Mr. Paul Colborne reports
SURGE ENERGY INC. ANNOUNCES 2021 FOURTH QUARTER AND YEAR-END FINANCIAL AND OPERATING RESULTS, AND 2021 YEAR-END RESERVES
Surge Energy Inc. has released its financial and operating results for the quarter and year ended Dec. 31, 2021, its year-end 2021 reserves as independently evaluated by Sproule Associates Ltd., and a new net asset value (NAV) of $16.94 per share for total proven plus probable reserves.
The financial and operating results contained herein do not include a full quarter of contribution from Surge's strategic $58.8 million light oil acquisition of Fire Sky Energy Inc. ("Fire Sky"), which closed on November 1, 2021.
2021: POSITIONING FOR THE TURN IN OIL PRICES
In 2020, Surge Management was intensely focused on preserving stakeholders' capital during the COVID pandemic, increasingly negative climate change sentiment, the Saudi/Russia oil price war, and the resulting drop in oil prices from more than US$63 WTI per barrel in January of 2020 to US$11.57 WTI per barrel in April of 2020.
In 2021, Surge shifted focus and prioritized positioning the Company to be a top performer in its Canadian public oil company peer group as crude oil prices began to recover. Consequently, over the last 15 months Surge's Management and Board moved to strategically high grade and diversify the Company's top tier1 conventional crude oil asset base, reposition the Company's balance sheet, and proactively address the significant reduction in reserve based lending debt capital available to the Canadian oil and gas industry. In this regard, during 2021 Surge:
Sold $106 million of mature assets at a multiple of 5.3 times cash flow from operating activities (i.e. inclusive of corporate interest expense savings) at then strip pricing;
- Closed a successful, oversubscribed $23 million flow-through share offering;
- Acquired two private companies with high operating netback2, light oil assets focused in SE Saskatchewan (Astra Oil Corp. and Fire Sky) at a combined 2.6 times cash flow from operating activities multiple at then strip pricing;
- Completed a strategic $130 million, 5-year term debt financing; replacing a portion of conventional six month revolving bank debt with stable long term debt capital;
- Positioned the Company with dominant operational positions in two of the top1 medium and light gravity, conventional crude oil plays in Canada (Surge's Sparky and SE Saskatchewan core areas); and
- Completely repositioned Surge's balance sheet, with a forecast 2022 exit net debt to cash flow from operating activities ratio of 0.55 times3; with forecasted annual free cash flow2 of more than $170 million in 2022 at US$85 WTI4 oil prices.
During the fourth quarter of 2021, Surge delivered adjusted funds flow5 of $43.3 million (on an average oil price of US $77 WTI during the period), an increase of over 410% as compared to Q4/20 adjusted funds flow of $8.5 million.
Surge reported a realized loss on financial contracts of $31.0 million in Q4/21, primarily due to lender mandated fixed price oil hedging requirements instituted in late 2020. The Company generated adjusted funds flow before realized gains or losses on financial contracts of $74.4 million in Q4/21, an increase of 405% over adjusted funds flow before realized gains or losses on financial contracts of $14.7 million in Q4/20. The lender mandated fixed price oil hedges entered into in late 2020 expired on December 31, 2021.
Surge continues to execute the Company's ongoing risk management program, including strategic hedge positions over the next several quarters for crude oil, natural gas, interest rates and power costs, as described in Surge's MD&A for the period ended December 31, 2021 which can be accessed under the Company's profile on SEDAR.
Based on Surge's new independent December 31, 2021 Sproule reserves report, the Company has a Total Proved Plus Probable NAV6 of $16.94 per basic share, and a Total Proved NAV of $9.81 per basic share - on Sproule's 2021 year-end price deck that averages approximately US$70 WTI per barrel over the first five years. Given the significant and rapid increase in both spot and strip crude oil prices since December 31, 2021, the NAV calculations contained in this press release may not be reflective of current crude oil prices.
