CALGARY, Aug. 3, 2016 /CNW/ – Surge Energy Inc. (“Surge” or the “Company”) (TSX: SGY) announces its operating and financial results for the quarter ended June 30, 2016.
SECOND HALF DRILLING PROGRAM ACCELERATED
“Due to the record drilling efficiencies and cost savings Surge has achieved so far in 2016, management chose to use a portion of the proceeds from the Company’s first quarter non-core asset sale to accelerate its second half 2016 drilling program. Favorable weather conditions in Southwest Saskatchewan allowed for the mobilization of a rig to the Upper Shaunavon field in early May. This decision was largely based on the desire to replace the divested volumes, and was further supported by a historically low service cost environment, drilling program improvements and efficiencies”, stated Paul Colborne, President and Chief Executive Officer of Surge.
“These factors allowed the Company to add production at less than $9,875 per flowing barrel from the 14 well program. Significantly lower service costs and record drilling efficiencies have allowed for Surge to increase the scope of its drilling program within the original capital budget of approximately $55 million. Surge management continues to monitor the commodity price environment, and retains the optionality to expand the 2016 budget accordingly.”
SECOND QUARTER HIGHLIGHTS
- Funds flow from operations (“FFO”) was $22.1 million in the second quarter of 2016, or $0.10 per share.
- Surge delivered an all-in sustainability ratio of 95 percent for the quarter, with oil prices averaging US$45.59 WTI per barrel.
- The Company achieved a debt to cashflow ratio of 1.53 times annualized cashflow for the quarter.
- The Company’s recent 14 well drilling program has added production of more than 2,000 boepd (85 percent oil; IP/180 day), at an “all-in” on-stream cost of $19.75 million – providing a production efficiency of less than $9,875 per flowing boepd.
- As a result of Surge’s excellent development drilling results discussed above, together with continued successful waterflood results at Shaunavon, Eyehill, Nipisi, Silver, and Doe, Surge’s current production continues to exceed the Company’s previously announced 2016 production exit rate target of 13,000 boepd.
- Through two recent Crown purchases in the Sparky area, Surge has acquired nine contiguous sections of 100 percent working interest land (with prior vertical Sparky well control) prospective for Sparky production. The acquired lands have an estimated OOIP of more than 65 million barrels. Surge will be drilling this exciting new Sparky reservoir (utilizing modern horizontal and completion technology) in 2017.
- Surge achieved an operating netback of $23.27 per boe and a corporate netback of $19.91 per boe in the quarter, an increase of 147 percent and 225 percent respectively from the first quarter of 2016.
- Operating expenses were $12.69 per boe, down 16 percent as compared to the same period in 2015, as Surge operations personnel continue to execute on optimization projects.
- Transportation expenses were reduced by 50 percent as compared to the first quarter of 2016, as the benefits from facilities optimization projects at Valhalla were realized for a full quarter.
- Production volumes for the quarter reflect the $28 million non-core asset sale of Sunset, a 700 boepd divestiture that closed at the end of the first quarter of 2016. Volumes were impacted by approximately 350 boepd of unplanned downtime at a third party processing facility, and approximately 300 boepd of uneconomic shut-in production.
- Surge’s banking facility was re-determined at $250 million subsequent to the quarter. With net debt of $134.6 million at June 30, 2016, the facility is approximately 54 percent drawn, providing the Company with ample liquidity to continue to execute on Surge’s business plan. The reduction in stand-by fees should result in a $1 million savings in annual interest expense.
OPERATIONS UPDATE
Surge provided a detailed operations update highlighting the Company’s recent drilling results dated July 21, 2016. Please refer to this release for detailed operational results in Surge’s key operating properties.
FINANCIAL UPDATE
As discussed above, Surge has elected not to change guidance at this time. The Company will continue to monitor commodity prices and its ability to drill and pay the dividend within cash flow during the second half of 2016. Based on the Company’s excellent balance sheet and low-cost structure, management retains the flexibility to potentially increase Surge’s 2016 capital budget – when crude oil prices firm up above US$50 WTI per barrel for a sustainable period.
Strong cash flow during the second quarter allowed the Company to accelerate its low-risk development drilling program, and to capitalize on a period of historically low service costs, while maintaining lower debt levels. The Company remains well positioned to accelerate production growth into 2017 as volumes from Surge’s successful drilling program will support higher cash flow in the second half of the year.
Funds flow in the quarter was positively impacted by a prior period adjustment to operating expenses, and a reduction in Alberta Crown royalties relating to an adjustment of Surge’s 2015 Gas Cost Allowance (“GCA”).
HEDGING UPDATE
Surge intends to maintain a hedging policy that allows for management to opportunistically add volumes concurrent with a disciplined approach designed to ensure a minimum hedge level. Accordingly, the Company executed an additional contract during the second quarter 2016 as follows:
Commodity |
Time Frame |
Volume |
Value |
WTI oil collars (put/call) |
2H 2017 |
500 bbl/d |
CAD $60 x $80.25 |
Surge now has approximately 20 percent of oil volumes hedged via collars in 2017.
BANK LINE UPDATE
Subsequent to the quarter, Surge closed on the redetermination of its banking facility. The borrowing base has been renewed at $250 million. The revolving period on the entire credit facility expires on May 29, 2017, and the Company’s bank line has no non-conforming portion. The new capacity will provide the Company with significant liquidity to execute on its business plan while allowing for substantial savings in stand-by fees.
The Company is also pleased to announce that it retained all lenders in the syndicate, and also added an additional lender during the process. The Company is well positioned to add capacity for future growth.
