- a new term loan facility (the “Term Facility”) led by the Business Development Bank of Canada (“BDC”) in partnership with the Company’s syndicate of lenders (the “Syndicate”), for a non-revolving facility of $40 million with attractive interest rates and a four year term; and
- a credit commitment of up to $50 million from Export Development Canada (“EDC”) to join the Company’s existing $335 million first-lien credit facility (“Credit Facility”).
Subject to the closing of the Term Facility, the Syndicate has agreed to an extension of Surge’s Credit Facility. Maturity on the Credit Facility will be extended from March 31, 2021 to December 31, 2021 and the Company’s next semi-annual borrowing base redetermination will be shifted out from December 15, 2020 to June 30, 2021.
Surge anticipates that these new credit commitments, as well as the extension of the Credit Facility, will close on or about the week of November 16th, 2020. Closing is subject to final documentation.
$40 MILLION 4 YEAR TERM DEBT FACILITY
Surge has received commitments for a $40 million Term Facility under the BDC’s Business Credit Availability Program (“BCAP”) Mid-Market Financing Program, which provides the Company with a four year, non-revolving second lien Term Facility.
The BDC’s BCAP Mid-Market Financing Program was designed to provide support to financially viable, medium-sized businesses impacted by the COVID-19 pandemic, and the recent decline in oil prices, in the form of additional liquidity to continue operations through the pandemic, and to assist these companies in returning to pre-COVID-19 operating levels.
This Term Facility will also drive meaningful economic activity across the country, through the creation of hundreds of direct and indirect full-time jobs.
The Term Facility will provide Surge with significant, long term liquidity at attractive interest rates, and allows the Company to return production to pre-COVID-19 levels through the development of its high-quality, medium and light crude oil asset base. In turn, the Company will generate net asset value per share growth for all stakeholders.
$50 MILLION EDC CREDIT COMMITMENT
In addition to the Term Facility, the Company has received a credit commitment of up to $50 million from EDC, providing Surge with a significant new Syndicate banking partner in the Company’s existing $335 million Credit Facility.
EXTENSION OF CREDIT FACILITY
Concurrently with closing of the Term Facility, Surge’s lending Syndicate will re-confirm the Company’s existing $335 million Credit Facility.
Subject to the closing of the Term Facility, Surge’s Syndicate of lenders have agreed to extend the maturity of the Company’s $167.5 million revolving facility, and its non-revolving $167.5 million facility, from March 31, 2021 to December 31, 2021. In addition, the Company’s next semi-annual borrowing base redetermination will be extended to June 30, 2021.
The above reconfirmation and Credit Facility extensions, in combination with the Term Facility, will provide Surge with over $75 million in available liquidity on its credit facilities1.
Additionally, the Credit Facility requirement that Surge explore potential options for a small number of its lenders, through an asset sales solicitation process, has been deferred.
The Company appreciates the support and partnership of the BDC, EDC, and Surge’s Syndicate of lenders.
ESG AND ALBERTA SITE REHABILITATION PROGRAM UPDATE
As part of the Company’s commitment to Environmental, Social and Governance (“ESG”) stewardship, Surge and its service providers submitted more than 1,700 applications under the Government of Alberta’s Site Rehabilitation Program (“SRP”) to abandon and reclaim well bores, pipelines and well sites. The Government of Alberta is administering the SRP in various phases, providing grant funding through service providers for the abandonment or remediation of oil and gas sites.
As a result of these applications, the Company has now received SRP grants to date in excess of $10 million, which will allow Surge to greatly increase the number of wells, pipelines, and facilities it can abandon. In addition, Surge has received funding from the Saskatchewan Accelerated Site Closure Program to complete abandonments at the Company’s Saskatchewan properties.
Surge’s internal ongoing abandonment program, together with the enhanced SRP abandonment program, will meaningfully reduce the Company’s decommissioning liability over the next 12 months. The Company now anticipates abandoning more than 300 wells by March, 2021 – which is equal to approximately 26 percent of Surge’s total inactive well count.
Surge remains actively engaged with the Government of Alberta regarding additional SRP developments, as well as new developments in both Federal and Government of Saskatchewan programs, in order to accelerate the decommissioning of the Company’s asset retirement obligations.
Surge strives to be a leader in reducing the impact of its operations on the environment. The Company is committed to producing energy in a safe, responsible, and sustainable manner.
