COVID-19: PROTECTING STAFF, FAMILIES, SERVICE PROVIDERS, STAKEHOLDERS AND THE PUBLIC
In response to the rapidly evolving COVID-19 pandemic, Surge has taken all possible steps to protect its staff, their families, service providers, stakeholders and the general public. Health and safety is our number one priority and we have a dedicated team working on proactive measures to limit COVID-19 from negatively impacting our employees and business.
At this time, we have taken the necessary steps to slow the spread of the virus, including heeding the government’s advice for physical distancing. We have closed our Calgary office and staff are working remotely. Furthermore, we have mitigation plans in place for all field operations staff across Western Canada. These measures protect their health while they work diligently to ensure the safety and security of our facilities as well as continuing to deliver reliable production. All our locations have implemented enhanced cleaning and sanitation measures.
We will continue to monitor the situation, taking guidance from health authorities, and look for opportunities to participate in any activities that will slow the spread of the virus and “flatten the curve”. We thank our staff, their families, our partners and the communities in which we operate, for their participation in these proactive measures.
Both the COVID-19 pandemic, and increased oil production from OPEC and Russia, have dramatically decreased the price of crude oil in recent weeks. Accordingly, Surge’s management and Board acted quickly, taking decisive action to protect shareholders and the Company’s balance sheet. On March 9, 2020 (US$31 per bbl WTI), Surge reduced its dividend by 90 percent. In addition, Surge suspended all major capital expenditures in early March, providing the Company with greater operational and financial flexibility for the balance of 2020.
Furthermore, Surge has completed a comprehensive review of operating costs in all production areas, as the Company continues to focus on further reducing its cost structure. On this basis, the Company has elected to temporarily curtail up to 4,400 boepd of lower margin production in order to maximize corporate cash flows. Surge has the ability to restart this production in short order, as commodity prices increase. Additionally, Surge is selectively choosing to work over any wells that meet the Company’s internal economic hurdle rate of a six to nine month payout at current strip prices.
After executing these temporary production curtailments, based on the Company’s robust, ongoing risk management program, Surge will now have approximately 50 percent of its net, after royalty Crown oil production hedged through the balance of 2020. Surge’s excellent WTI hedge position, depicted below, has an average floor price of approximately CAD$80 per barrel for the first half of 2020.
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Surge’s ongoing risk management program encompasses not only WTI crude oil price hedges, but also includes very attractive WCS and MSW oil differential hedges, as well as AECO and NYMEX natural gas hedge positions. For example, Surge has now locked in more than 65 percent of its light oil differentials for Q2 and Q3 2020 at approximately US$5 per barrel.
Surge has a very low corporate decline of 23 percent. Operationally, the Company’s high quality, large original oil in place1 (“OOIP”), conventional reservoirs continued to deliver excellent results during the first quarter of 2020. Surge completed its Q1 2020 drilling program in early March, drilling 19 successful horizontal wells in seven different Sparky pools, which included the delineation of two new Sparky pool discoveries on its lands at Betty Lake North and Eyehill South.
Currently, 16 of the wells drilled in the quarter are on production, with initial production results performing at or above management’s expectations. With these successful drilling results, the Company’s production exceeded 21,000 boepd in March (prior to the temporary production curtailments), with three additional Sparky wells to be brought on production as crude oil prices improve.
Subsequent to Surge’s March 9th press release, when Surge’s management and Board elected to reduce the Company’s dividend by 90 percent, crude oil prices have continued to drop precipitously.
In light of this continued volatility in global crude oil markets, as well as the ongoing impacts of the COVID-19 pandemic, the Company is taking further steps to protect shareholder value and corporate cash flow by suspending its dividend (approximately $33.5 million in annualized savings i.e. when combined with the previously announced March 9th dividend reduction) until such time as Surge’s management and Board see a sustainable recovery in world crude oil prices.
As such, the last cash dividend payment prior to suspension will be on April 15, 2020 in respect of March 2020 production, for the shareholders on record March 31, 2020 in the amount of $0.000833 per share, as declared on March 16, 2020.
Given the unprecedented circumstances facing world crude oil markets, along with the aforementioned production curtailments, the Company is also suspending its previously announced 2020 guidance and capital program of $98.5 million. Surge’s capital expenditures were approximately $34 million in the first quarter, and the Company’s capital program will be re-guided as commodity prices improve.
ANNUAL GENERAL MEETING
The Company’s Annual General Meeting of Shareholders is currently scheduled for 3:00 PM on Tuesday, May 12, 2020. In light of the COVID-19 pandemic, the Company will ensure that all government measures in effect on May 12, 2020, including physical distancing, will be adhered to at the annual meeting, and Surge does not plan to have a presentation at the conclusion of the meeting.
Given the current circumstances, the Company strongly encourages registered shareholders and proxyholders not to attend the meeting in person. All shareholders are strongly encouraged to submit their vote by proxy ahead of the meeting in accordance with the instructions described in the Company’s information circular. In the event Surge must adjust the meeting plans due to the COVID – 19 situation, further information will be shared by way of news release as promptly as possible.