Mr. Paul Colborne reports
SURGE ENERGY INC. ANNOUNCES $40 MILLION, 4 YEAR BDC TERM FACILITY; $50 MILLION EDC CREDIT COMMITMENT; EXTENSION OF CREDIT FACILITY MATURITY TO DECEMBER 31, 2021; ALBERTA SITE REHABILITATION PROGRAM UPDATE; AND THIRD QUARTER FINANCIAL AND OPERATING RESULTS
Surge Energy Inc. has received lender approvals for a total of $90-million in new credit commitments to the company, subject to final documentation. These commitments include:
A new term loan facility led by the Business Development Bank of Canada (BDC), in partnership with the company's syndicate of lenders, for a non-revolving facility of $40-million with attractive interest rates and a four-year term;
A credit commitment of up to $50-million from Export Development Canada (EDC) to join the company's existing $335-million first lien credit facility.
Subject to the closing of the term facility, the syndicate has agreed to an extension of Surge's credit facility. Maturity on the credit facility will be extended from March 31, 2021, to Dec. 31, 2021, and the company's next semi-annual borrowing base redetermination will be shifted from Dec. 15, 2020, to June 30, 2021.
Surge anticipates that these new credit commitments, as well as the extension of the credit facility, will close on or about the week of Nov. 16, 2020. Closing is subject to final documentation.
$40-million four-year debt facility
Surge has received commitments for a $40-million term facility under the BDC's Business Credit Availability Program (BCAP), which provides the company with a four-year, non-revolving second lien term facility.
The BDC's BCAP was designed to provide support to financially viable, medium-sized businesses impacted by the COVID-19 pandemic and the recent decline in oil prices, in the form of additional liquidity to continue operations through the pandemic, and to assist these companies in returning to pre-COVID-19 operating levels.
This term facility will also drive meaningful economic activity across the country through the creation of hundreds of direct and indirect full-time jobs.
The term facility will provide Surge with significant long-term liquidity at attractive interest rates and allows the company to return production to pre-COVID-19 levels through the development of its high-quality medium/light crude oil asset base. In turn, the company will generate net asset value per share growth for all stakeholders.
$50-million EDC credit commitment
In addition to the term facility, the company has received a credit commitment of up to $50-million from EDC, providing Surge with a significant new syndicate banking partner in the company's existing $335-million credit facility.
Extension of credit facility
Concurrently with closing of the term facility, Surge's lending syndicate will reconfirm the company's existing $335-million credit facility.
Subject to the closing of the term facility, Surge's syndicate of lenders has agreed to extend the maturity of the company's $167.5-million revolving facility and $167.5-million non-revolving facility from March 31, 2021, to Dec. 31, 2021. In addition, the company's next semi-annual borrowing base redetermination will be extended to June 30, 2021.
The above reconfirmation and credit facility extension, in combination with the term facility, will provide Surge with over $75-million in available liquidity on its credit facilities.
Additionally, the credit facility requirement that Surge explore potential options for a small number of its lenders, through an asset sale solicitation process, has been deferred.
The company appreciates the support and partnership of the BDC, EDC and Surge's syndicate of lenders.
ESG (environmental, social and governance) and Alberta Site Rehabilitation Program (SRP) update
As part of the company's commitment to ESG stewardship, Surge and its service providers submitted more than 1,700 applications under the government of Alberta's Site Rehabilitation Program to abandon and reclaim wellbores, pipelines and well sites. The government of Alberta is administering the SRP in various phases, providing grant funding through service providers for the abandonment or remediation of oil and gas sites.
As a result of these applications, the company has received SRP grants to date in excess of $10-million, which will allow Surge to greatly increase the number of wells, pipelines and facilities it can abandon. In addition, Surge has received funding from the Saskatchewan Accelerated Site Closure Program to complete abandonments at the company's Saskatchewan properties.
Surge's internal continuing abandonment program, together with the enhanced SRP abandonment program, will meaningfully reduce the company's decommissioning liability over the next 12 months. The company now anticipates abandoning more than 300 wells by March, 2021, approximately 26 per cent of Surge's total inactive well count.