Q3 2020 FINANCIAL AND OPERATING HIGHLIGHTS
During Q3/20, the Company reactivated most of its temporarily curtailed production, averaging 17,092 boepd for the period. As a result of a lower than anticipated corporate production decline rate (now approximately 19 percent), Q3/20 production was consistent with the average production rate of Q2/20 with no drilling activity during the period.
Reactivation of the Company’s temporarily curtailed production was due to both rising crude oil and natural gas prices, as well as successful cost optimization projects, which have resulted in a lower breakeven price for several of Surge’s properties.
Strong operating results, combined with cost reduction efforts, resulted in the Company continuing to reduce net debt meaningfully during the quarter, despite crude oil prices averaging only US$40.93WTI per barrel. Year to date, Surge has reduced bank debt by more than $20 million through the COVID-19 pandemic and the Saudi/Russia crude oil price war. In Q3/20 alone, Surge generated $10 million of adjusted funds flow in excess of exploration and development expenditures.
Additionally, in Q3/20 the Company brought onstream two new Sparky wells that were drilled in the first quarter of 2020, confirming a significant new medium gravity crude oil discovery at Betty Lake North. This discovery at Betty Lake North further de-risks over 75 net Sparky locations2 in Surge’s internal drilling inventory, with full waterflood upside.
This exciting new discovery is consistent with the Company’s stated operating strategy of focusing capital towards large OOIP3 per section, conventional, low-cost, long-life, medium/light oil pools. Betty Lake North is the latest in a series of Sparky new pool discoveries for the Company over the last 6 years.
Surge has recently completed its 2020 internal type curve review of the Company’s extensive ~500 well ( > 12 year) Sparky drilling inventory, and the weighted average Sparky drilling location delivers an IRR3 of greater than 50 percent at US$40 WTI per barrel flat pricing.
FINANCIAL AND OPERATING HIGHLIGHTS
Three Months Ended September 30, |
Nine Months Ended September 30, |
||||||
($000s except per share amounts) |
2020 |
2019 |
% Change |
2020 |
2019 |
% Change |
|
Financial highlights |
|||||||
Oil sales |
54,000 |
93,818 |
(42)% |
143,643 |
289,333 |
(50)% |
|
NGL sales |
1,161 |
1,958 |
(41)% |
2,868 |
6,032 |
(52)% |
|
Natural gas sales |
1,770 |
1,250 |
42 % |
4,631 |
7,194 |
(36)% |
|
Total oil, natural gas, and NGL revenue |
56,931 |
97,026 |
(41)% |
151,142 |
302,559 |
(50)% |
|
Cash flow from operating activities |
15,082 |
40,228 |
(63)% |
61,190 |
114,943 |
(47)% |
|
Per share – basic ($) |
0.04 |
0.13 |
(69)% |
0.18 |
0.37 |
(51)% |
|
Adjusted funds flow* |
12,523 |
41,513 |
(70)% |
51,405 |
134,106 |
(62)% |
|
Per share – basic ($)* |
0.04 |
0.13 |
(69)% |
0.15 |
0.43 |
(65)% |
|
Net loss** |
(13,184) |
(4,269) |
209 % |
(689,570) |
(14,863) |
4,540 % |
|
Per share basic ($) |
(0.04) |
(0.01) |
300 % |
(2.06) |
(0.05) |
4,020 % |
|
Total exploration and development expenditures |
2,477 |
22,247 |
(89)% |
38,497 |
88,705 |
(57)% |
|
Total acquisitions & dispositions |
(762) |
12,077 |
(106)% |
(6,038) |
(44,896) |
(87)% |
|
Total capital expenditures |
1,715 |
34,324 |
(95)% |
32,459 |
43,809 |
(26)% |
|
Net debt*, end of period |
369,993 |
377,409 |
(2)% |
369,993 |
377,409 |
(2)% |
|
Operating highlights |
|||||||
Production: |
|||||||
Oil (bbls per day) |
13,759 |
17,170 |
(20)% |
14,817 |
17,358 |
(15)% |
|
NGLs (bbls per day) |
582 |
769 |
(24)% |
558 |
713 |
(22)% |
|
Natural gas (mcf per day) |
16,503 |
19,668 |
(16)% |
16,857 |
20,342 |
(17)% |
|
Total (boe per day) (6:1) |
17,092 |
21,217 |
(19)% |
18,185 |
21,461 |
(15)% |
|
Average realized price (excluding hedges): |
|||||||
Oil ($ per bbl) |
42.66 |
59.39 |
(28)% |
35.38 |
61.06 |
(42)% |
|
NGL ($ per bbl) |
21.68 |
27.69 |
(22)% |
18.76 |
30.97 |
(39)% |
|
Natural gas ($ per mcf) |
1.17 |
0.69 |
70 % |
1.00 |
1.30 |
(23)% |
|
Netback ($ per boe) |
|||||||
