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Surge Energy Inc
Symbol SGY
Shares Issued 335,068,916
Close 2020-03-09 C$ 0.45
Recent Sedar Documents

Surge Energy loses $158.66-million in 2019

2020-03-10 01:50 ET - News Release

Mr. Paul Colborne reports

SURGE ENERGY INC. ANNOUNCES 2019 FOURTH QUARTER AND YEAR-END FINANCIAL AND OPERATING RESULTS; 2019 YEAR-END RESERVES; AND DIVIDEND REDUCTION

Surge Energy Inc. has released its financial and operating results for the quarter and year ended Dec. 31, 2019, and its year-end 2019 reserves, as evaluated by Sproule.

Message to the shareholders

Surge had a solid year in 2019. The company's 2019 production averaged 21,175 barrels of oil equivalent per day (84 per cent oil and natural gas liquids), an increase of more than 17 per cent as compared with 2018 average production volumes of 18,058 boe per day (81 per cent oil and NGLs).

During the year, Surge was able to maintain production to within 1.5 per cent of the company's 2019 budget production guidance, while drilling 12 (21 per cent) fewer net wells and spending $15-million less capital than originally budgeted. These results were achieved due to drilling and water flood programs outperforming expectations, as well as improved capital efficiencies.

In 2019, Surge achieved an all-in payout ratio1 of 91 per cent, with dividends paid representing only 18 per cent of adjusted funds flow (1). Through a combination of reduced capital spending and non-core asset sales, Surge was able to reduce net debt (1) by $79-million in 2019.

Operationally, the company's high-quality, large original oil in place (2) (OOIP), conventional reservoirs continue to deliver consistent results. The company delivered finding, development and acquisition (2) (FD&A) costs of $16.09 per boe on a proven developed producing (PDP) basis in 2019, driving a 1.76 times recycle ratio (2). On a three-year basis, the company organically replaced 109 per cent of production (2) on a total proven plus probable (total P+P) basis, with a reserve life index (2) of approximately 15 years.

Furthermore, Surge's highly economic 2019 Sparky capital program (24.6 net wells) replaced more than 94 per cent of the company's total 2019 production, adding total P+P reserves of more than 7.3 million boe.

Strategically, during 2019, Surge continued to expand its dominant position in the medium to light crude oil window of the large Sparky play trend, acquiring over 23 net sections of highly prospective land in the company's Sparky core area. All of these lands are defined by detailed geological and geophysical mapping, which is supported by both vertical well control and production. Portions of these lands will be drilled as part of Surge's 2020 Sparky drilling program, which will further derisk the company's future drilling inventory.

Corporately, the company's core area land acquisitions organically added 133 net internally estimated drilling locations (3), replacing more than two years of annual drilling inventory for Surge, at a low total cost of $8.49-million.

In Surge's Sparky core area, the company has now amassed a conventional, low-cost, low-risk, medium/light oil play that has the following characteristics:

  • Greater than 1.0 billion barrels of net internally estimated OOIP;
  • Delivered production growth of over 490 per cent from 1,500 boe per day five years ago to more than 8,900 boe per day (greater than 90 per cent oil) today;
  • An extensive, low-risk, 500-location, greater-than-10-year drilling inventory -- with water flood upside;
  • Per-well economics that deliver quick payouts and excellent rates of return;
  • Top-tier production efficiencies (4) of $9,565 per boe per day (that is, 115-barrel-of-oil-equivalent-per-day 90-day initial production rate (4) for a total cost of $1.1-million);
  • Proven water flood results and excellent long-term profit to investment ratios;
  • The company has derisked its Sparky core area geologically, operationally and financially, drilling 138 horizontal wells with a success rate of 99 per cent.

Based on the recent volatility stemming from the COVID-19 outbreak, Surge's management and board of directors continue to closely monitor the impact on global crude oil prices. In response to this volatility, the company has acted quickly to shift capital from first quarter 2020 into the second half of the year, providing Surge with greater operational and financial flexibility for the balance of 2020.

