Mr. Paul Colborne reports
SURGE ENERGY INC. ANNOUNCES RECORD SECOND QUARTER FINANCIAL & OPERATING RESULTS; RETURN OF CAPITAL FRAMEWORK; OPERATIONS UPDATE; AND 2022 CAPITAL AND OPERATING BUDGET UPDATE
Surge Energy Inc. has released its financial and operating results for the quarter ended June 30, 2022, an update on Surge's shareholder returns framework, an operations update, and revisions to the company's 2022 capital and operating budget.
Q2 2022 FINANCIAL & OPERATING HIGHLIGHTS
An extremely tight physical market for crude oil has manifested from continued growth in demand, supply disruptions stemming from years of global underinvestment in oil projects, and ongoing geopolitical tensions. These factors have led to a favourable commodity pricing environment for Canadian producers.
During the second quarter of 2022 Surge delivered record cash flow from operating activities of $75.8 million, an increase of 818 percent, as compared to Q2/21 cash flow from operating activities of $8.3 million. Additionally, the Company delivered adjusted funds flow1 of $78.6 million in Q2/22, an increase of 479 percent compared to Q2/21 adjusted funds flow of $13.6 million.
In Q2/22, the Company generated cash flow from operations before realized gains or losses on financial contracts of $121.8 million (with an average oil price of US$108.41 WTI per barrel during the period), an increase of 318 percent as compared to $29.2 million in Q2/21 (with an average oil price of US$66.07 WTI per barrel during the period). Surge reported a realized loss on financial contracts of $46.0 million in Q2/22, primarily due to mandated fixed price oil hedging relating to the corporate acquisitions that closed in 2H/21. These fixed price hedging volumes wind down significantly over the second half of 2022, and expire at the end of the year.
Prior to the $121.8 million generated in Q2/22, the single best quarter in Surge's 12 year corporate history for cash flow from operations before realized gains or losses on financial contracts was Q3/14 at $77.5 million.
During the quarter, Surge generated $36 million of free cash flow1, reducing net debt significantly from $315.8 million at March 31, 2022 to $280.1 million at June 30, 2022.
Additionally, on June 15, 2022 Surge reinstated its base cash dividend of $0.42 per share per annum (paid monthly). Annualized, the Company's base cash dividend represents 12 percent of Q2/22 cash flow from operating activities.
Additional highlights from the Company's Q2 2022 financial and operating results include:
Reduced net debt1 by $35.6 million as compared to March 31, 2022 while concurrently completing the successful Q2/22 capital program for $36.9 million;
- Achieved average daily production of 21,003 boepd (85 percent liquids) during Q2/22, an increase of 39 percent over Q2/21 production of 15,132 boepd (84 percent liquids);
- Successfully drilled 9 net wells with activity focused in the Company's Sparky, SE Saskatchewan and Valhalla conventional, light and medium gravity crude oil core areas; and
- As previously released, the Company was successful at a highly competitive Saskatchewan Crown land sale at Steelman, adding more than 40 net highly economic light oil Frobisher drilling locations, directly offsetting Surge's recent successful drilling results.
RETURN OF CAPITAL FRAMEWORK
Surge is poised to deliver strong operational results in 2H/22 and beyond with more than 2.6 billion of net (internally estimated) original oil in place ("OOIP")2, an approximate 6.5 percent recovery factor to date, and dominant operational positions in two top tier light and medium gravity crude oil growth plays in the Sparky and SE Saskatchewan core areas. Further, with over $1.3 billion in tax pools, the Company is well positioned to deliver its shareholders a combination of:
Continued net debt repayment, increasing Surge's net asset value ("NAV")2 per share;
- A sustainable base monthly cash dividend (currently a 4.7 percent yield based on a $9.00/share price);
- Strategic share buybacks;
- Potential for variable or special dividends; and
- A modest production growth wedge.
On this basis, Surge's Board and Management are pleased to announce the implementation of the Company's return of capital framework. This return of free cash flow will follow a phased approach, based on achieving certain net debt targets, as set forth below:
Phase 1: Return approximately 25 percent of free cash flow to shareholders through the Company's existing base dividend of $0.42 per share per annum. The remainder of free cash flow will be allocated to debt reduction until net debt is reduced to $200 million;
Phase 2: Return approximately 50 percent of free cash flow to shareholders, with 25 percent allocated to the base dividend, and 25 percent allocated to strategic share buybacks, acquisitions, and/or variable or special dividends, until net debt is reduced below $125 million; and
Phase 3: Return approximately 75 percent of free cash flow to shareholders once net debt is reduced below $125 million. 25 percent of free cash flow will be allocated to the base dividend, 50 percent allocated to strategic share buybacks, a modest growth wedge, and/or variable or special dividends, and 25 percent will be allocated to strategic acquisitions and/or further net debt repayment.
