Surge Energy Inc. Announces 2017 Year End Reserves; Over 10 Percent Increase in Net Asset Value to $6.06 Per Share; 9 Percent Increase in Reserves Per Share; Reinstitution of Share Buy Back

CALGARY, Feb. 13, 2018 /CNW/ – Surge Energy Inc. (“Surge” or the “Company”) announced the results of its independent reserves evaluation (the “Sproule Report”) effective December 31, 2017, as prepared by Sproule Associates Limited (“Sproule”).

Surge is pleased to announce an increase in the Company’s year-end 2017 net asset value (“NAV”) of more than 10 percent per share over 2016, to $6.06 per share. Sproule’s 2017 year end price forecast has 2018 WTI crude oil prices below current average strip pricing for 2018.

The Company also reported that its 2017 capital expenditure program resulted in an increase of 13 percent in Surge’s total reserves on a total proved plus probable basis, to 95 million barrels of oil equivalent (“boe”)- with over 82 percent being oil and NGL’s.

2017 RESERVES HIGHLIGHTS:

Surge’s focused operating strategy of utilizing growth capital to acquire, exploit and waterflood high quality, large original oil in place (“OOIP¹“), conventional, sandstone reservoirs, continues to provide excellent consistent results, as demonstrated by the following:

• Increased the Company’s 2017 NAV by 11 percent to $6.06 per common share; Sproule’s 2018 crude oil price forecast is below current strip oil pricing for 2018.
• Surge’s Total Proved (“1P”) 2017 NAV has been independently evaluated to be $3.67 per basic share, an increase of 9 percent from 2016.
• Increased Total Proved and Probable (“2P”) reserves by 13 percent, to 95.2 million boe.
• Proved developed producing reserves value increased by 10 percent over 2016, from $553 million to $607 million on a NPV10 BT basis.
• Added 9.28 MMboe of proved developed producing reserves, replacing over 170 percent of 2017 production (estimated at 5.45 MMboe).
• Delivered an “all-in” FD&A cost of $13.60 per boe2, on a total proved plus probable basis, including changes in undiscounted FDC.
• Reported a 2017 recycle ratio of 1.74 times FD&A3, on a total proved plus probable basis, with oil prices averaging US $50.95 WTI per barrel.
• Only 292 of Surge’s 700 gross internally estimated well inventory has been booked in the 2017 Sproule Report; this conservative booking reflects FDC of 4 years of estimated 2017 funds flow.
• Based on successful results from the Company’s ongoing waterflood activities, incremental waterflood reserve bookings were added in both the Upper Shaunavon and Sparky core areas.

2017 INDEPENDENT RESERVES EVALUATION:

The evaluation of our reserves was done in accordance with the definitions, standards and procedures contained in the Canadian Oil and Gas Evaluation Handbook (“COGE Handbook”) and National Instrument 51-101 – Standards of Disclosure for Oil and Gas Activities (“NI 51-101”). Additional reserves information as required under NI 51-101 will be included in Surge’s Annual Information Form which will be filed on SEDAR on or before March 31, 2018.

Independent reserve evaluators, Sproule, evaluated 100 percent of Surge’s total net present value reserves.

RESERVES SUMMARY:

The following 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 set forth in the Sproule Report.

The Company’s Proved Developed Producing reserves are 82 percent liquids.

NET ASSET VALUE:

The Company’s new NAV, as of December 31, 2017, has been evaluated to be $6.06 per basic share – utilizing Sproule’s December 31, 2017 independent reserves valuation and price forecast.  Notably, Sproule’s 2017 year end price forecast has crude oil prices below current average strip pricing for 2018.

Surge’s December 31, 2017 detailed NAV calculation is set forth below:

Surge’s 1P 2017 NAV has been independently evaluated to be $3.67 per basic share.

SUMMARY OF SELECTED SPROULE PRICE FORECASTS AS AT DECEMBER 31, 2017:

RESERVE LIFE INDEX (“RLI”):

Surge management creates shareholder value through the efficient development of high quality, large OOIP, conventional, crude oil reservoirs. The cost-effective growth of the Company’s reserves, combined with the sustainable production of these reserves, will continue to generate long term returns for Surge shareholders.

The following table highlights Surge historical RLI:

FUTURE DEVELOPMENT COSTS (“FDC”):

Future development cost estimates reflect Sproule’s best estimate of the costs required to bring the total proved and proved plus probable reserves on production. The Company has 50.4 MMboe of total proved and probable undeveloped and non-producing reserves assigned to $485 million of FDC. At a cost of $9.64 per boe, these future reserves generate $731 million of net present value discounted at 10 percent, before income tax.

The Company estimates 2017 corporate capital expenditures at $98.5 million (unaudited), and an additional $73 million pursuant to acquisitions and divestitures.

