Sign Up for FREE Daily Energy News
 
BREAKING NEWS:
WEC - Western Engineered Containment
Copper Tip Energy Services
Hazloc Heaters
Hazloc Heaters
Copper Tip Energy
WEC - Western Engineered Containment

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


CALGARYMarch 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.

_____________________

1 See Reserves Data in the Forward-Looking Statement section of this document for further details

2 See the Performance Measures section of this document for further details

3 This is a non-GAAP financial measure which is defined in the Non-GAAP Financial Measures section of this document

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

Three Months Ended December 31,

Year Ended December 31, 

2018

2017

% Change

2018

2017

% Change

Financial highlights

Oil sales

51,424

64,221

(20)%

285,378

217,194

31 %

NGL sales

2,477

2,751

(10)%

11,022

9,431

17 %

Natural gas sales

4,226

2,288

85 %

8,147

14,283

(43)%

Total oil, natural gas, and NGL revenue

58,127

69,260

(16)%

304,547

240,908

26 %

Cash flow from operating activities

26,770

28,640

(7)%

121,907

93,682

30 %

Per share – basic ($)

0.09

0.12

(25)%

0.50

0.41

22 %

Adjusted funds flow1

6,249

32,173

(81)%

113,651

103,816

9 %

Per share – basic ($)1

0.02

0.14

(86)%

0.46

0.45

2 %

Total exploration and development expenditures

33,598

22,709

48 %

120,552

98,466

22 %

Total acquisition and dispositions

299,032

368

nm2

327,765

72,465

 nm 

Total capital expenditures

332,630

23,077

 nm 

448,317

170,931

162 %

Net debt1, end of period

461,187

239,718

92 %

461,187

239,718

92 %

Operating highlights

Production:

Oil (bbls per day)

16,578

12,169

36 %

13,992

11,347

23 %

NGLs (bbls per day)

703

571

23 %

623

639

(3)%

Natural gas (mcf per day)

22,598

17,607

28 %

20,658

17,615

17 %

Total (boe per day) (6:1)

21,047

15,675

34 %

18,058

14,922

21 %

Average realized price (excluding hedges):

Oil ($ per bbl)

33.72

57.36

(41)%

55.88

52.44

7 %

NGL ($ per bbl)

38.28

52.41

(27)%

48.51

40.41

20 %

Natural gas ($ per mcf)

2.03

1.41

44 %

1.08

2.22

(51)%

Netback ($ per boe)

Petroleum and natural gas revenue

30.02

48.03

(37)%

46.21

44.23

4 %

Realized loss on financial contracts

(1.25)

(0.81)

54 %

(1.67)

(0.74)

126 %

Royalties

(3.86)

(5.62)

(31)%

(6.55)

(5.53)

18 %

Net operating expenses1

(15.70)

(13.85)

13 %

(14.76)

(13.62)

8 %

Transportation expenses

(1.53)

(1.21)

26 %

(1.50)

(1.41)

6 %

Operating netback1

7.68

26.54

(71)%

21.73

22.93

(5)%

G&A expense

(1.83)

(1.95)

(6)%

(2.01)

(1.94)

4 %

Interest expense

(2.60)

(2.28)

14 %

(2.47)

(1.94)

27 %

Adjusted funds flow1

3.25

22.31

(85)%

17.25

19.05

(9)%

Common shares outstanding, end of period

309,286

232,989

33 %

309,286

232,989

33 %

Weighted average basic shares outstanding

288,744

232,929

24 %

246,252

228,212

8 %

Stock option dilution

—%

—%

Weighted average diluted shares outstanding

288,744

232,929

24 %

246,252

228,212

8 %

1 This is a non-GAAP financial measure which is defined in the Non-GAAP Financial Measures section of this document.

2 The Company views this change calculation as not meaningful, or “nm”.

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 capacityat 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.

________________________

4 Calculated as $550 million, less reported bank debt of $408.6 million as per the December 31, 2018 Financial Statements of the Company

5 Production Replacement is calculated as the total organic reserves additions (ie. excluding acquisitions and dispositions) divided by annual production (excluding acquisitions and dispositions)

6 Reserve Life Index is calculated as total Company share reserves divided by the annualized fourth quarter actual production

7 See the Performance Measures section of this document for further details

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 SaskatchewanShaunavon 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.

