CALGARY, Aug. 25, 2015 /CNW/ – Surge Energy Inc. (“Surge” or the “Company”) (TSX: SGY) announces continued drilling success on the Company’s Upper Shaunavon crude oil discovery in SW Saskatchewan, and at Valhalla in NW Alberta, and the initiation of its previously announced share buy back.
In addition, Surge announces the appointment of Mr. Paul Ferguson, to the position of Chief Financial Officer.
RECORD DRILLING RESULTS
Surge has completed and placed on production the four net wells drilled in June and July at Shaunavon, Saskatchewan – with better than type curve results. Net production added from Surge’s latest four new Upper Shaunavon wells is over 800 bopd. Surge has more than 200 low risk Upper Shaunavon development drilling locations on this play.
At Valhalla, a significant portion of Surge’s associated natural gas production will commence flowing to the nearby Wembley gas plant this week, further increasing Surge’s ability to access third party plant capacity. Based on the three (100 percent) exciting wells drilled into the large northern pool extension at Valhalla this year, including the new well at 10-07-075-08W6 (Press Released August 5th, 2015), Surge is now experiencing record production volumes at its core operated property at Valhalla. The new 10-07 well has now produced over 56,000 barrels of oil in 26 days. Earlier this year, Surge further consolidated its position at the north end of Valhalla, providing the Company with multiple future locations in this exciting new pool extension.
The continued excellent development drilling results referred to above, leave Surge well positioned to exceed management’s 2015 production exit rate target of 14,500 boepd. Accordingly, Surge management has delayed the drilling of three wells ($5.1 million of capital) until the fourth quarter of 2015.
EXECUTIVE APPOINTMENT – MR. PAUL FERGUSON
Surge is pleased to welcome Mr. Paul Ferguson, who will be joining the Company in the position of Chief Financial Officer (“CFO”).
With over 25 years of industry experience, Mr. Ferguson brings a breadth of experience to the CFO role. He began his career in the field of Engineering with a Bachelor of Science in Mechanical Engineering from the University of Oklahoma and worked directly in operations. He later pursued a Masters of Business Administration from Southern Methodist University, in Texas. From there he moved into the financial industry, primarily in capital markets, holding research analyst and portfolio management positions in a variety of firms, most recently, Fidelity Management and Research, based in Denver. With his international perspective, unique blend of financial, capital markets, and operational experience, and strong leadership skills, Mr. Ferguson will bring a unique perspective to the management team at Surge.
Paul Colborne, President and CEO stated, “I am very excited about Paul Ferguson joining the management team here at Surge. I have known Paul for several years and am confident that he will make a strong and lasting contribution to the Company.”
Mr. Ferguson looks forward to joining Surge and is excited to lead the Finance and Accounting group. He views that team as a solid core of highly skilled individuals who have performed well and will continue to do so.
It is expected that Mr. Ferguson will begin as CFO of Surge in mid to late September once the required authorizations have been obtained from Citizenship and Immigration Canada.
INITIATION OF SHARE BUYBACK
As press released on August 5th, 2015, given Surge’s peer group leading balance sheet, and the Company’s continued excellent development drilling results, Surge management and Board have determined to start acquiring Surge common shares pursuant to a normal course issuer bid providing for the repurchase of Surge common shares through the facilities, rules and regulations of the TSX (the “Issuer Bid”). The Issuer Bid has been approved by the TSX.
Surge’s new net asset value (“NAV”) is $4.64 per share, utilizing Sproule’s recent third quarter of 2015 engineering price deck. In addition, the Company only books approximately two years of trailing cash flow as future development capital in its external engineering report. Further, 73 percent of Surge’s reserve value is in the proved developed producing and probable producing categories.
Surge’s NAV per share includes a booking of only 37 development drilling locations for its Upper Shaunavon play – where Surge now estimates the Company has over 200 low risk development locations on 300m spacing. No waterflood upside is included in Surge’s NAV per share for the Company’s Upper Shaunavon play.
Surge has approximately $295 million of credit availability on its bank lines, and a very low debt to cash flow of 0.9 times at the end of Q2 2015. Surge pays an interest rate of approximately 2.5 percent (after tax) on indebtedness owing under its bank lines.
Surge does not have to pay a dividend on the common shares that it acquires pursuant to the Issuer Bid – thereby increasing the Company’s sustainability.
The Issuer Bid provides an excellent, low risk return on investment to Surge shareholders of greater than 125 percent, including: NAV accretion (using the third quarter of 2015 Sproule price deck $4.64 per share NAV), dividend savings, less interest on applicable debt (if any). Essentially, the Issuer Bid provides an additional method for Surge management to return capital to its shareholders, along with the payment of the Company’s dividend.
Based on the current trading price of Surge common shares, management believes that, pursuant to the Issuer Bid, the Company is acquiring its reserves at a purchase price of less than $6.90 per boe for independently engineered proven plus probable reserves. This provides a low risk recycle ratio of more than 3.5 times, based on Surge’s second quarter of 2015 operating netback of $26.53 per boe.
As a result of the very attractive rates of return at Shaunavon, and the attractive, low risk metrics relating to the buy back of Surge’s common shares, management confirms the initiation of the acquisition of Surge common shares on August 24th, 2015 pursuant to the Issuer Bid.
Accordingly, Surge will: 1) deliver annual growth of three to four percent per share; 2) return capital to its shareholders pursuant to the Company’s attractive dividend; and 3) return capital to its shareholders pursuant to the accretive buyback of its common shares in accordance with the Issuer Bid.
