Mr. Paul Colborne reports
SURGE ENERGY INC. ANNOUNCES RECORD PRODUCTION LEVELS IN Q1/23; FINANCIAL & OPERATING RESULTS FOR Q1/23; AND AN OPERATIONS UPDATE ON DRILLING RESULTS IN SPARKY AND SE SASKATCHEWAN CORE AREAS
Surge Energy Inc. has released the company's financial and operating results for the quarter ended March 31, 2023, and has provided an update on Surge Energy's latest drilling results.
First quarter 2023 financial and operating highlights
Q1 2023 is the company's first quarter that includes the full impact of the strategic acquisition of high-quality core area assets from Enerplus, which closed in late fourth quarter 2022. In Q1 2023, Surge Energy delivered an increase in production of more than 22 per cent compared with Q1 2022, with production increasing from 20,550 barrels of oil equivalent per day (85 per cent liquids) to a record 25,138 boe/d (87 per cent liquids) in the current quarter. Surge Energy's Dec. 31, 2023, production exit rate guidance is 25,000 boe/d.
West Texas Intermediate (WTI) crude oil prices in Q1 2023 decreased by more than 19 per cent (that is, a drop of over $18 (U.S.) per barrel) compared with Q1 2022. Additionally, Western Canadian Select (WCS) differentials to WTI also widened substantially in Q1 2023, resulting in a benchmark WCS crude oil price of $69.46 per barrel, a decrease of 31 per cent compared with a Q1 2022 WCS price of $101.01 per barrel. The WCS differential to WTI in Q1 2023 was $24.79 (U.S.) per barrel. Approximately 50 per cent of Surge Energy's crude oil production is correlated to WCS pricing.
Encouragingly, WCS differentials have quickly returned to long-term historical levels, with both April, 2023, and May, 2023, WCS differentials settling below $16 (U.S.) per barrel. Surge Energy management is optimistic that WCS differentials could even improve beyond these levels as the Trans Mountain pipeline expansion project comes on-line (currently forecast for early 2024).
Despite the much lower crude oil price environment experienced during the quarter, Surge Energy's cash flow from operating activities increased by 4 per cent to $54.5-million in Q1 2023, up from $52.2-million in Q1 2022. Furthermore, after adjusting for changes in non-cash working capital, the company delivered adjusted funds flow (AFF) of $63.3-million in Q1 2023, which represents an increase of 1 per cent compared with Q1 2022 AFF of $62.9-million.
These positive financial results are primarily due to the accretive acquisition, Surge Energy's exciting Frobisher light oil drilling results in southeast Saskatchewan and the expiry of the company's previously mandated 2022 fixed-price crude oil hedges.
During the quarter, Surge Energy returned $11.7-million to its shareholders in the form of cash dividends pursuant to the company's base cash dividend of 48 cents per share per annum (paid monthly). The cash dividends paid during the quarter represent less than 19 per cent of Surge Energy's Q1 2023 AFF.
Additional highlights from the company's Q1 2023 financial and operating results include:
Reported Surge Energy's first complete quarter including the acquisition, with production from the acquired assets contributing approximately 3,800 boe/d (99 per cent liquids) to Q1 2023 production;
Achieved record average daily production of 25,138 boe/d (87 per cent liquids) during Q1 2023, an increase of over 22 per cent compared with Q1 2022 production of 20,550 boe/d (85 per cent liquids);
- Drilled 18 gross (17.9 net) wells, with activity focused in the company's Sparky and SE Saskatchewan conventional light- and medium-gravity crude oil core areas;
Announced that the company's independently engineered Dec. 31, 2022 (Sproule), proven developed producing (PDP) net asset value (NAV) increased by 107 per cent year over year, from $3.51 per share to $7.27 per share.
Operations update: strong drilling success in SE Saskatchewan and Sparky core areas
Surge Energy continued its strong operational momentum in Q1 2023, with a drilling rig active in each of its Sparky and SE Saskatchewan core areas. The company budgets drilling 67.0 net wells in 2023, with this program composed of 37.0 net Sparky wells and 30.0 net SE Saskatchewan wells. The company plans to commence its postbreakup drilling program in both the Sparky and SE Saskatchewan core areas on or about June 1, 2023.
During Q1 2023, Surge Energy drilled a total of 18 gross (17.9 net) wells, spending a total of $45.7-million, including expenditures on property, facilities and equipment. Q1 2023 capital expenditures were in line with the company's budget estimates. Drilling operations during the first quarter focused on Surge Energy's medium- and light-gravity crude oil assets in its Sparky and SE Saskatchewan core areas.
In the company's Sparky core area, Surge Energy drilled 10 gross (10.0 net) wells in the first quarter of 2023 with a 100-per-cent success rate (the average IP30 of the 10-well program being greater than 125 barrels per day). Two gross (2.0 net) of these 10 wells were drilled on lands located in the recently acquired Cadogan property, which was obtained through the Enerplus acquisition. These two Sparky wells are still cleaning up and are currently producing at a combined rate of 300 bopd. Surge Energy has identified an internally estimated 32.0 net follow-up Sparky drilling locations on the acquired Cadogan property alone.
Surge Energy's current Sparky core area production now exceeds 11,000 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 800 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 drilling locations, as well as attractive water flood upside.
In Q1 2023, Surge Energy drilled eight gross (7.9 net) wells in the company's SE Saskatchewan core area. Drilling operations primarily targeted light oil in the prolific Frobisher formation. The average Surge Energy SE Saskatchewan well drilled in Q1 2023 came on production with an IP30 of more than 250 boe/d (90 per cent light oil). Surge Energy's average internal Frobisher type curve has an IP30 of 240 boe/d and a payout of approximately 11 weeks at $80 (U.S.) WTI flat pricing.
Surge Energy continues to add significant organic drilling inventory in SE Saskatchewan, and has an inventory of more than 275.0 net drilling locations, with more than 160.0 net locations targeting the prolific Frobisher horizon.
Since the start of 2023, Surge Energy has continued to execute on the company's organic land acquisition strategy, adding 4.0 net sections and 28 gross (28.0 net) drilling locations through Crown land sales and freehold leasing. Included in this are 14.0 net drilling locations on the Frobisher trend in SE Saskatchewan. Surge Energy intends to drill four gross (4.0 net) wells on these newly acquired lands in 2023.
Outlook: positioned for success in 2023 and beyond
Surge Energy is a 25,000 boe/d (87 per cent liquids) intermediate, publicly traded oil company that is focused on enhancing shareholder returns through free cash flow generation. The company's defined operating strategy is based on acquiring and developing high-quality, conventional, light- and medium-gravity crude oil reservoirs, using proven technology to enhance ultimate oil recoveries.
With more than 3.0 billion barrels of net (internally estimated) original oil in place, 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 over $1.4-billion in estimated tax pools at Dec. 31, 2022, Surge Energy is committed to delivering its shareholders a combination of:
Continued net debt repayment (increasing Surge Energy's net asset value per share);
A 48-cent-per-share annual base cash dividend, paid monthly;
- Share buybacks;
- A modest production per-share growth wedge;
Potential for variable or special dividends.
We seek Safe Harbor.
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