barrels per day; (ix) bcf means billion cubic feet; * mboe means thousand barrels of oil equivalent; and (xi) mmboe means million barrels of oil equivalent
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.