Mr. Paul Colborne reports
SURGE ENERGY INC. ANNOUNCES INTENT TO REINSTITUTE BASE DIVIDEND ON JULY 15, 2022; LARGE NEW LIGHT OIL POOL EXTENSION AND LAND ACQUISITION AT STEELMAN IN SE SASKATCHEWAN; UPDATE ON TERM DEBT AND CREDIT FACILITY; INTENT TO REDEEM 5.75% CONVERTIBLE DEBENTURES; FIRST QUARTER FINANCIAL & OPERATING RESULTS; AND 2022 OUTLOOK
Surge Energy Inc. has provided an update on the following: (1) the intent to reinstitute the company's base dividend on July 15, 2022; (2) the successful acquisition of strategic, core area lands in southeast Saskatchewan at a recent Crown sale; (3) the receipt of an additional $30-million of term debt financing under the same terms and conditions as its existing five-year term debt facility; (4) the intent to redeem the company's $44.5-million of 5.75 per cent convertible debentures for cash; (5) the reconfirmation and extension of Surge's $150-million first-lien credit facility; (6) the company's financial and operating results for the quarter ended March 31, 2022; and (7) Surge's 2022 outlook.
Intent to reinstitute base dividend on July 15, 2022
With crude oil prices now in excess of $100 (U.S.) WTI (West Texas Intermediate) per barrel, which is significantly above the company's $85 (U.S.) WTI guidance price for crude oil in 2022, Surge is pleased to announce its intention to resume its base cash dividend distribution, payable on a monthly basis.
At current strip commodity prices for crude oil and natural gas, management projects that Surge's net debt target range will be achieved during Q3 2022. On this basis, the company anticipates reinstating its base annual cash dividend, expected to be 42 cents per share (3.5 cents per month), payable on July 15, 2022, to holders of the company's common shares of record at the close of business on June 30, 2022. Any anticipated dividend payment will be subject to the approval of Surge's board of directors at the time of declaration.
On an annualized basis, this base cash dividend is equal to approximately 20 per cent of Surge's previously guided annual 2022 free cash flow utilizing a pricing assumption of $85 (U.S.) WTI per barrel crude oil.
With the majority of the company's mandated fixed-price crude oil hedges for 2022 expiring in less than two months, Surge has resumed its regular, continuing risk management program. This orderly program is designed to set price floors that protect Surge's dividend and capital programs while also providing participation in a rising commodity price environment.
The monthly cash dividend is expected to be designated as an eligible dividend for Canadian federal and provincial income tax purposes. Dividends paid to shareholders who are non-residents of Canada will be subject to Canadian non-resident withholding taxes.
New light oil pool extension and land acquisition at Steelman in southeast Saskatchewan
Surge is pleased to announce that drilling on its operated, light oil, core area assets at Steelman in southeast Saskatchewan
has delivered better-than-anticipated results. The company has been actively drilling in southeast Saskatchewan
since its acquisition of Astra Oil Corp. and Fire Sky Energy Inc. in the second half of 2021.
The company's most recent 4.0 gross (2.5 net) wells drilled at Steelman in Q1 2022 have continued to deliver strong results, producing at an average IP30 rate of more than 2,503 barrels of oil equivalent per day. These four wells have been independently evaluated as some of the best wells drilled in Saskatchewan to date this year, and, at current oil prices, these wells are anticipated to pay out in less than 50 days.
In addition to these excellent drilling results, Surge was also successful at a recent, highly competitive, Saskatchewan Crown land sale at Steelman. As a result, the company is pleased to announce that it has acquired the majority of the targeted prospective acreage on this exciting new light oil Frobisher pool extension. With Surge's success at the Crown land sale, the company now estimates it has added up to 40 gross (40.0 net) incremental, highly economic, light oil Frobisher drilling locations on the newly acquired Crown lands -- directly offsetting the recent successful drilling results noted herein.
Furthermore, Surge's integrated geotechnical modelling on the new pool extension has added internally estimated original oil in place (OOIP) of over 20 million barrels (15 million barrels net) on the new lands. The company now internally estimates combined OOIP of over 72 million barrels (53 million net) at its Steelman Frobisher pool.
Term debt update, intention to redeem 5.75 per cent convertible debentures for cash and credit facility update
The company's term debt facility provider has exercised its previously announced right to deliver an additional $30-million of term debt financing (under the same terms and conditions as its existing five-year term debt facility) to Surge, providing the company with significant incremental liquidity. Management anticipates that, at current commodity prices, the $30-million in gross proceeds, combined with a portion of Surge's forecasted free cash flow, will be used to settle the company's $44.5-million of 5.75 per cent convertible debentures for cash prior to their maturity on Dec. 31, 2022.
