CALGARY, AB, May 8, 2024 /CNW/ – Surge Energy Inc. (“Surge” or the “Company”) (TSX: SGY) is pleased to announce the Company’s financial and operating results for the quarter ended March 31, 2024, an update on Surge’s latest drilling results, an increase to Surge’s first lien revolving credit facilities, and the release of the Company’s 2023 sustainability report.
Select financial and operating information is outlined below and should be read in conjunction with the Company’s unaudited interim financial statements and management’s discussion and analysis for the three months ended March 31, 2024, available at www.sedarplus.ca and on Surge’s website at www.surgeenergy.ca.
Q1 2024 FINANCIAL AND OPERATING HIGHLIGHTS
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 in the energy industry over the past several years.
During Q1/24, Western Canadian oil producers were significantly impacted by wide crude oil differentials. The Western Canadian Select (“WCS”) differential (a discount to US WTI per barrel) averaged US$19 per barrel in Q1/24, however, has now tightened to approximately US$12 per barrel on the spot market. Additionally, the Mixed Sweet Blend (“MSW”) light oil differential, which averaged a discount to WTI of US$9 per barrel in Q1/24, is now currently trading at a US$3 per barrel discount to WTI.
Surge’s forecasted 2024 annual cash flow from operating activities increases by approximately $9 million for every US$1 per barrel increase in the WTI price1. Furthermore, every US$1 per barrel decrease in either the WCS or MSW differential increases the Company’s forecasted 2024 annual cash flow from operating activities by approximately $4.5 million1. A US$1 per barrel decrease in both differentials increases Surge’s forecast 2024 annual cash flow by $9 million1.
Surge is pleased to report the Company reduced its Scope 1 greenhouse gas emissions intensity by 18 percent in 2023 as compared to 2022. Surge has now reduced its Scope 1 emissions intensity by 28 percent since 2021. These results demonstrate the Company’s continued commitment to reducing the emissions intensity of its operations.
In Q1/24, Surge achieved average daily production of 24,903 boepd (86 percent liquids). These strong quarterly production levels were achieved with Surge having drilled four less (net) wells than originally budgeted for Q1/24, as the Company reacted to earlier than anticipated spring break up conditions in both SE Saskatchewan and Sparky core areas.
Highlights from the Company’s Q1 2024 financial and operating results include:
- Delivered cash flow from operating activities of $66.8 million, and generated adjusted funds flow2 (“AFF”) of $62.5 million;
- Achieved average daily production of 24,903 boepd (86 percent liquids);
- Returned over $12 million of cash dividends to shareholders; and
- Drilled 24 gross (21.4 net) wells, with activity focused in the Company’s Sparky and SE Saskatchewan core areas.
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1 Sensitivities are based on the Company’s 2024 guidance production of 25,000 boepd and the following pricing assumptions: US$75 WTI, US$16 WCS differential, US$3.50 EDM differential, $0.725 CAD/USD FX and $2.95 AECO. |
2 This is a non-GAAP and other financial measure which is defined under Non-GAAP and Other Financial Measures. |
FINANCIAL AND OPERATING HIGHLIGHTS
FINANCIAL AND OPERATING HIGHLIGHTS |
Three Months Ended March 31, |
||
($000s except per share and per boe) |
2024 |
2023 |
% Change |
Financial highlights |
|||
Oil sales |
150,716 |
152,664 |
(1) % |
NGL sales |
3,935 |
3,618 |
9 % |
Natural gas sales |
3,516 |
5,688 |
(38) % |
Total oil, natural gas, and NGL revenue |
158,167 |
161,970 |
(2) % |
Cash flow from operating activities |
66,785 |
54,506 |
23 % |
Per share – basic ($) |
0.66 |
0.56 |
18 % |
Per share diluted ($) |
0.66 |
0.55 |
20 % |
Adjusted funds flowa |
62,487 |
63,331 |
(1) % |
Per share – basic ($)a |
0.62 |
0.65 |
(5) % |
Per share diluted ($) |
0.62 |
0.64 |
(3) % |
Net income (loss)c |
(3,630) |
14,789 |
(125) % |
Per share basic ($) |
(0.04) |
0.15 |
(127) % |
Per share diluted ($) |
(0.04) |
0.15 |
(127) % |
Expenditures on property, plant and equipment |
49,400 |
45,733 |
8 % |
Net acquisitions and dispositions |
(8) |
(678) |
nmb |
Net capital expenditures |
49,392 |
45,055 |
10 % |
Net debta, end of period |
295,924 |
331,917 |
(11) % |
Operating highlights |
|||
Production: |
|||
Oil (bbls per day) |
20,620 |
21,055 |
(2) % |
NGLs (bbls per day) |
860 |
721 |
19 % |
Natural gas (mcf per day) |
20,539 |
20,172 |
2 % |
Total (boe per day) (6:1) |
24,903 |
25,138 |
(1) % |
Average realized price (excluding hedges): |
|||
Oil ($ per bbl) |
80.32 |
80.57 |
— % |
NGL ($ per bbl) |
