CALGARY, AB – Surge Energy Inc. (“Surge” or the “Company”) (TSX: SGY) is pleased to announce its financial and operating results for the quarter and year ended December 31, 2020, and its year-end 2020 reserves, as independently evaluated by Sproule Associates Limited (“Sproule”).
2020 FINANCIAL, OPERATIONAL, AND RESERVES HIGHLIGHTS
- Achieved an all-in payout ratio1 of less than 100 percent for 2020 while oil averaged less than US$40 WTI per barrel, generating cash flow from operating activities less payments on lease obligations of $64.1 million and employing a disciplined exploration and development program of $52.8 million;
- Generated realized hedging gains on financial contracts of over $20 million in 2020 pursuant to the Company’s ongoing strategic risk management program;
- Added over $90 million of new credit facility commitments, including a previously announced BDC financing ($40 million second lien) and a $51 million commitment by EDC into Surge’s existing first lien credit facility;
- Reduced net bank debt1 by $36.5 million in 2020 from $313.6 million at December 31, 2019 to $277.1 million at December 31, 2020;
- Continued Surge’s focus on ESG, completing a total of $9.3 million on abandonment activities. This was funded using a combination of cash flow from operating activities, as well as grants received through the Alberta Site Rehabilitation Program;
- Achieved average daily production of 17,356 boepd (84% liquids) during the fourth quarter of 2020; consistent with the second and third quarters of 2020 despite no production additions from drilling activity during those periods and a significantly reduced exploration and development expenditure program as compared to the prior year;
- Prior to suspending major exploration and development expenditures in March 2020, successfully drilled 19 consecutive Sparky wells at an all-in cost of $22 million.
- Reduced P+PDP decline from 21% (2019YE) to 18%2 (2020YE);
- Estimated Total P+P Net Asset Value of $2.43 per basic share and Total Proved Net Asset Value of $1.19 per basic share at a US $55 WTI Flat Price Deck3;
- Surge’s 401 net (427 gross) booked locations of undeveloped reserves in the Company’s new Sproule December 31, 2020 Engineering Report, have a Finding & Development (“F&D”) cost of $12.43/boe on a Proved plus Probable Undeveloped (“P+PUD”) reserves basis;
- 2020 Drilling (19 Wells) F&D was $12.05/boe PDP and $10.25/boe P+PDP;
- Increased Total P+P reserve life index to 16 years;
Subsequent to the year-end 2020, on March 5, 2021 Surge announced:
1. The Company is nearing completion of its successful, 32 well 1H/21 drilling program – and anticipates adding more than 3,200 boepd for an “all-in” cost of $39 million;
2. The strategic sale of 2,700 boepd of production (the “Sale”) for proceeds of $106 million (closing March 25/21).
- The disposed assets had reserves of 10.3 MMBOE on a Total Proved basis and 20.6 MBOE on a Total Proved plus Probable basis as at December 31, 2020.
- The disposed assets had 40.8 net Proved locations booked and 62.8 net Proved plus Probable locations booked.
- Surge maintains a deep inventory of booked locations, with 270 net Proved and 339 net Proved plus Probable locations net of the disposition. Furthermore, the Company has an additional >400 net unbooked locations4;
3. Following the Sale, Surge retains a deep, 14 year drilling inventory of more than 750 highly economic drilling locations for medium and light gravity crude oil; and
4. At the closing of the Sale, Surge anticipates it’s first lien credit facilities will be re-determined at $215 million, with the Company’s next bank review scheduled on or before November 30, 2021. In addition, the previous obligation to conduct an asset sale solicitation process in 2021 is eliminated. This re-determination is forecast to provide the Company with over $25 million of available liquidity5 upon the closing of the Sale, and to significantly reduce Surge’s annual interest expense.
OPERATIONAL UDPATE
Surge’s high quality, low cost conventional reservoirs continued to deliver excellent results throughout the year. Surge completed a reduced Q1/20 drilling program in early March, drilling 19 successful horizontal wells in seven different Sparky pools. This program included the delineation of two new Sparky pool discoveries on its lands at Betty Lake North and Eyehill South.
In late Q4/20, Surge commenced a disciplined, 32 well drilling program, following the closing of the Company’s previously announced $40 million Term Facility under the Business Development Bank of Canada’s Business Credit Availability Mid-Market Financing Program. The Company drilled and rig released 13 gross (13.0 net) Sparky wells in late Q4/20. These wells have all now been completed and are anticipated to be on production in late Q1/21.
This drilling program continued into Q1/21, and the Company has rig released an additional 18 gross (18.0 net) wells to date in 2021, all in the Company’s Sparky core area. One additional (1.0 net) well is budgeted to be drilled in late Q1/21 into the Company’s large OOIP Montney turbidite pool in the Valhalla core area. This is a development offset location to the Company’s successful Montney horizontal well drilled and brought on production in Q4/19. This well had an IP30 oil rate of more than 1,000 bopd and has delivered cumulative production of over 215,000 barrels of light oil in one year.
