Mr. Paul Colborne reports
SURGE ENERGY INC. ANNOUNCES 2022 CAPITAL AND OPERATING BUDGET; CORPORATE UPDATE ON SHAREHOLDER RETURNS BUSINESS MODEL; OPERATIONS UPDATE
Surge Energy Inc. has released its 2022 budget guidance, as approved by the company's board of directors, an update on Surge's anticipated reinstatement of management's shareholder-return-focused business model and an operations update.
2022 budget guidance -- continued focus on shareholder returns and sustainability
Surge's focus in 2022 continues to be on disciplined capital allocation, with cash flow strategically allocated between capital projects, net debt repayment, and a fundamental goal of reinstating the company's dividend-focused and shareholder-return-focused business model. The company's 2022 capital budget will see 85 per cent of the expenditures focused in its two, top-tier core medium and light gravity conventional crude oil plays in Sparky and SE Saskatchewan, which now comprise two-thirds of Surge's current production.
In 2022, the company can maintain its current production levels of 21,500 barrels of oil equivalent per day (boepd), while continuing to increase shareholder's net asset value by generating more than $130-million of free cash flow at $75 (U.S.) WTI -- providing investors with an estimated free cash flow yield of over 25 per cent.
2022 budget highlights
Surge's disciplined 2022 capital expenditure budget:
- Maximizes free cash flow through a return-focused, $124-million exploration and development capital program;
Generates forecasted 2022 annual cash flow from operating activities in excess of $255-million ($3.06 per share) at $75 (U.S.) WTI crude oil pricing;
Generates free cash flow of over $130-million ($1.57 per share1) at $75 (U.S.) WTI crude oil pricing;
Reduces the company's exit 2022 net debt to cash flow from operating activities to an estimated 0.75 times at $75 (U.S.) WTI crude oil pricing;
Targets 65 of the company's most capital efficient drilling locations -- focused predominately in its Sparky and SE Saskatchewan core areas;
Uses less than 7 per cent of the company's internally estimated drilling locations (over 950 net estimated locations currently in inventory);
Cost-effectively maintains production of 21,500 boepd (86 per cent liquids), maximizing free cash flow.
Further details relating to the 2022 budget are set forth in the attached table.
Corporate update -- timeline for reinstatement of Surge's multifaceted shareholder returns model
Management's stated goal is to position the company as a well-financed energy producer with a significant free cash flow profile that supports consistent shareholder returns through 1) net asset value per share increases through continuing debt repayment; 2) sustainable dividends; 3) modest production per-share growth; and 4) opportunistic share buybacks.
On Dec. 9, 2021, the company announced the successful closing of a $130-million, five-year term debt facility, injecting a significant amount of stable, long-term debt into the company's capital structure, with the strategic objective of reducing Surge's reliance on volatile, shorter-term debt. Surge will continue to focus on providing shareholder returns through further reductions in net debt over the coming months.
On this basis, Surge is initially targeting a reduction of net debt to a range of $250-million to $265-million, at which point the company will look to resume its historical, shareholder-return-focused business model, including the reinstatement of a dividend. Management will also evaluate the potential for opportunistic share buybacks. A reduction of net debt to the targeted range will also add approximately 60 cents to 75 cents per share to the net asset value of the company (based on approximately 83.4 million shares outstanding).
At current commodity price levels, management estimates that Surge will be within its targeted net debt range before midyear in 2022.
Operations update -- unlocking significant incremental value in Sparky and SE Saskatchewan
Surge finished 2021 on a strong operational note. The company continued to successfully develop its dominant land position in its core Sparky asset, using its traditional low-risk single-leg multistage frac design, with results continuing to outperform internal-type curve expectations. In addition, Surge has now successfully tested multileg, open-hole lateral development in portions of its Sparky core area where the multistage frac design is not optimal.
To date, Surge has drilled four multileg laterals in the Sparky formation with the average of the four wells exceeding the company's internal-type curve expectations. Encouragingly, two of the wells have been brought on production with rates over 220 bopd (barrels of oil equivalent per day) each on an IP30 basis. At current pricing, these two wells paid out in just 115 days.
Additionally, given that the rock properties of the Sparky formation are analogous to that of the Clearwater formation, Surge is testing drilling mud systems that have proven to be effective in the Clearwater play, in three separate multileg Sparky wells. On this basis, the company is piloting an oil-based mud system, offsetting wells drilled with variations of KCL brine-based mud systems. Initial results on the oil based pilot well are encouraging and, as such, Surge will expand the pilot of this oil-based mud system in its 2022 drilling program.
Going forward, Surge views multileg lateral development as complementary to its existing single-leg multifrac drilling program. The addition of the multileg design will upgrade a meaningful portion of the company's existing Sparky core area drilling inventory, which currently consists of over 425 internally estimated locations. Based on the strong initial well results, Surge is now budgeting eight additional multileg Sparky wells in its 2022 drilling program, along with 27 single-leg multifrac Sparky wells.
In Surge's newly acquired, high-operating-netback, light oil core area of SE Saskatchewan, recent development drilling has yielded impressive results. In the Minard area, two wells drilled in August had initial production rates over 320 bopd and have already produced a total of 30,000 barrels of oil each. These wells each paid out in less than 55 days. In 2022, SE Saskatchewan will be an important component of the company's drilling activity, with 36 gross (27.7 net) wells budgeted.
Surge has continued its Q4 2021 operational momentum by securing services, having commenced its 2022 drilling program in December, 2021. The company currently has three drilling rigs operating in its core areas: one rig drilling single-leg multifrac Sparky wells, one drilling multileg open-hole Sparky wells and one drilling horizontal wells in SE Saskatchewan. To date, the company has rig released eight net wells of its planned 27.1-net-well Q1 2022 drilling program.
Outlook -- positioned for outperformance in 2022
Surge's management and board are excited about the company's outlook for 2022, as previous lender-mandated fixed-price crude oil hedging contracts expired at the end of 2021. Management continues to strategically assess, analyze and position the company based on its strong competitive corporate advantages, including Surge's long 15-year reserve life index, low conventional corporate decline, high-crude-oil operating netbacks, top-tier production efficiencies, large 13-year drilling inventory and the company's substantial $1-billion tax pool base.
Surge's lower-risk, high-operating-netback, conventional crude oil asset and opportunity base matches very well with management's conservative return-based business strategy. The company's large OOIP9 conventional reservoirs provide top-tier production efficiencies, shallow declines and significant free cash flow -- underpinning management's strategic plan to return to a dividend plus share buyback business model.
At $75 (U.S.) WTI per barrel, Surge anticipates delivering a free cash flow yield of over 25 per cent to investors in 2022.
We seek Safe Harbor.
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