50.25 |
55.78 |
(10) % |
Natural gas ($ per mcf) |
1.88 |
3.13 |
(40) % |
Netback ($ per boe) |
|||
Petroleum and natural gas revenue |
69.79 |
71.59 |
(3) % |
Realized gain (loss) on commodity and FX contracts |
0.06 |
(0.88) |
nm |
Royalties |
(13.30) |
(12.84) |
4 % |
Net operating expensesa |
(21.81) |
(22.26) |
(2) % |
Transportation expenses |
(1.18) |
(1.79) |
(34) % |
Operating netbacka |
33.56 |
33.82 |
(1) % |
G&A expense |
(2.26) |
(2.04) |
11 % |
Interest expense |
(3.73) |
(3.80) |
(2) % |
Adjusted funds flowa |
27.57 |
27.98 |
(1) % |
Common shares outstanding, end of period |
100,581 |
98,334 |
2 % |
Weighted average basic shares outstanding |
100,529 |
97,087 |
4 % |
Stock based compensation dilution |
— |
2,296 |
(100) % |
Weighted average diluted shares outstanding |
100,529 |
99,383 |
1 % |
a This is a non-GAAP and other financial measure which is defined under Non-GAAP and Other Financial Measures. |
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b The Company views this change calculation as not meaningful, or “nm”. |
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c Q1/24 includes a $15.1 million unrealized loss on financial contracts (Q1/23 – $3.6 million unrealized gain on financial contracts). |
OPERATIONS UPDATE: CONTINUED DRILLING SUCCESS IN SPARKY AND SE SASKATCHEWAN CORE AREAS
SPARKY (MANNVILLE)
During Q1/24, Surge continued the Company’s core area Sparky development program, drilling a total of 10 gross (10.0 net) wells in the area.
Approximately 3.5 years ago, Surge announced the discovery of a large new Sparky crude oil pool at Betty Lake with an internally estimated 150 million barrels (25° API) of original oil in place (“OOIP”)3. In April 2024, Surge acquired a 50% working interest and operatorship of the 6-8 gas plant in the Betty Lake area for $3.7 million. This gas plant handles the natural gas volumes associated with the production of crude oil at Betty Lake. The Company’s current production at Betty Lake has now grown to approximately 2,300 boepd (90% oil); and the Company anticipates that operating expenses at Betty Lake will decrease by an estimated $1.50 per boe (from $11.32 per boe in Q1 2024) due to the acquisition.
Surge has continued to systematically grow its Sparky core area production (>85% liquids; 23° API average crude oil gravity) from approximately 1,800 boepd in 2010 to nearly 12,000 boepd today (see chart below). Surge has also assembled an internally estimated 11 year development drilling inventory4 of more than 470 net locations in the Sparky/Mannville trend.
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3 See Oil & Gas Advisories. |
4 See Drilling Inventory. |
Surge’s internal estimates now indicate that the Company owns and controls more than 1 billion barrels of net OOIP3 in the medium and light gravity oil portion of the Sparky/Mannville play trend.
In addition to consistent production growth, over the last three years Surge has drilled 18 gross (18.0 net) multi-lateral wells in the Sparky and other Mannville formations. These 18 multi-lateral wells are currently producing a combined 1,250 boepd, representing approximately 11 percent of the Company’s total Sparky core area production.
During Q1/24, the Company drilled and brought on production two multi-lateral wells, one at Betty Lake and one at Hope Valley.
Both of these wells had strong 30 day initial production rates (“IP”), with the Betty Lake well producing at 170 boepd, and the Hope Valley well producing at 230 bopd. The multi-lateral well at Hope Valley is a follow up to the Company’s initial, proof-of-concept, 12 leg multi-lateral open hole well. Management is encouraged by the initial rates from this follow up Hope Valley well, as it continues to be optimized. Surge’s technical interpretation of its recent 46 square kilometer 3-D seismic program allowed the Company to optimally drill this well and has de-risked future drilling locations in Hope Valley.
In the second half of 2024, Surge anticipates drilling 27 gross (27.0 net) wells in the Sparky core area, including 8 gross (8.0 net) additional multi-lateral wells. The Company has now identified over 85 multi-lateral locations within its Sparky (Mannville) core area4.
SE SASKATCHEWAN
During the first quarter of 2024, Surge continued its core area SE Saskatchewan development program, highlighted by the drilling of 14 gross (11.4 net) wells in Surge’s large OOIP Steelman light oil pools.
Surge continues to drill some of the highest initial production rate, light oil Frobisher wells of any operator in the Province of Saskatchewan. Notably, the Company’s 01-03-005-06W2 well, drilled in Q1/24 at Steelman, produced at a rate of more than 550 bopd on an IP30 basis.