Furthermore, the drastic drop in world crude oil prices from $63.05 (U.S.) WTI (West Texas Intermediate) per barrel on Jan. 3, 2020, to a low of $27.62 (U.S.) WTI per barrel on March 8, 2020, has caused Surge to re-evaluate the current level of its dividend. Surge's management and board assess market conditions on a weekly and monthly basis with respect to protecting the company's balance sheet, weighing the efficacy of capital expenditures and assessing the appropriate level of the company's dividend.

In this regard, until such time as Surge's management and board see a sustainable recovery in world crude oil prices, Surge anticipates reducing the company's dividend from 10 cents per share per year to one cent per share per year, effective with the March, 2020, dividend payable in April 2020.

 
                                    FINANCIAL AND OPERATING HIGHLIGHTS
                                     ($000s except per-share amounts)
  
                                                     Three months ended Dec. 31,            Years ended Dec. 31, 
                                                           2019         2018 (2)           2019            2018
Financial highlights
Oil sales                                               $86,905         $51,424        $376,238        $285,378
NGL sales                                                 2,076           2,477           8,109          11,022
Natural gas sales                                         2,808           4,226          10,002           8,147
                                                     ----------      ----------      ----------      ----------
Total oil, natural gas and NGL revenue                   91,789          58,127         394,349         304,547
                                                     ----------      ----------      ----------      ----------
Cash flow from operating activities                      34,474          26,770         149,417         121,907
Per share -- basic ($)                                     0.11            0.09            0.47            0.50
Adjusted funds flow (1)                                  38,881           6,249         172,988         113,651
Per share -- basic ($)                                     0.12            0.02            0.55            0.46
Net loss (3)                                           (143,801)        (82,473)       (158,664)        (71,533)
Per share -- basic ($)                                    (0.44)          (0.29)          (0.50)          (0.29)
Total exploration and development expenditures           30,760          33,598         119,465         120,552
Total acquisition and dispositions                        2,458         299,032         (42,438)        327,765
                                                     ----------      ----------      ----------      ----------
Total capital expenditures                               33,218         332,630          77,027         448,317
                                                     ----------      ----------      ----------      ----------
Net debt (1), end of period                             382,309         461,187         382,309         461,187
                                                     ----------      ----------      ----------      ----------
Operating highlights
Production
Oil (bbl per day)                                        16,441          16,578          17,127          13,992
NGLs (bbl per day)                                          630             703             692             623
Natural gas (Mcf per day)                                19,521          22,598          20,135          20,658
                                                     ----------      ----------      ----------      ----------
Total (boe per day) (6:1)                                20,325          21,047          21,175          18,058
                                                     ----------      ----------      ----------      ----------
Average realized price (excluding hedges)
Oil ($ per bbl)                                           57.46           33.72           60.19           55.88
NGL ($ per bbl)                                           35.84           38.28           32.09           48.51
Natural gas ($ per Mcf)                                    1.56            2.03            1.36            1.08
                                                     ----------      ----------      ----------      ----------
Netback ($ per boe)
Petroleum and natural gas revenue                         49.09           30.02           51.02           46.21
Realized gain (loss) on financial contracts                0.13           (1.25)          (0.61)          (1.67)
Royalties                                                 (7.00)          (3.86)          (6.71)          (6.55)
Net operating expenses (1)                               (14.91)         (15.70)         (14.50)         (14.76)
Transportation expenses                                   (1.40)          (1.53)          (1.54)          (1.50)
                                                     ----------      ----------      ----------      ----------
Operating netback (1)                                     25.91            7.68           27.66           21.73
                                                     ----------      ----------      ----------      ----------
G&A expense                                               (1.95)          (1.83)          (1.85)          (2.01)
Interest expense                                          (3.16)          (2.60)          (3.45)          (2.47)
                                                     ----------      ----------      ----------      ----------
Adjusted funds flow (1)                                   20.80            3.25           22.36           17.25
                                                     ----------      ----------      ----------      ----------

(1) This is a non-generally accepted accounting principle financial measure.
(2) IFRS 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 the 
financial statements and management's discussion and analysis for additional 
information.
(3) For the year ended Dec. 31, 2019, the company incurred a net loss of 
$158.7-million, including a non-cash asset impairment charge of $180.7-million 
recognized in the fourth quarter of 2019 primarily due to a decrease in the 
independent engineering price forecast. The impairment charge does not impact 
the company's adjusted funds flow and is reversible in future periods should 
there be any indicators that the value of the assets has increased.