________________________

8 See the drilling locations section of this document for further details.

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.

9 This is a non-GAAP financial measure which is defined in the Non-GAAP Financial Measures section of this document

RESERVES SUMMARY AND NET PRESENT VALUE

Gross Reserves(1)

Crude Oil
and NGLs

(Mbbl)(2)

Natural
Gas

(MMcf)(3)

Oil
Equivalent
Total
Reserves

(Mboe)

Before Tax NPV of Future Net
Revenue
(4) Discounted at

5%

($MM)

10%

($MM)

15%

($MM)

Proved:

Proved Producing

37,511

35,369

43,406

815

741

656

Proved Non-Producing

1,631

989

1,796

49

39

33

Proved Undeveloped

29,336

36,173

35,365

738

538

404

Total Proved

68,478

72,531

80,566

1,602

1,318

1,093

Probable

36,392

34,111

42,077

1,060

736

548

Total Proved Plus Probable

104,869

106,643

122,643

2,662

2,054

1,641

(1)

Amounts may not add due to rounding.

(2)

Includes light, medium, heavy and tight oil and natural gas liquids.

(3)

Includes conventional natural gas, solution gas and coal bed methane.

(4)

Total ADR (Abandonment, Decommissioning, Reclamation) is included in the reserves report, as it is best practice stated in the COGE Handbook.

FUTURE CAPITAL COSTS

Total Proved

Total Proved
Plus Probable

($MM)

($MM)

2019

113

127

2020

155

202

2021

166

192

2022

109

165

2023

64

107

Remaining

37

61

Total (Undiscounted)

644

854

Total (Discounted at 10%)

509

660

(1)

In addition to Future Development Costs, Future Capital Costs include an additional $103 million of

undiscounted maintenance capital ($54 MM discounted at 10%).

PERFORMANCE MEASURES

2018

Three Year Average

TP

TPP

TP

TPP

F&D ($/boe) (1)

$22.39

$22.99

$15.71

$19.84

FD&A ($/boe) (2)

$25.34

$20.97

$17.77

$12.77

FD&A Recycle Ratio (3)

0.92

1.12

1.28

2.49

Production Replacement (%) (4)

128%

133%

134%

131%

RLI (Years) (5)

10.5

16.0

10.8

16.9

(1)

2018 Finding and Development costs calculated using capital of $115 million plus changes in FDC of $69 million.

(2)

2018 Finding, Development and Acquisition costs calculated using capital of $448 million, plus total change in FDC of $265 million.

(3)

Recycle Ratio is calculated using the 2018 operating netback excluding realized gain (loss) on financial contracts10 of $23.40/boe divided by F&D. The Company’s 2018 operating netback includes only 2 months of contribution from the MBOG acquisition.

(4)

Production Replacement is calculated as the total organic reserves additions (ie. excluding acquisitions and dispositions) divided by annual production (excluding acquisitions and dispositions).

(5)

Reserve Life Index is calculated as total Company share reserves divided by the annualized fourth quarter actual production.

NET ASSET VALUE

TP

TPP

Reserve Value NPV10 BT ($MM) (1)

1,318

2,054

Undeveloped Land and Seismic ($MM) (2)

134

134

Net Debt ($MM)

(461)

(461)

Total Net Assets ($MM)

990

1,726

Basic Shares Outstanding (MM)

309.3

309.3

Fully Diluted Shares Outstanding (MM)

318.5

318.5

Estimated NAV per Basic Share ($/share)

$3.20/sh

$5.58/sh

(1)

Includes $148 MM (TP) and $165 MM (TPP) of costs for changes due to the COGE Handbook to include operating expenditures for non-producing properties and abandonment liabilities.

(2)

Internally estimated as $101 MM for non-reserve assigned land and $33 MM for seismic data.

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.

________________________

10 This is a non-GAAP financial measure which is defined in the Non-GAAP Financial Measures section of this document.

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.


Share This:



More News Articles


New SHOWCASE Directory Companies

 

U of C Executive Education
Kicker Video
Alliance Borealis Canada Corp.
Millennium Directional
DRYAIR Manufacturing Corp.
John Brooks
RAE Engineering
Stress Engineering