Mr. Paul Colborne reports
SURGE ENERGY INC. ANNOUNCES 2020 BUDGET
Surge Energy Inc. has provided its budget guidance for 2020 as approved by the company's board of directors.
2020 budget -- defensive and sustainable
Surge's disciplined 2020 capital expenditure budget reaffirms the company's commitment to free cash flow generation and debt reduction.
Surge's board of directors has approved a defensive, sustainable budget for 2020 at $56.50 (U.S.) West Texas Intermediate flat pricing (less than current strip), that:
Delivers production of 21,000 barrels of oil equivalent per day (86 per cent oil) in 2020, for total capital of $98.5-million;
Continues to pay down the company's debt by more than $20-million;
Increases Surge's debt-adjusted production per share by 3.1 per cent (1) cost-effectively;
Improves Surge's all-in payout ratio to 86 per cent (2);
Delivers the company's dividend, using only 19.3 per cent of 2020 adjusted funds flow (2);
Maximizes cash flow through a returns-focused, efficient, capital expenditure program;
Maintains operational flexibility to adjust to a changing commodity price environment;
Provides disciplined capital allocation, with cash flow strategically allocated between capital projects, debt repayment and the payment of Surge's dividend.
In summary, as a result of Surge's low 23-per-cent annual corporate decline and by focusing drilling operations to the top-tier production efficiencies associated with the company's core Sparky play, Surge can deliver average production of 21,000 boepd in 2020, spending $36.5-million less exploration and development capital than Surge's 2019 budget of $135-million.
On this basis, Surge is currently providing an attractive annual dividend yield of more than 9.5 per cent, as well as a free cash flow yield of more than 6 per cent, based on the company's 2020 budget.
Details relating to the 2020 budget are set forth below.
Overview of current business environment
Current pricing fundamentals for crude oil continue to improve. The forward one-year strip price for crude oil is currently over $57 (U.S.) WTI per barrel. Spot oil prices are over $59 (U.S.) WTI per barrel and continue to show volatility in relation to various shorter-term events, including improving United States-China trade talks, continued unrest in the Middle East (that is, the Saudi oil installation bombing), OPEC (Organization of the Petroleum Exporting Countries) production cuts, U.S. and Canadian rig counts dropping, and the slowing of U.S. shale oil production growth estimates.
On a macro scale, the long-term demand for crude oil continues to move upward. The IEA (International Energy Agency) projects that world crude oil demand growth in Q3 2019 was up 1.1 million barrels per day over the same period in 2018 (that is, total crude oil demand is over 100 million barrels a day). Growth in world oil demand in 2020 is now projected to be up another 1.2 million barrels per day (3).
Positioning for success in 2019
In 2019, Surge anticipates spending approximately $15-million to $16-million less than the company's exploration and development capital budget guidance of $135-million, as management strategically chose to drill 21 per cent less wells (12 wells) and to continue to pay down debt.
Despite drilling 21 per cent fewer wells than budgeted, in 2019 Surge will still exit the year with production of approximately 21,000 boepd (85 per cent oil).
Through a combination of primarily non-core asset sales and reduced capital spending, during the first nine months of 2019 Surge has reduced net debt (2) by $84-million, adding significant additional liquidity to the company's credit facilities.
Furthermore, in the last three financial quarters, Surge has:
Acquired 8.5 sections of highly prospective Crown land to the north of the company's large, core area Sparky oil discovery at Betty Lake (Betty Lake North) (with vertical Sparky well control and logs);
Leased four highly prospective sections of land at Betty Lake North (with vertical Sparky well control and logs);
- Leased 2.75 sections of highly prospective Sparky land on an exciting new Sparky play and acquired an additional section of Crown land on this play (which has vertical Sparky well control and well logs);
Acquired 9.5 sections of highly prospective Slave Point acreage at the company's large-OOIP (original oil in place), waterflooded Nipisi light oil asset in the Greater Sawn core area; this acreage includes both Slave Point and Clearwater rights.
These smaller, core area, top-up land acquisitions have added an internally estimated 71 net drilling locations5 in Surge's Sparky core area and an internally estimated 17 net locations in the Greater Sawn core area, replacing more than 1.5 years of annual drilling inventory for Surge, at a low total cost of $5.4-million.
In Surge's core Sparky asset, the company has now amassed a conventional, low-cost, low-risk, medium/light oil play that has:
Greater than 900 million of net internally estimated OOIP;
Grown from 1,200 boepd four years ago to more than 8,250 boepd (greater than 90 per cent oil) today;
An extensive 13-year drilling inventory;
- Per-well economics that deliver quick payouts and excellent rates of return at current strip prices;
- Top-tier production efficiencies of $9,565 per boepd (that is, 115 boepd IP90 for a total cost of $1.1-million);
- Excellent longer-term waterflood results and profit to investment ratios (all at current strip prices).
Further, the Sparky core area has been derisked geologically, operationally and financially over the last five years, as Surge has now drilled 121 out of 122 successful horizontal wells.
On this basis, the Sparky play provides a significant operational advantage to the company's management and board when guiding and positioning the company through the challenging business conditions present today. Surge's Sparky play has excellent production efficiencies and compelling economics -- even in a low-oil-price environment.
2020 budget -- defensive and sustainable
In 2020 Surge is budgeting to spend $98.5-million of exploration and development capital (including corporate overhead charges), which includes the drilling of 56 wells. The 2020 budget will primarily be focused in Surge's Sparky core area and will consist of returns-based development drilling. This focused drilling program increases Surge's oil and liquids weighting from 85 per cent in 2019 to 87 per cent exit 2020.
Using Surge's annual corporate decline of 23 per cent, and a 2020 drilling and completion capital budget of $68-million, the drilling program will have robust production efficiencies of less than $15,000 boepd. These top-tier efficiencies are being achieved from both Surge's high-quality drilling inventory, as well as the strong operational benefits of a large program utilizing pad drilling.
