Mr. Paul Colborne reports
SURGE ENERGY INC. ANNOUNCES 2022 FOURTH QUARTER AND YEAR END FINANCIAL AND OPERATING RESULTS, AND 2022 YEAR END RESERVES
Surge Energy Inc. has released its financial and operating results for the quarter and year ended Dec. 31, 2022, its year-end 2022 reserves as independently evaluated by Sproule Associates Ltd., and a new total proven plus probable (TPP) net asset value of $22.37 per share.
Surge Energy's new year-end 2022 proven developed producing (PDP) NAV per share increased 107 per cent from $3.51 per share on Dec. 31, 2021, to $7.28 per share as independently evaluated by Sproule.
The company's 2022 financial and operating results contained herein include only 12 days of operating and financial contribution from Surge Energy's strategic core area crude oil acquisition of 3,850 barrels of oil equivalent per day (99 per cent liquids) from Enerplus Corp., which closed on Dec. 19, 2022, for a net purchase price of $198-million (after interim adjustments).
Surge Energy: record performance in 2022
During 2022, Surge Energy delivered a total shareholder return (TSR) of 112 per cent (share capital appreciation plus dividend), exceeding the Capped Energy Index TSR by 110 per cent.
The company's following operating and financial results are set forth below:
- Delivered record cash flow from operating activities in 2022 of $276.1-million, an increase of 175 per cent as compared with 2021 cash flow from operating activities of $100.5-million;
Increased the company's adjusted funds flow (AFF) by over 190 per cent from $100.4-million in 2021 to $293.6-million in 2022;
Achieved average daily production of 21,262 boe/d (85 per cent liquids) in 2022, a 21-per-cent increase as compared with production of 17,642 boe/d (84 per cent liquids) in 2021;
Increased the company's cash flow from operating activities per share by 78 per cent from $1.83 in 2021 to $3.26 in 2022;
Delivered an increase in operating netbacks of nearly 100 per cent from $21.84 per boe in 2021 to $43.47 per boe in 2022;
Reinstituted Surge Energy's annual base cash dividend, as announced on June 15, 2022, at 42 cents per share per year;
Completed the strategic acquisition of core area light- and medium-gravity crude oil production (3,850 boe/d, 99 per cent oil), with an internally estimated 12-per-cent decline, for a net purchase price of $198-million, which closed on Dec. 19, 2022;
Announced an increase of 14 per cent to Surge Energy's annual base cash dividend, in conjunction with the closing of the acquisition, from 42 cents per share per year to 48 cents per share per year, effective Feb. 15, 2023;
Completed a highly successful, upsized, oversubscribed $80-million common share equity offering with a syndicate of 10 underwriters in conjunction with the acquisition;
Reported a new Frobisher light oil pool extension discovery at Steelman, Sask., which added more than 40 highly economic internally estimated locations to Surge Energy's large light oil drilling location inventory in its southeast Saskatchewan core area;
Continued to expand the company's Sparky core area, increasing Surge Energy's medium-gravity (average 25-degree API) crude oil production to more than 10,500 boe/d (85 per cent liquids) today, up over 775 per cent from 1,200 boe/d eight years ago.
2022 financial and operational highlights
Highlights from the company's fourth quarter 2022 and year-end 2022 financial report and operations include:
- A very successful 2022 drilling program of 83 gross (69.1 net) wells, with activity strategically focused to medium- and light-gravity crude oil in the company's conventional Sparky and southeast Saskatchewan core areas;
Continued the company's focus on environmental, social and governance efforts, highlighted by spending a total of $11.2-million on abandonment activities during the year; this resulted in Surge Energy abandoning 139 gross wells during 2022, representing two wells abandoned for each new net well drilled in 2022; these operations were financed 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;
- Replaced and replenished over 200 per cent of the wells drilled by the company in 2022 through a combination of organic drilling inventory additions through strategic land acquisition programs, as well as the acquisition;
- Delivered Q4 2022 cash flow from operating activities of $79.0-million and adjusted funds flow of $71.8-million, increases of over 57 per cent and 66 per cent, respectively, as compared with Q4 2021;
Increased Q4 2022 cash flow from operating activities per share by 43 per cent from 63 cents per share in Q4 2021 to 90 cents per share in Q4 2022.
