CALGARY, Aug. 2, 2017 /CNW/ – Surge Energy Inc. (“Surge” or the “Company”) (TSX: SGY) announces its operating and financial results for the quarter ended June 30, 2017.
Based on excellent development drilling results in all three of Surge’s core areas, together with successful waterflood results at Shaunavon and Eyehill, the Company’s Q2/17 production continued to exceed budgeted expectations.
In Q2/17 Surge’s production averaged 15,125 boepd (81 percent oil and liquids) – which is very close to the Company’s 2017 production exit rate guidance of 15,150 boepd. This exciting operational result was more than five percent above Surge’s budgeted expectations, and was accomplished during spring break-up where the Company had a significantly reduced drilling program.
Surge has now revised upward the Company’s production guidance three times in the last 12 months – two times organically, and once relating to the Company’s recent Sparky core area acquisition.
HIGHLIGHTS
- Increased production 24 percent year over year, from 12,182 boepd in Q2/16 to 15,125 boepd in Q2/17;
- In Q2/17 Surge increased production per share nine percent over Q1/17;
- In the last 12 months Surge has now increased production per share 22 percent;
- Increased Q2/17 unhedged adjusted funds from operations per share by 19 percent over Q1/17, from $0.105 to $0.124 – despite $US WTI crude oil prices dropping seven percent in Q2/17 compared to Q1/17;
- Increased Q2/17 unhedged adjusted funds from operations per share by 51 percent over Q2/16, from $0.083 to $0.124;
- Increased Q2/17 unhedged corporate netback by 24 percent over Q2/16, from $16.46/boe to $20.38/boe;
- Increased Q2/17 adjusted funds from operations per share by 25 percent over Q1/17, from $0.096 to $0.12 – despite $US WTI crude oil prices dropping seven percent in Q2/17 compared to Q1/17;
- Increased oil production 29 percent from 8,958 barrels per day in Q2/16 to 11,522 barrels per day in Q2/17;
- Maintained an excellent balance sheet with a debt to cash flow of less than two times, with significant liquidity on Surge’s bank line (greater than $75 million credit available);
- During Q2/17, Surge closed a $36 million acquisition (net of closing adjustments) of a low decline, high netback, waterflooded, crude oil producing asset in the Company’s Sparky core area in Central Alberta. This strategic acquisition also included two key sections of undeveloped land at Surge’s core operated Eyehill asset, and provides Surge with up to 29 additional low risk, development drilling locations;
- Successfully renegotiated Surge’s syndicated bank line in Q2/17 with a large increase from $250 million to $285 million; and
- On April 19, 2017 Surge announced an upward revision to the Company’s 2017 average daily production estimate to 14,450 boepd, and Surge’s 2017 production exit rate target to 15,150 boepd from 14,450 boepd.
FINANCIAL AND OPERATING SUMMARY |
|||||||
($000s except per share amounts) |
|||||||
Three Months Ended June 30, |
Three Months Ended |
||||||
2017 |
2016 |
% Change |
June 30, 2017 |
Mar 31, 2017 |
% Change |
||
Financial highlights |
|||||||
Oil sales |
54,216 |
37,523 |
44 % |
54,216 |
48,194 |
12 % |
|
NGL sales |
2,282 |
1,367 |
67 % |
2,282 |
2,240 |
2 % |
|
Natural gas sales |
4,275 |
2,053 |
108 % |
4,275 |
4,016 |
6 % |
|
Total oil, natural gas, and NGL revenue |
60,773 |
40,943 |
48 % |
60,773 |
54,450 |
12 % |
|
Adjusted funds from operations1 |
27,018 |
22,063 |
