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Surge Energy Inc
Symbol SGY
Shares Issued 335,068,916
Close 2020-05-05 C$ 0.29
Recent Sedar Documents

Surge Energy loses $615.22-million in Q1

2020-05-05 14:10 ET - News Release

Mr. Paul Colborne reports

SURGE ENERGY INC. ANNOUNCES FIRST QUARTER 2020 RESULTS

Surge Energy Inc. has released its financial and operating results for the quarter ending March 31, 2020.

Q1 2020 corporate update -- navigating the pandemic

Massive crude oil demand destruction from the COVID-19 pandemic, together with increased oil production from OPEC (the Organization of the Petroleum Exporting Countries) and Russia, contributed to a dramatic decrease in the price of oil in the first half of 2020 (H1 2020). Consequently, Surge's management and board acted decisively to protect the company's balance sheet and net asset value as follows:

  1. On March 9, 2020, Surge became one of the first oil companies in Canada to reduce its dividend (by 90 per cent).
  2. In early March, the company suspended all major capital expenditures, providing operational and financial flexibility for the balance of 2020.
  3. On April 14, 2020, the company was one of the first oil companies in Canada to implement temporary production curtailments. This included up to 4,400 barrels of oil equivalent per day (boe/d) (approximately 21 per cent of March volumes) of lower netback production in order to maximize corporate cash flows.
  4. Also, on April 14, 2020, Surge suspended the company's dividend in its entirety until market conditions improve.
  5. In Q1 and early Q2 2020, the company successfully continued to lock in very attractive forward WTI (West Texas Intermediate) crude oil prices, significantly above current spot prices, pursuant to its strategic continuing hedging program.
  6. Prior to suspending Q1 2020 capital expenditures, Surge completed an outstanding Q1 development drilling program, drilling 19 consecutive successful Sparky wells (of a budgeted 26-well program). The company added more than 2,500 boe/d (more than 90 per cent medium/light oil), with this reduced program at an all-in cost of $22-million, providing top-tier capital efficiencies of $8,800 per boe/d.

Given the unprecedented circumstances facing world crude oil markets, together with management's aforementioned production curtailments, on April 14, the company suspended its previously announced 2020 guidance and capital program of $98.5-million. Surge's remaining 2020 capital program will be reguided as crude oil prices improve.

In addition to the capital allocation decisions set forth above, in accordance with management's strategic plan, the company has continued to reduce net debt significantly from Q1 2019 as compared with Q1 2020 by more than $53-million, a decrease of over 12 per cent.

Furthermore, the company has identified approximately $40-million of annualized operating and general and administrative (G&A) cash reductions through temporary production curtailments, work force optimizations, and the minimization or elimination of discretionary corporate costs. As a result of management's pro-active capital allocation decisions, these cash reductions, combined with the suspension of the company's dividend, are expected to result in aggregate annualized cost savings of approximately $73-million per year.

                 FINANCIAL AND OPERATING HIGHLIGHTS
(in thousands of dollars, except per-share amounts and as indicated)

                                         Three months ended March 31,
                                                 2020           2019
Financial highlights
Oil sales                                  $   61,211     $   91,128
Natural gas liquid (NGL) sales                  1,063          2,425
Natural gas sales                               1,432          4,315
Total oil, natural gas and NGL revenue         63,706         97,868
Cash flow from operating activities            43,138         28,908
Per share, basic ($)                             0.13           0.09
Adjusted funds flow (i)                        30,028         41,851
Per share -- basic ($) (i)                       0.09           0.14
Net (loss) (ii)                              (615,227)        (7,983)
Per share basic ($)                             (1.85)         (0.03)
Total exploration and development 
expenditures                                   32,504         41,261
Total acquisitions and dispositions                 -        (27,807)
Total capital expenditures                     32,504         13,454
Net debt, end of period                       384,686        438,150
Operating highlights
Production
Oil (bbl/d)                                    16,891         17,542
NGL (bbl/d)                                       564            644
Natural gas (mcf/d)                            17,409         20,663
Total (boe/d) (6:1)                            20,357         21,630
Average realized price (excluding hedges) 
Oil ($/bbl)                                     39.82          57.72
NGL ($/bbl)                                     20.72          41.86
Natural gas ($/mcf)                              0.90           2.32
Netback ($/boe)   
Petroleum and natural gas revenue               34.39          50.27
Realized gain (loss) on commodity 
and foreign exchange (FX) contracts              7.29          (0.37)
Royalties                                       (4.59)         (5.68)
Net operating expenses (i)                     (14.29)        (15.12)
Transportation expenses                         (1.64)         (1.98)
Operating netback (i)                           21.16          27.12
General and administrative (G&A) expense        (1.84)         (1.78)
Interest expense                                (3.10)         (3.84)
Adjusted funds flow (i)                         16.22          21.50

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

(ii) For the period ended March 31, 2020, the company incurred a net 
loss of $615.2-million, including a non-cash asset impairment charge 
of $590.6-million recognized in the first quarter of 2020, primarily 
due to a decrease in the average independent engineering price 
forecasts. 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.

Strategic hedging program; continued debt reduction

Surge achieved excellent hedging results in the last few weeks, capturing a large portion of the significant (record) contango in the forward curve for crude oil prices and blending it in with the company's much higher pre-existing crude oil hedges.

