CALGARY, Nov. 7, 2017 /CNW/ – Surge Energy Inc. (“Surge” or the “Company”) (TSX: SGY) announces its operating and financial results for the quarter ended September 30, 2017.
Surge’s low risk, development drilling and waterflood results at the Company’s Sparky, Shaunavon and Valhalla core areas continue to exceed managements budgeted expectations. Production averaged 15,007 boepd in Q3 2017 – approximately two percent above budget – with only a small contribution from Surge’s recently announced Sparky acquisition (please refer to Surge’s October 26, 2017 Press Release).
Surge has now revised upward production guidance four times in the last 17 months – two times organically, and two times in relation to high quality, long life, Sparky core area acquisitions.
Detailed information regarding Surge’s preliminary guidance for 2018 is set forth in the Company’s Press Release dated October 26, 2017.
HIGHLIGHTS
Surge’s Q3 2017 results include only 23 days of operational and financial contribution from its recently announced Sparky core area acquisition.
The Company’s Q3 2017 financial and operating highlights are summarized below:
- Surge’s average production increased by 14 percent in Q3 2017 to 15,007 boepd, as compared to an average of 13,120 boepd in Q3 2016;
- Production per share increased by 11 percent in Q3 2017, as compared to Q3 2016;
- Adjusted funds flow from operations was $23.0 million in Q3 ($0.10 per share), up 20 percent (up 17 percent on a per share basis) over Q3 2016 at $19.1 million ($0.09 per share);
- Unhedged adjusted funds flow from operations per share increased by six percent in Q3 2017, as compared to the Q3 2016 – at similar US$ WTI crude oil prices;
- Increased oil production 16 percent from 9,807 barrels per day in Q3 2016 to 11,380 barrels per day in Q3 2017;
- On September 8, 2017, Surge closed a $37.2 million acquisition 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 includes key undeveloped land directly offsetting Surge’s core, operated Sounding Lake and Eyehill assets, and provides Surge with up to 38 net additional internally estimated low risk, development drilling locations;
- Subsequent to the end of Q3 2016, Surge completed a 3D seismic program and successfully drilled its first well at the Company’s core Sparky Betty Lake asset; the Company estimates that this play has potential for more than 80 million of net OOIP[1] (with an internally estimated recovery factor of 10 percent on primary, and up to 30 percent with waterflood), and more than 35 additional internally estimated drilling locations;
- Subsequent to the end of the quarter on October 26, 2017 Surge announced a $40 million bought deal, five-year, unsecured, convertible debt financing with a syndicate of underwriters, with a coupon of 5.75 percent per annum, and a conversion price of $2.75 per Surge common share; proforma this strategic financing Surge expects to have approximately $75 million under its current credit facility (prior to receiving any lending value attributed to the acquisition); and
- On October 26, 2017 Surge announced an upward revision to the Company’s 2017 production exit rate target to 15,850 boepd from 15,150 boepd.
______________________________
1 Original Oil in Place (OOIP) is the equivalent to Discovered Petroleum Initially In Place (DPIIP) for the purposes of this press release.
FINANCIAL AND OPERATING SUMMARY
The Q3 2017 financial and operating highlights are summarized below:
Three Months Ended |
Nine Months Ended September 30, |
|||||
Sep 30, 2017 |
June 30, 2017 |
% Change |
2017 |
2016 |
% Change |
|
Financial highlights |
||||||
Oil sales |
50,563 |
54,216 |
(7)% |
152,973 |
104,345 |
47 % |
NGL sales |
2,158 |
2,282 |
(5)% |
6,680 |
3,391 |
97 % |
Natural gas sales |
3,704 |
4,275 |
(13)% |
11,995 |
7,597 |
58 % |
Total oil, natural gas, and NGL revenue |
56,425 |
60,773 |
(7)% |
171,648 |
115,333 |
49 % |
Adjusted funds from operations2 |
22,985 |
27,018 |
(15)% |
71,643 |
48,692 |
47 % |
Per share basic ($) |
0.10 |
0.12 |
(17)% |
0.32 |
0.22 |
45 % |
Capital expenditures – petroleum & gas properties3 |
26,652 |
15,064 |
77 % |
75,757 |
50,447 |
50 % |
Capital expenditures – acquisitions & dispositions3 |
36,650 |
35,716 |
nm(5) |
72,097 |
(41,141) |
nm |
Total capital expenditures3 |
63,302 |
50,780 |
nm |
147,854 |
9,306 |
nm |
Net debt at end of period4 |
246,398 |
208,061 |
18 % |
246,398 |
141,155 |
75 % |
Operating highlights |
||||||
Production: |
||||||
Oil (bbls per day) |
11,380 |
11,522 |
(1)% |
11,071 |
9,529 |
16 % |
NGLs (bbls per day) |
627 |
678 |
(8)% |
663 |
592 |
12 % |
Natural gas (mcf per day) |
17,997 |
17,547 |
3 % |
17,618 |
16,693 |
6 % |
Total (boe per day) (6:1) |
15,007 |
15,125 |
(1)% |
14,670 |
12,903 |
14 % |
Average realized price (excluding hedges): |
