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Surge Energy closes $280-million in loan facilities

2021-12-09 17:51 ET - News Release

Mr. Paul Colborne reports

SURGE ENERGY INC. ANNOUNCES $130 MILLION TERM DEBT FINANCING; NEW $150 MILLION FIRST LIEN CREDIT FACILITY; REPAYMENT OF $42 MILLION BDC TERM FACILITY; AND PROVIDES STRATEGIC OUTLOOK TO SHAREHOLDERS

Surge Energy Inc. has closed a $130-million five-year term debt facility and a new normal course $150-million first lien credit facility with a revised syndicate of five lenders. Concurrent with the closing of the term debt facility and first lien credit facility, the company has repaid its $42-million non-revolving BDC term loan.

New five-year term debt facility

On Dec. 9, 2021, Surge closed a new five-year, $130-million senior secured second lien term debt facility with an annual coupon of 8.85 per cent. The lenders under the $130-million term debt facility have the option through 2022 to lend an additional $30-million to Surge on the same terms and conditions.

The term debt facility provides the company with long-term stable capital to facilitate the continued development of Surge's high-quality, conventional, light and medium gravity crude oil asset base. Furthermore, the term debt facility also represents a significant step forward toward the company's goal of returning to a shareholder-returns-based business model focused on a combination of: (1) debt repayment; (2) sustainable dividends; (3) modest production-per-share growth; and (4) share buybacks.

Surge has directed the majority of the $130-million term debt facility proceeds toward the repayment of existing first lien revolving bank debt, the repayment of the $42-million owing under the bdc term facility and the acquisition of certain oil infrastructure previously leased by the company.

New first lien credit facility

In conjunction with the term debt facility, Surge has also closed a new first lien secured credit facility for a total of $150-million with a syndicate of five supportive banks. The first lien credit facility is a normal course, reserve-based credit facility available on a revolving basis through Nov. 30, 2022, with biannual borrowing base redeterminations and term maturity of Nov. 30, 2023.

Repayment of BDC term facility

The closing of the term debt facility and first lien credit facility has facilitated the repayment of the company's non-revolving, $42-million BDC term facility, created by the Business Development Bank of Canada.

This strategic repayment allows the company to exit the business credit availability program (BCA program) that governed the BDC term facility. Participation in the BCA program placed certain restrictions on Surge's capital allocation options, including the payment of dividends.

The company would like to thank the Business Development Bank of Canada for the capital provided under the BCA program during a period of unprecedented commodity price volatility.

Revised debt capital structure and liquidity

With the closing of the term debt facility, the new first lien credit facility and the repayment of the BDC term facility, the company's debt capital structure benefits from significantly improved term and enhanced stability.

The company now forecasts that it will be drawn approximately $100-million on the first lien credit facility as at Dec. 31, 2021, providing Surge with approximately $50-million in undrawn credit capacity and significant available liquidity.

"Surge's attractive conforming first lien credit facility and new second lien credit facility are the culmination of the many strategic steps taken by management and the board over the past 12 months to reposition Surge for the current business environment," said Paul Colborne, president and chief executive officer. "We have now positioned Surge to thrive in the current environment and provided the company with significant financial flexibility going forward. Surge remains committed to our goal of returning to a dividend- and shareholder-returns-based business model in 2022."

Surge will continue to focus on reducing debt leverage over the next six months and is targeting the reinstatement of its sustainable dividend model in mid-2022, subject to market conditions and the approval of Surge's board of directors.

Strategic outlook: financial discipline and shareholder returns model

The company has seen significant structural changes regarding the availability of conventional debt capital for Canadian energy companies, due primarily to the Redwater decision of the Supreme Court of Canada, as well as the global COVID-19 pandemic.

Consequently, in late 2020, Surge management strategically assessed and analyzed the company's strong competitive corporate advantages, including its long (15-year) reserve life index, low conventional corporate decline, high crude oil netbacks, top tier production efficiencies, large 13-year drilling inventory and substantial $1.0-billion tax pool base.

Accordingly, with this announcement today, over the last 12 months, Surge management has now executed over $620-million of debt and equity financings, refinancings, asset sales, and two corporate acquisitions, to strategically adapt to changing market conditions, and to reposition the company to be a top performer in 2022 and beyond. Excitingly for shareholders, Surge has also been able to maintain a dominant operational growth position in the company's medium gravity crude oil Sparky core area, while also adding a significant new core area position in the light gravity crude oil growth plays in southeast Saskatchewan.

Surge management's stated goal is to position the company as a well-financed energy producer with a significant free cash flow yield that supports consistent shareholder returns through: (1) debt repayment; (2) sustainable dividends; (3) modest production-per-share growth; and (4) share buybacks.

As previously announced, Surge now forecasts a free cash flow yield of 30 per cent (1) in 2022 at crude oil pricing of $70 (U.S.) WTI (West Texas Intermediate) per barrel (2).

The company is currently producing at or above management's projected 2021 production exit rate of 21,500 barrels of oil equivalent per day (86 per cent liquids), with over 975 net (internally estimated) development drilling locations -- providing the company a 13-year development drilling inventory.

The company will provide further details to shareholders on management's shareholder-returns-based business model, along with announcing its board-approved 2022 capital budget, in January of 2022.

Advisers

National Bank Financial Inc. acted as exclusive financial adviser to Surge with respect to the term debt facility. ATB Capital Markets and BMO Capital Markets have been appointed strategic advisers to Surge on the term debt facility. McCarthy Tetrault LLP is acting as legal adviser to Surge with respect to the term debt facility.

We seek Safe Harbor.

(1) Calculated as $225-million in 2022 forecast cash flow from operating activities, less $120-million in exploration and development capital, for $105-million or $1.26 per share of free cash flow. One dollar and 26 cents per share divided by a $4.25 Surge Energy share price results in a 30-per-cent free cash flow yield.

(2) $70 (U.S.) WTI per barrel, minus $13.00 (U.S.) per barrel WCS differential, minus $4 (U.S.) per barrel MSW differential, $3.50 per GJ AECO, 78 U.S. cents to $1 FX.

We seek Safe Harbor.

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