Mr. Paul Colborne reports
SURGE ENERGY INC. ANNOUNCES CLOSING OF THE PREVIOUSLY ANNOUNCED STRATEGIC CORE AREA ACQUISITION; REITERATES ANTICIPATED 14% INCREASE TO DIVIDEND; CONFIRMS 2023 CAPITAL AND OPERATING BUDGET GUIDANCE AND PROVIDES UPDATE ON RETURN OF CAPITAL FRAMEWORK
Surge Energy Inc. has closed the previously announced acquisition of long-life, low-decline, crude oil assets in Surge Energy's Sparky and southeast Saskatchewan core areas for a net purchase price of $202-million.
The assets are currently producing more than 3,850 barrels of oil equivalent per day (99 per cent liquids) of predominantly light- and medium-gravity crude oil. The acquisition is 15 per cent accretive to Surge Energy's 2023 free cash flow per share (1). Furthermore, Surge Energy management has identified a development drilling inventory of over 45 net unbooked locations, which can hold production flat for an estimated seven years.
Surge Energy is reconfirming its upwardly revised 2022 production exit rate of more than 25,000 boe/d (approximately 87 per cent liquids).
As previously announced, with the completion of the acquisition, Surge Energy anticipates declaring an increase to the company's annual base cash dividend by 14 per cent, from 42 cents to 48 cents per share per annum (four cents per share per month), payable on Feb. 15, 2023. Any dividend increase remains subject to the approval of Surge Energy's board of directors with consideration given to the business environment at the time.
Surge Energy: a premier Canadian crude oil divco
Management's primary corporate goal is for Surge Energy to rank as the top total rate of return, growth plus dividend-paying crude oil company in the Canadian energy sector. Management firmly believes that Surge Energy's premium asset quality will drive operational outperformance and, ultimately, superior financial returns.
Surge Energy's focused operating strategy is to direct growth and development capital toward high-quality, large original oil in place (OOIP (2)), conventional crude oil reservoirs to generate free cash flow (1). On this basis, more than 75 per cent of the company's exit 2022 production comes from Surge Energy's SE Saskatchewan and Sparky core areas, which have been independently ranked (3) as two of the top-four oil plays in Canada.
In addition to Surge Energy's operating strategy, the company's increasing shareholder return business model focuses on returning free cash flow to shareholders through disciplined capital allocation, together with modest growth in production per share. Independent research has ranked the growth, plus increasing compounding dividend business model, as one of the best investing strategies over the last 75 years (4).
"The strategic core area acquisition that closed today further solidifies Surge's disciplined operating strategy by lowering the company's corporate decline and increasing free cash flow per share," said Paul Colborne, president and chief executive officer, Surge Energy. "This aligns exceptionally well with the company's modest growth (6 per cent accretive to production per share), plus increasing compounding dividend business model (anticipated 14-per-cent increase to Surge's annual dividend)."
Accordingly, following the acquisition, Surge Energy has key corporate characteristics.
Anticipated dividend increase
Surge Energy anticipates increasing the company's annual base cash dividend by 14 per cent, from 42 cents per share to 48 cents per share (four cents per share per month), on Feb. 15, 2023. This upwardly revised base dividend is consistent with phase 1 of the company's return of capital framework set forth herein.
Any dividend increase will be subject to the approval of Surge Energy's board of directors with consideration given to the business environment at the time.
2023 capital and operating budget guidance
Surge Energy's financial and operating estimates for 2023 have been approved by the board of directors.
Updated return of capital framework
Today, Surge Energy's crude oil assets are internally estimated to have more than three billion of net OOIP, an approximately 7.5-per-cent recovery factor to date, and a dominant operational position in two top-tier light- and medium-gravity crude oil growth plays in the company's Sparky and SE Saskatchewan core areas. Further, with over $1.4-billion in tax pools, Surge Energy is well positioned to deliver its shareholders a tax-efficient combination of:
Continued net debt repayment -- systematically increasing Surge Energy's net asset value (NAV) (2) per share;
A sustainable base monthly cash dividend;
Strategic share buybacks;
Potential for variable or special dividends;
A modest production growth wedge.
On this basis, Surge Energy's board and management are pleased to announce an update to the company's return of capital framework, incorporating the impact of the acquisition. Return of free cash flow to shareholders will continue to follow a phased approach, based on achieving certain net debt targets, as set forth below:
Phase 1: Return approximately 25 per cent of free cash flow to shareholders through the company's anticipated, increased base dividend of 48 cents per share per annum. The rest of free cash flow will be allocated to debt reduction until net debt is reduced to $250-million.
Phase 2: Return approximately 50 per cent of free cash flow to shareholders, with 25 per cent allocated to the base dividend and 25 per cent allocated to strategic share buybacks, acquisitions, and/or variable or special dividends, until net debt is reduced below $175-million.
Phase 3: Return approximately 75 per cent of free cash flow to shareholders once net debt is reduced below $175-million. Twenty-five per cent of free cash flow will be allocated to the base dividend, 50 per cent allocated to strategic share buybacks, a modest growth wedge, and/or variable or special dividends, and 25 per cent will be allocated to strategic acquisitions and/or further net debt repayment.
Based on the company's $80 (U.S.) WTI (West Texas Intermediate) budget price deck, Surge Energy anticipates reaching phase 2 of the return of capital framework in the second half of 2023.
Annual sustainability report released
Surge Energy has released its second annual sustainability report, outlining the company's advancement of its environmental, social and governance practices, and their impact on Surge Energy's business and operating strategy.
The company's second annual sustainability report reaffirms Surge Energy's commitment to be a leader in reducing the impact of oil and gas operations on the environment. The report covers performance metrics for the 2019, 2020 and 2021 calendar years, and aligns with guidance set forth by the Task Force on Climate-related Financial Disclosure.
The sustainability report was approved by Surge Energy's management team, as well as the company's board of directors, and is intended to allow all Surge Energy stakeholders to better understand the company's commitment to sustainable, responsible oil and gas operations.
The new annual sustainability report can be viewed through the company's website.
Outlook -- positioning for 2023 and beyond
Surge Energy's board and management continue to be optimistic regarding the outlook for crude oil prices, based on a tight physical market, continuing geopolitical issues and the significant underinvestment that has occurred in the energy industry over the past several years.
The closing of the strategic core area acquisition today further solidifies Surge Energy's disciplined operating strategy by lowering the company's corporate declines and increasing free cash flow. This aligns well with the company's modest growth (6 per cent accretive to production per share) plus increasing compounding dividend business model (anticipated 14-per-cent increase to Surge Energy's annual dividend).
Based on the strong foundation from Surge Energy's key corporate characteristics, as set forth above, the company is well positioned for success in 2023.
(1) This is a non-generally accepted accounting principle and other financial measure.
(2) Note the oil and gas advisories.
(3) From Canadian oil play economics: when two times payout is reached at $50 WTI, Raymond James Energy Research, Jan. 25, 2022; and from crude oil and natural gas plays: table 7.2, Peters & Co. Research, Sept. 6, 2022.
(4) From Quantifying the power of dividends, Ned Davis Research Inc., May 9, 2017; from The power of dividends, RBC Global Asset Management, March 8, 2022.
We seek Safe Harbor.
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