||||||
Oil ($ per bbl) |
48.29 |
51.71 |
(7)% |
50.62 |
39.96 |
27 % |
NGL ($ per bbl) |
37.42 |
36.99 |
1 % |
36.92 |
20.91 |
77 % |
Natural gas ($ per mcf) |
2.24 |
2.68 |
(16)% |
2.49 |
1.66 |
50 % |
Netback ($ per boe) |
||||||
Oil, natural gas and NGL sales |
40.87 |
44.16 |
(7)% |
42.86 |
32.62 |
31 % |
Realized gain (loss) on commodity contracts |
0.12 |
(0.75) |
nm |
(0.71) |
1.74 |
nm |
Royalties |
(5.27) |
(5.58) |
(6)% |
(5.49) |
(3.73) |
47 % |
Operating expenses |
(13.73) |
(12.98) |
6 % |
(13.54) |
(12.06) |
12 % |
Transportation expenses |
(1.40) |
(1.48) |
(5)% |
(1.48) |
(1.60) |
(8)% |
Operating netback |
20.59 |
23.37 |
(12)% |
21.64 |
16.97 |
28 % |
G&A expense |
(1.94) |
(1.95) |
(1)% |
(1.94) |
(1.87) |
4 % |
Interest expense |
(2.01) |
(1.79) |
12 % |
(1.81) |
(1.32) |
37 % |
Corporate netback |
16.64 |
19.63 |
(15)% |
17.89 |
13.78 |
30 % |
Common shares outstanding, end of period |
232,920 |
225,766 |
3 % |
232,920 |
222,278 |
5 % |
Weighted average basic shares outstanding |
228,309 |
225,766 |
1 % |
226,623 |
221,236 |
2 % |
Stock option dilution |
— |
3,790 |
nm |
6,357 |
— |
nm |
Weighted average diluted shares outstanding |
228,309 |
229,556 |
(1)% |
232,980 |
221,236 |
5 % |
2 |
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. |
3 |
Please see capital expenditures discussion in the MD&A. |
4 |
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. |
5 |
The Company views this change calculation as not meaningful, or “nm”. |
OPERATIONAL MOMENTUM CONTINUES – HIGHLIGHTS
Surge’s low risk, development drilling and waterflood results at the Company’s Sparky, Shaunavon and Valhalla core areas continue to exceed management’s budgeted expectations. Production averaged 15,007 boepd in Q3 2017 – approximately two percent above budget – with only a small contribution from Surge’s recent Sparky acquisition.
In Q3 2017 Surge executed an active drilling program with total capital expenditures of $26.7 million (including corporate G&A), which included the drilling of 13 wells (11.5 net) in the Company’s three core operating areas – together with associated capex for infrastructure, land and seismic. Surge achieved a 100 percent success rate for the Company’s Q3 2017 drilling program.
With crude oil prices dropping below US$45 WTI per barrel in July, from a disciplined capital allocation perspective Surge strategically moved to execute the Company’s Q3 2017 drilling program utilizing one-rig (rather than the two-rig program initially budgeted). This provides Surge with greater flexibility in terms of the timing of spending capital throughout the second half of 2017.
Operational highlights from Q3 2017 are summarized below:
Sparky – Conventional Resource Growth Engine:
- Surge’s internally estimated net original oil in place (“OOIP”) for its core, operated Eyehill asset have now increased by more than 40 percent to 145 million barrels of internally estimated OOIP net to the Company (greater than 190 million barrels internally estimated OOIP gross); Surge now has more than 70 net internally estimated drilling locations remaining in inventory at Eyehill.
- Production from Surge’s Sparky core area has now increased by 3,500 boepd (123 percent) over the last 18 months, from 2,850 boepd to over 6,350 boepd today.
- Drilling and waterflood results at Eyehill have exceeded expectations – providing both excellent internal rates of return (“IRR’s”), and very strong, long-term, high profit to investment ratios (“PIR’s”).
- In Q3 2017 Surge successfully drilled two development wells at Eyehill on lands newly acquired pursuant to the Company’s April 12, 2017 Sparky core area acquisition.
- Operating costs at Surge’s 29○ API pool at Eyehill are less than $4.95 per boe, and current netbacks are over $34 per boe.
- In early Q4 2017 Surge converted two additional Eyehill Sparky wells to injection – effectively doubling the Company’s area under injection; four additional injectors are planned for 2018.
- In the last six months, Surge has added over 90 internally estimated, low risk, development drilling locations in the Company’s Sparky core area through Crown sales, strategic acquisitions, and swap transactions.
- Surge completed a 3D seismic program over its nine section block of land (100 percent working interest) at Betty Lake in the Sparky core area.
- Subsequent to Q3 2017, the Company successfully drilled and completed an exciting Sparky well at Betty Lake – management internally estimates more than 80 million barrels of net OOIP at Betty Lake (with expected recovery factors of 10 percent on primary, and up to 30 percent with waterflood) – providing more than 35 additional internally estimated locations. This well has been completed, and will be brought onstream in November, 2017.