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.

Year-end 2019 financial and reserves highlights:

  • Average daily production increased by 17 per cent in 2019 to 21,175 barrels of oil equivalent per day from 18,058 boe per day in 2018;
  • Achieved an all-in payout ratio of 91 per cent for 2019;
  • Increased liquids weighting by 3 per cent in 2019 to 84 per cent, as compared with 81 per cent in 2018;
  • Reduced net debt by $79-million from Dec. 31, 2018, to Dec. 31, 2019;
  • Operating netbacks increased by more than 27 per cent to $27.66 per boe for the year ended Dec. 31, 2019, compared with $21.73 per boe in the prior year;
  • Increased total proven (TP) reserves per debt-adjusted share (5) by 4 per cent in 2019;
  • Delivered PDP FD&A costs of $16.09 per boe in 2019, including changes in future development capital, with a recycle ratio of 1.76 times;
  • Maintained a Total P+P reserve life index of approximately 15 years;
  • Organically added 21.6 million boe of total P+P reserves over the past three years, replacing 109 per cent of production;
  • Increased total P+P reserves in the Sparky core area by 7.3 MMboe, replacing over 94 per cent of Surge's total 2019 corporate production;
  • Surge's 428 net (458 gross) booked locations of undeveloped reserves in the company's new Sproule Dec. 31, 2019, engineering report, have a finding and development (5) (F&D) cost of $13.03 per boe (6) on a proven plus probable undeveloped (P+PUD) reserves basis;
  • The company's 2019 drilling program (35.6 net wells) added PDP reserves at an F&D cost of $12.90 per boe (7);
  • Oil and natural gas liquids make up more than 86 per cent of total P+P reserves;
  • Estimated total P+P net asset value (5) of $4.27 per basic share;
  • Estimated total proven net asset value of $2.37 per basic share.

2019 operational highlights

Surge's disciplined operating strategy of focusing on high-quality conventional, large OOIP, light- and medium-gravity crude oil assets continued to provide strong operational results in 2019.

In total, the company spent $119.5-million of exploration and development capital in 2019 ($15-million less than budgeted), drilling 36 gross (35.6 net) wells, along with water flood injector conversions,and associated infrastructure, land, seismic and corporate overheads.

Through stepout delineation drilling and strategic land acquisitions, the company was able to increase Surge's drilling inventory to more than 850 gross (800 net) net internally estimated locations, replacing more than two years of corporate drilling inventory during the year.

Sparky core area

In the Sparky core area, Surge drilled 25 gross (24.6 net) wells in four separate pools during the year.

In addition to continued successful drilling at Eyehill and Provost, the company also drilled seven successful wells at Betty Lake, further derisking this large OOIP Sparky discovery. Peak production from the Betty Lake asset was over 850 boe per day (greater than 90 per cent oil), and six additional successful wells have now been drilled into the pool in first quarter 2020. With over 120 net internally estimated locations remaining at Betty Lake and Betty Lake North, this large OOIP Sparky asset is very well positioned for long-term, sustainable growth, as well as water flood upside.

At Surge's large OOIP Sounding Lake pool, the company drilled its first Sparky horizontal infill well in fourth quarter 2018, which was subsequently followed up with two additional successful wells drilled in first quarter 2019. Four additional wells have now been drilled at Sounding Lake off a single pad in the first quarter 2020 drilling program.

With drill, complete and equipment costs of under $1.2-million, year-round access, well-developed infrastructure, proven water flood performance, and over 500 net internally identified locations, the Sparky core area is a cornerstone growth asset in Surge's business model.

Valhalla core area

At Valhalla, Surge drilled and completed five gross (five net) wells in 2019. Four of these wells were drilled into the Doig formation, and each well had an average 30-day initial production oil rate (IP30) of over 800 barrels of oil per day.

Excitingly, during fourth quarter 2019, the company drilled and brought on production its first horizontal well into Surge's large 40-million-barrel net OOIP, conventional Montney light oil pool, with an IP30 oil rate of over 1,000 bopd. This prolific well continues to produce at over 700 bopd of high-netback light oil today. The company has now identified a number of follow-up Montney locations.