The NAV estimates in this press release are based upon Sproule's independent evaluation of the Company's year end 2021 reserves, and contain no value for undeveloped land or seismic. Further, Surge has booked only 456 net P+P locations in its Sproule NAV estimates, out of a total of 975 net locations in the Company's large (internally estimated) 13 year conventional drilling inventory.7
2021 FINANCIAL AND OPERATIONAL HIGHLIGHTS
Highlights from the Company's Q4/21 and Year-End 2021 Financial Report and operations include:
Achieved average daily production of 21,163 boepd (85% liquids) during the fourth quarter of 2021, an increase of 22% as compared to Q4/20 production of 17,356 boepd (84% liquids);
- Delivered fourth quarter cash flow from operating activities of $50.4 million and adjusted funds flow of $43.3 million (on an average oil price of US $77 WTI during the period), increases of over 350% and 410% as compared to Q4/20;
- Closed a strategic $130 million 5-year term debt financing on December 9, 2021, significantly reducing the Company's reliance on more volatile, short-term debt;
- Reduced net debt by $49.6 million;
- Successfully drilled 48 (48.0 net) wells in 2021, with activity strategically focused in the Company's Sparky and SE Saskatchewan high quality, conventional, medium and light gravity crude oil core areas;
- Continued the Company's focus on ESG efforts, highlighted by completing a total of $12.6 million on abandonment activities, which resulted in Surge abandoning more than five wells for each new well drilled in 2021. This was funded using a combination of cash flow from operating activities, as well as grants received through the Alberta Site Rehabilitation Program and the Saskatchewan Accelerated Site Closure Program; and
- Achieved several ESG milestones, including:
Published the Company's inaugural ESG report in December 2021; and
- Abandoned over 270 wells in 2021; and
- Completed a 45km gas gathering pipeline in SE Saskatchewan, allowing Surge to reduce Scope 1 emissions within Surge's SE Saskatchewan operations by approximately 56% (this included a 95% reduction for specific facilities in Minard, Steelman, and Viewfield); and
- Completed a gas conservation project in SW Saskatchewan, conserving 70% of Scope 1 emissions in the area.
2021 YEAR END RESERVES HIGHLIGHTS
With Surge's December 31, 2021 Sproule reserve report, the Company delivered:
A Total Proved Plus Probable NAV of $16.94 per basic share, and a Total Proved NAV of $9.81 per basic share on Sproule's 2021YE price deck that averages US$70 WTI crude oil over the first five years;
- PDP Finding & Development ("F&D") cost of $9.63/boe, including changes in FDC;
- A 3.8x PDP Recycle Ratio on a 2021 average operating netback before realized losses on financial contracts of $36.13/boe;
- PDP Finding, Development & Acquisition ("FD&A") cost of $15.41/boe, resulting in a 2.3x Recycle Ratio on a 2021 operating netback before realized losses on financial contracts of $36.13/boe; and
- An organic Reserves Replacement of 154% on PDP (+9,898 mboe), 168% on TP (+10,824 mboe), and 172% on TPP (+11,053 mboe).
2021 YEAR-END RESERVES
The Company's reserves were independently evaluated by Sproule in accordance with National Instrument 51-101 - Standards of Disclosure for Oil and Gas Activities ("NI 51-101") effective December 31, 2021. Surge's Annual Information Form (the "AIF") for the year ended December 31, 2021 contains Surge's reserves data and other oil and natural gas information as mandated by NI 51-101.
The following tables summarize Surge's working interest oil, natural gas liquids and natural gas reserves and the net present values ("NPV") of future net revenue for these reserves (before taxes) using forecast prices and costs as evaluated in the Sproule Report. The evaluation is based on Sproule's forecast pricing and exchange rates at December 31, 2021 which is available on their website www.sproule.com. All references to reserves in this release are to gross Company reserves, meaning Surge's working interest reserves before deductions of royalties and before consideration of the Company's royalty interests. The amounts in the tables may not add due to rounding.
In 2021, Surge drilled a total of 48.0 net wells with a 100% success rate, spending a total of $103.8 million for expenditures on property, plant, and equipment. The Company focused drilling operations primarily to its core Sparky and SE Saskatchewan medium and light gravity oil plays.
In addition, Surge has continued the Company's operational momentum into early 2022, with three drilling rigs active in its Sparky and SE Saskatchewan core areas. Surge plans to drill 65.0 net wells in 2022, comprised of 36.0 net Sparky wells, 27.5 net SE Saskatchewan wells, and 1.5 net wells at Valhalla and Greater Sawn.
The Company commenced its winter drilling program in December of 2021, and has now completed the drilling of 14.0 net Sparky locations, including five Sparky multi-leg laterals, and 11 gross (9.5 net) wells in southeast Saskatchewan. The first 3 gross (2.5 net) wells from the SE Saskatchewan light oil program have been brought on production, with initial gross 30-day production rates averaging over 325 barrels of oil per day8 each. All wells from both the Sparky and SE Saskatchewan programs are anticipated to be completed and on production prior to March 31, 2022.
