Surge Announces Upward Revision to 2014 Guidance, and 11 Percent
Increase in Dividend
CALGARY, June 5, 2014 /CNW/ - Surge Energy Inc. ("Surge" or the
"Company") (TSX: SGY) and Longview Oil Corp. ("Longview") (TSX: LNV)
are pleased to announce that they have completed their previously
announced business combination whereby Surge has acquired all of the
issued and outstanding common shares of Longview pursuant to an
arrangement under the Business Corporations Act (Alberta) (the "Arrangement"). Surge is one of the best positioned
intermediate light and medium gravity crude oil asset growth and
dividend paying companies in Canada, with high quality, low decline,
high netback crude oil assets strategically focused in just three
operating areas, namely the Williston Basin, Central Alberta and NW
Under the Arrangement, which was approved by Longview shareholders by a
99.9% majority, Longview shareholders received 0.975 of a Surge common
share for each Longview common share resulting in the issuance of
approximately 38 million Surge common shares (Surge share price of
$6.14 at March 31, 2014). In addition, Surge assumed $155 million of
Longview net debt (including transaction costs). Accordingly, the
transaction implies a value of approximately $430 million for Longview,
including Surge's previously announced acquisition of 9.3 million (19.8
percent) Longview common shares at a price of $4.45 per share. It is
anticipated that the Longview common shares will be delisted from
trading on the TSX in the next few days.
As a result of the highly accretive Longview acquisition, Surge's Board
of Directors have now approved an 11 percent increase in the Company's
annual dividend from $0.54 per share per year ($0.045 per share per
month) to $0.60 per share per year ($0.05 per share per month),
effective for Surge's next declared dividend.
STRATEGIC, ACCRETIVE TRANSACTION
The Longview acquisition fits squarely within Surge's defined operating
strategy of investing growth capital to acquire high quality, operated,
light and medium gravity crude oil reservoirs, with large original oil
in place ("OOIP"1) and low recovery factors. Surge now has over 1.9 billion barrels of
light and medium gravity OOIP under the Company's ownership and
management, more than 1,000 lower risk development drilling locations,
and a portfolio of high quality waterflood projects.
The Longview acquisition also fits very well with Surge's
dividend-paying growth business model, as Longview's high netback
properties possess a low annual decline of 19 percent, which provides
significant annual free cash flow to Surge for distribution to
Longview's assets fit seamlessly into Surge's core areas, including: the
Midale Marly light oil play trend in SE Saskatchewan; and in Central
Alberta, the Sparky medium gravity oil play trend as well as Longview's
several large oil resource pools categorized by high netbacks and low
decline production. This complementary production base creates an
excellent operational platform for additional drilling and waterflood
growth on these proven trends. With the seamless fit of the Longview
assets into Surge's core areas, Surge expects to see substantial
operating cost reductions on the Longview properties.
The Longview acquisition is highly accretive to Surge shareholders on
all metrics, including funds flow, production and reserves per share
basis. In particular, this transaction was 22 percent accretive to Surge's
proved plus probable reserves per share, based on each parties'
December 31, 2013 independent engineering reports.
As a result of the closing of the Arrangement, based upon the parties'
December 31, 2013 independent engineering reports, Surge's net asset
value per share has now increased 18 percent - from $6.95 at December
31, 2013, to $8.23 per share today2.
The following sets forth the metrics with respect to the acquisition of
1. Purchase Price:
The purchase price for Longview is $430 million (the "Purchase Price"),
which is comprised of the following:
a) 38 million shares of Surge (Surge share price of $6.14 as at the
time of the announcement)
b) $155 million net debt assumption; and
c) 9.3 million shares of Longview purchased at $4.45 per share;
2. Long Life Oil Reserves:
Longview's assets provide independently engineered Proven and Probable
(P+P) reserves of: 37.6 million boe (80 percent oil and NGLs).
Reserve acquisition metrics for the Longview acquisition are: $11.41 per
Based on current production, the Longview reserves have a long reserve
life index of approximately 18 years (P+P).
3. Light/Medium Oil Production:
Current production relating to the Longview acquisition is greater than
5,700 boepd, comprised of more than 80% oil.
On this basis, Surge is paying approximately $75,250 per flowing barrel
of production with respect to the acquisition.
4. Low Decline:
The Longview properties have an estimated annual corporate production
decline rate of 19 percent. Accordingly, Surge now has an estimated 22
percent annual corporate decline rate, one of the lowest in its peer
group in Canada.
