CALGARY, May 8, 2018 /CNW/ – Surge Energy Inc. (“Surge” or the “Company”) (TSX: SGY) announces its operating and financial results for the quarter ended March 31, 2018.
Over the last seven financial quarters Surge has delivered consistent drilling results, production per share growth, and funds flow per share growth. This consistent track record continued in Q1 2018 with the following production and funds flow metrics, as well as the other highlights from the quarter. All production and funds flow results in Q1 2018 are net of the sale of a non-core asset that closed on January 4, 2018, which accounted for approximately 240 boepd of production.
Based on better than anticipated drilling and waterflood results in the Company’s three core areas, Surge’s Q1 2018 production of 16,027 boepd exceeded management’s guidance expectations.
Surge’s daily production for the month of April exceeded the Company’s 2018 production exit rate guidance of 16,650 boepd (82% oil and liquids).
HIGHLIGHTS
- Surge’s Q1 2018 quarterly production of 16,027 boepd increased by 16 percent over Q1 2017 production of 13,866 boepd (12 percent per share).
- Adjusted funds flow in Q1 2018 was $28.2 million, an increase of over 30 percent as compared to Q1 2017 at $21.6 million.
- Adjusted funds flow per share in Q1 2018 was $0.121, an increase of 26 percent over Q1 2017 at $0.096 per share.
- Crude oil and liquids production increased by over 18 percent – from 10,982 barrels per day in Q1 2017 to 13,006 barrels per day in Q1 2018.
- The Company’s unhedged operating netback increased by over 12 percent, to $25.28 per boe in Q1 of 2018, from $22.47 per boe in Q1 of 2017.
- Subsequent to Q1 2018, Surge received commitments from its banking syndicate to increase the Company’s bank line to $350 million from $305 million (pending formal approval of an amendment to the credit agreement), which is expected to occur on or before May 31, 2018. This large increase to Surge’s bank line will provide the Company with more than $125 million of pro-forma liquidity on its bank line as at March 31, 2018.
- Surge drilled an exciting, large, new pool extension to the south at Lakeview in the Company’s Sparky core area. The well is producing with similar characteristics to an Eyehill Sparky type curve, and sets up over 20 follow up low risk development locations in the Lloyd formation.
- Proved up Betty Lake as another exciting growth asset in Surge’s Sparky play trend with a successful discovery well in late Q4 2017; Surge plans to drill four more wells at Betty Lake in the second half of 2018, as well as construct and install a new production battery to allow for further well optimization; The Company now sees up to 35 more development locations at Betty Lake.
- Closed the previously announced disposition of Surge’s non-core, gas-weighted Windfall property for $6.8 million.
- During the first quarter of 2018, Surge acquired more than 2 million of its common shares under the Company’s normal course issuer bid (“NCIB”).
- Delivered a 2017 finding development and acquisition (“FD&A”) cost of $13.60 per boe, on a total proved plus probable basis, including changes in undiscounted future development capital (“FDC”).
- Reported a top decile 2017 recycle ratio of 1.74 times FD&A, on a total proved plus probable basis.
- Increased the Company’s net asset value (“NAV”) by over 10 percent to $6.06 per common share, as compared to $5.47 per share at year end 2016, based on the Company’s independently evaluated reserve reports; Sproule’s 2017 year end WTI crude oil price forecast is approximately US $10.00 per barrel below current strip oil pricing for 2018.
Following an outage on TransCanada’s Keystone pipeline in November 2017, Western Canada Select (“WCS”) differentials expanded from US$12.26 per barrel in Q4 2017 to US$24.27 per barrel in Q1 2018. Prompt month WCS differentials are now tightening, returning to near-historical averages in recent weeks following the restart of the Keystone pipeline.
For comparative purposes only, had WCS differentials remained at Q4 2017 levels (ie. US$12.26/bbl), Surge estimates that the Company’s adjusted funds flow for Q1 2018 would have been approximately $37 million, or $0.16 per share.
