Mr. Paul Colborne reports
SURGE ENERGY INC. ANNOUNCES 2017 YEAR END RESERVES; OVER 10 PERCENT INCREASE IN NET ASSET VALUE TO $6.06 PER SHARE; 9 PERCENT INCREASE IN RESERVES PER SHARE; REINSTITUTION OF SHARE BUY BACK
Surge Energy Inc. has released the results of its independent reserves evaluation, effective Dec. 31, 2017, as prepared by Sproule Associates Ltd.
Surge is pleased to announce an increase in the company's year-end 2017 net asset value (NAV) of more than 10 per cent per share over 2016, to $6.06 per share. Sproule's year-end 2017 price forecast has 2018 WTI (West Texas Intermediate) crude oil prices below current average strip pricing for 2018.
The company also reported that its 2017 capital expenditure program resulted in an increase of 13 per cent in Surge's total reserves on a total proven plus probable basis to 95 million barrels of oil equivalent -- with over 82 per cent being oil and NGLs (natural gas liquids).
2017 reserves highlights
Surge's focused operating strategy of utilizing growth capital to acquire, exploit and water flood high-quality, large original oil in place (1), conventional sandstone reservoirs continues to provide excellent consistent results, as demonstrated by the following:
- Increased the company's 2017 NAV by 11 per cent to $6.06 per common share; Sproule's 2018 crude oil price forecast is below current strip oil pricing for 2018;
- Surge's total proven (1P) 2017 NAV has been independently evaluated to be $3.67 per basic share, an increase of 9 per cent from 2016;
- Increased total proven and probable (2P) reserves by 13 per cent, to 95.2 million barrels of oil equivalent;
- Proven developed producing reserves value increased by 10 per cent over 2016, from $553-million to $607-million on an NPV10 before tax basis;
- Added 9.28 million boe of proven developed producing reserves, replacing over 170 per cent of 2017 production (estimated at 5.45 million boe);
- Delivered an all-in FD&A (finding, development and acquisition) cost of $13.60 per boe (2), on a total proven plus probable basis, including changes in undiscounted FDC (finding and development costs);
- Reported a 2017 recycle ratio of 1.74 times FD&A (3), on a total proven plus probable basis, with oil prices averaging $50.95 (U.S.) WTI per barrel;
- Only 292 of Surge's 700 gross internally estimated well inventory have been booked in the 2017 Sproule report; this conservative booking reflects FDC of four years of estimated 2017 funds flow;
- Based on successful results from the company's continuing water flood activities, incremental water flood reserve bookings were added in both the Upper Shaunavon and Sparky core areas.
(1) Original oil in place (OOIP) is the equivalent to discovered petroleum initially in place (DPIIP) for the purposes of this press release.
(2) All-in FD&A was calculated by dividing the total 2017 capital (total 2017 development capital and 2017 A&D (acquisition and development) capital and 2017 DFDC capital) by the total 2017 TPP reserve adds and revisions.
(3) Recycle ratio is equal to Surge's 2017 operating netback, divided by FD&A.
2017 independent reserves evaluation
The evaluation of the company's reserves was done in accordance with the definitions, standards and procedures contained in the Canadian oil and gas evaluation handbook (COGE handbook) and National Instrument 51-101 (Standards of Disclosure for Oil and Gas Activities). Additional reserves information as required under NI 51-101 will be included in Surge's annual information form, which will be filed on SEDAR on or before March 31, 2018.
Independent reserve evaluator Sproule evaluated 100 per cent of Surge's total net present value reserves.
The attached reserves summary and net present value of future net revenue table summarizes Surge's working interest oil, natural gas liquids and natural gas reserves, and the net present values of future net revenue for these reserves (before taxes) using forecast prices and costs as set forth in the Sproule report.
RESERVES SUMMARY AND NET PRESENT VALUE OF FUTURE NET REVENUE
Gross reserves (4) Crude oil Natural Oil Before-tax NPV of future net revenue
and NGLs gas (6) equivalent discounted at
(5) (MMcf) total 5% 10% 15%
(Mbbl) reserves ($000s) ($000s) ($000s)
Proven producing 27,430 34,321 33,151 $737,123 $606,591 $517,242
Proven non-producing 1,665 766 1,792 36,972 31,203 26,605
Proven undeveloped 20,910 31,663 26,187 486,270 358,162 271,793
------ ------- ------ --------- --------- ---------
Total proven 50,005 66,752 61,130 1,260,365 995,956 815,640
Probable 28,440 33,874 34,086 801,350 556,062 414,968
------ ------- ------ --------- --------- ---------
Total proven plus probable 78,445 100,625 95,216 2,061,715 1,552,018 1,230,607
------ ------- ------ --------- --------- ---------
(4) Amounts may not add due to rounding.
(5) Includes light, medium, heavy and tight oil and natural gas liquids.