The following chart illustrates Surge’s peer leading 180 bopd IP90 rates from 56 wells targeting the Frobisher formation over the last two years:
SE Saskatchewan Frobisher Average IP90 By Operator (January 2022 – December 2023)
Source: GeoScout
On average, Surge’s Frobisher wells pay out in approximately 12 weeks4 (at US$80 WTI per bbl pricing) and deliver internal rates of return of more than 450 percent, demonstrating the top-tier economics associated with the Company’s SE Saskatchewan drilling inventory. In the second half of 2024, Surge will be drilling 23 gross (19.7 net) wells in SE Saskatchewan, all targeting the Frobisher and Midale formations.
In less than three years, Surge has grown its SE Saskatchewan core area to more than 400 million bbls of net internally estimated OOIP3, while growing current production to more than 8,000 boepd, comprised of 90 percent high netback, light crude oil.
Surge has now assembled an internally estimated 7-8 year drilling inventory4 of more than 290 net drilling locations in the Frobisher and Midale formations.
EXPANDED FIRST LIEN REVOLVING CREDIT FACILITY & EARLY REPAYMENT OF SECOND LIEN TERM FACILITY B
Subsequent to the first quarter of 2024, the Company increased its revolving first lien credit facility by $60 million (40%) from $150 million to $210 million. This increased facility is comprised of a committed revolving term facility of $180 million and an operating loan facility of $30 million with a syndicate of lenders. The first lien credit facility is a normal course, reserve-based credit facility available on a revolving basis.
Concurrent with the increase to the first lien credit facility, Surge elected to exercise a one-time option for early repayment of a portion of the Company’s second lien term debt facilities. On April 30, 2024, the Company repaid the remaining $36 million of outstanding principle under its second lien Term Facility B, utilizing a portion of the incremental liquidity provided by the newly confirmed $210 million first lien credit facility.
ANNUAL SUSTAINABILITY REPORT RELEASED
Surge has released its third 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 third 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 2021, 2022, and 2023 calendar years and aligns with guidance set forth by the Task Force on Climate-Related Financial Disclosure.
Surge is pleased to report the Company reduced its Scope 1 greenhouse gas emissions intensity by 18 percent in 2023 as compared to 2022. Surge has now reduced its Scope 1 emissions intensity by 28 percent since 2021. These results demonstrate the Company’s continued commitment to reducing the emissions intensity of its operations.
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 responsible oil and gas operations.
Surge’s latest annual Sustainability Report can be accessed through the Company’s website at www.surgeenergy.ca.
OUTLOOK: ASSET QUALITY DRIVES SUPERIOR RETURNS
Surge is a publicly traded intermediate oil company focused on enhancing shareholder returns through free cash flow2 generation. The Company’s defined operating strategy is based on owning and developing high quality, large OOIP, conventional light and medium gravity crude oil reservoirs, and using proven technology to enhance ultimate oil recoveries.
Surge has now assembled dominant operational positions in two of the top four crude oil plays in Canada in its Sparky (>11,500 boepd; 85% medium gravity oil) and SE Saskatchewan (~8,000 boepd; 90% light oil) core areas, as independently evaluated by a leading brokerage firm5. Over 80 percent of the Company’s current production and Total Proved plus Probable NAV now comes from these two core areas3.
In the second half of 2024, Surge will continue to execute an active drilling program in both the Sparky and SE Saskatchewan core areas, with a total of 50 gross (46.7 net) wells budgeted to be drilled.
Surge remains on track to meet or exceed its production guidance for 2024.
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5 As per Peters Oil & Gas Plays Update from January 14, 2024: North American Oil and Natural Gas Plays – Half Cycle Payout Period. Note: Sparky is represented as “Conventional Heavy Oil Multi-Lateral” by Peters. |
The Company is well positioned to continue delivering attractive shareholder returns in 2024 and beyond, based on the following key corporate fundamentals:
- Estimated 2024 average production of 25,000 boepd (87 percent liquids);
- An estimated 24 percent annual corporate decline3;
- Budgeted 2024 cash flow from operating activities of $295 million at US$75WTI6;
- $48 million annual cash dividend ($0.48 per share, paid monthly);
- More than 1,000 (net) internally estimated drilling locations providing a 13-year drilling inventory4;
- $1.4 billion in tax pools at December 31, 2023 (approximate 4 year tax horizon at US$75 WTI pricing); and
- Total Proved plus Probable net asset value (“NAV”) of $17.63 per share and Total Proved NAV of $11.27 per share3.
With cash flow from operating activities strategically allocated between high rate of return capital expenditures, debt repayment, and cash dividends paid to shareholders, Management currently forecasts that the Company will achieve its previously announced Phase 2 return of capital net debt target in early Q4/24, based on current crude oil pricing.