FINANCIAL AND OPERATING SUMMARY:
|Three Months Ended March 31|
|($000s except per share amounts)||2012||2011||% change|
|Oil and NGL sales||48,216||47,366||2%|
|Natural gas sales||5,355||3,678||46%|
|Total oil, natural gas, and NGL revenue||53,582||51,060||5%|
|Funds from Operations1||25,237||24,007||5%|
|Per share basic ($)||0.35||0.34||3%|
|Per share diluted ($)||0.35||0.33||6%|
|Net income (loss)||(1,354)||2,657||nm2|
|Per share basic ($)||(0.02)||0.04||nm|
|Per share diluted ($)||(0.02)||0.04||nm|
|Capital expenditures – petroleum & gas properties3||40,065||54,898||(27%)|
|Capital expenditures – acquisitions & dispositions3||(807)||104,398||(101%)|
|Total capital expenditures3||39,257||159,296||(75%)|
|Net debt at end of period4||234,795||158,769||48%|
|Oil and NGL (bbls per day)||6,854||6,110||12%|
|Natural gas (mcf per day)||16,689||17,398||(4%)|
|Total (boe per day) (6:1)||9,636||9,009||7%|
|Average realized price (excluding hedges):|
|Oil and NGL ($ per bbl)||78.18||85.19||(8%)|
|Natural gas ($ per mcf)||3.57||2.32||54%|
|Realized loss on financial contracts ($ per boe)||(0.46)||(0.94)||(51%)|
|Netback (excluding hedges) ($ per boe)|
|Oil, natural gas and NGL sales||61.78||62.28||(1%)|
|Common shares (000s)|
|Common shares outstanding, end of period||71,217||71,033||0%|
|Weighted average basic shares outstanding||71,217||70,474||1%|
|Stock option dilution (treasury method)||–||1,711||(100%)|
|Weighted average diluted shares outstanding||71,217||72,185||(1%)|
|1 Management uses funds from operations (cash flow from operations before changes in non-cash working capital) 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.
2 The Corporation views this change calculation as not meaningful, or “nm”.
3 Please see capital expenditures note in the Company’s Management Discussion and Analysis.
4 The Company defines net debt as outstanding bank debt plus or minus working capital excluding the fair value of financial contracts.
ACHIEVEMENTS & HIGHLIGHTS:
Surge has achieved excellent growth year to date in 2013. Funds from operations increased five percent compared to the same time period in 2012 and five percent as compared to the fourth quarter of 2012. Funds from operation per fully diluted share increased six percent compared to the same time period in 2012 and three percent as compared to the fourth quarter of 2012. Production grew seven percent compared to the same time period in 2012 and eight percent as compared to the fourth quarter of 2012. Management continues to execute a strong risk management program which supports the protection of Surge’s balance sheet. The Corporation currently has 53 percent of its forecast 2013 oil and NGL production (after royalties) hedged with an average WTI floor price of $93.43 per barrel.
Surge continues to achieve operational and general and administrative efficiencies and continues to strive to become one of the lowest cost oil producers among its oil weighted peer group.
Highlights for the quarter include:
- Funds from operations increased five percent to $25.2 million during the first quarter of 2013 from $24.0 million during the same period of 2012.
- Funds from operations per fully diluted share increased six percent during the first quarter of 2013 to $0.35 compared to the same period in 2012.
- Increased production by seven percent to 9,636 boe per day during the first quarter of 2013 from 9,009 boe per day during the first quarter of 2012.
- Reduced G&A per boe by 12 percent in the first quarter of 2013 as compared to the same period of 2012.
- Achieved a 93 percent success rate drilling 15 gross (10.95 net) wells in the first quarter of 2013.
- Surge realized a 71 percent oil and natural gas liquids production weighting in the first quarter of 2013.
- Approximately 90 percent of Surge’s revenue resulted from oil and natural gas liquids production, in the first quarter of 2013 with approximately 10 percent derived from natural gas production.
Surge achieved a 93 percent success rate during the quarter ended March 31, 2013, drilling 15 gross (10.95 net) wells. The 15 gross wells drilled during the quarter include five wells in North Dakota, six wells in South East Alberta, two wells in Valhalla, and two wells in Nipisi. Twelve of the 15 gross wells drilled in the first quarter were on production at quarter end, with the remainder to be brought on production during the second quarter of 2013. One well encountered drilling issues and had to be abandoned.