FINANCIAL AND OPERATING SUMMARY
The Q1 2018 financial and operating highlights are summarized below:
($000s except per share amounts) |
||||
Three Months Ended March 31, |
||||
($000s except per share amounts) |
2018 |
2017 |
% Change |
|
Financial highlights |
||||
Oil sales |
64,492 |
48,194 |
34 % |
|
NGL sales |
2,461 |
2,240 |
10 % |
|
Natural gas sales |
1,337 |
4,016 |
(67)% |
|
Total oil, natural gas, and NGL revenue |
68,290 |
54,450 |
25 % |
|
Adjusted funds flow1 |
28,169 |
21,640 |
30 % |
|
Per share basic ($) |
0.121 |
0.096 |
26 % |
|
Capital expenditures – petroleum & gas properties2 |
34,909 |
34,041 |
3 % |
|
Capital expenditures – acquisitions & dispositions2 |
(6,485) |
(269) |
nm(4) |
|
Total capital expenditures2 |
28,424 |
33,772 |
nm |
|
Net debt at end of period3 |
252,742 |
178,753 |
41 % |
|
Operating highlights |
||||
Production: |
||||
Oil (bbls per day) |
12,446 |
10,298 |
21 % |
|
NGLs (bbls per day) |
560 |
684 |
(18)% |
|
Natural gas (mcf per day) |
18,128 |
17,302 |
5 % |
|
Total (boe per day) (6:1) |
16,027 |
13,866 |
16 % |
|
Average realized price (excluding hedges): |
||||
Oil ($ per bbl) |
57.58 |
52.00 |
11 % |
|
NGL ($ per bbl) |
48.82 |
36.39 |
34 % |
|
Natural gas ($ per mcf) |
0.82 |
2.58 |
(68)% |
|
Netback ($ per boe) |
||||
Oil, natural gas and NGL sales |
47.34 |
43.63 |
9 % |
|
Realized gain (loss) on commodity contracts |
(1.10) |
(1.59) |
nm |
|
Royalties |
(6.20) |
(5.64) |
10 % |
|
Net operating expenses |
(14.60) |
(13.95) |
5 % |
|
Transportation expenses |
(1.26) |
(1.57) |
(20)% |
|
Operating netback |
24.18 |
20.88 |
16 % |
|
G&A expense |
(2.22) |
(1.93) |
15 % |
|
Interest expense |
(2.44) |
(1.61) |
52 % |
|
Corporate netback |
19.52 |
17.34 |
13 % |
|
Common shares outstanding, end of period |
231,357 |
225,766 |
2 % |
|
Weighted average basic shares outstanding |
233,007 |
225,764 |
3 % |
|
Stock option dilution |
— |
3,427 |
nm |
|
Weighted average diluted shares outstanding |
233,007 |
229,191 |
2 % |
1 |
Management uses adjusted funds flow (cash flow from operating activities before changes in non-cash working capital, decommissioning expenditures, transaction and other costs and cash settled stock-based compensation) to analyze operating performance and leverage. Adjusted funds flow 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 capital expenditures discussion in the MD&A. |
3 |
The Company defines net debt as outstanding bank debt and the liability component of the convertible debentures 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”. |
OPERATIONAL MOMENTUM CONTINUES
Based on better than anticipated drilling and waterflood results in the Company’s three core areas, Surge’s Q1 2018 production of 16,027 boepd exceeded management’s guidance expectations.
Surge’s daily production for the month of April exceeded the Company’s 2018 production exit rate guidance of 16,650 boepd (82% oil and liquids).
With WCS differentials widening in Q1 2018, Surge was able to react quickly and successfully execute a strategic operational pivot to the Company’s extensive light oil assets at Valhalla. Accordingly, the Company accelerated its Valhalla capital program to include an additional well in the first quarter of 2018. This was in addition to a significant new light oil well drilled late in the fourth quarter of 2017. Surge also recently completed a successful workover on a Doig well at Valhalla. Combined, these three projects added over 2,000 boepd (more than 70 percent light oil) of sustainable production for a capital cost of approximately $9 million.
Operating costs in Q1 2018 were higher than budget due to the more severe weather conditions experienced this winter. We expect operating costs to revert back to budget levels of $13.95 per boe on a go forward basis.
Following are the Q1 2018 operational highlights for Surge’s three core properties:
Sparky – Key Wells at Provost, Lakeview and Betty Lake
Better than anticipated results at Surge’s Sparky play in Southeast Alberta continues to support significant allocation of the Company’s capital resources to this core area. Surge’s prospective Sparky land base and drilling inventory continues to expand as the Company remains active at both Crown land sales and through the acquisition of freehold lease agreements. Surge drilled nine gross wells on its Southeast Alberta Sparky properties during the first quarter. In addition to continued success at Eyehill, the Company also drilled exciting step out wells at both Provost and Lakeview.