- In Q3 2017, Surge also successfully drilled and completed a mile long “step-out” well at the Company’s core, operated Provost asset – extending Surge’s large, 45 million net internally estimated OOIP pool to the southwest; Surge estimates expected recovery factors at Provost of 10 percent on primary, and up to to 30 percent with waterflood. This well is producing above Surge’s internal Sparky type-curve.
- Subsequent to the end of Q3 2017, Surge completed a swap transaction, acquiring 1.5 sections of highly prospective lands at Provost – adding up to 12 additional internally estimated Sparky locations.
- Surge also acquired highly prospective Crown land at its core operated Eyehill and Lakeview assets (7.5 net sections) during Q3 2017 – adding 22 internally estimated drilling locations.
- The Company now has more than 250 low risk, internally estimated, development drilling locations in its Sparky core area – providing an inventory of more than 10 years.
Shaunavon – Waterflood Results Exceeding Expectations:
- Surge drilled 7 gross (5.5 net) successful development wells at Shaunavon in Q3 2017.
- Included in these wells is an exciting Upper Shaunavon “step-out” well more than six kilometers to the north of the current development. This is a significant pool extension on Surge’s contiguous 59 section land base. Currently the well is producing at attractive rates three months after being completed, and has confirmed numerous follow-up locations. The IP 30 for this well was over 200 bopd – which meets Surge’s internal type curve.
- Surge drilled its first Lower Shaunavon well in three years – utilizing new monobore and cemented liner technology. This well is producing at approximately 150 percent of management’s internal type curve expectations, and well above all directly offsetting Lower Shaunavon producing wells.
- The Company’s extensive Upper Shaunavon waterflood in the west central portion of the Surge’s large, 250 million barrel internally estimated OOIP, operated, crude oil pool continues to exceed expectations (with expected recovery factors up to 30 percent on waterflood).
- The nine producing Upper Shaunavon oil wells, which are being supported by five injectors, are averaging over 85 bopd each after approximately 22 months of production. At current strip pricing, the average of these nine producers would reach ‘pay-out’ in approximately seven months.
- In Q3 2017 Surge converted four more Upper Shaunavon wells to injection, three of which are located at the large Upper Shaunavon pool extension that Surge discovered two years ago on the southern portion of the Company’s land block.
- Current netbacks at Shaunavon are over $40 per boe.
- Surge has 200 net internally estimated drilling locations at Shaunavon, comprised of 130 Upper Shaunavon, and 70 Lower Shaunavon locations – providing a drilling inventory of more than 10 years.
- Shaunavon wells provides both excellent IRR’s, and high long term PIR’s, for both primary drilling and waterfloods.
Valhalla – Development Drilling Success Continues
- At Valhalla, in Q3 2017 Surge drilled a successful 100 percent working interest well at the Company’s operated, light oil asset. This well is meeting management’s type curve expectations.
- In order to ensure the availability of fraccing services in the fall of 2017, Surge plans to drill one additional (100 percent working interest) well this fall at Valhalla with plans to frac in late Q4 2017 – this well had originally been budgeted for drilling in Q1 2018.
- Surge’s high quality, 140 million internally estimated OOIP, Doig sandstone reservoir at Valhalla (with expected recovery factors of 10 to 15 percent on primary), has been independently analyzed by a number of firms as having some of the best rates of return for crude oil drilling in Canada; Valhalla wells also provide strong PIR’s.
- The Company’s exciting multi zone, light oil assets at Valhalla have over 75 internally estimated locations, providing an inventory of more than 10 years (including Doig; Montney; Doe Creek; and Charlie Lake).
Management attributes the Company’s continued quarterly operational outperformance to be a direct result of strategically allocating growth capital to Surge’s high quality, large OOIP, light and medium gravity, conventional crude oil reservoirs with low risk development drilling, and successful waterflood implementation.
OUTLOOK – SUSTAINABLE GROWTH, LONG TERM VALUE, AND INCOME
Management’s goal is to be the best positioned public light/medium gravity crude oil growth and dividend paying company in Canada.
In the last 17 months, Surge has now upwardly revised the Company’s production per share estimates four times. As a result of Surge’s successful ongoing drilling and waterflood activities in the Company’s three primary operating areas, together with its recent core Sparky area asset acquisitions, Surge will now be delivering production per share growth of more than 24 percent from Q2 2016 to the end of Q4 2017.
All three of Surge’s core operated assets generate excellent IRR’s, and high, long term PIR’s – for both drilling and waterflood activities.
In addition, Surge has increased the Company’s dividend per share by 26.7 percent since the start of 2017, while maintaining a conservative simple payout ratio.
Accordingly, as a result of management’s strategic capital allocation decisions, rigorous cost cutting initiatives, and excellent ongoing operational results, we believe that Surge is well positioned to continue delivering solid per share growth, while drilling wells that deliver both high IRR’s and PIR’s, and paying the Company’s dividend, on a go-forward basis.
Detailed information regarding Surge’s preliminary guidance for 2018 is set forth in the Company’s Press Release dated October 26, 2017.