Mr. Paul Colborne reports
SURGE ENERGY INC. ANNOUNCES FINANCIAL & OPERATING RESULTS FOR Q2 2023
Surge Energy Inc. has released its financial and operating results for the quarter ended June 30, 2023.
Message to shareholders
Crude oil prices softened over the course of the second quarter, with Western Texas Intermediate (WTI) averaging nearly $80 (U.S.) per bbl in April, 2023, and approximately $70 (U.S.) per bbl (barrel) in June, 2023. Despite this drop in WTI pricing, Surge realized significant benefits from a dramatic tightening of Western Canadian Select (WCS) differentials, which averaged $15.07 (U.S.) per bbl in Q2 2023 -- down 39 per cent from $24.79 (U.S.) WTI per bbl during Q1 2023. Approximately half of Surge's oil production is medium gravity crude oil, which is correlated to WCS pricing and significantly mitigated the impact of softer WTI pricing in the quarter. On this basis, Surge increased cash flow from operating activities by 11 per cent in Q2 2023, as compared with Q1 2023, up from the $54.5-million realized during the first quarter to $60.6-million in the second quarter of 2023. Furthermore, the company increased its adjusted funds flow by 2 per cent, from $63.3-million in Q1 2023 to $64.6-million in Q2 2023.
The second quarter is traditionally a slow drilling activity quarter for Canadian oil and gas companies, as counties impose annual spring road bans for moving heavy trucks and drilling equipment. Accordingly, after a successful and active Q1 2023 drilling program, Surge focused a significant portion of its Q2 2023 capital expenditures on facility, pipeline and well maintenance work, as well as further land consolidation in southeast Saskatchewan. Subsequent to road bans being lifted in early June, Surge resumed drilling activity in both the southeast Saskatchewan and Sparky core areas.
During Q2 2023, Surge safely executed eight operated gas plant and oil battery turnarounds at Valhalla, Provost, Betty Lake, Lakeview and Steelman. In addition, the company experienced four additional turnarounds at facilities operated by third parties (including the Sexsmith, Keyera, Steelreef and TCPL gas plant turnarounds). Although several of these turnarounds were budgeted for by the company, the impact of the unscheduled turnarounds reduced production in the quarter by approximately 700 boepd (barrels of oil equivalent per day). Surge remains on track to meet the company's 2023 production exit rate target of 25,000 boe per day.
The company spudded 11.8 net (13 gross) wells, and rig released 8.8 net (10 gross) wells during Q2 2023, with all of these wells expected to be completed and brought on stream in mid Q3 2023. Drilling activity during the second quarter, along with the end of spring turnaround season, has positioned Surge to maximize operational runtime during the second half of 2023.
During Q2 2023, Surge brought on production two new exciting Sparky wells that were drilled at Cadogan, on lands recently acquired in Q4 2022. These two wells are currently producing at a combined rate of over 390 boepd (95 per cent oil). Surge has an internally estimated 32 net follow-up Sparky drilling locations on the acquired Cadogan lands.
Surge has also acquired more than 20 sections of land on the company's new open hole, multilateral, oil play in the Sparky core area. These acquired lands are offsetting the company's exciting six-leg, open hole, Sparky discovery well that was drilled in late 2022. Subsequent to Q2 2023, Surge recently completed drilling the company's first 12-leg, open hole, Sparky stepout well on this play trend. The company expects production results from this stepout well in the latter part of Q3 2023.
Stable quarterly cash flow, combined with a seasonally light capital expenditure program during the quarter, contributed to Surge delivering a substantial net debt1 reduction in the amount of $20.1-million in Q2 2023. This net debt reduction was achieved while also distributing $11.8-million to shareholders in Q2 2023 by way of Surge's cash dividend -- which is paid monthly.
Today, more than 75 per cent of Surge's crude oil production is strategically located in the company's Sparky and southeast Saskatchewan core areas -- which have been recently independently evaluated as two of the top four crude oil plays in North America. Surge has a deep, 13-year, drilling inventory of more than 1,000 net locations.