5. Annual Funds Flow:
Annual funds flow for Longview based on guidance pricing (as set out
below) and using current production levels is estimated to be $90
Based on current production and using guidance pricing (as set out
below), Surge estimates that the Company is paying approximately 4.8
times annualized funds flow for Longview.
6. Cost Savings and Synergies:
Surge anticipates achieving substantial operating cost reductions on the
Longview properties. In addition, Surge is now forecasting combined
general and administrative expenses of $1.90/boe, a decrease of five
percent from the Company's previously released guidance on $2.05/boe
7. Exciting Upside:
Surge has identified 166 gross (115 net) low risk development drilling
locations on the Longview lands, the most significant of which are an
additional 60 locations in the very active, light oil, Midale trend in
south east Saskatchewan, as well as the potential associated with 83
sections of fee lands on this trend.
8. Producing Infrastructure:
The Longview acquisition includes key producing infrastructure,
including batteries, pipelines, and waterflood facilities.
9. Undeveloped Land:
Longview has approximately 143,600 net acres of undeveloped land, of
which 50,800 acres (83 sections) are fee lands located in south east
10. Operatorship and High Working Interests:
The Longview production is 83 percent operated, and the average working
interest in the assets is greater than 75 percent.
UPWARD REVISION TO GUIDANCE
The following sets forth Surge's upwardly revised guidance estimates.
Surge New Guidance
2014E Exit Production (boe/d)
21,350 (84% Oil/NGLs)
16,550 (84% Oil/NGLs)
>15 years based on 2014E exit production
>12.5 years based on 2014E Q1 production
2014E Capital Spending
2014E Wells Drilled
63/40.5 gross/net wells3
39/37.1 gross/net wells
Surge 2014E Guidance4,5,6
Previous 2014E Guidance4,7,8
Annualized Funds from Operations ("FFO")9
$326 million ($1.50 per share)
$244 million ($1.38 per share)
2014E Operational Netback
2014E Cash Flow Netback
Basic Shares Outstanding
Basic Payout Ratio 2014E
"All-in" Payout Ratio
2014E Exit Net Debt
Annualized Net Debt to FFO10
In accordance with Surge's upwardly revised guidance set forth above,
with a low "all-in" payout ratio of less than 90 percent, the Company's
debt will be reduced by a forecast of more than $31 million on an
INCREASE DIVIDEND, DIRECTOR ADDITION AND OUTLOOK
As a result of the accretive Longview acquisition, Surge's Board of
Directors has approved an 11 percent increase in the Company's annual
dividend from $0.54 per share per year ($0.045 per share per month) to
$0.60 per share per year ($0.05 per share per month).
In conjunction with the Longview transaction, Surge has appointed Mr.
Daryl Gilbert, a current director of Longview, to the Board of
Directors of Surge.
For the remainder of 2014 Surge will continue to focus growth capital
towards its high quality, large OOIP, light and medium gravity crude
With world crude oil prices well over US $100 per barrel WTI, the low
Canadian dollar, low crude oil differentials, increased North American
natural gas prices and recovering equity markets, Surge management are
very positive about the present industry fundamentals in Canada. We are
also excited about Surge's relative positioning in this marketplace.
Today, Surge has one of the highest-quality asset bases of any light oil
company in Canada, with over 1.9 Billion barrels of OOIP under its
ownership and management. Surge has one of the lowest corporate
declines in the divco peer group at 22 percent, and the lowest, most
sustainable, "all-in" payout ratio at less than 90%.
Surge has high, top decile netbacks, and a very low, lean cost
structure. The Company has an excellent balance sheet with over $200
million of room on Surge's bank lines. Surge's bank line has now
increased to $725 million. Management also has a disciplined hedging
strategy designed to protect cash flows for the Company's dividend, and
its capital spending program.
Surge currently has more than a 10 year, low risk development drilling
inventory, together with a suite of excellent waterflood projects.
Management's low-risk business model and operating strategy calls for
4% per share annual growth in reserves, production and cashflow, plus a solid, sustainable, increasing dividend which is currently at 8.6%
annually. In addition, Surge has a very low "all-in" sustainability
ratio, which reduces debt each year and increases net asset value.
Management's goal is to deliver a 12 to 14 percent annualized total rate
of return - with an increasing, compounding dividend - over the long
Macquarie Capital Markets Canada Ltd acted as exclusive financial
advisor to Surge with respect to the transaction. McCarthy Tétrault LLP
acted as legal advisor to Surge with respect to the transaction.
