FORWARD LOOKING STATEMENTS:More particularly, this press release contains statements concerning: Surge’s stated goals, objectives and focus; Surge’s 2019 exploration and development capital expenditure program and budget (the “
2019 Budget“); the ability of Surge to execute the 2019 Budget; the potential to increase Surge’s 2H 2019 exploration and development capital by up to
$25 million and the anticipated increase in production resulting therefrom; Surge’s dividend payout ratio and targeted all-in payout ratio; the sustainability of Surge’s dividend; anticipated 2019 guidance, including with respect to average and exit production rates and operating, transportation and general and administrative costs; Surge’s ongoing review of commodity prices and the ability of Surge to adjust to any changes thereto; and the availability of undrawn capacity with respect to Surge’s credit facility.
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6 This is a capital management measure which is defined in the Non-GAAP Financial Measures and Capital Management Measures section of this document
7 Spot WCS price in CAD$, as at January 11th, 2019 for WCS crude oil
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The forward-looking statements are based on certain key expectations and assumptions made by Surge, including the performance of existing wells and success obtained in drilling new wells; anticipated expenses, cash flow and capital expenditures; the application of regulatory and royalty regimes; prevailing commodity prices and economic conditions; development and completion activities; the performance of new wells; the successful implementation of waterflood programs; the availability of and performance of facilities and pipelines; the geological characteristics of Surge’s properties; the successful application of drilling, completion and seismic technology; the determination of decommissioning liabilities; prevailing weather conditions; exchange rates; licensing requirements; the impact of completed facilities on operating costs; the availability and costs of capital, labour and services; and the creditworthiness of industry partners.
Although Surge believes that the expectations and assumptions on which the forward-looking statements are based are reasonable, undue reliance should not be placed on the forward-looking statements because Surge can give no assurance that they will prove to be correct. Since forward-looking statements address future events and conditions, by their very nature they involve inherent risks and uncertainties. Actual results could differ materially from those currently anticipated due to a number of factors and risks. These include, but are not limited to, risks associated with the oil and gas industry in general (e.g., operational risks in development, exploration and production; delays or changes in plans with respect to exploration or development projects or capital expenditures; the uncertainty of reserve estimates; the uncertainty of estimates and projections relating to production, costs and expenses, and health, safety and environmental risks), commodity price and exchange rate fluctuations and constraint in the availability of services, adverse weather or break-up conditions, uncertainties resulting from potential delays or changes in plans with respect to exploration or development projects or capital expenditures or failure to obtain the continued support of the lenders under Surge’s bank line. Certain of these risks are set out in more detail in Surge’s Annual Information Form dated March 14, 2018 and in Surge’s MD&A for the period ended September 30, 2018, both of which have been filed on SEDAR and can be accessed at www.sedar.com.
The forward-looking statements contained in this press release are made as of the date hereof and Surge undertakes no obligation to update publicly or revise any forward-looking statements or information, whether as a result of new information, future events or otherwise, unless so required by applicable securities laws.
Reserves
Any reserves disclosed in this press release are derived from a third party external evaluation done by Sproule using standard practices as prescribed in the Canadian Oil and Gas Evaluations Handbook and account for associated proved and/or probable reserves, as applicable. Reserves referenced in this presentation account for all of Surge’s Acquisitions and Divestiture activity to date, reflecting the bookings that existed (from the respective 3rd party evaluator), as of January 1, 2018 (the “Surge Report”).
Boe means barrel of oil equivalent on the basis of 1 boe to 6,000 cubic feet of natural gas. Boe may be misleading, particularly if used in isolation. A boe conversion ratio of 1 boe for 6,000 cubic feet of natural gas is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. Boe/d and boepd means barrel of oil equivalent per day. Bbl means barrel of oil. NGLs means natural gas liquids.
For the purpose of this press release, Original Oil in Place (“OOIP”) means Discovered Petroleum Initially In Place (“DPIIP”) as at Oct 31st, 2018. DPIIP is derived by Surge’s internal Qualified Reserve Evaluators (“QRE”) and prepared in accordance with National Instrument 51-101 and the Canadian Oil and Gas Evaluations Handbook (“COGEH”). DPIIP, as defined in COGEH, is that quantity of petroleum that is estimated, as of a given date, to be contained in known accumulations prior to production. The recoverable portion of DPIIP includes production, reserves and Resources Other Than Reserves (ROTR). The OOIP/DPIIP and potential recovery rate estimates are as at Oct 31st, 2018 and are based on current recovery technologies and have been prepared by Surge’s internal Qualified Reserve Evaluators. There is significant uncertainty as to the ultimate recoverability and commercial viability of any of the resource associated with the OOIP/DPIIP estimates, and as such a recovery project cannot be defined for this volume of OOIP/DPIIP at this time.
Drilling Locations
This presentation discloses drilling locations in two categories: (i) booked locations; and (ii) unbooked locations. Booked locations are proved locations and probable locations derived from a third party external evaluation using standard practices as prescribed in the Canadian Oil and Gas Evaluations Handbook and account for drilling locations that have associated proved and/or probable reserves, as applicable. Drilling locations referenced in this presentation account for all of Surge’s Acquisitions and Divestiture activity to date, reflecting the bookings that existed (from the respective 3rd party evaluator), as of January 1, 2018.