FINANCIAL AND OPERATING HIGHLIGHTS
FINANCIAL AND OPERATING HIGHLIGHTS |
Three Months Ended December 31, |
Years Ended December 31, |
||||
($000s except per share amounts) |
2020 |
2019 |
% Change |
2020 |
2019 |
% Change |
Financial highlights |
||||||
Oil sales |
55,565 |
86,905 |
(36)% |
199,208 |
376,238 |
(47)% |
NGL sales |
1,745 |
2,076 |
(16)% |
4,613 |
8,109 |
(43)% |
Natural gas sales |
2,597 |
2,808 |
(8)% |
7,228 |
10,002 |
(28)% |
Total oil, natural gas, and NGL revenue |
59,907 |
91,789 |
(35)% |
211,049 |
394,349 |
(46)% |
Cash flow from operating activities |
11,000 |
34,474 |
(68)% |
72,190 |
149,417 |
(52)% |
Per share – basic ($) |
0.03 |
0.11 |
(73)% |
0.21 |
0.47 |
(55)% |
Adjusted funds flow1 |
8,467 |
38,881 |
(78)% |
59,872 |
172,988 |
(65)% |
Per share – basic ($)1 |
0.02 |
0.12 |
(83)% |
0.18 |
0.55 |
(67)% |
Net loss2 |
(57,727) |
(143,801) |
(60)% |
(747,297) |
(158,664) |
371 % |
Per share basic ($) |
(0.17) |
(0.44) |
(61)% |
(2.22) |
(0.50) |
344 % |
Total exploration and development expenditures |
14,276 |
30,760 |
(54)% |
52,773 |
119,465 |
(56)% |
Total acquisitions & dispositions |
– |
2,458 |
(100)% |
(6,038) |
(42,438) |
(86)% |
Total capital expenditures |
14,276 |
33,218 |
(57)% |
46,735 |
77,027 |
(39)% |
Net debt1, end of period |
381,023 |
382,309 |
– % |
381,023 |
382,309 |
– % |
Operating highlights |
||||||
Production: |
||||||
Oil (bbls per day) |
13,788 |
16,441 |
(16)% |
14,558 |
17,127 |
(15)% |
NGLs (bbls per day) |
726 |
630 |
15 % |
600 |
692 |
(13)% |
Natural gas (mcf per day) |
17,050 |
19,521 |
(13)% |
16,906 |
20,135 |
(16)% |
Total (boe per day) (6:1) |
17,356 |
20,325 |
(15)% |
17,976 |
21,175 |
(15)% |
Average realized price (excluding hedges): |
||||||
Oil ($ per bbl) |
43.80 |
57.46 |
(24)% |
37.39 |
60.19 |
(38)% |
NGL ($ per bbl) |
26.14 |
35.84 |
(27)% |
21.00 |
32.09 |
(35)% |
Natural gas ($ per mcf) |
1.66 |
1.56 |
6 % |
1.17 |
1.36 |
(14)% |
Netback ($ per boe) |
||||||
Petroleum and natural gas revenue |
37.52 |
49.09 |
(24)% |
32.08 |
51.02 |
(37)% |
Realized gain (loss) on commodity and FX contracts |
(3.91) |
0.13 |
(3,108)% |
3.05 |
(0.61) |
(600)% |
Royalties |
(4.07) |
(7.00) |
(42)% |
(3.72) |
(6.71) |
(45)% |
Net operating expenses1 |
(15.99) |
(14.91) |
7 % |
(14.72) |
(14.50) |
2 % |
Transportation expenses |
(1.18) |
(1.40) |
(16)% |
(1.48) |
(1.54) |
(4)% |
Operating netback1 |
12.37 |
25.91 |
(52)% |
15.21 |
27.66 |
(45)% |
G&A expense |
(1.86) |
(1.95) |
(5)% |
(1.90) |
(1.85) |
3 % |
Interest expense |
(5.21) |
(3.16) |
65 % |
(4.20) |
(3.45) |
22 % |
Adjusted funds flow1 |
5.30 |
20.80 |
(75)% |
9.11 |
22.36 |
(59)% |
Common shares outstanding, end of period |
339,785 |
326,330 |
4 % |
339,785 |
326,330 |
4 % |
Weighted average basic shares outstanding |
339,785 |
324,836 |
5 % |
336,052 |
316,639 |
6 % |
Weighted average diluted shares outstanding |
339,785 |
324,836 |
5 % |
336,052 |
316,639 |
6 % |
1 This is a non-GAAP financial measure which is defined in the Non-GAAP Financial Measures section of this document. |
2 For the year ended December 31, 2020, the Company incurred a net loss of $747.3 million, including a non-cash asset impairment charge of $628.1 million recognized in the year 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. |
ENVIRONMENTAL, SOCIAL, AND GOVERNANCE
Surge was recently allocated an additional $3.2 million under the Government of Alberta’s Site Rehabilitation Program (“SRP”) to abandon and reclaim well bores, pipelines, and well sites. To date, the Company has now received more than $14 million in grant funding from the Alberta SRP.
Surge will continue to be actively engaged with the Government of Alberta regarding additional SRP developments, as well as new developments in both Federal and Government of Saskatchewan programs, in order to accelerate the decommissioning of the Company’s asset retirement obligations.
