The Assets are currently producing more than 3,850 boepd (99 percent liquids) of predominantly light and medium gravity crude oil. The Acquisition is 15 percent accretive to Surge’s 2023 free cash flow per share[1]. Furthermore, Surge management has identified a development drilling inventory of over 45 net unbooked locations, which can hold production flat for an estimated seven years.
Surge is reconfirming its upwardly revised 2022 production exit rate of more than 25,000 boepd (approximately 87 percent liquids).
As previously announced, with the completion of the Acquisition, Surge anticipates declaring an increase to the Company’s annual base cash dividend by 14 percent, from $0.42 to $0.48 per share per annum ($0.04 per share per month), payable on February 15, 2023. Any dividend increase remains subject to the approval of Surge’s Board of Directors with consideration given to the business environment at the time.
SURGE ENERGY: A PREMIER CANADIAN CRUDE OIL DIVCO
Management’s primary corporate goal is for Surge to rank as the top total rate of return, growth plus dividend paying crude oil company in the Canadian energy sector. Management firmly believes that Surge’s premium asset quality will drive operational outperformance, and ultimately, superior financial returns.
Surge’s focused operating strategy is to direct growth and development capital towards high quality, large original oil in place (“OOIP[2]”), conventional crude oil reservoirs in order to generate free cash flow1. On this basis, more than 75 percent of the Company’s exit 2022 production comes from Surge’s SE Saskatchewan and Sparky core areas, which have been independently ranked[3] as two of the top four oil plays in Canada.
In addition to Surge’s operating strategy, the Company’s increasing shareholder returns business model focuses on returning free cash flow to shareholders through disciplined capital allocation, together with modest growth in production per share. Independent research has ranked the growth, plus increasing compounding dividend business model, as one of the best investing strategies over the last 75 years[4].
“The strategic core area Acquisition that closed today further solidifies Surge’s disciplined operating strategy by lowering the Company’s corporate decline and increasing free cash flow per share,” said Paul Colborne, President & CEO, Surge Energy. “This aligns exceptionally well with the Company’s modest growth (6 percent accretive to production per share), plus increasing compounding dividend business model (anticipated 14 percent increase to Surge’s annual dividend).”
Accordingly, following the Acquisition, Surge has the following key corporate characteristics:
OOIP / Recovery Factor |
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Reserve Base |
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Production Base & Decline Profile |
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Operating Netbacks |
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Development Drilling Inventory |
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Cash Flow Base |
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Free Cash Flow |
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Dividend Yield / Payout Ratio |
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Balance Sheet |
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Tax Pools |
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Shares Outstanding |
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a: Internally generated estimate as of Dec 31, 2021, see Oil and Gas Advisories. |
b: Jan 2022 P+PDP production rate: 26,452 boe/d. |
c: This is a non-GAAP and other financial measure which is defined in the Non-GAAP and Other Financial Measures section of this document. |
d: See the Drilling Inventory section of this document. |
e: Calculated as $0.48 per share anticipated annual dividend, divided by a share price of $8.50 per share. |
ANTICIPATED DIVIDEND INCREASE
Surge anticipates increasing the Company’s annual base cash dividend by 14 percent, from $0.42 per share to $0.48 per share ($0.04 per share per month), on February 15, 2023. This upwardly revised base dividend is consistent with Phase 1 of the Company’s return of capital framework set forth below.
Any dividend increase will be subject to the approval of Surge’s Board of Directors with consideration given to the business environment at the time.