During the first quarter at Eyehill, Surge drilled six successful wells, and completed a facilities expansion at the battery. Recent production at Eyehill is more than 2,000 boepd. Surge plans to drill an additional eight wells at Eyehill in 2H 2018.
At Provost, Surge drilled two of its top producing Sparky wells to date on the northern portion of the Company’s land base. These exciting wells confirm recently acquired 3D seismic data that supports incremental capital allocation to the Provost area. The Company plans to drill two additional wells at Provost in 2018. In addition to the successful drilling in the north, Surge also drilled two successful Sparky step out wells to the south – significantly extending the Company’s large OOIP pool to the southwest. The Company now estimates that its operated Provost Sparky pool has more than 70 million barrels of net internally estimated OOIP, and up to 25 net additional internally estimated Sparky drilling locations.
At Lakeview, Surge drilled its first Lloyd well during Q1 2018. This successful well confirms the presence of a large, internally estimated 54 million barrels of original oil in place (“OOIP”1) pool in the Lloydminster formation at Lakeview. The well is currently producing similar to an Eyehill Sparky type curve well. This exciting new pool extension discovery has added up to 20 net internally estimated drilling locations into the Lloydminster sand at Lakeview. Future Lloydminster well costs are expected to be in the range of $800,000 per well, as these wells do not require fracture stimulation. Surge plans to drill an additional two wells at Lakeview in 2018.
Surge’s initial Q4 2017 well at the Betty Lake discovery has now been on production for the majority of Q1 2018, and is currently producing at a rate of 115 boepd. The Company estimates that this 100 percent working interest play has potential for more than 80 million barrels of net OOIP (with an internally estimated recovery factor of 10 percent on primary, and up to 30 percent with waterflood), and more than 35 net additional internally estimated drilling locations. Based on these results, the Company now plans to drill an additional four wells at Betty Lake in the second half of 2018, and install a production battery to facilitate well optimization and further development.
Valhalla – Incremental Capital Allocation Leads to Higher Light Oil Volumes
Over the past several years price differentials for WCS barrels have averaged approximately US $14 per barrel below WTI US prices. During this period, Surge focused on growing its WCS-linked core areas at Sparky and Shaunavon. Following the TransCanada Keystone pipeline outage in November of 2017, WCS pricing differentials widened – but have since narrowed to near historical averages in Q2 2018, with the TCPL pipeline repaired.
Due to wider WCS differentials in Q1 2018, Surge successfully executed a strategic operational pivot to the Company’s extensive light oil assets at Valhalla. In addition to a significant new Doig oil well drilled in the fourth quarter of 2017, the Company was able to accelerate its Valhalla light oil capital program to include an additional well in the first quarter of 2018. Surge also completed a successful workover on an existing horizontal Doig well at Valhalla during the quarter. Combined, these three projects added over 2,000 boepd (more than 70 percent light oil) of sustainable production for a capital cost of approximately $9 million.
______________________________ |
|
1 |
Original Oil in Place (OOIP) is the equivalent to Discovered Petroleum Initially In Place (DPIIP) for the purposes of this press release. |
Due to market conditions and recent drilling success, Surge has elected to keep one rig running at Valhalla during the second quarter of 2018. The Company recently completed drilling its third Doig well in 2018, and plans to drill three more Doig wells, over the balance of the year. In addition to the Doig, Surge maintains significant light oil production and drilling potential in the conventional Montney, Doe Creek, and Charlie Lake plays at Valhalla. The Company plans to drill one additional well in either the Charlie Lake or Montney formations prior to year’s end.
Shaunavon – Contribution from Workovers and Waterflood
Surge drilled five and completed seven net wells at Shaunavon in the first quarter of 2018, including five in the Upper Shaunavon and two Lower Shaunavon. The Company continues to be encouraged with results from a new cemented liner completion design in both Upper and Lower Shaunavon horizons.
In addition to recent drilling activity, the Company has also implemented a very successful artificial lift workover program for legacy Lower Shaunavon wells. To date, Surge has converted 16 wells from progressive cavity pumps to pump jack operations, which has resulted in the addition of 245 bopd of production gain. For the balance of 2018, the Company plans to drill six more wells, and complete up to 10 more pump jack conversions.
