CALGARY, Dec. 13, 2016 /CNW/ – Surge Energy Inc. (“Surge” or the “Company”) (TSX: SGY) announces that its Board of Directors has formally approved an upward revision to the Company’s previously announced 2017 preliminary production guidance.
Pursuant to a Press Release dated September 6, 2016, Surge provided preliminary capital expenditure and production guidance for 2017.
Based on continued successful development drilling results at the Company’s Shaunavon, Sparky and Valhalla core areas, combined with ongoing waterflood activities, Surge is now increasing its 2017 production guidance as set forth below, with no corresponding increase to capital expenditures.
APPROVED GUIDANCE FOR 2017
The Company’s 2017 $85 million capital expenditure program and increased production growth estimates are set forth below – at a US $55 WTI per barrel pricing assumption. This guidance has now been formally approved by the Company’s Board of Directors.
In 2017 Surge’s average daily production estimate has been increased from 13,500 boepd to 14,000 boepd (80 percent oil), and the Company’s 2017 exit rate guidance has now been increased from 14,150 boepd to 14,450 boepd. On this basis, Surge will be providing shareholders with organic production per share growth of 18 percent from the second quarter of 2016 to the end of 2017.
Revised 2017 Guidance at |
|
US $55 WTI |
|
OPERATIONAL |
|
2017 Average Production (boe/d) |
14,000 |
2017 Exit Production (boe/d) |
14,450 |
Total Capital Spending |
$85 million |
Operating Expenses ($/boe) |
$11.45/boe to $11.95/boe |
Transportation Expenses ($/boe) |
$1.50/boe |
Royalties as a % of Revenue |
12% to 13% |
Estimated Funds Flow from Operations1 |
$124.3 million |
Funds Flow from Operations per Share ($/share) |
$0.55 |
Revised 2017 Guidance at |
|
US $55 WTI |
|
FINANCIAL |
|
Basic Shares Outstanding (MM) |
225.7 |
Annual Dividend Payable |
$16.9 million |
Exit 2017 Debt |
$128.4 million |
Debt/Cash Flow2 |
1.0x |
Payout/Sustainability Ratio3 |
82% |
CAPITAL EXPENDITURE BREAKDOWN
In 2017 Surge anticipates spending $85 million of total capital, broken down as follows:
Capital Category |
Amount |
Drill & Complete, Tie-in |
$53 million |
Waterflood |
$4 million |
Facilities |
$8 million |
Workovers |
$9 million |
Land, Capitalized G&A, other |
$11 million |
Total |
$85 million |
Sparky
Following the success of the 10 monobore Sparky wells at Eyehill in the second half of 2016, Surge plans to drill 13 net Sparky wells at Eyehill, Provost, and Betty Lake in 2017. Drilling, fracing, and on-stream costs at Sparky have now dropped below $1.0 million per well, and the Company anticipates 140,000 boe of internally estimated ultimate recovery per well for primary production only.
The latest four monobore wells drilled at Eye Hill in the fourth quarter of 2016, are currently on production, and exhibiting good overall fluid deliverability and increasing oil cut. Importantly, the wells drilled by Surge at Eyehill this year have exceeded the Company’s current Eye Hill type curve.
As a result of these consistent excellent drilling results, production at Eyehill has increased from approximately 500 boepd to over 1,500 boepd (80 percent oil) in the last five months. Operating expenses at Eyehill have now dropped to less than $5.50 per boe, and are budgeted to be under $5 per boe in 2017.
Surge’s waterflood project at Eyehill continues to deliver excellent, measurable results, with two water injector conversions to date. The Company has applied to expand the horizontal waterflood scheme in 2017 under the Alberta Enhanced Hydrocarbon Recovery Program in order to obtain the applicable waterflood royalty incentives.
Shaunavon
Surge currently plans to drill 20 net wells at Shaunavon in 2017.
The Company will continue to delineate both the northern and southern portions of Surge’s 58 section Upper Shaunavon field in 2017. Very little capital is required to tie in additional wells or implement new waterflood pilots, as extensive existing infrastructure is already in place in the Shaunavon field, including an operated 10,000 bopd battery. Continued investment at Shaunavon is underpinned by low operating expenses (budgeted to be under $6 per boe in 2017), favorable royalty rates, top tier well results, and excellent rates of return at strip oil prices.
