CALGARY, AB – Surge Energy Inc. (“Surge” or the “Company”) (TSX: SGY) and Astra Oil Corp. (“Astra”) announce that they have entered into an arrangement agreement (the “Arrangement Agreement”), pursuant to which Surge has agreed to acquire all of the issued and outstanding common shares of Astra (“Astra Shares”) by way of a statutory arrangement (the “Transaction”) for total consideration of approximately $160 million. The Transaction is to be funded by the issuance of Surge common shares (“Surge Shares”), and the assumption of approximately $15 million of net debt1.
The Astra assets (“Astra Assets”) include more than 4,100 boepd (90 percent liquids) of operated, light oil production, focused primarily in SE Saskatchewan with an operating netback1 of more than $42 per boe at US $65 WTI pricing. The Transaction is accretive to Surge’s forecast debt-adjusted 2022 cash flow per share1 and free cash flow1 per share, and adds highly concentrated light oil reserves, production, land, and operations. The Astra Assets are forecast to generate $58.1 million of net operating income1 over the next 12 months at US $65 WTI (less than current strip pricing), and the Company now estimates that its exit 2022 net debt to annualized Q4 2022 adjusted funds flow1 ratio will be approximately 1.0 times.
The Astra Assets will also contribute significantly to Surge’s ongoing ESG initiatives of reducing the impact of its operations on the environment. Astra is in the process of constructing a 45-kilometer gas gathering infrastructure system to conserve gas at critical facilities in SE Saskatchewan, reducing emissions from several operating fields. The project is estimated to cost approximately $12 million and will be partially funded by Natural Resources Canada’s Emissions Reduction Fund. Additionally, the Astra Assets have a very attractive corporate liability management rating (“LMR”) of 5.4, with a very low total undiscounted decommissioning liability of only $12.9 million.
The Transaction will result in a high quality, well-positioned 20,200 boepd (85 percent oil and liquids weighted), light and medium gravity, intermediate public oil company. The Astra Assets represent an exciting re-entry into southeast Saskatchewan for the Surge team. Surge management strategically targeted SE Saskatchewan as a new core area based on its high light oil netbacks, low cost production efficiencies and quick drilling payouts. Surge’s operational track record of execution in southeast Saskatchewan, combined with proven in-house technical expertise, positions the Company for both organic and acquisitive growth in this new core area.
Pro forma the Transaction, Surge’s two core growth areas rank in the top echelon for drilling economics2 in the entire Western Canadian Sedimentary Basin. Surge’s dominant position in the medium gravity Sparky crude oil play, and Astra’s SE Saskatchewan light oil assets, independently3 rank by rate of return (i.e. with the Clearwater and Lower Charlie Lake oil plays) as two of the top five crude oil plays in Canada.
In conjunction with the Transaction, Surge is pleased to announce that it has reached an agreement in principle with its lending syndicate, confirming the Company’s pro forma first lien revolving credit facility at $215 million, and extending the maturity from July 1, 2022 to November 30, 2022.
TRANSACTION HIGHLIGHTS
The Transaction has the following key benefits to Surge stakeholders @ US$65 WTI per barrel pricing4:
- 20 percent accretive to Surge’s forecast 2022 debt-adjusted cash flow per share;
- Surge’s net debt to annualized Q4 2022 adjusted funds flow ratio is forecast to decrease to 1.0 times;
- Increases Surge’s 2022 adjusted funds flow per boe by approximately 10 percent;
- Improves Surge’s forecast 2022 all-in payout ratio5 to 58 percent; and
- Increases Surge’s light oil weighting from 35 percent oil to 50 percent.
Paul Colborne, President and CEO of Surge, stated: “We believe this Transaction is an exciting opportunity for both Surge and Astra shareholders. Shareholders in the combined Company will have ownership in a sustainable, intermediate, light and medium gravity crude oil public company. Shareholders will benefit from Surge’s existing dominant position in the Sparky crude oil play, and from Astra’s highly focused, operated asset base, targeting high value light oil in SE Saskatchewan.
