Surge Energy Inc. Announces 2018 Fourth Quarter and Year-End Financial and Operating Results; 2018 Year-End Reserves; Record Production and Reserves Achieved

CALGARY, March 12, 2019 /CNW/ – Surge Energy Inc. (“Surge” or the “Company”) (TSX: SGY) is pleased to announce its operating and financial results for the quarter ended December 31, 2018, and its year-end 2018 reserves, as evaluated by Sproule.

Surge’s financial and operating results for the fourth quarter of 2018 include only a partial quarter of the previously announced Mount Bastion Oil & Gas Ltd. (“MBOG”) light oil acquisition, which closed during the fourth quarter of 2018.

MESSAGE TO THE SHAREHOLDERS

Overall, 2018 was a transformative year for the Company. Surge’s Q4 2018 production of 21,047 boepd (82% oil and NGLs) increased by more than 34 percent (over 8 percent per share) as compared to Q4 2017 production volumes of 15,675 boepd (81% oil and NGLs). This production growth was predominantly generated by the addition of high-netback, light oil production. Additionally, Surge increased its Proven plus Probable (“P+P”) reserves by 29 percent, from 95.2 MMboe at year-end 2017, to 122.6 MMboe at year-end 2018.

Operationally, the Company’s high quality, large original oil in place¹ (“OOIP”), conventional reservoirs continued to deliver consistent results. The Company organically replaced 133% of 2018 production, and has delivered three year FD&A costs of $12.77 per boe on a P+P basis. This drove a three year average recycle ratio of 2.5 times².

During the fourth quarter of 2018 the price of oil dropped 44% – from over US$76 WTI per barrel to as low as US$42.50 WTI per barrel.   Furthermore, Western Canadian Select (“WCS”) crude oil differentials widened precipitously from US$19 per barrel to as high as US$50 per barrel, and Edmonton Light differentials widened from US$4 per barrel to more than US$30 per barrel.

Surge management reacted quickly to these negative market conditions by reducing capital expenditures and delaying well completions into 2019. Accordingly, on January 14, 2019, Surge announced a 2019 capital expenditure budget which focused on sustainability, generation of free adjusted funds flow³ at lower commodity prices, and payment of the Company’s dividend.

The extremely negative factors that affected Q4 2018 financial results have corrected quickly in Q1 2019.  WTI crude oil prices are up approximately 35% since December 2018, and both Edmonton light and WCS crude oil differentials have quickly tightened to below historical averages.  Currently, Surge is receiving pricing on its WCS correlated production that is 675% higher than in December 2018, at C$62 per barrel, and Edmonton light production is receiving 275% higher pricing than December 2018, at C$70 per barrel.

Surge remains well-positioned to execute its 2019 guidance, focused on the continued development of its extensive portfolio of large OOIP, light and medium gravity crude oil assets.

FINANCIAL AND OPERATING HIGHLIGHTS
($000s except per share amounts)

In accordance with industry practice, the Company uses adjusted funds flow to analyze the cash flow generated from its ongoing principal business activities. On this basis, both adjusted funds flow and cash flow from operating activities are provided for comparative purposes.  Please see the Non-GAAP Financial Measures section of this release for further details.

2018 FOURTH QUARTER AND YEAR-END RESERVES HIGHLIGHTS

• During the fourth quarter, Surge announced the closing of the Company’s accretive MBOG light oil acquisition, and the creation of the Greater Sawn core area;
• Surge’s Q4/18 quarterly average production of 21,047 boepd increased by more than 34% as compared to Q4/17 production of 15,675 boepd;
• The Company’s Q4/18 quarterly average production of 21,047 boepd increased by 17% as compared to Q3/18 production of 18,029 boepd;
• The Company’s revolving credit facility increased by 57 percent to $550 million, up from $350 millionpreviously. The Company had over $140 million in undrawn capacity⁴ at December 31, 2018;
• Independently engineered Proved Developed Producing reserves (as of December 31, 2018) of 43.4 MMboe, increased 31% from year-end 2017;
• Total Proved Plus Probable reserves of 122.6 MMboe, increased 29% from year-end 2017;
• Organically added 8.0 MMboe of Proved Plus Probable Reserves, replacing 133% of 2018 production⁵;
• Organically added 6.2 MMboe of Proved Developed Reserves, replacing 102% of 2018 production⁵;
• Total Proved Plus Probable FD&A⁷ cost of $20.97/boe including changes in future development capital;
• Delivered three year average Total Proved Plus Probable FD&A cost of $12.77/boe⁷, including changes in future development capital;
• Reported a three year average recycle ratio of 2.5 times on a Total Proved Plus Probable basis;
• Total Proved Plus Probable Reserve life index⁶ of 16 years;
• Estimated Total Proved Plus Probable Net Asset Value of $5.58 per common share⁷, a 1% increase from year-end 2017; and
• Estimated Total Proven Net Asset Value of $3.20 per common share⁷.
• Subsequent to Q4/18, Surge has executed a definitive purchase and sale agreement regarding the disposition of certain non-core assets for cash proceeds of $28.65 million, subject to standard closing adjustments.

2018 OPERATIONAL HIGHLIGHTS

Surge’s disciplined operating strategy and high quality conventional, large OOIP assets continued to provide strong operational results in 2018. When combined with the MBOG light oil acquisition, this resulted in Surge achieving record production of 21,047 boepd in the fourth quarter of 2018. The Company has now increased production by 73% from Q2 2016 through Q4 2018.

