With the Company’s recent acquisition of Astra Oil Corp. (“Astra”), Surge management strategically targeted SE Saskatchewan as a new area of growth based on its high value light oil netbacks, low-cost production efficiencies, and quick drilling payouts. Surge’s operational track record of execution in SE Saskatchewan, combined with its proven in-house technical expertise, make this an exciting new core area for the Company.
The Fire Sky assets (“Fire Sky Assets”) are currently producing more than 1,500 boepd (>95 percent liquids) of operated, light oil, focused in Surge’s SE Saskatchewan core area, with an operating netback1 of more than $52 per boe at US$70 WTI pricing – which is now less than 2022 average strip pricing.
Following the Transaction, Surge now forecasts average production in 2022 of 21,500 boepd (86% liquids) of primarily light and medium gravity crude oil.
STRATEGIC RATIONALE
- The Transaction is accretive to Surge’s 2022 free cash flow1 per share, and debt adjusted cash flow per share1;
- The Fire Sky Assets are forecast to increase the Company’s cash flow from operating activities by $26 million over the next 12 months at US $70 WTI;
- The Company now estimates that its exit 2022 net debt to annualized Q4 2022 adjusted funds flow1 ratio will be approximately 0.7 times at US$70 WTI;
- The Transaction adds highly concentrated light oil reserves, production, land, and infrastructure in Surge’s SE Saskatchewan core area;
- The Fire Sky Assets include a large internally estimated development drilling inventory of more than 100 locations2;
- The Fire Sky Assets are an excellent operational fit providing numerous synergies with the attractive light oil assets recently acquired through the Astra transaction; and
- Fire Sky has an attractive corporate Licensee Liability Rating (“LLR”) in Saskatchewan of 3.5, with a total undiscounted decommissioning liability of only $9.8 million.
The Transaction is consistent with Surge’s defined business model of acquiring high quality, operated, light and medium gravity crude oil reservoirs with large original oil in place (“OOIP”)3 and low recovery factors. The combined company possesses high netbacks, an operated light and medium gravity crude oil asset base, with extensive infrastructure in place to facilitate years of future development drilling and waterflood.
TRANSACTION HIGHLIGHTS
The Transaction has the following key benefits to Surge stakeholders @ US$70 WTI per barrel pricing4:
- Accelerates Surge’s return to its traditional value-based shareholder returns business model, including the potential for reinstatement of a dividend and share buy-back program;
- Five 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 0.7 times;
- Increases Surge’s 2022 adjusted funds flow per boe by approximately five percent;
- Improves the forecast 2022 all-in payout ratio5 to 47 percent from 50 percent;
- Raises Surge’s forecast 2022 free cash flow to over $120 million ($1.44 per share6); and
- Increases the Company’s light oil weighting from 50 percent to approximately 53 percent.
TRANSACTION METRICS
Purchase Price |
$58 million |
Annual cash flow from operating activitiesa |
$26 million |
Current production rate |
>1,500 boepd (95% light oil) |
Proved plus probable reservesb |
5.8 MMboe (99% light oil) |
Proved plus probable RLIc |
11 years |
Licensee Liability Rating (“LLR”) |
3.5 |
Total Asset Retirement Obligation (“ARO”) |
$9.8 million |
a: |
Based on 2021 pricing averaging as follows: US$70.00WTI/bbl; CAD$87.50WTI/bbl; EDM CAD$81.25/bbl; WCS CAD $70.62/bbl; AECO $2.50/mcf |
b: |
Based upon Surge’s internally generated total proved plus probable reserve estimate as of September 1, 2021. |
c: |
Based upon Surge’s internally generated total proved plus probable reserve estimate as of September 1, 2021 divided by production of 1,500 boepd. |
Acquisition cost per boepd |
$38,650/boepd |
Operating Netback @ US$70 WTI |
$52/boe |
Proved plus probable reservesb acquisition cost |
$10/boe |
Proved plus probable recycle ratio7 |
5.2 x |
COMBINED COMPANY HIGHLIGHTS – A SUSTAINABLE, INTERMEDIATE OIL PRODUCER
Operational platform to continue to execute on sustainable business model:
- A 21,500 boepd light and medium gravity oil producer (86 percent oil and liquids weighted);
- Over 2.6 billion barrels of net combined, internally estimated, conventional OOIP – with a low 6 percent recovery factor to date;
- Combined Total Proven Plus probable year end 2020 reserves of over 104 million boe (86 percent total liquids)8;
- A low corporate base decline of approximately 26 percent;
- Large development drilling upside: >975 net locations9 (internally estimated); providing a development drilling inventory of more than 13 years; and
- A long 13 year reserve life index (total proved plus probable).
Financial platform to deliver shareholder returns at less than strip pricing of US$70 WTI per bbl:
- 2022 forecast adjusted funds flow of more than $255 million ($3.06 per share10);
- Full cycle corporate production efficiencies8 of less than $21,500 per flowing boepd (IP-180); and
- 2022 forecast free cash flow of over $120 million ($1.44 per share10), providing a free cash flow yield11 of over 25 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 preliminary financial and operational guidance for 2022 (after giving effect to the Transaction):
Upwardly Revised Guidance |
@ US $65 WTI* |
@ US $70 WTI* |
@ US $75 WTI* |
Exit 2021 production (boepd) |
21,500 |
||
Average 2022 production (boepd) |
21,500 |
||
% oil and NGL’s |
86% |
||
2022 Adjusted funds flow ($MM) |
$230 |
$255 |
$275 |
2022 Cash flow from operations ($MM) |
$215 |
$240 |
$260 |
2022 Exploration and Development Capital |
$120 |
$120 |
$120 |
2022 Free cash flow ($MM) |
$95 |
$120 |
$140 |
2022 All-in payout ratio |
56% |
50% |
46% |
2022 Net debt to annualized Q4/22 adjusted |
0.9x |
0.7x |
0.5x |
* |
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. |
TRANSACTION DETAILS
The purchase price payable by Surge under the Transaction is $58 million, comprised of: 1) the issuance of approximately 0.1438 Surge Shares for every issued and outstanding Fire Sky Share; and in addition, 2) the assumption of approximately $3 million of Fire Sky net debt, inclusive of transaction costs.
The Transaction is expected to close on or before October 30, 2021. Completion of the Transaction is subject to the approval of at least 66 2/3 of the voting Fire Sky shareholders. Completion of the Transaction is also subject to, among other things, the receipt of regulatory approvals, including the approval of the Toronto Stock Exchange for the issuance of the Surge Shares under the Transaction, and other customary closing conditions.
All of the directors and officers of Fire Sky, as well as Fire Sky’s largest shareholders, collectively holding approximately 73 percent of the outstanding Fire Sky Shares, have entered into support agreements pursuant to which they have agreed to vote their Fire Sky Shares in favor of the Transaction. Certain of such shareholders have additionally agreed not to sell any Surge Shares received by them pursuant to the Transaction for specified periods following the completion of the Transaction, subject to certain exceptions.
Each of Fire Sky and Surge has agreed to pay a termination fee of $2 million to the other party in certain circumstances, including in the case of Fire Sky, if Fire Sky recommends, approves, or enters into an agreement with respect to a superior proposal. Fire Sky has agreed not to solicit or initiate any discussions regarding any other acquisition proposals or sale of material assets. Fire Sky has also granted Surge a three-business-day right to match any superior proposal.