Macquarie Capital Markets Canada Ltd. will conduct the bid on behalf of Surge pursuant to an automatic purchase plan. All purchases under the bid will be purchased on the open market through the facilities of the TSX and alternative Canadian trading platforms at the prevailing market price at the time of such transaction.
This press release contains forward-looking statements. The use of any of the words “anticipate”, “continue”, “estimate”, “expect”, “may”, “will”, “project”, “should”, “believe” and similar expressions are intended to identify forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in such forward-looking statements.
More particularly, this press release contains statements concerning: (i) Surge’s drilling and development plans and enhance recovery projects and the timing and results to be expected thereof; (ii) estimated sizes, characteristics, efficiencies, rates of return, netbacks, pool recovery factors and risk levels of plays and the number of associated drilling locations, as applicable; (iii) management’s expectations with respect to the Company’s waterflood program, results therefrom and quantity of producing assets that will be placed under waterflood; (iv) the Company’s expectations with respect to its 2015 production exit rate; (v) expectations with respect to the Company’s ability to operate and succeed in the current commodity price environment; (vi) the Company’s declared focus and primary goals; (vi) management’s forecast of debt to cash flow ratio and the availability of Surge’s bank line to fund Surge’s future capital requirements; (viii) management’s estimates and expectations regarding production efficiencies, drilling upside, well costs, growth opportunities, reserves and reserve life index and decline rates; (ix) the Company’s intentions with respect to the normal course issuer bid and purchases thereunder and the effects of repurchases under the bid; and * the appointment of Mr. Ferguson to the executive team of Surge, the timing thereof, and the receipt of all required authorizations from Citizenship and Immigration Canada in connection therewith.
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, the application of regulatory and royalty regimes, prevailing commodity prices and economic conditions, development and completion activities, the performance of new wells, the successful implementation of waterflood programs, the availability of and performance of facilities and pipelines, the geological characteristics of Surge’s properties, the successful application of drilling, completion and seismic technology, the determination of decommissioning liabilities, the successful implementation of the Corporation’s normal course issuer bid, prevailing weather conditions, exchange rates, licensing requirements, the impact of completed facilities on operating costs and the availability, costs of capital, labour and services, and the creditworthiness of industry partners.
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 constraint in the availability of services, adverse weather or break-up conditions, uncertainties resulting from potential delays or changes in plans with respect to exploration or development projects or capital expenditures or failure to obtain the continued support of the lenders under Surge’s bank line. Certain of these risks are set out in more detail in Surge’s Annual Information Form dated March 19, 2015 and in Surge’s MD&A for the period ended June 30, 2015, both of which have 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.
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 and boepd means barrel of oil equivalent per day. Bopd means barrels of oil per day. 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. 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.
Surge’s NAV per share is calculated by taking proved plus probable reserve value NPV10 BT (including future capital) of $1,022 million, as evaluated by Sproule and McDaniel as at December 31, 2014, and adjusting for undeveloped land ($130 million) and net debt ($126 million) and dividing by the number of issued and outstanding shares, being 221.1 million.
The reserves data provided in this news release presents only a portion of the Company’s reserve information. Additional reserves information are contained in Surge’s annual information form dated March 19, 2015, which was filed on and which may be accessed through the SEDAR website.
This press release discloses drilling locations in three categories: (i) proved locations; (ii) probable locations; and (iii) unbooked locations. Proved locations and probable locations, which are sometimes collectively referred to as “booked locations”, are derived from the Company’s most recent independent reserves evaluation as of December 31, 2014 and account for drilling locations that have associated proved or probable reserves, as applicable. Unbooked locations are internal estimates based on the Company’s prospective acreage and an assumption as to the number of wells that can be drilled per section based on industry practice and internal review. Unbooked locations do not have attributed reserves or resources. Unbooked locations have specifically been identified by management as an estimation of our multi-year drilling activities based on evaluation of applicable geologic, seismic, engineering, production and reserves data on prospective acreage and geologic formations. The drilling locations on which we actually drill wells will ultimately depend upon the availability of capital, regulatory approvals, seasonal restrictions, oil and natural gas prices, costs, actual drilling results and other factors.
Of the 200 net drilling locations identified herein in the Upper Shaunavon, 37 are booked locations.
Test Results and Initial Production Rates
Any references in this press release to initial, early and/or test production/performance rates are useful in confirming the presence of hydrocarbons, however, such rates are not determinative of the rates at which such wells will continue production and decline thereafter. While encouraging, readers are cautioned not to place reliance on such rates in calculating aggregate production. The initial production rate may be estimated based on other third party estimates or limited data available at this time. Initial production or test rates are not necessarily indicative of long-term performance of the relevant well or fields or of ultimate recovery of hydrocarbons.
This press release contains the terms “funds from operations”, “net debt”, “netback”, and “NAV” which do not have a standardized meaning prescribed by International Financial Reporting Standards (“IFRS”) and therefore may not be comparable with the calculation of similar measures by other companies. Management uses funds generated by operations to analyze operating performance and leverage. Management believes “net debt” is a useful supplemental measure of the total amount of current and long-term debt of the Company. Mark-to-market risk management contracts are excluded from the net debt calculation. Management believes “netbacks” are a useful supplemental measures of the amount of revenues received after royalties and operating and transportation costs and secondly, the amount of revenues received after the royalties, operating, transportation costs, general and administrative costs, financial charges and asset retirement obligations. NAV is calculated as set forth above. Additional information relating to these non-IFRS measures can be found in the Company’s most recent management’s discussion and analysis MD&A, which may be accessed through the SEDAR website (www.sedar.com).
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.