22 % |
27,018 |
21,640 |
25 % |
|
Per share basic ($) |
0.12 |
0.10 |
20 % |
0.12 |
0.10 |
20 % |
|
Capital expenditures – petroleum & gas properties2 |
15,064 |
16,810 |
(10)% |
15,064 |
34,041 |
(56)% |
|
Capital expenditures – acquisitions & dispositions2 |
35,716 |
— |
nm4 |
35,716 |
(269) |
nm |
|
Total capital expenditures2 |
50,780 |
16,810 |
202 % |
50,780 |
33,772 |
50 % |
|
Net debt at end of period3 |
208,061 |
134,613 |
55 % |
208,061 |
178,753 |
16 % |
|
Operating highlights |
|||||||
Production: |
|||||||
Oil (bbls per day) |
11,522 |
8,958 |
29 % |
11,522 |
10,298 |
12 % |
|
NGLs (bbls per day) |
678 |
564 |
20 % |
678 |
684 |
(1)% |
|
Natural gas (mcf per day) |
17,547 |
15,959 |
10 % |
17,547 |
17,302 |
1 % |
|
Total (boe per day) (6:1) |
15,125 |
12,182 |
24 % |
15,125 |
13,866 |
9 % |
|
Average realized price (excluding hedges): |
|||||||
Oil ($ per bbl) |
51.71 |
46.03 |
12 % |
51.71 |
52.00 |
(1)% |
|
NGL ($ per bbl) |
36.99 |
26.64 |
39 % |
36.99 |
36.39 |
2 % |
|
Natural gas ($ per mcf) |
2.68 |
1.41 |
90 % |
2.68 |
2.58 |
4 % |
|
Netback ($ per boe) |
|||||||
Oil, natural gas and NGL sales |
44.16 |
36.94 |
20 % |
44.16 |
43.63 |
1 % |
|
Realized gain (loss) on commodity contracts |
(0.75) |
3.45 |
(122)% |
(0.75) |
(1.59) |
(53)% |
|
Royalties |
(5.58) |
(3.27) |
71 % |
(5.58) |
(5.64) |
(1)% |
|
Operating expenses |
(12.98) |
(12.69) |
2 % |
(12.98) |
(13.95) |
(7)% |
|
Transportation expenses |
(1.48) |
(1.16) |
28 % |
(1.48) |
(1.57) |
(6)% |
|
Operating netback |
23.37 |
23.27 |
0 % |
23.37 |
20.88 |
12 % |
|
G&A expense |
(1.95) |
(1.98) |
(2)% |
(1.95) |
(1.93) |
1 % |
|
Interest expense |
(1.79) |
(1.38) |
30 % |
(1.79) |
(1.61) |
11 % |
|
Corporate netback |
19.63 |
19.91 |
(1)% |
19.63 |
17.34 |
13 % |
|
Common shares outstanding, end of period |
225,766 |
221,047 |
2 % |
225,766 |
225,766 |
—% |
|
Weighted average basic shares outstanding |
225,766 |
221,047 |
2 % |
225,766 |
225,764 |
—% |
|
Stock option dilution |
3,790 |
— |
nm |
3,790 |
3,427 |
11 % |
|
Weighted average diluted shares outstanding |
229,556 |
221,047 |
4 % |
229,556 |
229,191 |
0 % |
|
1 |
Management uses adjusted funds from operations (cash flow from operating activities before changes in non-cash working capital, decommissioning expenditures, transaction costs and cash settled stock-based compensation) to analyze operating performance and leverage. Adjusted funds from operations as presented does not have any standardized meaning prescribed by IFRS and, therefore, may not be comparable with the calculation of similar measures for other entities. |
2 |
Please see capital expenditures discussion throughout this press release. |
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. |
4 |
The Company views this change calculation as not meaningful, or “nm”. |
TWELVE MONTH LOOKBACK – LOW COST PRODUCTION ADDITIONS
As oil prices reached a low of US$26.75 WTI per barrel in February of 2016, the Surge management team continued to strategically position the Company for growth when oil prices recovered. Steps taken by management in early 2016 include: the disposition of a non-core asset at Sunset, deferred drilling and other discretionary capital spending to keep debt low, aggressive balance sheet management, rigorous cost cutting initiatives, delineation of Surge’s high quality, large OOIP, crude oil assets, and the strategic implementation and optimization of waterfloods across the Company’s asset base.