Unbooked locations are internal estimates based on prospective acreage and assumptions as to the number of wells that can be drilled per section based on industry practice and internal review. Unbooked locations do not have attributed reserves or resources. Unbooked locations have been identified by Surge’s internal Qualified Reserve Evaluators as an estimation of our multi-year drilling activities based on evaluation of applicable geologic, seismic, engineering, production and reserves information. There is no certainty that the Company will drill all unbooked drilling locations and if drilled there is no certainty that such locations will result in additional oil and gas reserves, resources or production. The drilling locations on which the Company actually drills wells will ultimately depend upon the availability of capital, regulatory approvals, seasonal restrictions, oil and natural gas prices, costs, actual drilling results, additional reservoir information that is obtained and other factors. While certain of the unbooked drilling locations have been de-risked by drilling existing wells in relative close proximity to such unbooked drilling locations, the majority of other unbooked drilling locations are farther away from existing wells where management has less information about the characteristics of the reservoir and therefore there is more uncertainty whether wells will be drilled in such locations and if drilled there is more uncertainty that such wells will result in additional oil and gas reserves, resources or production.
Assuming the January 1, 2018 reference date outlined above, the company discussed in this press release over >400 net drilling locations identified herein, of these >300 net are unbooked locations. Of the 97 net booked locations identified herein 78 net are Proved locations and 19 net are Probable locations.
Non-GAAP Financial Measures and Capital Management Measures
Certain secondary measures in this press release – namely, “adjusted funds flow”(included within the definition of all-in payout ratio, “dividend payout ratio”, and “all-in payout ratio” are disclosed for the purpose of providing investors with additional insight as to how the Company evaluates the management of its capital and analyze business performance. Management uses capital management measures to analyze the Company’s capital management objectives and to assist in capital allocation decisions. Management believes capital management measures may be useful to investors on the same basis. Non-GAAP financial measures are used by management to analyze cash flow generated from the Company’s principal business activities and it may be useful to investors on the same basis. None of these measures are used to enhance the Company’s reported financial performance or position.
Non-GAAP financial measures and capital management measures do not have a standardized meaning prescribed by IFRS and therefore are unlikely to be comparable to similar measures presented by other issuers. Furthermore, capital management measures do not have a corresponding IFRS measure. They are common in the reports of other companies but may differ by definition and application. The amounts used in the calculation of the capital management measures are derived from the financial statements that are prepared in accordance with IFRS. In some instances, the capital management measure incorporates a non-GAAP measure, such as adjusted funds flow which is defined below in this document.
Adjusted Funds Flow
The Company adjusts cash flow from operating activities in calculating adjusted funds flow for changes in non-cash working capital, decommissioning expenditures, transaction and other costs, and cash settled stock-based compensation plans, particularly cash used to settle withholding obligations on stock-based compensation arrangements that are settled in shares. Management believes the timing of collection, payment or incurrence of these items involves a high degree of discretion and as such may not be useful for evaluating Surge’s cash flows.
Changes in non-cash working capital are a result of the timing of cash flows related to accounts receivable and accounts payable, which management believes reduces comparability between periods. Management views decommissioning expenditures predominately as a discretionary allocation of capital, with flexibility to determine the size and timing of decommissioning programs to achieve greater capital efficiencies and as such, costs may vary between periods. Transaction and other costs represent expenditures associated with acquisitions, which management believes do not reflect the ongoing cash flows of the business, and as such reduces comparability. Subsequent to the third quarter of 2018, all of the Company’s stock-based compensation plans are equity classified as the Company has the intention of settling all awards with shares. Cash settled stock-based compensation currently represents the statutory tax withholdings required on stock-based compensation awards and is a discretionary allocation of capital. The Company has the option to either require the holder to sell shares earned in the stock-based compensation plan to satisfy tax withholdings, or the Company can issue less shares to the individual and remit a cash payment to satisfy tax withholding requirements. Each of these expenditures, due to their nature, are not considered principal business activities and vary between periods, which management believes reduces comparability.
All-in Payout Ratio
All-in payout ratio is calculated using the sum of total exploration and development capital plus dividends paid divided by adjusted funds flow. This capital management measure is used by management to analyze allocated capital in comparison to the cash being generated by the principal business activities. This measure is provided to allow readers to quantify the amount of adjusted funds flow that is being used to either: i) pay dividends; and ii) deployed into the Company’s development and exploration program. A ratio of less than 100% indicates that a portion of the adjusted funds flow is being retained by the Company and can be used to fund items such as asset abandonment, repayment of debt, fund acquisitions or the costs related thereto, withholding tax obligations on stock based compensation or other items.
Dividend Payout Ratio
Dividend payout ratio is calculated as the dividends paid for the respective period divided by adjusted funds flow. This capital management measure is used by management to analyze the level of dividends currently being paid on the stock in comparison to the cash being generated by the principal business activities.
Neither the TSX nor its Regulation Services Provider (as that term is defined in the policies of the TSX) accepts responsibility for the adequacy or accuracy of this release.
SOURCE Surge Energy Inc.
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