We now anticipate that Surge will generate free cash flow of more than $85 million in 2022 at US$65 WTI per barrel pricing, providing free cash flow per share of $0.146 in 2022.”
Andrew Greenslade, President and CEO of Astra, stated: “We are very excited about the Transaction with Surge. With Surge’s high quality, low decline, crude oil asset base, their dominant Sparky play, and their exciting financial free cash flow ‘torque’ to rising oil prices, we feel that pro forma Surge/Astra will prove to be one of the best positioned intermediate crude oil public companies in Canada as the recovery in energy continues. Astra’s high netback, SE Saskatchewan light oil asset base, low debt leverage, and its large 10 year drilling inventory, nicely complements Surge’s existing, low cost, conventional crude oil assets.”
TRANSACTION METRICS
Purchase Price |
$160 million |
Annual Net Operating Income |
$58.1 million |
Current Production |
>4,100 boepd (87% light oil) |
Proved plus probable reservesa |
16.6 MMboe (73% light oilb) |
Proved plus probable RLI |
11 years |
Estimated operating netback @ US $65 WTIc,5 |
$42/boe |
Liability Management Rating (“LMR”) |
5.4 |
Total Asset Retirement Obligation (“ARO”) |
$12.9 million |
Notes: |
a – Based upon Astra Oil Corp.’s Sproule reserve report titled “Evaluation of the P&NG Reserves of Astra Oil Corp. (as of December 31, 2020). |
b – Lower oil percentage booked is due to Sproule’s assumption that Steelman, Viewfield and Minard gas is tied in (total liquids booked at 85%) |
c – Based on 2021 pricing averaging as follows: US$65.00WTI/bbl; CAD$81.25WTI/bbl; EDM CAD$75.00/bbl; WCS CAD $64.38/bbl; AECO $2.50/mcf |
Net operating income multiple1,7 |
2.75x |
Production per boepd |
$39,024 / boepd |
Proved plus probable reserves |
$9.63 / boe |
Proved plus probable recycle ratio8 |
> 4.4x |
PRO FORMA HIGHLIGHTS – AN EXCITING, SUSTAINABLE, INTERMEDIATE OIL PRODUCER
The Transaction is consistent with Surge’s defined business model of acquiring high quality, operated, light and medium gravity crude oil reservoirs with large OOIP9 with low recovery factors. The combined Company will have over 850 internally estimated net development drilling locations10, providing a 13 year drilling inventory. The combined entity possesses a high quality, operated, light and medium gravity crude oil asset base, with extensive infrastructure in place to facilitate years of future development drilling and waterflood.
Operational platform to continue to execute on sustainable business model:
- Over 2.5 billion barrels of net combined, internally estimated, conventional OOIP – with a 6 percent recovery factor to date;
- Combined proven plus probable year end 2020 reserves of over 95 million boe (85 percent total liquids)9;
- 20,200 boepd light and medium gravity oil producer (85 percent oil and liquids weighted);
- Combined corporate base decline of 25 percent;
- Development drilling upside: >850 net locations10 (internally estimated); providing a development drilling inventory of more than 13 years; and
- A 13 year reserve life index (total proved plus probable).
Financial platform to deliver solid shareholder returns:
- Operating netbacks (before hedging) of more than $34.50 per boe at US $65 WTI per bbl;
- Full cycle corporate production efficiencies9 of less than $22,000 per flowing boepd;
- Greater than $85 million of free cash flow in 2022 at US $65 WTI crude oil prices;
- Free cash flow per share of $0.14 in 2022, providing a free cash flow yield11 of over 20 percent12.