Based on the successful step-out drilling completed during the first quarter, the Corporation was able to confirm an additional 80 million barrels of internally estimated DPIIP5 and more than 40 oil drilling locations to the Corporation’s portfolio. The four step-out wells that account for the confirmed additional DPIIP are:
- A horizontal multi-frac step-out well, two miles north from its previous most northerly well, at Valhalla that confirmed the extension of the pool to the north;
- A horizontal step-out well at Nipisi South that confirmed the commercial viability of the 30 million barrels of internally estimated DPIIP in the pool;
- A horizontal multi-frac well into a new pool in the Silver Area of South East Alberta that confirms the commercial viability of the 47 million barrels of internally estimated DPIIP in this pool; and
- A horizontal well that was drilled into another new pool in the Silver Lake Area that confirmed the commercial viability of the 2.2 million barrels of internally estimated DPIIP in this pool.
|5 Discovered Petroleum Initially In Place (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.|
Valhalla (Doig), Western Alberta
At Valhalla, Surge drilled, completed and brought on production two gross (1.44 net) horizontal multi-frac wells during the first quarter of 2013. One of the wells was the Company’s most northerly well at that time (13-7-75-8W6; 100 percent WI) and averaged 1,560 boe per day (89 percent oil and NGLs) for the first 15 days that it was on production. The well produced an average of 1,275 boe per day (86 percent oil and NGLs) after 30 days of being on production, which exceeded the Company’s type curve expectations of 620 boe per day (76 percent oil and NGLs). Surges operational staff was successful in reducing the total cost of this well by approximately 15 percent by significantly reducing the number of drilling days and improving the completion methodology. The results of this successful two mile north step-out well from section 31-74-8W6, confirms the addition of nine gross/net horizontal multi-frac follow-up locations in the northern part of the pool.
The second well (13-31-74-8W6; 44 percent WI) that Surge drilled during the first quarter, was completed and brought on production during the second quarter. The well came in under budget and has produced an average of 695 boe per day (81 percent oil and NGLS) during its first 30 days of production.
During the second quarter of 2013, Surge drilled, completed and brought on production an additional two gross (two net) horizontal multi-frac wells (5-18-75-8W6; 100 percent WI and 102/14-32-73-8W6) at Valhalla. The 5-18 well was drilled in the northern portion of the Doig pool, half a mile north of 04/13-7 well noted above. The well is currently performing to the Company’s type curve expectations and has been placed on pump. The 102/14-32 well, which has now been on production for ten days, was drilled in the southern portion of the Valhalla Doig pool and production is exceeding the Company’s type curve expectations for the area.
Surge will spud a fifth horizontal multi-frac Valhalla Doig well (100 percent WI) in May, 2013 and has four more wells (3.44 net) budgeted to drill during the remainder of the year.
An ERCB Hearing addressing objections to multiple holding applications for reduced spacing in the Doig formation at Valhalla is scheduled to commence May 21, 2013.
Nipisi (Slave Point), Western Alberta
At Nipisi, Surge drilled and brought on production a horizontal multi-frac well (15-2-78-9W5; 100 percent WI) during the first quarter of 2013. This well is meeting the Company’s type curve expectations of best month average production rate of 175 barrels of light oil per day.
Surge has completed the installation of the facilities necessary to commence waterflooding the Slave Point formation at Nipisi and injection is planned to commence on May 10, 2013. Based on successful waterflood implementation, Surge estimates that it will ultimately recover at least 20 percent of the estimated 85 million barrels of DPIIP in this northern pool based on offsetting analogous waterflooded pools.
The Company has an additional three gross (three net) wells budgeted at Nipisi for the remainder of the year and one gross (0.75 net) farmin well budgeted at Utikuma.
Nipisi South (Slave Point), Western Alberta
Surge drilled a successful, step-out, horizontal well at Nipisi South (13-36-76-9W5; 73 percent working interest or “WI”) for a total cost of $3.2 million during the first quarter. The well averaged sales volumes of greater than 150 barrels of oil per day during its first month of production and confirmed the commercial viability of the 30 million barrels of internally estimated DPIIP in the pool. The Company anticipates that at least ten gross (9.2 net) wells will be required to optimally develop the pool.
Silver Lake Area (Cretaceous Sands), SE Alberta
Surge drilled a total of six gross, 100 percent WI (mix of horizontal and horizontal multi-frac) wells during the first quarter of 2013. Five of the wells were completed and on production by quarter end. One horizontal well was drilled at Sounding Lake (into a new Cretaceous pool), two wells were drilled at Silver Lake (one horizontal and one horizontal multi-frac), one well was drilled at Long Coulee, one water disposal well was drilled at Provost and one horizontal multi-frac earning well was drilled at Sounding Lake East (into a new Cretaceous pool).