(6) Includes conventional natural gas, solution gas and coal bed methane.
The company's proven developed producing reserves are 82 per cent liquids.
Net asset value
The company's new NAV, as of Dec. 31, 2017, has been evaluated to be $6.06 per basic share -- utilizing Sproule's Dec. 31, 2017, independent reserves valuation and price forecast. Notably, Sproule's year-end 2017 price forecast has crude oil prices below current average strip pricing for 2018.
Surge's Dec. 31, 2017, detailed NAV calculation is set forth as follows.
NAV proven plus probable reserve value NPV10 before tax (including FDC) (in millions): $1,552,000
Undeveloped land and seismic (internally estimated) (in millions): $100,000
Estimated net debt (unaudited) (in millions): $(241,000)
Total net assets (in millions): $1,411,000
Basic shares outstanding: 233 million
Fully diluted shares outstanding: 244.6 million
Estimated NAV per basic share: $6.06 per share
Estimated NAV per fully diluted share:
$5.77 per share
Surge's 1P 2017 NAV has been independently evaluated to be $3.67 per basic share.
SUMMARY OF SELECTED SPROULE PRICE FORECASTS
AS AT DEC. 31, 2017
Year WTI Cushing, AECO-C Spot Exchange rate
Okla., Cdn$/ $U.S./$Cdn
40-degree API MMBtu
2018 $55.00 $2.85 $0.79
2019 65.00 3.11 0.82
2020 70.00 3.65 0.85
2021 73.00 (7) 3.80 0.85
(7) Escalation rate 2 per cent thereafter.
Reserve life index (RLI)
Surge management creates shareholder value through the efficient development of high-quality, large OOIP, conventional, crude oil reservoirs. The cost-effective growth of the company's reserves, combined with the sustainable production of these reserves, will continue to generate long-term returns for Surge shareholders.
The attached reserve life index table highlights Surge historical RLI.
RESERVE LIFE INDEX
2017 2016 2015
Total proven 11.2 11.1 10.3
Total proven plus probable 17.5 17.9 16.8
---- ---- ----
(8) Calculated based on the amount for the
relevant reserves category prepared by
Sproule, divided by the production estimate
for the applicable year.
Future development costs
Future development cost estimates reflect Sproule's best estimate of the costs required to bring the total proven and proven plus probable reserves on production. The company has 50.4 million boe of total proven and probable undeveloped and non-producing reserves assigned to $485-million of FDC. At a cost of $9.64 per boe, these future reserves generate $731-million of net present value discounted at 10 per cent, before income tax.
The company estimates 2017 corporate capital expenditures at $98.5-million (unaudited) and an additional $73-million pursuant to acquisitions and divestitures.
During the year, the company completed two strategic core area acquisitions of high-quality assets with large OOIP, low-decline, light- and medium-gravity crude oil production, and associated undeveloped acreage directly offsetting Surge's core operated, large OOIP Eyehill and Sounding Lake crude oil assets. Surge internally estimates over 65 net crude oil drilling locations on these core area acquisitions.
The attached future development costs table sets forth the schedule of FDC required to develop Surge's future undeveloped reserves (using forecast prices and costs).
FUTURE DEVELOPMENT COSTS
Total proven Total proven plus probable
2018 $75,076 $82,049
2019 111,086 143,373
2020 129,388 152,206
2021 38,024 84,492
2022 6,568 23,096
Remaining 0 260
Total (undiscounted) 360,142 485,477
Total (discounted at 10%) 302,267 399,526
Intention to reinstate normal course issuer bid
Over the last six quarters, Surge has delivered excellent drilling and water flood results at its three core areas of Sparky, Shaunavon and Valhalla -- all conventional, low-cost assets that generate top-tier production efficiencies and high rates of return at strip oil prices. The company has now increased production per share by more than 22 per cent in the past 18 months, while maintaining a corporate decline estimated to be less than 24 per cent.
As world crude oil prices increased from $26 (U.S.) WTI per barrel on Feb. 11, 2016, to over $58 (U.S.) WTI today, the price of Surge's common shares has decreased from $1.91 per share on Feb. 11, 2016, to $1.77 per share today. Surge's new 2017 PDP NAV is $2.01
(9) per share.
Accordingly, given Surge's significant available liquidity and the company's continued excellent operational results, Surge management and board have determined to seek Toronto Stock Exchange approval to reinstitute a normal course issuer bid (NCIB) providing for the repurchase of Surge common shares through the facilities, rules and regulations of the TSX.
Surge will file a notice of intention to make an NCIB with the TSX. The NCIB will be subject to receipt of certain approvals, including acceptance of the notice of intention by the TSX. The NCIB will commence following receipt of all such approvals and will continue for a period of up to one year.
