CORPORATE UPDATE – MACRO ENVIROMENT FOR OIL IMPROVING
In 2019, with US WTI crude oil prices averaging US$57 WTI per bbl, Surge successfully maintained the Company’s annual production (cost effectively), paid its prior dividend (using just 17 percent of the Company’s adjusted funds flow1), and reduced net debt1 by $79 million (adding significantly to the net asset value and liquidity of the Company).
In early 2020, crude oil prices rallied to over US$63 WTI per bbl. Accordingly, pursuant to Surge’s strategic hedging program, the Company locked-in a significant portion of its 2020 oil production at these attractive, pre-COVID, price levels.
In March and April of 2020, massive crude oil demand destruction from the COVID-19 pandemic, together with increased oil production from OPEC and Russia, contributed to a dramatic decrease in the price of oil. On this basis, Surge’s management and Board acted decisively to protect the Company’s balance sheet and net asset value (“NAV”) during this period as follows:
- On March 9, 2020, Surge was the first public oil company in Canada to reduce its dividend (by 90 percent);
- In early March the Company suspended all major capital expenditures providing operational and financial flexibility for the balance of 2020;
- Prior to suspending Q1/20 capital expenditures, Surge completed its previously-announced Q1 development drilling program, drilling 19 consecutive successful Sparky oil wells (i.e. of a budgeted 26 well program). The Company added more than 2,500 boepd (>90 percent medium/light oil) with this reduced program at an all-in cost of $22 million, providing top tier capital efficiencies2 of $8,800 per boepd;
- On April 14, 2020, the Company was one of the first oil companies in Canada to implement temporary production curtailments. This curtailment included up to 4,400 boepd (~21 percent of March volumes, 96 percent liquids) of lower netback production in order to maximize corporate cashflows;
- On April 14, 2020, Surge suspended the Company’s dividend in its entirety until market conditions improve; and
- The Company identified approximately $40 million of annualized operating and G&A cash reductions through, workforce optimizations, temporary production curtailments, as well as the minimization and elimination of discretionary corporate costs.
Crude oil prices have now increased over 225 percent, from a low of US$11.57 per bbl WTI on April 21, 2020 to over US$39 per bbl WTI currently. Furthermore, positive May, 2020 employment numbers in the US and Canada, historic OPEC+ production curtailments, rising US gasoline demand, rapidly increasing Chinese oil demand, combined with massive global production curtailments, capital expenditure reductions, and significant US shale oil declines, have all led to crude oil prices recovering much faster than management anticipated.
Management’s proactive capital allocation decisions set forth above, along with the Company’s strategic hedging program, have worked very well to protect both Surge’s balance sheet, and the Company’s December 31, 2019 independently engineered Sproule proved developed producing NAV of $1.08 per share, as well as Surge’s total proved NAV of $2.37 per share.
CREDIT FACILITY REDETERMINATION – REVOLVER EXTENDED TO DECEMBER 15, 2020
The Company, in partnership with its syndicate of lenders (“Syndicate”), has completed the redetermination of its Credit Facility. Surge’s Credit Facility has been confirmed at $335 million, with the revolving period extended to December 15, 2020 and the term period amended to March 31, 2021.
The Company has agreed to a maintenance capital budget for 2020 of approximately $45 million, with the ability to expand this budget with Board and unanimous Syndicate approval. Surge anticipates the Credit Facility will provide sufficient liquidity to execute on its business plan through the balance of 2020, with the Company drawn approximately $305 million as of June 19, 2020 and having spent $32.5 million in capital as at March 31, 2020.
As a result of the Company’s very low, 23 percent, corporate decline, its strategic hedging program, and management’s proactive decisions detailed above, Surge anticipates reducing net debt meaningfully over the rest of the year at strip oil prices3. This will continue to both enhance the Company’s balance sheet and increase Surge’s NAV per share.
SPARKY TECHNICAL UPDATE
Over the past five years in Surge’s Sparky core area, the Company has amassed a dominant, conventional, low cost, low risk, medium/light oil play that has the following characteristics4:
- >1 billion bbls of net internally estimated OOIP;
- An extensive, low risk, 500 net location, >12 year drilling inventory – with waterflood upside; and
- Per well economics that deliver quick payouts and excellent rates of return at US$40 WTI per bbl flat pricing.
Surge has now grown its Sparky core area production by more than 650 percent in the last 6 years, from 1,200 boepd to more than 9,000 boepd today (>94% liquids).
The Company has now drilled 138 consecutive successful wells into its prolific core Sparky asset. Over the last few months Surge completed an internal technical analysis of the Company’s drilling results in the Sparky area. This analysis confirmed that the average production from the original 400m primary Sparky wells, were identical to the subsequent 200m ‘infill’ wells, on an IP180 day basis.
Thisexciting verification of Surge’s deep Sparky drilling inventory is due to the high quality, large OOIP per section nature of the reservoirs. These Sparky reservoirs are shallow, conventional, sandstones with up to 30 percent porosity. Given the low drilling costs associated with the play (ie. $1.15MM ‘all-in’ drilled, completed, on-stream), the Company’s Sparky wells generate top tier production efficiencies.