As disclosed on April 14, 2020, Surge has a strong in-the-money hedge book, in which the company reported 5,500 barrels per day (bbl/d) of production hedged for Q2 at attractive crude oil pricing (above $80 (Canadian) per barrel). In addition, Surge has continued to act quickly and decisively to add further hedges to protect the company's balance sheet, given the near-term crude inventory concerns that are negatively impacting near-term crude oil prices.

For example, during the week of April 13, 2020, to April 17, 2020, Surge successfully took advantage of the significantly higher future prices in the forward WTI crude oil curve by adding an additional 1,500 bbl/d of hedges (three ways and swaps) for the period from May, 2020, through June, 2021. This further protects Surge's near-term crude oil price realizations against a falling spot price, with floors on the incremental 1,500 bbl/d between $32 (U.S.) and $36 (U.S.) WTI, and with upside participation to more than $40 (U.S.) per barrel on a significant portion of these hedges.

Additionally, as global inventory concerns continued to grow, on April 17, 2020, Surge executed an incremental 1,000 bbl/d of WTI swaps for the month of June, which average nearly $42 (Canadian) per barrel ($30 (U.S.) per barrel). Currently, the June WTI futures contract is trading at approximately $25 (U.S.) WTI per bbl.

Considering management's strategic decision to pro-actively curtail up to 21 per cent of Surge's oil production, the company is now even better hedged on a percentage basis. For example, Surge has now hedged approximately 71 per cent of the company's forecast after Crown royalty crude oil production in June at over $67 (Canadian) per barrel.

In late 2019, management pro-actively reacquired all of the puts that Surge sold pursuant to its three-way hedge transactions in H1 2020 for a minimal total cost of $400,000. This defensive, pro-active step provides approximately $13.9-million (Canadian) in incremental hedging gains to the company, representing a return of approximately 3,500 per cent on the decision to reacquire the puts.

Operations update -- production curtailment -- record sparky drilling results

On April 14, 2020, the company announced its strategic decision to temporarily curtail up to 4,400 boe/d (approximately 21 per cent) of lower-netback production in order to maximize corporate cash flows. Surge has the ability to restart this production in short order, as commodity prices increase. Additionally, Surge is selectively choosing to work over wells that meet the company's internal economic hurdle rate of a six-month to nine-month payout at current strip prices.

Following this announcement, crude prices have continued to fall precipitously. On this basis, Surge is reviewing the temporary curtailment of additional production where the economics of such a curtailment are advantageous to the company.

Surge's high-quality, large original-oil-in-place (OOIP) conventional reservoirs continued to deliver excellent results during Q1 2020. Surge completed a reduced Q1 2020 drilling program in early March, drilling 19 successful horizontal wells (of an originally budgeted 26 wells) in seven different Sparky pools, which included the delineation of two new Sparky pool discoveries on its lands at Betty Lake North and Eyehill South.

Currently, 14 of the wells drilled in the quarter are on stream, with initial production results performing at or above management's expectations. Given Surge's very successful Q1 2020 drilling results, the company's production exceeded 21,000 boe/d in March (prior to the temporary production curtailments), with five additional Sparky wells to be brought on production following breakup and as crude oil prices improve.

As discussed in the section of this news release on strategic hedging program, management acted decisively during the week of April 13, 2020, to April 17, 2020, to take advantage of the significantly higher forward crude oil pricing curve that was available and captured a significant, incremental, positive hedge position before crude oil strip pricing dropped further.

Outlook -- balance sheet management and rigorous cost-cutting

In light of the COVID-19 pandemic, Surge has taken many steps to protect its staff, their families, service providers, stakeholders and the general public. The company's dedicated COVID-19 team ensures that Surge is staying up to date with the latest information and data surrounding the virus outbreak, including heeding the government's advice for physical distancing. These measures protect the health of Surge staff while they work diligently to ensure the safety and security of the company's facilities, as well as continuing to deliver reliable production. All of Surge's Calgary office staff are working remotely and all field locations have implemented enhanced distancing, cleaning and sanitation measures. The management and COVID-19 teams will continue to monitor the situation, taking guidance from health authorities.

Massive crude oil demand destruction from the COVID-19 pandemic, together with increased oil production from OPEC and Russia, contributed to a dramatic decrease in the price of oil in H1 2020. Consequently, Surge's management and board acted decisively to protect the company's balance sheet and net asset value, including suspending the company's dividend and deferring all major capital expenditures indefinitely.

Furthermore, in Q1 and early Q2 2020, the company successfully continued to lock in very attractive forward crude oil prices pursuant to Surge's strategic continuing hedging program, through to June, 2021.

Furthermore, the company has identified approximately $40-million of annualized operating and G&A cash reductions through temporary production curtailments, work force optimizations, and the minimization or elimination of discretionary corporate costs. As a result of management's pro-active capital allocation decisions, these cash reductions, combined with the suspension of the company's dividend, are expected to result in aggregate annualized cost savings of approximately $73-million per year.

Given the unprecedented circumstances facing world crude oil markets, together with management's aforementioned production curtailments, on April 14, 2020, the company suspended its previously announced 2020 guidance and capital program of $98.5-million. Surge's remaining 2020 capital program will be reguided as crude oil prices improve.

We seek Safe Harbor.

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