During the year, the Company completed two strategic core-area acquisitions of high quality assets with large OOIP, low decline, light and medium gravity crude oil production, and associated undeveloped acreage directly offsetting Surge’s core operated, large OOIP, Eyehill and Sounding Lake crude oil assets. Surge internally estimates over 65 net crude oil drilling locations on these core area acquisitions.

The following table sets forth the schedule of FDC required to develop Surge’s future undeveloped reserves (using forecast prices and costs).

INTENTION TO REINSTATE NORMAL COURSE ISSUER BID:

Over the last six quarters Surge has delivered excellent drilling and waterflood results at its three core areas of Sparky, Shaunavon and Valhalla – all conventional, low cost assets that generate top tier production efficiencies, and high rates of return at strip oil prices. The Company has now increased production per share by more than 22 percent in the past 18 months, while maintaining a corporate decline estimated to be less than 24 percent.

As world crude oil prices increased from US$26 WTI per barrel on February 11^th, 2016 to over US $58 WTI today, the price of Surge’s common shares have decreased from $1.91 per share on February 11^th, 2016, to $1.77 per share today. Surge’s new 2017 PDP NAV is $2.01⁹ per share.

Accordingly, given Surge’s significant available liquidity, and the Company’s continued excellent operational results, Surge management and Board have determined to seek TSX approval to re-institute a normal course issuer bid (“NCIB”) providing for the repurchase of Surge common shares through the facilities, rules and regulations of the TSX.

Surge will file a notice of intention to make a NCIB with the TSX.  The NCIB will be subject to receipt of certain approvals, including acceptance of the notice of intention by the TSX.  The NCIB will commence following receipt of all such approvals and will continue for a period of up to one year.

The Company is currently generating significant annualized free funds flow, based on budget pricing assumptions, and current strip WTI pricing for oil of more than US $58 WTI. Surge has approximately $100 million of credit availability on its bank lines.

Further, early in the first quarter of 2018, the Company closed the sale of a minor, non-core property for gross proceeds of $6.8 million.  Surge intends to redeploy, on an accretive per share basis, some or all of the proceeds from this non-core asset sale into the NCIB.

Acquiring Surge common shares pursuant to the facilities of the TSX NCIB rules allows Surge management excellent flexibility in assessing market valuations and fluctuations on a weekly basis i.e. if market conditions recover and the trading price for Surge shares increases, management can choose to suspend the NCIB for a short period, or indefinitely, at their discretion.

Further, Surge does not have to pay a dividend on common shares that it acquires pursuant to the NCIB – thereby increasing the Company’s sustainability.

The NCIB set forth above provides an excellent return on investment to Surge shareholders, including: significant NAV accretion (using Surge’s new December 31, 2017 Sproule NAV of $6.06 per share), dividend savings, less interest on applicable debt. The NCIB provides an additional method for Surge management to return capital to its shareholders, along with the payment of the Company’s dividend.

Accordingly, in 2018 Surge anticipates: 1) delivering annual growth of five to seven percent production per share; 2) returning capital to its shareholders pursuant to the Company’s attractive dividend; 3) generating substantial free funds flow at current strip pricing and management’s budget pricing assumptions; and 4) returning capital to its shareholders pursuant to the accretive buyback of its common shares in accordance with the NCIB.

FINANCIAL UPDATE

Since the end of the third quarter 2017, Surge has been augmenting the Company’s 2018 crude oil hedge position.  Over the past three months, Surge has added on average 1,900 bopd to hedge volumes for 2018.  In aggregate this includes 650 bopd of swap contracts with a weighted average price of US $58.02/bbl, and 1250 bopd of put option/option spreads at various prices.  The table below provides the detailed contract breakdown:

As a result of Surge’s on ongoing risk management program, the Company now has an average of 4,900 barrels per day of crude oil hedged for 2018, with an average floor price of CAD $67.25 WTI per barrel¹⁰.

OUTLOOK – STRONG PROFITABILITY AT STRIP CRUDE OIL PRICES:

Management’s stated goal at Surge is to be the best positioned public crude oil growth and dividend paying company in Canada.

Today Surge has released an exciting new Five Year Business Plan (“Plan”) available in the Company’s Corporate Presentation – which can be found online at (www.surgeenergy.ca). The Plan illustrates that Surge can organically grow production per share per year at five percent; cash flow per share per year at nine percent; pay Surge’s current $0.095 per share, per annum dividend; and, in addition, generate over $215 million of free cash flow over the five years (i.e. above the Company’s capex and current dividend) – all at flat US $65 WTI pricing for oil. In this scenario, only 47 percent of Surge’s large, 10 year inventory of more than 700 drilling locations will be used.

Surge management believe that the Company’s focused operating strategy, top production efficiencies, rigorous cost controls and solid balance sheet, will allow the Company to continue to outperform.