The company is currently generating significant annualized free funds flow, based on budget pricing assumptions and current strip WTI pricing for oil of more than $58 (U.S.) WTI. Surge has approximately $100-million of credit availability on its bank lines.
Further, early in the first quarter of 2018, the company closed the sale of a minor, non-core property for gross proceeds of $6.8-million. Surge intends to redeploy, on an accretive per-share basis, some or all of the proceeds from this non-core asset sale into the NCIB.
Acquiring Surge common shares pursuant to the facilities of the TSX NCIB rules allows Surge management excellent flexibility in assessing market valuations and fluctuations on a weekly basis -- that is, if market conditions recover and the trading price for Surge shares increases, management can choose to suspend the NCIB for a short period, or indefinitely, at its discretion.
Further, Surge does not have to pay a dividend on common shares that it acquires pursuant to the NCIB -- thereby increasing the company's sustainability.
The NCIB set forth herein provides an excellent return on investment to Surge shareholders, including: significant NAV accretion (using Surge's new Dec. 31, 2017, Sproule NAV of $6.06 per share), dividend savings and less interest on applicable debt. The NCIB provides an additional method for Surge management to return capital to its shareholders, along with the payment of the company's dividend.
Accordingly, in 2018, Surge anticipates: (1) delivering annual growth of 5- to 7-per-cent production per share; (2) returning capital to its shareholders pursuant to the company's attractive dividend; (3) generating substantial free funds flow at current strip pricing and management's budget pricing assumptions; and (4) returning capital to its shareholders pursuant to the accretive buyback of its common shares in accordance with the NCIB.
(9) NPV10 before tax, based on Sproule's year-end 2017 independent reserves valuation and price forecast, combined with internally estimated values for land, seismic and net debt.
Since the end of the third quarter 2017, Surge has been augmenting the company's 2018 crude oil hedge position. Over the past three months, Surge has added on average 1,900 barrels of oil per day to hedge volumes for 2018. In aggregate, this includes 650 bopd of swap contracts with a weighted-average price of $58.02 (U.S.) per barrel, and 1,250 bopd of put option/option spreads at various prices. The attached table provides the detailed contract breakdown.
Type Contract Term Bbl/d Currency Floor (per bbl) Ceiling (per bbl) Swap price
WTI Swap Jan.-Feb., 2018 2,000 U.S.$ $57.03
WTI Swap March-June, 2018 1,000 U.S.$ $60.00
WTI Long put option Q1 2018 2,000 U.S.$ $53.00
WTI Short put option Q1 2018 1,000 U.S.$ $47.75
WTI Long put option H2 2018 1,000 U.S.$ $60.00
WTI Short put option H2 2018 1,000 U.S.$ $55.00
As a result of Surge's on continuing risk management program, the company now has an average of 4,900 barrels per day of crude oil hedged for 2018, with an average floor price of $67.25 WTI per barrel (10).
Outlook -- strong profitability at strip crude oil prices
Management's stated goal at Surge is to be the best-positioned public crude oil growth and dividend-paying company in Canada.
Today, Surge has released an exciting new five-year business plan available in the company's corporate presentation -- which can be found on-line. The plan illustrates that Surge can organically increase production per share per year at 5 per cent; cash flow per share per year at 9 per cent; pay Surge's current 9.5-cent-per-share-per-annum dividend; and, in addition, generate over $215-million of free cash flow over the five years (that is, above the company's capex (capital expenditures) and current dividend) -- all at flat $65 (U.S.) WTI pricing for oil. In this scenario, only 47 per cent of Surge's large, 10-year inventory of more than 700 drilling locations will be used.
Surge management believes that the company's focused operating strategy, top production efficiencies, rigorous cost controls and solid balance sheet will allow the company to continue to outperform.
(10) Assumes an exchange rate of 78 Canadian cents for $1 (U.S.) on all U.S.-dollar-denominated positions.
Unaudited financial information
Certain financial and operating information included in this press release for the quarter and year ended Dec. 31, 2017, such as finding and development costs, production information, operating netbacks, recycle ratios, and net asset value calculations, is based on unaudited financial results for the year ended Dec. 31, 2017, and is subject to certain forward-looking limitations. These estimated amounts may change upon completion of the audited financial statements for the year ended Dec. 31, 2017, and those changes may be material.
Per-share information is based on the total common shares outstanding, as at Dec. 31, 2017.
For certain calculations, management used an estimate of $171.5-million for total capital expenditures for 2017, including acquisitions and dispositions.
Information regarding disclosure on oil and gas reserves
The reserve data provided in this news release present only a portion of the disclosure required under National Instrument 51-101. The oil and gas disclosure statements for the year ended Dec. 31, 2017, which will include complete disclosure of Surge's oil and gas reserves and other oil and gas information in accordance with NI 51-101, will be contained within Surge's annual information form, which will be available on Surge's SEDAR profile on or before March 31, 2018.
We seek Safe Harbor.
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