The attached table provides a detailed list of the capital categories.
Capital category 2020e
Drilling and completions $68.0-million
Facilities, equipment, pipelines and seismic $23.5-million
Other (land, corporate) $7.0-million
Total exploration and development capital $98.5-million
PRODUCTION AND COST GUIDANCE
Average production 21,000 boepd (86% liquids)
Exit production 21,000 boepd (87% liquids)
Net operating expenses (2) $14.00 - $14.50 per boe
Transportation expenses $1.50 - $1.75 per boe
General and administrative expenses $1.85 - $1.95 per boe
FINANCIAL & PRICING GUIDANCE
Cash flow from operating activities $162.8-million
Asset retirement obligations $6.0-million
Adjusted funds flow (2) $168.8-million
Total exploration and development
Leasing expenditures $10.8-million
WTI (U.S.$/bbl) $56.50
Edmonton par differential (U.S.$/bbl) ($5.50)
WCS differential (U.S.$/bbl) ($15.50)
CAD/U.S.D exchange rate 0.75
Natural gas (AECO C$/GJ) $1.50
Successful Q4 2019 drilling program
During the fourth quarter of 2019, the company drilled 13 net successful wells, comprising 12 Sparky wells and one Valhalla Montney well.
In the Sparky core area, Surge expects to add more than 1,500 boepd (greater than 90 per cent oil) from the 12-well program, at an estimated all-in capital cost of $13.5-million. Pad drilling continues to deliver significant cost savings, consistently driving the cost per pad well to less than budget estimates of $1.2-million per well.
At Valhalla, Surge drilled an exciting new light oil horizontal well into a large, conventional Montney (turbidite) pool that sits below the company's Doig pool. This Montney pool has large internally estimated OOIP of more than 40 million barrels and a pay column of up to 17 metres thick. The new horizontal well is currently exceeding the company's 300-barrels-of-oil-per-day-type curve by more than 85 per cent and has a number of follow-up drilling locations as well as waterflood upside.
Environment, social and governance
In 2020 Surge will continue its commitment to being an industry leader in environmental, social and governance matters.
Pursuant to the company's 2020 budget, management has now increased Surge's target abandonment program to more than 150 wells, which is approximately three times the number of wells the company plans to drill during the year.
Outlook -- resilient adjusted funds flow base
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.
Appointment of senior vice-president, geosciences
Surge is pleased to announce that Derek Christie has joined the company as senior vice-president, geosciences, effective Nov. 18, 2019. Mr. Christie is a senior energy executive and professional geologist with over 28 years of wide-ranging experience across North American basins in both conventional and unconventional reservoir exploration and development. Most recently, he was the senior vice-president of exploration and corporate development at a large Canadian oil company.
"We are excited to have Derek join the Surge team. His extensive geoscience, operational and strategic business experience will be a huge asset for the company," said Surge president and chief executive officer, Paul Colborne.
Consistent production; sustainable dividend
In setting and approving the company's 2020 budget, Surge's management team and board were able to take advantage of:
Surge's high-quality, large-OOIP, low-cost, conventional light and medium gravity crude oil asset base;
- The company's low annual corporate decline of 23 per cent;
- The top-tier production efficiencies, quick payouts and excellent rates of return associated with Surge's Sparky core area.
As a result of these key operational strengths, in 2020 Surge anticipates:
Delivering average production of 21,000 boepd, spending $36.5-million less capital than Surge's 2019 capital budget of $135-million (with 2020 debt-adjusted exit production per share increasing by 3.1 per cent);
- Continuing to pay down debt by more than $20-million;
- Delivering an all-in payout ratio of 86 per cent;
- Paying the company's attractive dividend of 10 cents per share per year, using only 19.3 per cent of 2020 adjusted funds flow.
Consequently, Surge is currently providing an attractive annual dividend yield of more than 9.5 per cent, as well as a free cash flow yield of more than 6 per cent, based on the company's 2020 budget.
Today the company has over 2.5 billion barrels of internally estimated OOIP, 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. Additionally, the company has a low annual corporate decline, with over 60 per cent of Surge's asset base under various stages of waterflood.
Based on the company's forecast debt reduction of more than $20-million in 2020, and in conjunction with its semi-annual borrowing base review, Surge anticipates a renewal of its credit facilities at $425-million, comprising a $300-million revolving line of credit, a $50-million operating line of credit and an accordion of $75-million. This accordion feature allows Surge to increase the revolving credit facility portion from $300-million to $375-million, for total credit facilities of $425-million, upon exercise and unanimous syndicate approval. These credit facilities provide the company ample liquidity to execute on its 2020 budget and will significantly reduce standby fees. Surge anticipates closing its semi-annual borrowing base review on or before Dec. 18, 2019.
Surge's high-quality, light and medium gravity, crude oil asset base provides an excellent platform for the company to continue to grow its reserves, production base and drilling inventory in its four core areas of Sparky, Valhalla, Greater Sawn and Shaunavon through low-risk development drilling and waterfloods. Surge also applies growth capital to high-quality, large-OIP, core area acquisitions where applicable. This is in accordance with management's disciplined business plan and operating strategy.
In light of the present business environment, Surge's primary focus in 2020 is on sustainability, balance sheet management, cost controls and maintaining the company's dividend.
(1) Debt-adjusted shares are calculated using exit shares of 326.2 million for 2019 and 2020, respectively, adjusted by the reduction in exit net debt, divided by a $1.00 share price for 2019 and the 2020 budget.
(2) This is a non-generally accepted accounting principles financial measure.
(3) Source: IEA (2019), "Oil Market Report - November 2019," IEA, Paris.
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