Strategic, opportunistic acquisitions continue to be a key focus for Surge as Management looks to increase sustainable free cash flow on a per share basis for shareholders. Surge's approach to acquisitions will continue to be disciplined with a focus on acquiring high quality, large OOIP, low cost, conventional reservoirs that provide free cash flow per share accretion.
OPERATIONS UPDATE: SUCCESSFUL 1H/22 DRILLING PROGRAMS AT SPARKY, SE SASKATCHEWAN, AND VALHALLA
During Q2/22, Surge began its post spring break-up Sparky and SE Saskatchewan drilling programs, drilling 9 net wells in the quarter, with 7 net horizontal wells in Sparky, 1.5 net horizontal wells in SE Saskatchewan, and 0.5 net wells targeting the Doig formation at the Company's large OOIP, light oil pool in the Valhalla area. The Company continues to be active in its two primary core areas in 2H/22, with two drilling rigs operating in the Sparky area, and one in SE Saskatchewan.
All 21.5 net wells drilled and completed by the Company during the first quarter of the year in the Sparky and SE Saskatchewan core areas were on production during the second quarter and added over 2,550 boepd to Q2/22. These drilling results are consistent with Surge's type curve expectations.
Additionally, Surge has executed attractive fixed forward hedges for both power costs and WCS differentials, which provide stability in both operating costs and revenue.
2022 CAPITAL AND OPERATING BUDGET UPDATE
Surge's high quality conventional asset base is characterized by shallow reservoirs, which means that the Company's drilling program is less susceptible to inflationary pressures. Shallow, conventional reservoirs can be drilled faster than deeper unconventional reservoirs, which reduces drilling days, the amount of steel used and, in many cases, the need to frac wells.
The Company will continue to monitor costs and manage capital expenditures for the balance of 2022 as they relate to the impact of supply constraints, cost inflation, and labour shortages that are being experienced across the energy industry and around the globe. Surge has secured the services necessary to execute its planned capital program for the balance of 2022 and into 2023, having contracted drilling rigs for operations in its Sparky and SE Saskatchewan core areas.
As previously released, the Company was successful at a highly competitive Saskatchewan Crown land sale at Steelman in Q2/22, which added more than 40 net, highly economic, light oil Frobisher drilling locations, directly offsetting recent successful drilling results. In addition, Surge has also been successful in adding to its Sparky core area land position through both Crown land sales and freehold leasing. To date in 2022, the Company has spent approximately $15 million in expenditures related to strategic, core area land acquisitions.
After completing a review of the impact of inflationary factors as well as land expenditures to date, Surge has increased its estimate for 2022 expenditures on property, plant, and equipment by approximately 12 percent, as compared to the Company's original budget released on January 17, 2022.
On this basis, Surge is revising its 2022 capital guidance, as detailed below. The new capital expenditure estimates for 2022 include approximately $15 million of previously unbudgeted core area Crown and freehold land acquisitions.
Given the impact of the aforementioned inflationary pressures, as well as above average power costs experienced year-to-date, the Company is also revising its 2022 operational costs and expenditures as follows:
OUTLOOK - ASSET QUALITY DRIVES OUTPERFORMANCE
Surge is a high quality, intermediate publicly traded oil company focused on enhancing shareholder returns through free cash flow generation. The Company's defined operating strategy is based on acquiring and developing high quality, light and medium grade crude oil conventional oil reservoirs, using proven technology to enhance ultimate oil recoveries.
Surge's December 31, 2021 independent Sproule net asset value is $24.34 per share3 on a proven plus probable basis, based on a flat US$80 WTI per barrel crude oil price deck.
During the second quarter of 2022 Surge delivered record cash flow from operating activities of $75.8 million, an increase of 818 percent, as compared to Q2/21 cash flow from operating activities of $8.3 million. Prior to the $121.8 million of cash flow from operations before realized gains or losses on financial contracts generated in Q2/22, the single best quarter in Surge's 12 year corporate history for cash flow from operations before realized gains or losses on financial contracts was Q3/14 at $77.5 million.
The Company's fixed price oil hedge volumes will wind down and expire by the end of 2022, providing incremental cash flow and free cash flow in 2023 and beyond at current strip oil prices.
On July 15, 2022, Surge paid its first monthly cash distribution of its $0.42 per share, per annum base dividend. This base dividend represents 12 percent of annualized Q2/22 cash flow from operating activities of more than $300 million.
The Company currently anticipates releasing preliminary 2023 guidance on or before the release of its Q3/22 results.
Free cash flow is a non-GAAP financial measure, calculated as cash flow from operating activities less expenditures on property, plant, equipment and dividends paid. Management uses free cash flow to determine the amount of funds available to the Company for future capital allocation decisions.
1 This is a non-GAAP and other financial measure which is defined in the Non-GAAP and Other Financial Measures section of this document.
2 See Oil and Gas Advisories section of this document for further information
3 This is a Company defined fixed price sensitivity and is not NI51-101 compliant. See the Oil and Gas Advisories section for further information.
We seek Safe Harbor.
© 2022 Canjex Publishing Ltd. All rights reserved.