Throughout 2019, Surge continued to expand its drilling inventory in this stacked, light oil, multizone area. The company has 78 net internally estimated locations in the Doig, Montney and Charlie Lake formations.

Greater Sawn core area

Surge's core operating area at Greater Sawn provides a low-decline light oil production base, underpinned by large OOIP, with conventional carbonate reef reservoirs that have proven water flood upside. These high-quality, light oil assets continue to provide a stable production and cash flow base, complementing Surge's low-decline, growth and dividend-paying business model.

During 2019, the company brought on production four gross (four net) wells at Sawn. Combined to date, these wells have produced over 175,000 barrels of high-netback light oil, and continue to produce at a combined rate of over 465 bopd.

Water flood has proved to be very successful in the Sawn pool with five gross horizontal wells having now been converted to water injection. On this basis, Surge undertook a comprehensive reservoir simulation study in 2019 to optimize future infill drilling and water flood development.

Shaunavon core area

Surge drilled four gross (four net) wells at its Shaunavon core area in the past year, targeting both the Upper and Lower Shaunavon formations. Strategically positioned in southwest Saskatchewan, Shaunavon receives Fosteron-grade crude oil pricing, which has historically traded at a premium to WCS (Western Canadian Select). Accordingly, Shaunavon has one of the highest operating netbacks in the company and generates cash flow in excess of the property exploration and development capital expenditures, providing cash flow that can be deployed across Surge's asset base.

Year-end 2019 reserves

The company's reserves were evaluated by Sproule in accordance with National Instrument 51-101 (Standards of Disclosure for Oil and Gas Activities), effective Dec. 31, 2019. Surge's annual information form for the year ended Dec. 31, 2019, contains Surge's reserves data and other oil and natural gas information as mandated by NI 51-101.

The attached reserves tables summarize Surge's working interest oil, natural gas liquids and natural gas reserves and the net present values (NPV) of future net revenue for these reserves (before taxes) using forecast prices and costs as evaluated in the Sproule report. The evaluation is based on Sproule's forecast pricing and exchange rates at Dec. 31, 2019, which are available on its website. All references to reserves in this release are to gross company reserves, meaning Surge'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.

 
                                 RESERVES SUMMARY AND NET PRESENT VALUE
  
Gross reserves (a)           Crude oil     Natural gas           Oil          Before-tax NPV of future net 
                              and NGLs       (MMcf) (c)   equivalent           revenue (d)  discounted at
                             (Mbbl) (b)                        total        5% ($MM)   10% ($MM)   15% ($MM)
                                                            reserves
                                                               (Mboe)
Proven                                                               
Proven producing                34,505          31,104        39,689           $663        $603        $537
Proven non-producing               253             217           289              5           4           3
Proven undeveloped              31,589          35,146        37,446            577         416         307
Total proven                    66,346          66,467        77,424          1,245       1,023         848
Probable                        34,082          32,006        39,417            875         621         467
Total proven plus probable     100,428          98,474       116,841          2,120       1,644       1,315
                              --------        --------      --------       --------    --------    --------

(a) Amounts may not add due to rounding.  
(b) Includes light, medium, heavy and tight oil and natural gas liquids.
(c) Includes conventional natural gas, solution gas and coal bed methane.
(d) Total ADR (abandonment, decommissioning and reclamation) is included 
in the reserves report, as it is best practice stated in the Canadian oil
and gas evaluation handbook.

                              FUTURE DEVELOPMENT CAPITAL (FDC)
  
                                              Total proven     Total proven          Total proven
                                       developed producing                          plus probable
                                                      ($MM)            ($MM)                 ($MM)

2020                                                    $9             $114                  $123
2021                                                     7              149                   180
2022                                                     6              164                   209
2023                                                     5              116                   168
2024                                                     3               88                   126
Remaining                                               20               58                    91
                                                  --------         --------              --------
Total (undiscounted)                                    50              690                   897
Total (discounted at 10%)                               34              537                   682
                                                  --------         --------              --------

                                 RESERVE PERFORMANCE METRICS (a)
                        
                                                  2019                            Three-year average
                                     PDP           TP          TPP          PDP           TP          TPP