Q2 2023 highlights:
Achieved average production of 23,463 boe per day (87 per cent liquids), a 12-per-cent increase over Q2 2022 production of 21,003 boe per day (85 per cent liquids);
- Increased cash flow from operating activities by 11 per cent in Q2 2023 as compared with Q1 2023, up from $54.5-million to $60.6-million, despite lower WTI pricing during the period;
- Increased adjusted funds flow by 2 per cent as compared with Q1 2023, from $63.3-million in Q1 2023 to $64.6-million in Q2 2023;
- Reduced net debt during the second quarter of 2023 by approximately $20.1-million, while spending $30.6-million on property, plant and equipment, and distributing $11.8-million in cash dividends to shareholders in Q2 2023;
- The company spudded 11.8 net (13 gross) wells, and rig released 8.8 net (10 gross) wells during the quarter, with all wells expected to be completed and brought on stream in mid Q3 2023;
- Safely completed eight operated gas plant and oil battery turnarounds, positioning Surge to maximize operational runtime during the second half of 2023.
Outlook for Surge: positioned to outperform
Surge began the company's H2 2023 drilling program on June 1, 2023, with two rigs drilling in the Sparky core area, and one rig in the southeast Saskatchewan core area. Surge remains on track to meet the company's 2023 production exit rate target of 25,000 boe per day.
Management believes market conditions for Canadian crude oil prices in the second half of the year are favourable based on the following:
The incremental crude oil supply cuts by Saudi Arabia (1.0 million bbl per day) and Russia (0.5 million bbl per day), started on July 1, 2023. Energy analysts are now projecting a crude oil supply shortage deficit as high as 1.8 million bbl per day in H2 2023.
- Global crude oil demand hit an all-time record level of 102.8 million barrels in July, 2023.
- Canadian WCS differentials dropped dramatically from an average of $24.79 (U.S.) WTI per bbl in Q1 2023 to an average of $15.07 (U.S.) WTI per bbl for the second quarter 2023.
- The price of crude oil has been steadily rising, from a low of $67.12 (U.S.) WTI per bbl in June of 2023 to over $82 (U.S.) WTI per bbl recently.
Independent research from a large Canadian-based brokerage firm recently highlighted Surge as one of the best positioned public oil companies in Canada to benefit from the positive market conditions for crude oil prices as set forth herein.
Sensitivities outlining Surge's strong, positive cash flow torque to oil prices and WCS differentials are set forth herein).
Surge remains well positioned to continue delivering shareholder returns in 2023 and beyond, based upon the following key corporate fundamentals:
Ownership of more than 3.0 billion of net (internally estimated) OOIP; 7.7-per-cent recovery factor to date;
- Ownership of more than 120 million boe of P+P (proven plus probable) reserves (Sproule); long P+P RLI of greater than 13 years;
- 25,000 boepd production exit 2023 (87-per-cent liquids);
- Annual corporate decline: 23 per cent;
- Operating netbacks (at $80 (U.S.) WTI pricing): $42 per boe;
- Guidance annual cash flow from operations: $335=million (at $80 (U.S.) WTI pricing);
- Annual dividend: $47-million; 48 cents per share annual dividend (paid in cash/monthly);
- More than 1,000 (net) drilling locations; providing a 13-year drilling inventory;
- Tax pools: $1.4-billion; approximate four-year tax horizon at $80 (U.S.) WTI pricing;
- An independent Dec. 31, 2022, Sproule NAV: $22.37 per share (P+P); TP NAV: $13.72 per share.
Surge has a dominant operational position in two of the top four crude oil plays in Canada in the company's Sparky (11,000 boepd; 85 per cent medium gravity oil and liquids) and southeast Saskatchewan (8,000 boepd; 95 per cent light oil and liquids) core areas; as independently evaluated by a leading independent brokerage firm. Surge management believes that the company's premium crude oil asset and opportunity base is directly responsible for driving Surge's operating and financial results.
We seek Safe Harbor.
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