Petroleum and natural gas revenue |
36.21 |
49.71 |
(27)% |
30.33 |
51.64 |
(41)% |
|
Realized gain (loss) on commodity and FX contracts |
(1.67) |
(0.86) |
94 % |
5.29 |
(0.84) |
(730)% |
|
Royalties |
(4.00) |
(7.12) |
(44)% |
(3.61) |
(6.61) |
(45)% |
|
Net operating expenses* |
(14.16) |
(13.93) |
2 % |
(14.32) |
(14.36) |
– % |
|
Transportation expenses |
(1.39) |
(1.42) |
(2)% |
(1.58) |
(1.58) |
– % |
|
Operating netback* |
14.99 |
26.38 |
(43)% |
16.11 |
28.25 |
(43)% |
|
G&A expense |
(1.91) |
(1.81) |
6 % |
(1.91) |
(1.82) |
5 % |
|
Interest expense |
(5.11) |
(3.31) |
54 % |
(3.88) |
(3.54) |
10 % |
|
Adjusted funds flow* |
7.97 |
21.26 |
(63)% |
10.32 |
22.89 |
(55)% |
|
Common shares outstanding, end of period |
339,785 |
324,215 |
5 % |
339,785 |
324,215 |
5 % |
|
Weighted average basic shares outstanding |
337,115 |
318,076 |
6 % |
334,799 |
313,876 |
7 % |
|
Stock option dilution |
– |
– |
– % |
– |
– |
– % |
|
Weighted average diluted shares outstanding |
337,115 |
318,076 |
6 % |
334,799 |
313,876 |
7 % |
* This is a non-GAAP financial measure which is defined in the Non-GAAP Financial Measures section of this document. |
** For the nine months ended September 30, 2020, the Company incurred a net loss of $689.6 million, including a non-cash asset impairment charge of $590.6 million recognized in the first quarter of 2020 primarily due to a decrease in the average independent engineering price forecasts. The impairment charge does not impact the Company’s adjusted funds flow, and is reversible in future periods should there be any indicators that the value of the assets has increased. |
SURGE OUTLOOK: A COMPELLING VALUE PROPOSITION
Surge has a high quality, low decline, light and medium gravity crude oil asset and opportunity base. With the Company’s low (19 percent) annual production decline, high netbacks, large OOIP per section (conventional) crude oil assets, Surge provides investors with an excellent opportunity to participate in the ongoing crude oil price recovery.
The Company’s anticipated closing of $90 million in new credit commitments, pending final documentation, provides Surge with significant additional long term liquidity at reasonable interest rates, allowing the Company to pursue attractive development opportunities that generate net asset value growth for all stakeholders.
Surge has the flexibility to strategically deploy capital into its Sparky play, which has now emerged as one of the premium medium and light oil growth plays in Canada. Surge’s industry leading Sparky play has some of the best production efficiencies4 (<$10,000/boepd IP90), and rates of return for drilling new wells in all of Canada. Surge estimates a weighted average, risked, IRR @ $40 WTI per bbl flat pricing for its entire Sparky inventory, of greater than 50 percent. These excellent risked returns are for primary drilling only, and do not include waterflood upside.
The Company has now drilled 138 consecutive successful horizontal Sparky wells, and grown production in its Sparky core area by more than 650 percent from 1,200 boepd (95 percent oil), to approximately 9,000 boepd (95 percent medium/light oil), in the last 6 years.
Surge’s Sparky core area now has:
- Numerous high quality, high permeability, high porosity, conventional sandstone reservoirs.
- 9,000 boepd (95 percent medium/light oil) of current production;
- ~500 internally identified net drilling locations5 (>12 year inventory) – with very predictable drilling results; and
- Top decile production efficiencies (<$10,000/boepd IP90).
Additionally, Western Canadian Select (“WCS”) differentials have contracted meaningfully in the last several months, with WCS to WTI differentials currently over 20 percent tighter than the long term average. Surge’s Sparky play will benefit significantly from this tightening, with cashflows, netbacks and reserve values in this premier conventional medium/light oil play increasing commensurately.
Management believes that Surge’s premium Sparky crude oil growth asset is unique within the Company’s entire peer group in Canada.