In early February 2022, the Company contained a small fire at one of its SE Saskatchewan oil batteries. Thanks to the efforts of Surge's Emergency Response Committee and local service providers, the Company is pleased to report no injuries or significant environmental impacts occurred in relation to the fire. Production from the affected areas resumed in late February. The Company estimates that the incident will have a minor impact on average annual production of approximately 125 boepd for 2022.
With Q1/22 drilling results to date exceeding internal type curve expectations, the Company continues to forecast average production for 2022 at 21,500 boepd.
ENVIRONMENTAL, SOCIAL, AND GOVERNANCE
Surge published its inaugural ESG report in December 2021, which is available on the Company's website. Additionally, the Company achieved several other important ESG milestones in 2021, including deploying $6.7 million of cash flow from operating activities and $5.9 million of SRP grants to abandon over 270 wells in 2021. This represents approximately 25% of the Company's previously inactive, unabandoned wells and has resulted in Surge abandoning over 460% more wells than it drilled in the year, with the Company abandoning approximately 5.6 net wells for every net well drilled in the year.
Further, the Company completed a 45km gas gathering pipeline in SE Saskatchewan, allowing Surge to reduce Scope 1 emissions within the Company's SE Saskatchewan operations by approximately 56% (this included a 95% reduction for specific facilities in Minard, Steelman, and Viewfield). Surge also completed a gas conservation project in SW Saskatchewan, conserving 70% of Scope 1 emissions in the area.
Surge is a leader and trusted steward in the responsible development of Canadian resources. Through sustainable asset development and continuous engagement with stakeholders, the Company is dedicated to creating value for current and future generations.
OUTLOOK: SGY - POSITIONED FOR OUTPERFORMANCE IN 2022
Management is excited regarding Surge's exposure to rising crude oil prices in 2022, following the execution of the Company's strategic corporate initiatives throughout 2021. The Company anticipates generating significantly higher operating netbacks and cash flow from operating activities in 2022 at current strip commodity prices as compared to 2021.
Surge is now a 21,500 boepd (86 percent liquids) intermediate light and medium gravity oil producer, with over 975 internally estimated net development drilling locations, providing an estimated 13 year development drilling inventory.
With 2.6 billion of net (internally estimated) original oil in place9, a 6.5% recovery factor to date, and dominant positions in two top medium and light gravity crude oil growth plays, Surge believes that the Company is poised to deliver strong results on an operational basis in 2022 and beyond. Further, with more than $170 million of free cash flow forecast for 2022 at US$85 WTI10 crude oil prices, over $1.3 billion in tax pools, and an attractive balance sheet, Surge anticipates that the Company will be positioned to deliver to its stakeholders a combination of:
Continued net debt repayment (increasing Surge's NAV per share);
- A reinstated, sustainable, base monthly dividend;
- Share buybacks;
- A modest production growth wedge; and
- Potential for variable or special dividends.
Management re-confirms that the Company is targeting a reduction of net debt to a range of $250 to $265 million, at which point the Company will look to resume its historical, shareholder returns 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 $0.60 to $0.75 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 mid-year in 2022.
1 Per Raymond James Research, dated January 25, 2022.
2 This is a non-GAAP and other financial measure which is defined in the Non-GAAP and Other Financial Measures section of this document.
3 Cash flow from operating activities assumes a nil change in non-cash working capital; 2022 exit net debt is prior to any contemplated allocation of 2022 free cash flow to shareholder returns through dividends or share buybacks.
4 Additional pricing assumptions: (WCS: US$13.00, EDM/Cromer US$3.50 differentials), Fx of $0.79 and AECO of $3.25 per mcf.
5 This is a non-GAAP and other financial measure which is defined in the Non-GAAP and Other Financial Measures section of this document.
6 NAV is the Company's Net Asset Value as of 2021YE (on a Before Tax basis), evaluated by an independent auditor (Sproule) and in accordance with COGE Handbook, minus debt, then divided by the company's basic share count as of Dec 31, 2021. Surge's NAV does not include any value for Land or Seismic.
7 See Drilling Inventory section
8 The three gross SE Saskatchewan wells brought on production in late February 2022 have gross IP30 rates of 405 bbl/d, 325 bbl/d & 257 bbl/d.
9 See Oil and Gas Advisories section of this document for further information.
10 Additional pricing assumptions: (WCS: US$13.00, EDM/Cromer US$3.50 differentials), Fx of $0.79 and AECO of $3.25 per mcf.
11 This is a non-GAAP and other financial measure which is defined in the Non-GAAP and Other Financial Measures section of this document.
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