Upward Revision to 2021 Exit PRODUCTION Rate & 2022 Guidance
The following is the Company’s increased guidance for Surge’s 2021 exit production rate, as well as financial and operational guidance for 2022 (after giving effect to the Transaction):
Upwardly Revised Guidance |
@ US $65 WTI* |
@ US $70 WTI* |
@ US $75 WTI* |
Exit 2021 production (boepd) |
20,200 |
||
Average 2022 production (boepd) |
20,200 |
||
% oil and NGL’s |
85% |
||
2022 Adjusted funds flow ($MM) |
$210 |
$235 |
$265 |
2022 Cash flow from operations ($MM) |
$195 |
$220 |
$250 |
2022 Exploration and Development Capital Expenditures ($MM) |
$110 |
$110 |
$110 |
2022 Free cash flow ($MM) |
$85 |
$110 |
$140 |
2022 All-in payout ratio |
56% |
50% |
44% |
2022 Net debt to annualized Q4/22 adjusted funds flow[13] |
1.0x |
0.8x |
0.6x |
*All pricing variables including differentials (WCS: US$13.50, EDM US$5.00), Fx of $0.80 and AECO of $2.50 per mcf remain constant. Adjusted funds flow and cash flow from operations exclude realized gains/losses from financial derivatives. |
NEW $215 MILLION CREDIT FACILITY
In combination with the Transaction, the Company is pleased to announce that it has reached an agreement in principle with its lending syndicate to amend and extend its first lien credit facilities.
Concurrent with the closing of the Transaction, Surge’s fully conforming first lien revolving credit facilities will be $215 million, with the Company’s next bank review scheduled to be on or before November 30, 2021. Additionally, the maturity of Surge’s first lien revolving credit facilities will be extended from July 1, 2022 to November 30, 2022.
This re-determination is forecast to provide the Company with ample available liquidity upon the closing of the Transaction, return the Company to a standard, single-tranche first lien credit facility, and significantly reduce Surge’s annual interest expense going forward.
TRANSACTION DETAILS
The purchase price payable by Surge under the Transaction will be $160 million, comprised of: 1) the issuance of approximately 3.1746 Surge Shares for every issued and outstanding Astra Share; and in addition, 2) the assumption of approximately $15 million of Astra net debt upon completion of the Transaction, before accounting for transaction costs.
The Transaction is expected to close in August 2021. Completion of the Transaction is subject to the approval of at least 66 2/3 of the voting Astra shareholders and approval of at least a simple majority of the voting shareholders of the issuance of Surge Shares pursuant to the Transaction. The meeting of Surge shareholders is currently expected to be held in mid-August 2021 and, in connection therewith, it is currently expected that a joint information circular and proxy statement will be sent to Surge shareholders in mid-July 2021. Completion of the Transaction is also subject to, among other things, the receipt of court approval, regulatory approvals and other customary closing conditions.
All of the directors and officers of Astra, as well as Astra’s largest shareholders, collectively holding approximately 68 percent of the outstanding Astra Shares, have entered into support and lock-up agreements pursuant to which they have agreed to vote their Astra Shares in favor of the Transaction and have agreed to certain escrow agreements with respect to any Surge Shares received from the Transaction following the completion of the Transaction, subject to certain exceptions.
Each of Astra and Surge has agreed to pay a termination fee of $4.35 million to the other party in certain circumstances, including in the case of Astra, if Astra recommends, approves, or enters into an agreement with respect to a superior proposal. Astra has agreed not to solicit or initiate any discussions regarding any other acquisition proposals or sale of material assets. Astra has also granted Surge a three business day right to match any superior proposal.
ADVISORS
Scotiabank is acting as exclusive financial advisor to Surge with respect to the Transaction and has provided a fairness opinion to the Surge Board of Directors. ATB Capital Markets, and BMO Capital Markets have been appointed strategic advisors to Surge on the Transaction. McCarthy Tétrault LLP is acting as legal advisor to Surge with respect to the Transaction.
National Bank Financial Inc. is acting as exclusive financial advisor to Astra. Burnet, Duckworth & Palmer LLP is acting as legal advisor to Astra with respect to the Transaction.
CONFERENCE CALL DETAILS
A conference call hosted by Paul Colborne, President and CEO of Surge, will be held for the investment community to discuss the Transaction. Details of the conference call are as follows:
Date: |
June 23, 2021 |
Time: |
9:00AM MST |
Dial-In: |
1-888-390-0608 (toll free) |
Conference ID: |
52957679 |