The Company is also pleased to report positive preliminary drilling results from the 14 wells recently drilled at Shaunavon in the fourth quarter of 2016. Average total fluid deliverability for the 14 wells continues to meet Surge’s current Upper Shaunavon per well expectations.
The Company’s waterflood project continues to deliver excellent, measurable results, and Surge continues to expand the Upper Shaunavon waterflood having now converted a total of five wells to water injection.
Drilling, fracing, and on-stream costs at Shaunavon have dropped below $1.1 million per well, and the Company anticipates 150,000 boe of internally estimated ultimate recovery per well for primary production only.
Valhalla
Surge’s latest well at Valhalla, drilled in the fourth quarter of 2016, is the longest horizontal well drilled by the Company to date at 2,350 meters of lateral section, and a measured depth of 4,580 meters; combined with the most frac intervals to date at 27 stages. This exciting well into the northern extension of Surge’s large, Doig light oil pool, was also the Company’s first 200 meter infill well – which is the inter well spacing Surge is now pursuing.
Surge currently plans to drill five net wells at Valhalla in 2017, and will continue to advance the Company’s 200 meter down spacing program. Operating costs are budgeted to be $8.40 per boe in 2017 at Valhalla.
OUTLOOK – POSITIONING FOR SUCCESS
Surge’s stated goal is to be the best positioned light/medium crude oil, growth and dividend paying company in Canada. During the extended downturn in world crude oil prices, Surge management focused on creating balance sheet flexibility, and implementing rigorous cost cutting initiatives. Management also high-graded and optimized the Company’s asset base into high quality, large OOIP crude oil reservoirs in Surge’s three core areas – through low risk development drilling, and the implementation of successful waterfloods.
As a result of the Company’s continued successful development drilling results in the fourth quarter of 2016, and ongoing waterflood activities, Surge is now well positioned to exceed management’s projected 2016 exit rate of 13,500 boepd.
In addition, as set forth above, Surge is now revising upwards the Company’s 2017 average daily production estimate to 14,000 boepd, from 13,650 boepd, and Surge’s 2017 production exit rate to 14,450 boepd, from 14,150 boepd. This will provide shareholders with an 18 percent increase in organic production per share growth by the end of 2017, over the Company’s reported second quarter 2016 production level of 12,182 boepd.
The upward revision to the Company’s 2017 production growth estimates is occurring with no corresponding increase to Surge’s preliminary 2017 capex estimate of $85 million.
This upward revision will result in a 74 percent increase in estimated funds flow per share in 2017, as compared to the current forecast for 2016.
2016 Forecast |
2017 Budget |
% Change |
||||
Funds Flow Netbacks ($/boe) |
$14.82 |
$24.32 |
64% |
|||
Funds Flow ($MM) |
$70 |
$124.3 |
77% |
|||
Per Share (Basic) |
$0.31 |
$0.55 |
74% |
|||
Net Debt to Funds Flow |
2.1x |
1.0x |
(49%) |
|||
Pricing Assumptions |
||||||
WTI ($US/bbl) |
$42.86
|
$55.00 |
28% |
|||
CAD/USD Exchange Rate |
$0.76
|
$0.76
|
0% |
|||
Natural Gas (AECO C/$GJ) |
$1.96
|
$2.95
|
51% |
Surge’s ongoing strategic hedging program protects the execution of the Company’s 2017 drilling program through spring break-up, at a crude oil price level as low as US $39 WTI, while maintaining a first half of 2017 debt-to-cash flow ratio of under 2.0 times (i.e. at that low crude oil pricing assumption).
In accordance with managements disciplined, low risk, growth and dividend strategy, in 2017 Surge will now deliver more than six percent annual growth in production per share, plus pay its current dividend, with an “all-in” payout ratio of less than 100 percent – at less than US $50 WTI per barrel pricing. Strip oil prices for 2017 are currently above US $55 WTI per barrel.
With a large internally estimated drilling inventory of more than 10 years, an excellent balance sheet, and a very low cost structure, the Company is well positioned to deliver continued future per share growth in the current commodity price environment.