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