F&D ($/boe)                       $21.88       $24.65       $29.61       $20.42       $20.65       $21.95
F&D recycle ratio                   1.29         1.15         0.95         1.24         1.23         1.15
FD&A ($/boe)                      $16.09       $23.75    $55.35 (b)      $24.30       $23.82       $21.92
FD&A recycle ratio                  1.76         1.19      0.51 (b)        1.04         1.06         1.16
Production replacement (%)            71%          89%          78%          82%         115%         109%
RLI (years)                          5.3         10.4         15.7          5.6         10.2         14.7
                                 -------      -------    ---------      -------      -------      -------

(a) Note the oil and gas advisories.
(b) The company views this calculation as not meaningful due to the reserves 
associated with the Doe Creek disposition in 2019 primarily offsetting organic
reserve adds.

                             NET ASSET VALUE 
                                                          TP                 TPP

Reserve value NPV10 BT ($MM)                          $1,023              $1,644
Undeveloped land and seismic ($MM) (a)                  $131                $131
Net debt ($MM)                                         ($382)              ($382)
                                                ------------        ------------
Total net assets ($MM)                                  $772              $1,393
Basic shares outstanding (MM)                          326.3               326.3
                                                ------------        ------------
Estimated NAV per basic share ($/share)          $2.37/share         $4.27/share

(a) Internally estimated as $95-million for non-reserve 
assigned land and $36-million for seismic data.

Environmental, social and governance

In 2019, the company elected to participate in the Alberta Energy Regulator's area-based closure program (ABC program). During this time frame, the company achieved abandonment costs that are approximately 50 per cent of AER estimates, confirming Surge's belief in the economies of scale that are found within the ABC program. Given the success under the ABC program in 2019, Surge has initiated ABC programs in a number of the company's non-core areas for 2020.

Surge spent $5.5-million in 2019 in executing the company's pro-active annual abandonment and reclamation program. This builds on the $17.5-million the company has spent since 2014.

In 2019, due to capital efficiencies afforded under the ABC program, the company abandoned 149 wells, which are more than four times the number of wells the company drilled in 2019. In addition to Surge's extensive annual abandonment and reclamation program set forth herein, the company also pays annually into the industry-wide Alberta Orphan Well Fund.

Surge is a supporter of community engagement and recognizes the importance of supporting charitable organizations in the communities in which the company operates. Details on the company's recent community engagement initiatives can be found on Surge's website.

Outlook

Surge's high-quality, light- and medium-gravity crude oil asset and opportunity base continues to outperform management's expectations. The company's conventional low-decline, high-netback, large OOIP reservoirs deliver solid, stable cash flow, together with excellent production efficiencies.

Based on the recent volatility stemming from the COVID-19 outbreak, Surge's management and board of directors continue to closely monitor the impact on global crude oil prices. In response to this volatility, the company has acted quickly to shift capital from first quarter 2020 into the second half of the year, providing Surge with greater operational and financial flexibility for the balance of 2020.

Furthermore, the drastic drop in world crude oil prices, from $63.05 (U.S.) West Texas Intermediate per barrel on Jan. 3, 2020, to a low of $27.62 (U.S.) WTI per barrel on March 8, 2020, has caused Surge to re-evaluate the current level of its dividend. Surge's management and board assess market conditions on a weekly and monthly basis with respect to protecting the company's balance sheet, weighing the efficacy of capital expenditures and assessing the appropriate level of the company's dividend.

In this regard, until such time as Surge's management and board see a sustainable recovery in world crude oil prices, Surge anticipates reducing the company's dividend from 10 cents per share per year to one cent per share per year, effective with the March, 2020, dividend payable in April, 2020.

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

(2) Note the oil and gas advisories.

(3) Note the company's drilling inventory.

(4) Note the oil and gas advisories.

(5) Note the oil and gas advisories.

(6) Calculated as $763-million in P+P FDC (drill, complete, equipment and tie-in only) divided by 59 million boe of P+P undeveloped reserves.

(7) Calculated as the total DCET capital in 2019 ($66.5-million), divided by the sum of PDP reserves and total production from these wells in 2019 (5,186,000 boe).

We seek Safe Harbor.

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