Concurrently, Surge has reconfirmed and extended its existing $150-million first-lien credit facility, which was drawn only $96.8-million at March 31, 2022. The maturity of the newly reconfirmed first-lien credit facility is now extended through to May 31, 2024.
The addition of the incremental term debt facility proceeds, combined with the intention to redeem the 5.75 per cent convertible debentures for cash, will provide Surge with a simplified debt capital structure, significant liquidity and no debt capital maturities through to mid-2024.
Operations update: successful Q1 2022 drilling program at Sparky and southeast Saskatchewan
Surge completed its Q1 2022 capital program drilling 23 (21.5 net) wells, with three rigs active in the quarter. This program comprised 14.0 net wells in the company's Sparky core area and 7.5 net wells in Surge's southeast Saskatchewan
core area for total expenditures on property, plant and equipment of $43-million. Furthermore, the company completed an additional 6.0 net wells in Q1 2022 that were drilled in Q4 2021.
In recent months, management has been successful in adding significant organic growth opportunities across its core areas. On this basis, the company has added more than 10 net sections of highly prospective land. These strategic core area land acquisitions have added an incremental 79 gross (70.0 net) drilling locations to Surge's deep 13-year drilling inventory at a total cost of $9.9-million, including the exciting southeast Saskatchewan
land sale at Steelman discussed herein.
The company is currently monitoring the impact of cost inflation, labour shortages and global supply chain challenges on its 2022 capital and operating expense guidance. Surge's Q1 2022 capital program tracked the company's 2022 budget, and the company will continue to monitor the impact of these inflationary pressures over the second half of 2022 and into 2023.
Q1 2022 financial and operating highlights
During the first quarter of 2022, Surge delivered cash flow from operating activities of $52.2-million, an increase of 236 per cent as compared with Q1 2021 cash flow from operating activities of $15.6-million. Additionally, the company delivered adjusted funds flow of $62.9-million in Q1 2022, an increase of 299 per cent compared with Q1 2021 adjusted funds flow of $15.8-million.
Surge reported a realized loss on financial contracts of $28.8-million in Q1 2022, primarily due to fixed-price oil hedging relating to the corporate acquisitions that closed in late 2021. The company generated adjusted funds flow before realized gains or losses on financial contracts of $91.7-million in Q1 2022 (with a Q1 2022 average oil price of $94.29 (U.S.) WTI per barrel), an increase of 181 per cent over $32.6-million in Q1 2022.
As previously announced, the company's production in Q1 2022 was impacted by a contained fire at one of its southeast Saskatchewan
oil batteries. Thanks to the efforts of Surge's emergency response committee and local service providers, the company is pleased to reaffirm that no injuries or significant environmental problems occurred in relation to the fire. Production from the affected areas resumed in late February, 2022. The impact on average production from this incident, along with unusually cold weather in January, 2022, was approximately 700 barrels of oil equivalent per day for Q1 2022.
Highlights from the company's Q1 2022 financial and operating results include the following.
Financial and operating highlights
Outlook -- Surge Energy positioned for outperformance in 2022 and beyond:
Delivered Q1 2022 cash flow from operating activities of $52.2-million, an increase of 236 per cent over Q1 2021 cash flow from operating activities of $15.6-million;
Delivered adjusted funds flow of $62.9-million in Q1 2022, an increase of 299 per cent over Q1 2021 adjusted funds flow of $15.8-million;
Achieved average daily production of 20,550 barrels of oil equivalent per day (85 per cent liquids) during Q1 2022, an increase of 24 per cent over Q1 2021 production of 16,582 barrels of oil equivalent per day (84 per cent liquids);
Successfully drilled 23.0 (21.5 net) wells in Q1 2022, with drilling activity strategically focused in the company's Sparky and southeast Saskatchewan
conventional, light and medium gravity crude oil core areas;
Reduced net debt by $15.7-million as compared with Dec. 31, 2021, while concurrently completing the Q1 2022 capital program for $43-million.
Surge is an intermediate light and medium gravity crude oil producer, with an estimated 13-year development drilling inventory comprising more than 1,000 internally estimated net development drilling locations. The company confirms its 2022 production exit rate guidance of 21,500 barrels of oil equivalent per day (86 per cent liquids).
With 2.6 billion of net (internally estimated) OOIP, an approximately 6.5-per-cent recovery factor to date, and dominant positions in two top-tier medium and light gravity crude oil growth plays at Sparky and southeast Saskatchewan, Surge is poised to deliver strong operational results in 2022 and beyond. Further, with over $1.3-billion in tax pools and an attractive balance sheet, the company will deliver to its stakeholders a combination of:
- Continued net debt repayment (increasing Surge's net asset value per share);
- A reinstated, sustainable, base monthly dividend;
- Share buybacks;
- A modest production growth wedge;
- Potential for variable or special dividends.
We seek Safe Harbor.
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