Scotia Capital Inc., GMP Securities L.P. and National Bank Financial
acted as strategic advisors to Surge with respect to the transaction.
BMO Capital Markets acted as financial advisor, and Burnet, Duckworth &
Palmer LLP is acted as legal advisor to Longview with respect to the
Surge is an oil-weighted production and development company with high
quality, large OOIP, crude oil reservoirs. Management is focused on
delivering to its shareholders solid per share organic growth,
sustainable monthly dividends, and further growth through accretive
acquisitions of additional elite oil reservoirs. For further
information visit our website at www.surgeenergy.ca.
FORWARD LOOKING STATEMENTS:
This press release contains forward-looking statements. More
particularly, this press release includes, without limitation,
forward-looking statements concerning: (i) anticipated operating cost
reductions on the Longview properties; (ii) Surge's number of drilling
locations and drilling, development and waterflood opportunities, (iii)
estimated production decline rates, (iv) Longview's estimated annual
funds flow; (v) the estimated 2014 exit production rate of Surge; (vi)
estimated 2014 capital expenditures and drilling activity; (vii)
estimated Q4 2014 annualized funds flow from operations, (viii)
estimated 2014 operational and cash flow netback, (ix) estimated 2014
exit net debt, * estimated ratio of 2014 net debt to Q4 2014
annualized cash flow, (xi) forecast annual reductions in Surge's debt,
(xii) targeted rates of growth in reserves, production and cash flow,
(xiii) the sustainability of and potential for increases in Surge's
dividend, and (xiv) targeted annualized rates of total return.
The forward-looking statements contained in this press release are based
on certain key expectations and assumptions made by Surge, including,
but not limited to, expectations and assumptions concerning the success
of future drilling, development and completion activities, the
performance of existing wells, the performance of new wells, the
viability of waterflood projects, the availability and performance of
facilities and pipelines, the geological characteristics of Surge's
properties, the successful application of drilling, completion and
seismic technology, prevailing weather conditions, commodity prices,
royalty regimes and exchange rates, the application of regulatory and
licensing requirements and the availability of capital, labour and
services. 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 uncertainties
resulting from potential delays or changes in plans with respect to
exploration or development projects or capital expenditures. Certain of
these risks are set out in more detail in Surge's Annual Information
Form which has 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.
Note: 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 means barrel of oil equivalent per
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.
1 Original Oil in Place (OOIP) is the equivalent to Discovered Petroleum
Initially In Place (DPIIP) for the purposes of this press release.
DPIIP is defined as quantity of hydrocarbons that are estimated to be
in place within a known accumulation, plus those estimated quantities
in accumulations yet to be discovered. There is no certainty that it
will be commercially viable to produce any portion of the resources. A
recovery project cannot be defined for this volume of DPIIP at this
time, and as such it cannot be further sub-categorized.
2 Calculated based on the before tax net present value of combined
reserves, discounted at 10%, plus the estimated value of undeveloped
land and less current net debt and working capital deficiency.
3 Includes 20 farmed out Viking locations at an average net working
interest of 20%.
4 Management uses funds from operations (cash flow from operations before
changes in non-cash working capital, legal settlement expenses,
transaction costs and current tax on disposition) to analyze operating
performance and leverage. Funds from operations as presented does not
have any standardized meaning prescribed by IFRS and, therefore, may
not be comparable with the calculation of similar measures for other
5 Based on a Surge share price of $7.00
6 Based on 2014 Edmonton Par $101.60/bbl; 2014 AECO gas $4.90/mcf and
a 2014 CAD/USD exchange rate of $0.91.
7 Based on 2014 Edmonton Par $96.95/bbl; 2014 AECO gas $3.69/mcf and
a 2014 CAD/USD exchange rate of $0.91.
8 Based on a Surge share price of $6.30.
9 Assumes a four percent growth rate on exit 2014 production of 21,350
boe/d and the annualized Q4 2014 FFO of $313 million.
10 Assumes the annualized FFO per note 9, including repayment of debt with
excess cashflow of $31 million. This results in ending debt of $481
SOURCE: Surge Energy Inc.
For further information:
Paul Colborne, President & CEO
Surge Energy Inc.
Phone: (403) 930-1507
Fax: (403) 930-1011
Max Lof, CFO
Surge Energy Inc.
Phone: (403) 930-1021
Fax: (403) 930-1011