Surge remains actively engaged with the government of Alberta regarding additional SRP developments, as well as new developments in both federal and government of Saskatchewan programs, in order to accelerate the decommissioning of the company's asset retirement obligations.
Surge strives to be a leader in reducing the impact of its operations on the environment. The company is committed to producing energy in a safe, responsible and sustainable manner.
Third quarter 2020 financial and operating highlights
During the third quarter of 2020, the company reactivated most of its temporarily curtailed production, averaging 17,092 barrels of oil equivalent per day for the period. As a result of a lower-than-anticipated corporate production decline rate (now approximately 19 per cent), Q3 2020 production was consistent with the average production rate of the second quarter of 2020, with no drilling activity during the period.
The reactivation of the company's temporarily curtailed production was due to rising crude oil and natural gas prices as well as successful cost optimization projects, which have resulted in a lower break-even price for several of Surge's properties.
Strong operating results, combined with cost reduction efforts, resulted in the company continuing to reduce net debt meaningfully during the quarter, despite crude oil prices averaging only $40.93 (U.S.) WTI (West Texas Intermediate) per barrel. Year to date, Surge has reduced bank debt by more than $20-million through the COVID-19 pandemic and the Saudi Arabia/Russia crude oil price war. In Q3 2020 alone, Surge generated $10-million of adjusted funds flow in excess of exploration and development expenditures.
Additionally, in Q3 2020, the company brought on stream two new Sparky wells that were drilled in the first quarter of 2020, confirming a significant new medium gravity crude oil discovery at Betty Lake North. This discovery at Betty Lake North further derisks over 75 net Sparky locations in Surge's internal drilling inventory, with full waterflood upside.
This exciting new discovery is consistent with the company's stated operating strategy of focusing capital toward large original-oil-in-place, conventional, low-cost, long-life medium/light oil pools. Betty Lake North is the latest in a series of new Sparky pool discoveries for the company over the last six years.
Surge has completed its 2020 internal type curve review of the company's extensive approximately 500-well (greater than 12 years) Sparky drilling inventory, and the weighted average Sparky drilling location delivers an IRR of greater than 50 per cent at a flat price of $40 (U.S.) WTI per barrel.
Surge outlook -- a compelling value proposition
Surge has a high-quality, low-decline light/medium gravity crude oil asset and opportunity base. With the company's low (19 per cent) annual production decline, high netbacks and large original-oil-in-place (conventional) crude oil assets, Surge provides investors with an excellent opportunity to participate in the continuing crude oil price recovery.
The company's anticipated closing of $90-million in new credit commitments, pending final documentation, provides Surge with significant additional long-term liquidity at reasonable interest rates, allowing the company to pursue attractive development opportunities that generate net asset value growth for all stakeholders.
Surge has the flexibility to strategically deploy capital into its Sparky play, which has emerged as one of the premium medium/light oil growth plays in Canada. Surge's industry-leading Sparky play has some of the best production efficiencies and rates of return for drilling new wells in all of Canada. Surge estimates a weighted average risked internal rate of return at $40 (U.S.) WTI per barrel for its entire Sparky inventory of greater than 50 per cent. These excellent risked returns are for primary drilling only and do not include waterflood upside.
The company has drilled 138 consecutive successful horizontal Sparky wells and grown production at its Sparky core area by more than 650 per cent from 1,200 boepd (95 per cent oil) to approximately 9,000 boepd (95 per cent medium/light oil) in the past six years.
Surge's Sparky core area now has:
Numerous high-quality, high-permeability, high-porosity, conventional sandstone reservoirs;
- A total of
9,000 boepd (95 per cent medium/light oil) of current production;
Approximately 500 internally identified net drilling locations with very predictable drilling results;
- Top-decile production efficiencies.
Additionally, Western Canadian Select (WCS) differentials have contracted meaningfully in the last several months, with WCS/WTI differentials currently over 20 per cent tighter than the long-term average. Surge's Sparky play will benefit significantly from this tightening, with cash flows, netbacks and reserve values in this premier conventional medium/light oil play increasing commensurately.
Management believes that Surge's premium Sparky crude oil growth asset is unique within the company's entire peer group in Canada.
We seek Safe Harbor.
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