As noted, Surge drilled in to new Cretaceous oil pools during the first quarter of 2013; a horizontal multi-frac well at Sounding Lake East and a horizontal well at Sounding Lake. The horizontal multi-frac well drilled and completed Sounding Lake East encountered 660 meters of Cretaceous section in this new pool and was frac’d with ten stages. The well was placed on pump on February 28, 2013and produced at rates of more than 300 barrels of oil per day during cleanup. The well produced an average of 186 barrels of oil per day during its first month of being on production, which is significantly above the Company’s type curve expectations of best first month average production of 110 barrels of oil per day. The well confirms the commercial viability of the 47 million barrels of internally estimated DPIIP in this pool and added 21 additional drilling locations in the new pool based on 400 meter inter-well spacing. Surge also recently acquired another section of rights in this pool for a total current exposure of 4.75 net sections.
The horizontal well that Surge drilled and completed at Sounding Lake encountered 650 meters of horizontal section and is currently performing to Surge’s type curve expectations of best month average production of 100 barrels of oil per day. The well confirms the commercial viability of the 2.2 million barrels of internally estimated DPIIP in this pool.
Surge has an additional eight gross (eight net) wells (mix of horizontal and horizontal multi-frac) wells budgeted in the Silver Lake Area of SE Alberta for the remainder of the year.
Surge has also successfully farmed-in on an additional 4.5 sections adjacent to its Cretaceous pool at Provost. Surge estimates the lands to contain an additional internally estimated DPIIP of 25 million barrels bringing the total captured DPIIP of this pool to approximately 53 million barrels.
Williston Basin (Spearfish), North Dakota and South West Manitoba
During the first quarter, Surge completed and brought on production five gross (1.95 net) horizontal multi-frac wells that were drilled during the fourth quarter of 2012 and drilled a total of five gross (1.79 net) wells with three gross (0.94 net) wells completed and on production by quarter end. The wells currently producing are exceeding Surge’s type curve expectations of best month average production of 125 barrels of oil per day. Surge completed the two gross (0.85 net) wells drilled in the first quarter during the second quarter.
At Waskada, Surge commenced a pilot waterflood during the first quarter of 2013 and the Company expects to see a positive response within six months. Based on successful waterflood implementation, Surge estimates potential recoveries of approximately 20 percent of the 10 million barrels of internally estimated DPIIP per section.
Windfall (Bluesky), Western Alberta
At Windfall in Western Alberta, Surge commenced a waterflood pilot during the third quarter of 2012. The formation has been taking the water at rates that are in line with the Company’s expectations at rates of 200 cubic meters. Surge expects to see a positive response from the two offsetting horizontal multi-frac wells in the second quarter of 2013. Based on successful waterflood implementation, Surge estimates potential recoveries of approximately 25 percent of the 60 million barrels of internally estimated DPIIP in this pool.
MANAGEMENT CHANGES AND SALE OF NON-CORE ASSETS:
Subsequent to the first quarter, Surge announced (in its press release dated May 8, 2013) management changes including: the Board of Directors unanimous decision to appoint Mr. Paul Colborne as President and CEO of Surge and Dan O’Neil’s retirement as President and CEO of Surge.
Mr. Colborne has over 22 years of experience in the oil and gas industry and has been involved in a leadership, executive or director capacity with over 30 oil and gas and energy services companies. He has successfully grown and, subsequently transitioned, a number of aggressive Canadian junior oil and gas companies into sustainable, modest growth dividend paying companies with excellent results, including: Startech Energy Inc., Crescent Point Energy Trust, and Star Point Energy Trust. At each of these companies, Mr. Colborne contributed to significant shareholder value being created.
Mr. Colborne will not be receiving a salary with respect to his employment as President and CEO of Surge, but shall participate in short-term and long-term incentive plans.
Non-Core Asset Sale
On May 8th, 2013, Surge also announced that it executed a formal purchase and sale agreement with a private Canadian oil and gas producer to sell its non-core, primarily non-operated assets in North Dakota for a purchase price of approximately US$42.75 million. Closing of this transaction is anticipated to occur on or around May 31, 2013. The non-core assets being sold comprise production of approximately 650 barrels of oil per day, with independently engineered P+P 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). The Company expects a reduction in its borrowing base of$13 million as a result of the sale, resulting in a bank line of $277 million.
The sale of Surge’s assets in North Dakota is the first step in implementing changes in the Company’s business plan to maximize shareholder value, strengthen the Company’s financial flexibility and support a sustainable business model.
Realizing Shareholder Value
In just three years, Surge management has built a high quality, high netback, reserve, production and cash flow base focused primarily in three elite, operated, crude oil properties. Approximately 90 percent of Surge’s assets are focused in these three assets.
