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Surge Energy Inc
Symbol SGY
Shares Issued 324,215,111
Close 2019-11-04 C$ 1.03
Recent Sedar Documents

Surge Energy talks production, omits Q3 P&L from NR

2019-11-04 21:15 ET - News Release

Mr. Paul Colborne reports

SURGE ENERGY INC. ANNOUNCES THIRD QUARTER 2019 RESULTS

Surge Energy Inc. has released its operating and financial results for the quarter ended Sept. 30, 2019.

Message to shareholders

Surge's large original oil in place (OOIP), light- and medium-gravity crude oil asset base continues to outperform management's expectations.

Surge's third quarter 2019 average production rate of 21,217 barrels of oil equivalent per day contains virtually no contribution from the company's third quarter 2019 drilling program, as drilling operations in the quarter did not commence until Sept. 1, 2019.

As set forth in the attached budget to actuals comparison table, over the last four financial quarters, Surge has maintained production within less than 1 per cent of the company's 2019 budgeted production estimates, while drilling 12 (21 per cent) fewer wells than budgeted.

In addition, with drilling and water flood results outperforming expectations, Surge management strategically decided to delay drilling operations in the quarter, picking up the company's rigs on Sept. 1, 2019, rather than on June 15, 2019, as management had previously budgeted. This capital allocation decision allowed the company to continue to reduce net debt (i). Surge has now reduced the company's net debt by $84-million in 2019.

     FOURTH QUARTER 2018 TO THIRD QUARTER 2019 BUDGET TO ACTUALS COMPARISON       
          
                            2018/2019 budget estimates                   Actuals  
       
New wells on production              49 wells budgeted          37 wells drilled
Average production*                       21,535 boe/d*             21,360 boe/d    

* Based on fourth quarter 2018 guidance (that is, following the Greater Sawn 
core area acquisition) and 2019 guidance of 22,000 barrels of oil equivalent 
per day, adjusted for the 490 boepd non-core disposition that closed in 
first quarter 2019.

Surge management believes that these excellent operational results are directly related to: (1) the company's high-quality, large OOIP, light- and medium-gravity crude oil assets; (2) the company's talented, hard-working employees; and (3) management's strategic, timely capital allocation/spending decisions.

Based on continued successful drilling and water flood results at Surge's Sparky, Valhalla, Greater Sawn and Shaunavon core areas, the company's third quarter 2019 production rate averaged 21,217 boe per day (85 per cent liquids), which represent an increase of 18 per cent over third quarter 2018 production of 18,029 boe per day (79 per cent liquids).

Additionally, the company achieved a 26-per-cent increase in liquids production in third quarter 2019 when compared with third quarter 2018, by strategically targeting higher-value light and medium oil production with the recent drilling programs and acquisitions.

Third quarter 2019 highlights:

  • Surge's third quarter 2019 production of 21,217 boe per day increased by 18 per cent over third quarter 2018 production of 18,029 boe per day.
  • Surge's liquids weighting increased 6 per cent, up from 79 per cent in third quarter 2018 to 85 per cent in third quarter 2019.
  • The company's third quarter 2019 liquids production increased by 26 per cent as compared with third quarter 2018, up from 14,229 barrels per day to 17,939 barrels per day (96 per cent light and medium oil).
  • The company's cash flow from operating activities in third quarter 2019 was $40.2-million, an increase of 8 per cent over third quarter 2018, at $37.2-million.
  • Surge's adjusted funds flow (i) in third quarter 2019 was $41.5-million, an increase of 2 per cent over third quarter 2018 at $40.6-million.
  • Operating expenses for third quarter 2019 were $14.69 per boe, and net operating expenses (i) were $13.93 per boe, both below the company's 2019 guided range of $14.95 to $15.45 per boe.
  • Surge generated $11.2-million of adjusted funds flow in the quarter in excess of exploration and development expenditures and dividends declared (and used to further reduce net debt).
  • The company paid dividends of $8.0-million in third quarter 2019, representing 19 per cent of third quarter 2019 adjusted funds flow.
  • In the last nine months, Surge has reduced net debt by $84-million.