Year-end 2022 reserves highlights
With Surge Energy's Dec. 31, 2022, Sproule reserve report, the company delivered the following results, using Sproule's YE 2022 price deck that averages approximately $83 (U.S.) West Texas Intermediate per barrel crude oil over the first five years:
Surge Energy's PDP NAV per basic share increased 107 per cent in 2022 from $3.51 per share on Dec. 31, 2021, to $7.28 per share on Dec. 31, 2022;
- A TPP NAV of $22.37 per basic share, and a total proven (TP) NAV of $13.73 per basic share;
A PDP finding and development (F&D) cost of $22.08 per boe, including changes in future development costs (FDC), resulting in a 2.54 times PDP recycle ratio on a 2022 average operating netback (before realized losses on financial contracts) of $56.12 per boe;
A PDP finding, development and acquisition (FD&A) cost of $21.95 per boe, resulting in a 2.56 times recycle ratio on a 2022 operating netback (before realized losses on financial contracts) of $56.12 per boe;
Organically replaced 99 per cent of production on PDP, and 103 per cent of production on TPP;
Replaced 223 per cent of production on PDP and 323 per cent of production on TPP, including acquisitions and dispositions;
FDC on a TP basis increased to $846-million ($670-million at year-end 2021) and, on a TPP basis, increased to $1,075-million ($832-million at year-end 2021); the increase in FDC is attributable to inflationary pressures consistent with industry averages and acquisitions and dispositions;
Strong reserve life index of 9.3 years on TP reserves and 13.4 years on TPP reserves.
Year-end 2022 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), effective Dec. 31, 2022. Surge Energy's annual information form for the year ended Dec. 31, 2022, contains Surge Energy's reserves data and other oil and natural gas information as mandated by NI 51-101.
Tables attached herein summarize Surge Energy's working interest oil, natural gas liquids and natural gas reserves and the net present values of future net revenue for these reserves (before taxes) using forecast prices and costs as evaluated in the Sproule reserves report. The evaluation is based on Sproule's forecast pricing and exchange rates at Dec. 31, 2022, which is available on its website. All references to reserves in this release are to gross company reserves, meaning Surge Energy's working interest reserves before deductions of royalties and before consideration of the company's royalty interests. The amounts in the attached tables may not add due to rounding.
In 2022, Surge Energy drilled a total of 83 gross (69.1 net) wells, spending a total of $169.9-million including expenditures on property, facilities and equipment. The company focused drilling operations primarily on its medium- and light-gravity crude oil assets in the Sparky core area and southeast Saskatchewan. Through the acquisition, as well as organic land additions, Surge Energy replaced over 200 per cent of the wells drilled by the company in 2022, increasing its internal corporate drilling inventory to more than 1,150 gross (1,050 net) locations, representing a 13-year drilling inventory.
As previously announced, in second quarter 2022, Surge Energy was successful at a highly competitive Saskatchewan Crown land sale in the Steelman area, which added more than 40 net internally estimated light oil Frobisher drilling locations to the company's inventory. As part of the company's second half 2022 drilling program in southeast Saskatchewan, six gross (six net) horizontal Frobisher wells were drilled on the newly acquired lands. All six of these wells are currently on production and are exceeding internal type curve expectations with average 30-day initial production rates of more than 450 boe/d (86 per cent light oil) per well, versus an internal type curve expectation of 250 boe/d per well. Each of the six wells had a payout of fewer than 11 weeks (at an average West Texas Intermediate price of $85 (U.S.) per barrel from August to December, 2022), demonstrating the strong economics associated with Surge Energy's large development drilling inventory in southeast Saskatchewan.
At the company's Sparky core area, current production is now exceeding 10,500 boe/d (greater than 85 per cent liquids, 25-degree API average oil quality) for the first time in the company's history, up over 775 per cent from 1,200 boe/d eight years ago. Surge Energy has a 12-year Sparky drilling inventory of more than 480 internally estimated locations, as well as further water flood upside.