Surge strives to be a leader in reducing the impact of its operations on the environment. The Company is committed to producing energy in a safe, responsible, and sustainable manner.
2020 YEAR-END RESERVES
The Company’s reserves were evaluated by Sproule in accordance with National Instrument 51-101 – Standards of Disclosure for Oil and Gas Activities (“NI 51-101”) effective December 31, 2020. Surge’s annual information form (the “AIF”) for the year ended December 31, 2020 contains Surge’s reserves data and other oil and natural gas information as mandated by NI 51-101.
The following tables summarize Surge’s working interest oil, natural gas liquids and natural gas reserves and the net present values (“NPV”) of future net revenue for these reserves (before taxes) using forecast prices and costs as evaluated in the Sproule Report. The evaluation is based on Sproule’s forecast pricing and exchange rates at December 31, 2020 which is available on their website www.sproule.com. All references to reserves in this release are to gross Company reserves, meaning Surge’s working interest reserves before deductions of royalties and before consideration of the Company’s royalty interests. The amounts in the tables may not add due to rounding.
RESERVES SUMMARY AND NET PRESENT VALUE
Gross Reserves(a) |
Crude Oil and (Mbbl)(b) |
Natural (MMcf)(c) |
Oil Equivalent (Mboe) |
Before Tax NPV of Future Net |
|||
5% ($MM) |
10% ($MM) |
15% ($MM) |
|||||
Proved: |
|||||||
Proved Producing |
26,661 |
24,208 |
30,696 |
296(e) |
298 |
276 |
|
Proved Non-Producing |
900 |
936 |
1,056 |
14 |
11 |
9 |
|
Proved Undeveloped |
29,729 |
33,837 |
35,369 |
336 |
237 |
169 |
|
Total Proved |
57,290 |
58,980 |
67,120 |
646 |
546 |
454 |
|
Probable |
29,675 |
27,185 |
34,206 |
577 |
414 |
311 |
|
Total Proved Plus Probable |
86,965 |
86,165 |
101,326 |
1,222 |
960 |
765 |
a) |
Amounts may not add due to rounding. |
b) |
Includes light, medium, heavy and natural gas liquids. |
c) |
Includes non-associated and natural gas, solution gas and coal bed methane. |
d) |
Total ADR (Abandonment, Decommissioning, Reclamation) is included in the reserves report, as it is best practice stated in the COGE Handbook. |
e) |
As discounting decreases, abandonment costs become more significant. |
FUTURE DEVELOPMENT CAPITAL (“FDC”)
Total Proved Developed |
Total Proved |
Total Proved |
|
($MM) |
($MM) |
($MM) |
|
2021 |
7 |
70 |
85 |
2022 |
7 |
161 |
200 |
2023 |
5 |
145 |
184 |
2024 |
4 |
129 |
172 |
2025 |
3 |
74 |
94 |
Remaining |
16 |
58 |
105 |
Total (Undiscounted) |
43 |
636 |
839 |
Total (Discounted at 10%) |
30 |
488 |
631 |
NET ASSET VALUE at US$55 WTI Flat
TP |
TPP |
|
Reserve Value NPV10 BT ($MM) (a) |
$673 |
$1,096 |
Undeveloped Land and Seismic ($MM) (b) |
$113 |
$113 |
Net Debt ($MM) |
$(381) |
$(381) |
Total Net Assets ($MM) |
$404 |
$827 |
Basic Shares Outstanding (MM) |
339.8 |
339.8 |
Estimated NAV per Basic Share ($/share) |
$1.19/share |
$2.43/share |
a) |
Run on a US$55 Flat price deck (-US$12.50/bbl WCS & -US$4.00/bbl EDM differentials, 0.78 FX and C$2.80/mmbtu AECO) |
b) |
Internally estimated as $80 MM for non-reserve assigned land and $33 MM for seismic data. |
Outlook; Guidance 2021/2022
In just the last 4 months, oil prices have rallied over 90%, from a low of US$33.64 per barrel on November 3, 2020 to over US$64 WTI per barrel, today. Furthermore, WCS differentials are trading below their long-term average of approximately US$17 per barrel to less than US$12 per barrel, today. Light oil differentials are also trading below their long-term average of approximately US$6 per barrel to less than US$3 per barrel today.
In 1H/21, the Company is completing a $39 million development drilling capital program, adding estimated production of more than 3,200 boepd (>90% medium/light oil) from 32 gross (32.0 net) wells. Concurrently, during Q1/21, Surge executed a binding Purchase and Sale Agreement for the sale of 2,700 boepd for total gross proceeds of $106 million (before customary adjustments); the sale is set to close on or before March 25, 2021.
On a go forward basis, Surge is planning a disciplined capital allocation strategy with an emphasis on free cash flow generation in 2H/21. The Company is currently budgeting for a 2H/21 maintenance drilling program, allocating the incremental free cash flow to continued reduction of bank indebtedness.
Surge will be reforecasting 2021, and providing 2022 guidance, after the closing of the Sale on March 25, 2021.