Surge Energy Inc. closes previously announced core area crude oil acquisition, conversion of subscription receipts, upwardly revised guidance and increased dividend

/NOT FOR DISTRIBUTION TO U.S. NEWSWIRE SERVICES OR FOR DISSEMINATION IN THE UNITED STATES/

CALGARY, Dec. 3, 2013 /CNW/ - Surge Energy Inc. ("Surge" or the "Company") (TSX: SGY) is pleased to announce that it has now closed the previously announced acquisition (the "Acquisition") of a high quality, low decline, operated, crude oil producing asset strategically located near Wainwright in the Company's core area of Central Alberta (the "Assets").

The Assets include over 980 barrels per day of primarily medium gravity crude oil production (with a historical nine percent annual decline), producing from the Sparky Formation. The purchase price for the Assets was $76.8 million.

As a result of the accretive Acquisition, together with better than anticipated operational and drilling results, Surge's Board of Directors has now approved an increase in the Company's annual dividend of four percent from $0.50 per share per year ($0.04166 per share per month), to $0.52 per share per year ($0.04333 per share per month).  This increased dividend is to be paid on January 15, 2014 in respect of December, 2013 production, for the shareholders of record on December 31, 2013.

The Acquisition comprises an elite, operated, low decline crude oil property strategically located within Surge's core operating area of Central Alberta. The production is focused in a large, medium gravity crude oil Sparky reservoir - with over 210 million barrels of estimated original oil in place ("OOIP")1.

The Assets are under waterflood and currently possess a very low annual decline of nine percent, which is expected to provide significant annual free cash flow to Surge. The Acquisition fits with the Company's focused business strategy and with Surge's modest growth/dividend business model.

Surge management has identified significant upside with respect to the Assets, primarily from waterflood optimization and infill drilling.

As a result of the closing of the Acquisition, Surge now has over 1.3 Billion barrels estimated of light and medium gravity OOIP under the Company's ownership and management.

Following the Acquisition, Surge has again revised upward the Company's 2013 exit guidance and 2014 full year guidance, as set forth below.

Operational:   

  Surge 2014E Guidance2 3
2013E Exit Production 15,000boe/d(83% Oil/NGLs)
2014E Average Production (boe/d) 15,250boe/d(83% Oil/NGLs)
2014E Exit Production (boe/d) 15,500 (83% Oil/NGLs)
2P Reserves4 69.7 mmboe
RLI (based on 2013E exit production) >12.5 years
2014E Capital Spending $112 million
2014E Wells Drilled 48 wells
2014 Decline 24%

Financial:

  Surge 2014E Guidance2 3
2014E Funds from Operations ("FFO") $214 ($1.29 per share)
2014E Operational Netback $42.78/boe
2014E Cash Flow Netback $38.51/boe
Basic Shares Outstanding 167 million
Annual Dividend $87 million
Yield5 7.9%
Basic Payout Ratio 2014E 40.9%
"All-in" Payout Ratio 93.8%
2014E Exit Net Debt $290 million
2014E Net debt / 2014 FFO 1.35x
Bank Line $470 million

CONVERSION OF SUBSCRIPTION RECEIPTS

The purchase price for the Acquisition was financed, in part, by the net proceeds pursuant to the previously announced $63,273,000 equity financing of Subscription Receipts completed by Surge on November 28, 2013. With the closing of the Acquisition, Surge confirms that the escrow release condition of the Subscription Receipt Agreement dated November 28, 2013 has occurred and therefore, each outstanding Subscription Receipt of Surge has been automatically exchanged, without payment of additional consideration or further action, for one Common Share of Surge.

Trading in the Subscription Receipts on the Toronto Stock Exchange ("TSX") has been halted and will remain halted until the close of business today, at which time the subscription receipts will be de-listed from the TSX.  The Common Shares issued on exchange of the Subscription Receipts have commenced trading on the TSX.

Neither the Subscription Receipts nor the Common Shares have been nor will be registered under the United States Securities Act of 1933, as amended (the "Securities Act") and may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements of the Securities Act and applicable state securities laws.  This press release shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of the securities in the United States or any jurisdiction in which such offer, solicitation or sale would be unlawful.

ADVISOR

Macquarie Capital Markets Canada Ltd. acted as financial advisor to Surge with respect to the Acquisition.

FORWARD LOOKING STATEMENTS:

This press release contains forward-looking statements.  More particularly, it contains forward-looking statements concerning: (i) potential development opportunities and drilling locations associated with the Acquisition, (ii) the timing, amount and sustainability of dividends, (iii) primary and secondary recovery potentials and implementation thereof, (iv) oil & natural gas production growth during 2013 and 2014, (v) planned drilling, development and waterflood activities, (vi) estimated 2014 average and exit rates of production, (ix) estimated 2014 capital expenditures, wells drilled, decline rates, funds from operations, operating netback, cash flow netback and payout ratio, estimated 2014 year end net debt and net debt to funds from operations ratio; and (xi) the anticipated exceeding by Surge of the previously estimated 2013 exit rate of production.

The forward-looking statements contained in this press release are based on certain key expectations and assumptions made by Surge, including 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.

FINANCIAL OUTLOOKS:

The estimates of 2014 year end net debt, 2014 funds from operations and 2014 operating netback and cash flow netback contained in this press release are financial outlooks within the meaning of applicable securities laws.  These financial outlooks have been prepared by management of Surge to provide an outlook of Surge's anticipated funds from operations and netbacks for a full year of operations with its current assets and based on management's expectations and assumptions as to a number of factors, including commodity pricing, production, operating expenses and royalties.  Readers are cautioned that this information may not be appropriate for any other purpose.   Management does not have firm commitments for all of the costs, expenditures, prices or other financial assumptions used to prepare the financial outlooks or assurance that such results will be achieved.  The actual results of Surge will likely vary from the amounts set forth in the financial outlooks and such variation may be material.

Surge and its management believe that the financial outlooks have been prepared on a reasonable basis, reflecting the best estimates and judgments, and represent, to the best of management's knowledge and opinion, Surge's expected expenditures and results of operations following completion of the Acquisitions. However, because this information is highly subjective and subject to numerous risks, including the risks discussed under the note regarding Forward Looking Statements, it should not be relied on as necessarily indicative of future results. Except as required by applicable securities laws, Surge undertakes no obligation to update this information.

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 day.

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 Based on 2014 Edmonton Par $90.45/bbl; 2014 AECO gas $3.69/mcf and a 2014 CAD/USD exchange rate of $0.98.
3 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 entities.
4 Based on independent and internally generated engineering reports as of December 31, 2012 or later.
5 Based on a Surge share price of $6.55.

 

 

 

SOURCE: Surge Energy Inc.

For further information:

Paul Colborne, President & CEO     
Surge Energy Inc.
Phone: (403) 930-1507
Fax: (403) 930-1011
Email: pcolborne@surgeenergy.ca   

Max Lof, CFO
Surge Energy Inc.
Phone: (403) 930-1021
Fax: (403) 930-1011
Email: mlof@surgeenergy.ca


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