FINANCIAL AND OPERATING SUMMARY |
|||||||
($000s except per share amounts) |
|||||||
Three Months Ended |
Six Months Ended June 30, |
||||||
Jun 30, 2016 |
Mar 31, 2016 |
% Change |
2016 |
2015 |
% Change |
||
Financial highlights |
|||||||
Oil sales |
37,523 |
26,166 |
43 % |
63,689 |
139,724 |
(54)% |
|
NGL sales |
1,367 |
769 |
78 % |
2,136 |
2,706 |
(21)% |
|
Natural gas sales |
2,053 |
2,211 |
(7)% |
4,264 |
8,791 |
(51)% |
|
Total oil, natural gas, and NGL revenue |
40,943 |
29,146 |
40 % |
70,089 |
151,221 |
(54)% |
|
Funds from operations1 |
22,063 |
7,491 |
195 % |
29,554 |
86,562 |
(66)% |
|
Per share basic ($) |
0.10 |
0.03 |
233 % |
0.13 |
0.39 |
(67)% |
|
Per share diluted ($) |
0.10 |
0.03 |
233 % |
0.13 |
0.39 |
(67)% |
|
Capital expenditures – petroleum & gas properties2 |
16,810 |
12,873 |
31 % |
29,683 |
40,769 |
(27)% |
|
Capital expenditures – acquisitions & dispositions2 |
— |
(41,141) |
nm4 |
(41,141) |
(460,950) |
nm |
|
Total capital expenditures2 |
16,810 |
(28,268) |
nm |
(11,458) |
420,181 |
nm |
|
Net debt at end of period3 |
134,613 |
133,816 |
1 % |
134,613 |
125,478 |
7 % |
|
Operating highlights |
|||||||
Production: |
|||||||
Oil (bbls per day) |
8,958 |
9,821 |
(9)% |
9,389 |
15,315 |
(39)% |
|
NGLs (bbls per day) |
564 |
615 |
(8)% |
589 |
696 |
(15)% |
|
Natural gas (mcf per day) |
15,959 |
17,829 |
(10)% |
16,894 |
18,594 |
(9)% |
|
Total (boe per day) (6:1) |
12,182 |
13,408 |
(9)% |
12,794 |
19,110 |
(33)% |
|
Average realized price (excluding hedges): |
|||||||
Oil ($ per bbl) |
46.03 |
29.28 |
57 % |
37.27 |
50.40 |
(26)% |
|
NGL ($ per bbl) |
26.64 |
13.75 |
94 % |
19.91 |
21.47 |
(7)% |
|
Natural gas ($ per mcf) |
1.41 |
1.36 |
4 % |
1.39 |
2.61 |
(47)% |
|
Netback ($ per boe) |
|||||||
Oil, natural gas and NGL sales |
36.94 |
23.89 |
55 % |
30.10 |
43.72 |
(31)% |
|
Realized gain (loss) on commodity contracts |
3.45 |
3.26 |
nm |
3.35 |
10.54 |
nm |
|
Royalties |
(3.27) |
(3.14) |
4 % |
(3.20) |
(6.46) |
(50)% |
|
Operating expenses |
(12.69) |
(12.27) |
3 % |
(12.47) |
(16.55) |
(25)% |
|
Transportation expenses |
(1.16) |
(2.33) |
(50)% |
(1.77) |
(1.43) |
24 % |
|
Operating netback |
23.27 |
9.41 |
147 % |
16.01 |
29.82 |
(46)% |
|
G&A expense |
(1.98) |
(1.96) |
1 % |
(1.97) |
(1.91) |
3 % |
|
Interest expense |
(1.38) |
(1.32) |
5 % |
(1.35) |
(2.88) |
(53)% |
|
Corporate netback |
19.91 |
6.13 |
225 % |
12.69 |
25.03 |
(49)% |
|
Common shares outstanding, end of period |
221,047 |
221,047 |
—% |
221,047 |
221,147 |
—% |
|
Weighted average basic shares outstanding |
221,047 |
221,042 |
— % |
221,045 |
220,174 |
— % |
|
Stock option dilution |
— |
— |
nm |
— |
— |
nm |
|
Weighted average diluted shares outstanding |
221,047 |
221,042 |
— % |
221,045 |
220,174 |
— % |
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. |
2 |
Please see the capital expenditures note in the MD&A. |
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”. |
OUTLOOK
Surge looks forward to realizing the full impact of its accelerated drilling program in the near future. The Company remains well positioned both financially and operationally to add a growth component to shareholder return in the near future.
As set forth in Surge’s press release dated July 21, 2016, as a result of calculated actions taken by management over the last 21 months, Surge will be one of the few in its peer group in Canada who will be able to add a substantial production per share growth component back into management’s business model – as crude oil prices sustainably firm up above US$50 WTI per barrel.
Today Surge has the following corporate fundamentals:
- Reserves: 80.7 mmboe Total Proven plus Probable (77 percent oil and liquids)
- Reserve Life Index: 17 years
- Decline: less than 23 percent (including 2016 drilling program)
- Production: >13,000 boepd (78 percent oil and liquids)
- Net Debt: $135 million as at June 30, 2016
- Forward Debt to Cash flow: 1.53 times (based on annualized Q2 2016 cashflow)
- Bank line: $250 million (54 percent drawn)
- Drilling Inventory: 747/727 (gross/net) total locations; 202 net locations booked
- NAV: $4.79 per share (Sproule external engineering report)
FINANCIAL STATEMENTS AND ACCOMPANYING MDA:
Surge has filed with Canadian securities regulatory authorities its financial statements and accompanying MD&A for the three and six months ended June 30th, 2016. These filings are available for review at www.sedar.com or www.surgeenergy.ca.