In total, the Company spent $120.6 million of exploration and development capital in 2018, drilling 46 gross (45.6 net) wells, along with waterflood injector conversions, associated infrastructure, land and seismic. Through step-out delineation drilling and minor land acquisitions, the Company was able to increase the drilling inventory to over 800⁸ net internally estimated locations, representing an increase of over 20% from 2017.

Sparky Core Area
In the Sparky core area, Surge drilled 25 gross (24.6 net) wells in four separate fields during the year. In addition to continued drilling at Eyehill and Provost, the Company drilled four additional wells and constructed a battery at Betty Lake. Peak production from the Betty Lake field was over 600 boepd, and three additional wells have now been drilled into the pool in Q1 2019. With over 50 net remaining internally estimated locations, this large OOIP Sparky asset is very well-positioned for long term, sustainable growth.

In the Sounding Lake field, the Company drilled its first Sparky horizontal infill well in Q4 2018. This well continues to produce at over 150 boepd. An additional two wells have been drilled in the Sounding Lake area in Q1 2019.

With drill, complete and equip costs of under $1.3 million, year-round access, well-developed infrastructure, proven waterflood performance and over 400 internally identified net locations, the Sparky core area is a cornerstone asset of Surge’s business.

Valhalla Core Area
At Valhalla, Surge successfully drilled and completed 5 gross (5 net) wells in 2018. Four of these wells were drilled into the Doig formation and had an average 30 day initial production oil rate of over 1,100 bopd. Two Doig wells have been drilled in Q1 2019.

The Company also drilled its first well into the Charlie Lake formation with a 30 day IP oil rate over 200 bopd. Throughout 2018, Surge continued to expand its drilling inventory in this multi-zone area and now has over 85 net locations in the Doig, Montney, Doe Creek and Charlie Lake formations.

Shaunavon Core Area
Surge successfully drilled 14 gross (14 net) wells at its Shaunavon core area in the past year, targeting both the Upper and Lower Shaunavon formations. Production from the field was maintained throughout the year at approximately 2,500 boepd.

Strategically positioned in Southwest Saskatchewan, Shaunavon receives Fosteron grade crude oil pricing, which has historically traded at a premium to WCS. Accordingly, Shaunavon has one of the highest operating netbacks in the Company and generates free adjusted funds flow⁹ that can be deployed across Surge’s asset base.

Greater Sawn Core Area
With the closing of the MBOG acquisition in Q4 2018, Surge created a fourth core operating area at Greater Sawn. The light oil, large OOIP, carbonate reef pools with waterflood potential complement Surge’s existing asset base and business model. Shortly after closing the acquisition in 2018, the Company drilled 2 gross (2 net) wells at Sawn. An additional two net wells have been drilled in Q1 2019 and all four wells have now been placed on production.

In the Sawn pool, five horizontal wells have already been converted to water injection by the previous operator, and plans are underway to further expand the waterflood and convert another one to two wells to water injection in 2019. A comprehensive reservoir simulation is also being completed on the Sawn pool to optimize future infill drilling and waterflood development.

2018 YEAR-END RESERVES

The Company’s reserves were evaluated by Sproule in accordance with National Instrument 51-101 – Standards of Disclosure for Oil and Gas Activities (“NI 51-101”) effective December 31, 2018. Surge’s annual information form for the year ended December 31, 2018 (the “AIF”) will contain Surge’s reserves data and other oil and natural gas information as mandated by NI 51-101. Surge expects to file the Company’s AIF on SEDAR on or before March 31, 2019.

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 evaluated in the Sproule Report.  The evaluation is based on Sproule’s forecast pricing and exchange rates at December 31, 2018 which is available on their website www.sproule.com. 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 tables may not add due to rounding.

RESERVES SUMMARY AND NET PRESENT VALUE

FUTURE CAPITAL COSTS

PERFORMANCE MEASURES

NET ASSET VALUE

OUTLOOK

Management’s stated goal is to be the best positioned, top performing, light/medium gravity crude oil growth and dividend paying public company in our peer group in Canada.

Overall, 2018 was a transformative year for the Company. Surge’s Q4 2018 production of 21,047 boepd (82% oil and NGLs) increased by more than 34 percent (over 8 percent per share) over Q4 2017 production volumes of 15,675 boepd (81% oil and NGLs). This significant production growth was predominantly generated by the addition of high-netback, light oil production. Additionally, Surge increased its Proven plus Probable (“P+P”) reserves by 29 percent, from 95.2 MMboe at year-end 2017, to 122.6 MMboe at year-end 2018.

On January 14, 2019 Surge announced a 2019 capital budget of $135 million. This budget provides substantial flexibility to react to changing commodity prices, while allowing the Company to continue to deliver its sustainable dividend to shareholders.

The Company’s 2019 capital budget is focused on the continued development of its extensive portfolio of low risk, large OOIP, light and medium gravity crude oil assets. Surge will execute this plan while maintaining the Company’s low 23 percent corporate decline rate, and Surge’s $140 million of credit availability¹¹.

Over the last ten financial quarters, Surge has continued to build and maintain the Company’s track record, delivering:

1. consistent successful drilling and waterflood results;
2. timely and accretive core area acquisitions;
3. increased production by more than 73 percent; and
4. increased Surge’s dividend three times by a cumulative 33 percent.