Surge management has delivered excellent per share growth in reserves, production and cash flow each year of the Company’s existence on a cost effective basis. Surge’s 2012 year-end independent engineering report (effective December 31, 2012) provides an estimated net asset value of $8.21per basic share for its Proved plus Probable (“P+P”) reserves.
Surge realized 2012 Finding Development and Acquisition (“FD&A”) costs, including the change in future development capital, of $23.32 per P+P reserves for a recycle ratio of 1.5 times. The team delivered an increase in P+P reserves of 43 percent and 29 percent on a fully diluted per share basis. Surge also achieved a P+P reserves replacement ratio of 5.3.
In spite of these positive developments, Surge’s share price has underperformed the peer group and currently trades at a significant discount to its net asset value.
Given that Surge has grown dramatically over the last three years, and given that the Company’s true value is not being recognized, Surge’s Board and management believe that changes are necessary to the Company’s business plan and operating strategy to adapt and succeed in the current, challenging business environment.
New Sustainable Business Model
Surge has assembled a high quality, light and medium gravity crude oil asset base. The Company has approximately 90 percent of its assets located in three key producing assets in the Valhalla, Nipisi and Silver areas of Alberta. These core operated assets are characterized by large DPIIP reservoirs with low recovery factors to date, and significant upside from infill and step-out development drilling and successful water flood implementation.
However, as the Company’s production has now exceeded 10,000 boe per day (greater than 70 percent oil and NGLs), like most of its peers Surge’s rate of annual per share growth is slowing from more than 20-25 percent to approximately 10-12 percent.
Given the current business environment, Surge’s high netback crude oil asset base, and the Company’s large inventory of low-risk development drilling locations and waterflood projects, the Board and management of Surge have determined that a number of changes are necessary with the respect to the Company’s business plan.
These changes will include the following principles:
- Target growth in reserves, production and cash flow per share;
- Opportunistically identify and acquire high quality, large DPIIP light and medium gravity crude oil assets with low recovery factors;
- Focus on lower risk infill and step-out development drilling opportunities and waterflood activities, on the Company’s existing crude oil assets;
- Continue to utilize current up-to-date technology to drill and exploit the Company’s assets and increase recovery factors;
- Utilize hedging techniques to lock-in cash flow to fund capital expenditures;
- Aggressively manage and protect the Company’s balance sheet; and
- Aggressively manage the Company’s cash costs and its general and administrative costs per boe.
In addition to the above operating principles, Surge will also consider minor, non-core asset sales, such as the successful sale of Surge’s non-core, primarily non-operated North Dakota assets, to reduce debt where applicable and potentially to fund normal course issuer bids to acquire and redeem the Company’s common shares in the market at price levels below its net asset value.
In this regard, Surge Board and management will also be considering a strategic conversion to a moderate growth / dividend business model.
AUDITED FINANCIAL STATEMENTS AND ACCOMPANYING MDA:
Surge has filed with Canadian securities regulatory authorities its audited financial statements and accompanying MD&A for the three months ended March 31, 2013. These filings are available for review at www.sedar.com or www.surgeenergy.ca.
ANNUAL GENERAL MEETING:
Surge’s Annual General Meeting is scheduled for 12:30 pm Mountain Daylight Time on May 15, 2013 at the Petroleum Club, Devonian Room located at 319 – 5th Avenue SW, Calgary AB.
Surge is an oil focused oil and gas company with operations throughout Alberta and in Manitoba. Surge’s common shares trade on the Toronto Stock Exchange under the symbol SGY and the Company currently has 71.2 million basic and 79.4 million fully diluted shares outstanding.
FORWARD LOOKING STATEMENTS:
This press release contains forward-looking statements. More particularly, this press release contains statements concerning anticipated: (i) capital expenditures for 2013, (ii) exploration, development, drilling, construction and acquisition activities, (iii) oil & natural gas production growth during 2013, (iv) debt and bank facilities, (v) hedging results, (vi) primary and secondary recovery potentials and implementation thereof, (vii) potential acquisitions, (viii) potential dispositions, (ix) reductions of operating costs and general and administrative expenses, * potential normal course issuer bid, (xi) potential payment of dividends, and (xii) realization of anticipated benefits of acquisitions.
The forward-looking statements are based on certain key expectations and assumptions made by Surge, including expectations and assumptions concerning the performance of existing wells and success obtained in drilling new wells, anticipated expenses, cash flow and capital expenditures and the application of regulatory and royalty regimes.
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.
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.
Test Results and Initial Production Rates
A pressure transient analysis or well-test interpretation has not been carried out and thus certain of the test results provided herein should be considered to be preliminary until such analysis or interpretation has been completed. Test results and initial production rates disclosed herein may not necessarily be indicative of long term performance or of ultimate recovery.
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.