2023 CAPITAL AND OPERATING BUDGET GUIDANCE
Surge’s financial and operating estimates for 2023 have been approved by the Board of Directors, and are detailed below:
Guidance |
@ US $80 WTIa |
Exit 2022 Production |
25,000 boepd (87% liquids) |
Average 2023(e) Production |
25,000 boepd (87% liquids) |
2023(e) Expenditures on Property, Plant and Equipment |
$175 million |
2023(e) Cash Flow from Operating Activities |
$335 million |
Per shareb |
$3.47/sh |
2023(e) Free Cash Flow Before Dividendsc |
$160 million |
Per shareb |
$1.66/sh |
2023(e) Dividend |
$46 million |
Per shareb |
$0.48/sh |
2023(e) All-in Payout Ratioc |
66 % |
2023(e) Royalties as a % of Petroleum and Natural Gas Revenue |
18.5 % |
2023(e) Net Operating Expensesc |
$19.50 – $19.95 per boe |
2023(e) Transportation Expenses |
$1.25 – $1.50 per boe |
2023(e) General & Administrative Expenses |
$1.95 – $2.25 per boe |
a: Based on the following pricing assumptions: US$80.00WTI/bbl; CAD$110.34WTI/bbl; EDM CAD$104.83/bbl; WCS CAD$83.45/bbl; AECO $4.95/mcf. |
b: Based on 96.5 million Common Shares outstanding. |
c: This is a non-GAAP and other financial measure which is defined in the Non-GAAP and Other Financial Measures section of this document. |
UPDATED RETURN OF CAPITAL FRAMEWORK
Today, Surge’s crude oil assets are internally estimated to have more than three billion of net OOIP, an approximate 7.5 percent recovery factor to date, and a dominant operational position in two top tier light and medium gravity crude oil growth plays in the Company’s Sparky and SE Saskatchewan core areas. Further, with over $1.4 billion in tax pools, Surge is well positioned to deliver its shareholders a tax efficient combination of:
- Continued net debt repayment – systematically increasing Surge’s net asset value (“NAV”)2 per share;
- A sustainable base monthly cash dividend;
- Strategic share buybacks;
- Potential for variable or special dividends; and
- A modest production growth wedge.
On this basis, Surge’s Board and Management are pleased to announce an update to the Company’s return of capital framework, incorporating the impact of the Acquisition. Return of free cash flow to shareholders will continue to follow a phased approach, based on achieving certain net debt targets, as set forth below:
- Phase 1: Return approximately 25 percent of free cash flow to shareholders through the Company’s anticipated, increased base dividend of $0.48 per share per annum. The remainder of free cash flow will be allocated to debt reduction until net debt is reduced to $250 million;
- Phase 2: Return approximately 50 percent of free cash flow to shareholders, with 25 percent allocated to the base dividend, and 25 percent allocated to strategic share buybacks, acquisitions, and/or variable or special dividends, until net debt is reduced below $175 million; and
- Phase 3: Return approximately 75 percent of free cash flow to shareholders once net debt is reduced below $175 million. 25 percent of free cash flow will be allocated to the base dividend, 50 percent allocated to strategic share buybacks, a modest growth wedge, and/or variable or special dividends, and 25 percent will be allocated to strategic acquisitions and/or further net debt repayment.
Based on the Company’s US $80 WTI budget price deck, Surge anticipates reaching Phase 2 of the return of capital framework in the second half of 2023.
ANNUAL SUSTAINABILITY REPORT RELEASED
Surge has released its second annual Sustainability Report, outlining the Company’s advancement of its environmental, social and governance practices, and their impact on Surge’s business and operating strategy.
The Company’s second annual Sustainability Report reaffirms Surge’s commitment to be a leader in reducing the impact of oil and gas operations on the environment. The report covers performance metrics for the 2019, 2020, and 2021 calendar years and aligns with guidance set forth by the Task Force on Climate-Related Financial Disclosure.
The Sustainability Report was approved by Surge’s management team, as well as the Company’s Board of Directors, and is intended to allow all Surge stakeholders to better understand the Company’s commitment to sustainable, responsible oil and gas operations.
The new annual Sustainability Report can be accessed through the Company’s website.
OUTLOOK – POSITIONING FOR 2023 AND BEYOND
Surge’s Board and management continue to be optimistic regarding the outlook for crude oil prices, based on a tight physical market, ongoing geopolitical issues, and the significant underinvestment that has occurred in the energy industry over the past several years.
The closing of the strategic, core area Acquisition today further solidifies Surge’s disciplined operating strategy by lowering the Company’s corporate declines and increasing free cash flow. This aligns well with the Company’s modest growth (6 percent accretive to production per share), plus increasing compounding dividend business model (anticipated 14 percent increase to Surge’s annual dividend).
Based on the strong foundation from Surge’s key corporate characteristics, as set forth above, the Company is well positioned for success in 2023.