In addition to adding the low-12-per-cent-decline, water flooded assets through the acquisition, Surge Energy has continued to strategically pursue water floods in both its Sparky and southeast Saskatchewan core areas, as well as at Sawn Lake. In 2022, Surge Energy converted eight wells to water injection in the Sparky core area, one well to injection at its Midale oil pool at Steelman, Sask., and three wells to injection in the company's Slave Point pool at Sawn Lake in Northern Alberta. The continued pursuit of water flood with the conversion of wells to water injection in the company's core areas helps lower declines, improves recovery factors and adds to the sustainability of Surge Energy's dividend plus modest growth business model.
Surge Energy has continued the company's operational momentum into early 2023, with two drilling rigs active in its Sparky and southeast Saskatchewan core areas. Surge Energy plans to drill 67 net wells in 2023, composed of 37 net Sparky wells and 30 net southeast Saskatchewan wells.
On this basis, the company commenced Surge Energy's winter drilling program in December of 2022, and has now completed the drilling of 10 net Sparky locations and eight net wells in southeast Saskatchewan. All wells from both the first quarter 2023 Sparky and southeast Saskatchewan drilling programs are anticipated to be completed and on production prior to March 31, 2023.
Environmental, social, and governance
Surge Energy's 2021 sustainability report was published in fourth quarter 2022 and can be found on the company's website. Surge Energy's 2022 sustainability report is expected to be published in third quarter 2023.
Surge Energy continues to focus on its operational footprint, particularly with respect to emissions related to its production operations. Further to Surge Energy's $11.2-million 2022 ARO program, Surge Energy continued to deploy capital focused on the reduction and conservation of associated emissions. Surge Energy's emission reduction budget of $2-million included tie-in of two multiwell batteries, vent reduction projects and flare repair, as well as the installation of vapour recovery units. These projects have served to reduce Surge Energy's corporate Scope 1 emissions by approximately 10 per cent. Surge Energy management and board are proud to showcase these achievements as demonstrations of projects that are both environmentally responsible and also economically beneficial to Surge Energy stakeholders.
Surge Energy also continued its commitment to abandonment and reclamation work. During 2022, Surge Energy expanded its focus beyond downhole abandonments and undertook extensive pipeline abandonments. Surge Energy engaged a host of different vendors for this project, which supported the communities it operates in throughout the year. In total, during 2022, Surge Energy abandoned over 290 kilometres of pipeline, completed 139 downhole abandonments, and spent $11.2-million on its overall abandonment and reclamation activities.
Furthermore, the company was awarded the United Way's award of excellence in the under-250-employee category. This award recognizes outstanding and innovative United Way campaigns that make Calgary a resilient and caring community. Surge Energy is committed to continue its award-winning programs and partnerships that benefit its local communities.
Surge Energy 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: positioned for success in 2023 and beyond
Management is excited regarding Surge Energy's exposure to the potential for rising crude oil prices in 2023.
Surge Energy is now a 25,000 boe/d (87 per cent liquids) intermediate, light- and medium-gravity crude oil producer, with over 1,050 net internally estimated development drilling locations, providing an estimated 13-year drilling inventory.
In 2022, Surge Energy's AFF increased by 192 per cent to $293.6-million from $100.4-million in 2021, and average production increased 21 per cent from 17,642 boe/d in 2021 to 21,242 boe/d in 2022. Further, Surge Energy's 2022 AFF and average production results include only 12 days of operational and financial contribution from the company's highly accretive acquisition, which closed on Dec. 19, 2022.
With more than 3.0 billion barrels of net (internally estimated) original oil in place (OOIP), a low 7.7-per-cent recovery factor at year-end 2022, and a dominant operational position in two of the most economic light- and medium-gravity crude oil plays in Canada, Surge Energy believes that the company is poised to deliver strong results both operationally and financially in 2023 and beyond. In addition, with $1.44-billion in estimated tax pools, supporting more than $160-million in forecast free cash flow before dividends in 2023, Surge Energy is well positioned to deliver to its shareholders a combination of:
- Continued net debt repayment (increasing Surge Energy's NAV per share);
A sustainable, base monthly dividend;
A modest production per-share growth wedge;
Potential for variable or special dividends.
We seek Safe Harbor.
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