As oil prices began to recover above US $45 WTI per barrel in May/June of 2016, management moved to add a solid production per share growth component back into Surge’s business model. Consequently, over the last four financial quarters Surge has delivered an increase in production of 24 percent (22 percent per share) from 12,182 boepd in Q2/16, to 15,125 boepd in Q2/17.
Surge has now revised upward the Company’s production guidance three times in the last 12 months – two times organically, and once relating to the Company’s recent strategic Sparky core area acquisition.
During the past four quarters, Surge has replaced production declines and grown by adding approximately 6,000 boepd to the Company’s production base (greater than 90 percent light and medium crude oil) for total, all-in capital expenditures (including acquisitions) of $144.3 million. We believe these very low production efficiencies for light and medium gravity crude oil, will turn out to be some of the best in the Company’s peer group in Canada over this period:
Capex |
Boepd |
||
Organic Drilling Capital |
$85.1 million |
3,0461 |
(Barrels needed to replace declines) |
1,8972 |
(Growth Wedge) |
||
$85.1 million |
4,943 |
||
Organic Drilling Capital Efficiencies |
$17,208 per flowing boe |
||
Land, Seismic, G&A |
$8.3 million |
||
All-in Organic Capital |
$93.4 million |
4,943 |
|
All-in Organic Capital Efficiencies |
$18,892 per flowing boe |
||
Valhalla Montney Acquisition |
$14.9 million |
300 |
|
Sparky Acquisition |
$36.0 million |
745 |
|
Total Capital Including Acquisitions |
$144.3 million |
5,988 |
|
All-in Capital Efficiencies, including Acquisitions |
$24,098 per flowing boe |
1 |
Represents an estimated 25 percent decline. |
2 |
Represents production additions, after replacing declines. |
The Company’s consistent production per share growth over the past year has also led to significant increases in Surge’s unhedged funds from operations per share, which grew by 51 percent from Q2/16 to Q2/17.
OPERATIONS UPDATE
During its spring break-up quarter, in Q2/17 Surge conducted a much reduced drilling program, with total capital expenditures of $15.1 million (including corporate G&A). The Q2/17 program included the drilling of 5 wells (4.32 net), together with 2.5 net completions, associated capex for infrastructure, land and seismic. The Company experienced a 100 percent success rate for the Q2/17 drilling program.
In late June, the Company began its 2H/17 drilling program where Surge plans to drill and complete a total of 22 wells in its three core areas, including eight Sparky area wells, 13 Shaunavon wells, and one Valhalla Doig well. The Company strategically moved to execute its drilling program utilizing one-rig, as opposed to a two-rig program initially proposed, providing Surge with additional flexibility on the timing of capital spending throughout the balance of 2H/17.
As discussed above, Surge exceeded management’s budgeted production expectations for Q2/17 by more than five percent – during spring break-up. Production in Q2/17 averaged 15,125 boepd (81 percent oil and liquids), compared to the Company’s internal budget of 14,275 boepd, and analyst consensus on the street of 14,350 boepd.
Management attributes the Company’s continued quarterly operational outperformance to be a direct result of applying growth capital to Surge’s high quality, operated, large OOIP, light and medium gravity crude oil, sandstone reservoirs.
OUTLOOK – CONTINUED QUARTERLY GROWTH
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.
In the last 12 months, Surge has increased production per share by more than 22 percent, increased its dividend by 26.7 percent, and upwardly revised production estimates three times. Surge continues to focus on sustainability, balance sheet management, and cost controls to deliver returns to Surge shareholders.
As a result of the Company’s consistent production per share growth, in Q2/17 Surge increased unhedged adjusted funds from operations per share by 19 percent over Q1/17 – a significant increase considering the average crude oil price dropped in the same time period by seven percent from an average of US$51.92 WTI per barrel in Q1/17 to US$48.28 WTI per barrel in Q2/17. This achievement is a direct result of Surge management’s continued focus on making disciplined capital allocation decisions, delivering top tier operational results, and the implementation of tight cost controls across the Company.
Surge continues to grow its production base and location inventory in its three core areas of Sparky, Shaunavon, and Valhalla through low risk development drilling results, and strategic high quality, core area acquisitions.