                                 FINANCIAL AND OPERATING SUMMARY 
                                 ($000s except per-share amounts)

                                                         Three months ended           Nine months ended
                                                              Sept. 30,                   Sept. 30,
                                                         2019       2018 (2)         2019          2018
Financial highlights
Oil sales                                             $93,818       $85,946      $289,333      $233,954
NGL sales                                               1,958         3,598         6,032         8,546
Natural gas sales                                       1,250         1,492         7,194         3,920
                                                   ----------    ----------    ----------    ----------
Total oil, natural gas and NGL revenue                 97,026        91,036       302,559       246,420
                                                   ----------    ----------    ----------    ----------
Cash flow from operating activities                    40,228        37,197       114,943        95,137
Per share -- basic ($)                                   0.13          0.16          0.37          0.41
Adjusted funds flow                                    41,513        40,638       134,106       107,403
Per share -- basic ($)                                   0.13          0.18          0.43          0.46
Total exploration and development expenditures         22,247        28,701        88,705        86,954
Total acquisition and dispositions                     12,077         6,279       (44,896)       28,733
                                                   ----------    ----------    ----------    ----------
Total capital expenditures                             34,324        34,980        43,809       115,687
                                                   ----------    ----------    ----------    ----------
Net debt (1), end of period                           377,409       282,394       377,409       282,394
                                                   ----------    ----------    ----------    ----------
Operating highlights
Production
Oil (bbl per day)                                      17,170        13,560        17,358        13,120
NGLs (bbl per day)                                        769           669           713           595
Natural gas (Mcf per day)                              19,668        22,797        20,342        20,004
                                                   ----------    ----------    ----------    ----------
Total (boe per day) (6:1)                              21,217        18,029        21,461        17,049
                                                   ----------    ----------    ----------    ----------
Average realized price (excluding hedges)
Oil ($ per bbl)                                         59.39         68.89         61.06         65.32
NGL ($ per bbl)                                         27.69         58.46         30.97         52.57
Natural gas ($ per Mcf)                                  0.69          0.71          1.30          0.72
                                                   ----------    ----------    ----------    ----------
Netback ($ per boe)
Petroleum and natural gas revenue                       49.71         54.89         51.64         52.94
Realized gain (loss) on financial contracts             (0.86)        (1.91)        (0.84)        (1.84)
Royalties                                               (7.12)        (8.32)        (6.61)        (7.68)
Net operating expenses (1)                             (13.93)       (14.36)       (14.36)       (14.37)
Transportation expenses                                 (1.42)        (1.55)        (1.58)        (1.48)
                                                   ----------    ----------    ----------    ----------
Operating netback                                       26.38         28.75         28.25         27.57
                                                   ----------    ----------    ----------    ----------
G&A expense                                             (1.81)        (1.98)        (1.82)        (2.08)
Interest expense                                        (3.31)        (2.27)        (3.54)        (2.42)
                                                   ----------    ----------    ----------    ----------
Adjusted funds flow (1)                                 21.26         24.50         22.89         23.07
                                                   ----------    ----------    ----------    ----------
 
(1) This is a non-generally accepted accounting principle financial measure.
(2) International financial reporting standard 16 was adopted Jan. 1, 2019, using the modified 
retrospective approach, and as such, comparative information for 2018 that may have been 
impacted has not been restated. Refer to the changes in accounting policies section of 
management's discussion and analysis for additional information.

In accordance with industry practice, the company uses adjusted funds flow to analyze the cash flow generated from its continuing principal business activities. On this basis, both adjusted funds flow and cash flow from operating activities are provided for comparative purposes.

Operational highlights

Surge spent a total of $22.2-million of exploration and development capital in the third quarter of 2019 for the drilling of four gross (four net) successful wells and the completion of one gross (one net) successful well ($10.3-million on drilling and completions), together with water flood injector conversions, associated infrastructure, land and seismic.

Surge also spent $4.9-million on facilities, equipment and pipelines during the quarter, focused on optimizing and expanding the company's water floods.

Included in capital spending for third quarter 2019 are two key, core-area land acquisitions of a total of $5.7-million.

Based on Surge's recent internal 2019 type curve review, management now estimates Surge has approximately 10 years of economic drilling inventory at $50 (U.S.) per bbl WTI (West Texas Intermediate), and approximately 13 years of highly economic drilling inventory at $60 (U.S.) WTI.

Outlook -- consistent production; sustainable dividend

Management's stated goal is to be the best-positioned, top-performing, light/medium-gravity crude oil growth and dividend-paying public company in its peer group in Canada.

Surge's high-quality, large OOIP, light- and medium-gravity crude oil asset base continues to outperform management's expectations.

The company now has over 2.5 billion barrels of internally estimated OOIP, with a low 6.2-per-cent recovery factor to date and a deep inventory of over 800 highly economic drilling locations -- providing a 13-year drilling inventory. In addition, the company has a low 23-per-cent annual corporate decline, with over 55 per cent of Surge's asset base under various stages of water flood.

In the last four financial quarters, Surge has maintained production within less than 1 per cent of budget guidance, while drilling 21 per cent (12) fewer wells than estimated. Furthermore, the company has now reduced net debt by $84-million in the last nine months, while maintaining an attractive dividend yield of over 9 per cent, representing 19 per cent of third quarter 2019 adjusted funds flow.

Surge anticipates confirming 2020 guidance in early January, 2020.

(i) This is a non-generally accepted accounting principle financial measure.

We seek Safe Harbor.

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