In September of 2017, Surge commenced waterflood operations on its southernmost development pod in the Upper Shaunavon. The Company is pleased to report that it has observed early signs of production stabilization across Surge’s Southern lands, as well as a positive production response from producing wells that are bound by injectors. These results, combined with continued success at Surge’s original Upper Shaunavon waterflood, confirm the Upper Shaunavon sandstone reservoir has ideal reservoir characteristics for waterflood operations.
FINANCIAL HIGHLIGHTS
Large Increase to Primary Credit Facility
Surge has now delivered consistent, cost effective production per share growth of 25 percent over the last seven financial quarters. On this basis, subsequent to Q1 2018 Surge received commitments from its banking syndicate to increase the Company’s bank line to $350 million from $305 million (pending formal approval of an amendment to the credit agreement), which is expected to occur on or before May 31, 2018.
This large increase to Surge’s bank line will provide the Company with more than $125 million of pro-forma liquidity on its bank line as at March 31, 2018.
NCIB Update
In February of 2018, Surge instituted a NCIB with the intent to repurchase the Company’s shares. The NCIB was announced in conjunction with the Company’s independent December 31, 2017 Sproule engineering reserve report, and Surge’s new Total Proved NAV of $3.67 per share. Sproule’s 2017 year end WTI crude oil price forecast is approximately US $10.00 per barrel below current strip pricing for 2018.
The prevailing market price for Surge common shares for much of February and March was below $2.00 per share, which allowed for the Company to repurchase shares at less than Sproule’s 2017 Proved Developed Producing NAV value of $2.01 per share. Under reasonable assumptions, purchasing Surge common shares at less than the Company’s Total Proved NAV of $3.67 per share provides an excellent rate of return that is competitive with other investment opportunities that compete for Surge’s capital resources.
During the first quarter, the Company acquired over 2 million Surge common shares in the market at an average price of $1.97 per share – utilizing free funds flow and returning the acquired shares to treasury. The NCIB has now been extended into the second quarter of 2018.
Hedging Update
Surge continues an active, ongoing crude oil hedging program. Over the past several quarters, the Company has adopted a primarily options-based hedging program, which has allowed Surge to retain up to 80 percent of the upside to crude oil prices in 2018. The options-based program consists of a portfolio of costless collars, three-way collars, and put option spreads.
The following table summarizes the WTI and WCS crude oil hedges that were completed during, and subsequent, to the first quarter of 2018:
Type |
Term |
Bbl/d |
Currency |
Put Sold |
Put acquired |
Call sold |
WTI (financial) |
Jul 2018 – Mar 2019 |
500 |
USD |
50.00 |
60.00 |
70.25 |
WTI (financial) |
Jul 2018 – Mar 2019 |
500 |
USD |
50.00 |
57.50 |
78.10 |
WTI (financial) |
Q2 2019 |
500 |
USD |
50.00 |
57.50 |
72.50 |
WCS (physical) |
H2 2018 |
500 |
USD |
n/a |
22.00 |
16.45 |
WCS (physical) |
Cal 2019 |
1500 |
USD |
n/a |
22.00 |
16.45 |
When combined with existing hedges, the Company now has 1,500 bopd of WCS collars in place for the second half of 2018 with a blended price collar of US $19.33 per barrel (ceiling) x $12.82 per barrel (floor).
In addition to the Company’s ongoing crude oil hedging program, Surge entered into an interest rate hedge during the first quarter of 2018. This floating to fixed rate swap was on a principal amount of C$100 million, with a term from February 2018 to February 2023. Based on the current bank borrowing spread, this interest rate swap results in an effective all-in rate of 5.13 percent for the five-year term. When combined with Surge’s convertible debenture, Surge has now fixed $144.5 million of the Company’s core debt with an average all-in interest rate of 5.3 percent for 5 years.
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.
Surge’s track record over the last seven financial quarters of delivering consistent drilling results, production per share growth, and funds flow per share growth, continued into the first quarter of 2018. Surge has now delivered production per share growth of 25 percent from Q2 2016 to Q1 2018.
In addition, Surge has increased the Company’s dividend per share by more than 27 percent since the start of 2017, while maintaining a conservative simple payout ratio of less than 20 percent.
Accordingly, Surge intends to continue: 1) delivering annual production per share growth of five to seven percent in accordance with the Company’s strategic Five-Year Business Plan; 2) returning capital to its shareholders pursuant to the Company’s attractive and sustainable dividend; 3) generating substantial free funds flow at current strip pricing; and 4) returning capital to its shareholders pursuant to the accretive buyback of its common shares in accordance with the NCIB.