Surge Energy closes previously announced core area light 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, Feb. 14, 2014 /CNW/ - Surge Energy Inc. ("Surge" or the "Company") (TSX: SGY) announced that it has closed the previously announced acquisition (the "Acquisition") of a high quality, low decline, operated, light oil producing asset strategically located in the Company's core area of Southeast Saskatchewan (the "Assets").

The Assets include an estimated annualized 1,250 boepd (97 percent oil) of high netback light crude oil production. The purchase price for the Assets was $109 million.

As a result of the accretive Acquisition, Surge's Board of Directors has now approved an increase in the Company's annual dividend of four percent from $0.52 per share per year ($0.04333 per share per month), to $0.54 per share per year ($0.045 per share per month). It is expected that this increased dividend will be paid on April 15, 2014 in respect of March, 2014 production, for the shareholders of record on March 31, 2014.

The Acquisition comprises elite, operated, low decline light oil assets strategically located within Surge's core operating area of SE Saskatchewan. The production is focused in several large, high quality, light oil reservoirs - with combined original oil in place ("OOIP")1 of over 240 million barrels.

The Assets possess a low annual decline of less than 18 percent, which provides significant annual free cash flow to Surge. The Acquisition fits very well with the Company's focused business strategy, and with Surge's dividend-paying / modest growth business model.

Surge management has identified significant upside with respect to the Assets, primarily from infill and stepout development drilling, and optimizations.

As a result of the closing of the Acquisition, Surge now has over 1.4 Billion barrels estimated of light and medium gravity OOIP under the Company's ownership and management.

The following sets forth Surge's upwardly revised guidance for full year 2014 estimates.

Operational: 

  Surge 2014E Guidance
(Prior to the Acquisition)2
Surge 2014E Guidance
(After the Acquisition and the Equity Financing)3
2014E Average Production (boe/d) 15,250 (83% Oil/NGLs) 16,125 (84% Oil/NGLs)
2014E Exit Production (boe/d) 15,500 (83% Oil/NGLs) 16,550 (84% Oil/NGLs)
2P Reserves4 69.7 mmboe 74.3 mmboe
RLI (based on 2013E exit production) >12.5 years >12.5 years
2014E Capital Spending $114.5 million $116 million
2014E Wells Drilled (gross/net) 38 / 36.1 wells 39 / 37.1 wells
2014 Decline 24% 24%

Financial:

  Surge 2014E Guidance
(Prior to the Acquisition)2
Surge 2014E Guidance
(After the Acquisition and the Equity Financing)3
2014E Funds from Operations ("FFO")5 $221 million ($1.33 per share) $244 million ($1.38 per weighted average share)
2014E Operational Netback $44.04/boe $45.67/boe
2014E Cash Flow Netback $39.69/boe $41.38/boe
Basic Shares Outstanding 167 million 179 million
Annual Dividend $87 million $96 million
2014E Dividend $0.52 per share $0.54 per share
Yield6 8.3% 8.6%
Basic Payout Ratio 2014E 39.6% 40.3%
"All-in" Payout Ratio 92.1% 88.4%
2014E Exit Net Debt $287 million $309 million
2014E Exit Net Debt / FFO <1.39x <1.28x

As a result of closing this high quality, low decline, light oil, core area acquisition, Surge has now:

  • increased the Company's reserves, production and cash flow per share (see above guidance);
  • significantly improved Surge's peer group leading "all-in" sustainability ratio from 92.1% to 88.4% (vs. an industry average of approximately 118%);
  • increased the Company's dividend per share by 4%;
  • increased Surge's operating netback to $45.67 per boe;
  • increased the Company's net OOIP to more than 1.4 billion barrels;
  • lowered corporate declines to less than 24%;
  • increased the Company's light oil production in the Williston Basin to over 3,200 bopd; and
  • expanded Surge's drilling inventory to over 700 development locations.

CONVERSION OF SUBSCRIPTION RECEIPTS

The purchase price for the Acquisition was financed, in part, by the net proceeds pursuant to the previously announced equity financing of Subscription Receipts completed by Surge on February 4, 2014. Gross proceeds from the financing total $80,506,440, including the Underwriter's exercised over-allotment option of $10,500,840 in additional proceeds. With the closing of the Acquisition, Surge confirms that the escrow release condition of the Subscription Receipt Agreement dated February 4, 2014 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.

FORWARD LOOKING STATEMENTS:

This press release contains forward-looking statements.  More particularly, it contains forward-looking statements concerning: (i) targeted growth in reserves, production and cash flow per share, (ii) the sustainability of dividends, (iii) potential growth through acquisitions, (iv) ultimate recovery factors at certain of Surge's properties, (v) planned drilling, development and waterflood activities, (vi) the potential number of drilling locations at certain of Surge's properties, (vii) estimated 2014 average production rate, (viii) estimated 2014 exit rate 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; (xi) potential development opportunities and drilling locations associated with the Acquisition, expectations and assumptions concerning the success of future drilling and development activities, the performance of existing wells, the performance of new wells, the successful application of technology and the geological characteristics of the Acquisition, (xii) the timing and amount of future dividend payments, (xiii) debt and bank facilities, (xiv) primary and secondary recovery potentials and implementation thereof, (xv) decline rates, (xvi) funds from operations, (xvii) operating and cash flow netbacks, and (xviii) realization of anticipated benefits of acquisitions.

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 Acquisition. 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.

In this press release: (i) mcf means thousand cubic feet; (ii) mcf/d means thousand cubic feet per day (iii) mmcf means million cubic feet; (iv) mmcf/d means million cubic feet per day; (v) bbls means barrels; (vi) mbbls means thousand barrels; (vii) mmbbls means million barrels; (viii) bbls/d means barrels per day; (ix) bcf means billion cubic feet; * mboe means thousand barrels of oil equivalent; and (xi) mmboe means million barrels of oil equivalent.

NO OFFER IN THE UNITED STATES

This news release does not constitute an offer to sell or a solicitation of an offer to buy any of the securities in the United States. The securities have not been and will not be registered under the United States Securities Act of 1933, as amended (the "U.S. Securities Act") or any state securities laws and may not be offered or sold within the United States or to U.S. Persons unless registered under the U.S. Securities Act and applicable state securities laws or an exemption from such registration is available.

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 $93.60/bbl; 2014 AECO gas $3.69/mcf and a 2014 CAD/USD exchange rate of $0.94.
3 Based on 2014 Edmonton Par $96.95/bbl; 2014 AECO gas $3.69/mcf and a 2014 CAD/USD exchange rate of $0.91.
4 Based on independent and internally generated engineering reports as of December 31, 2012 or later.
5 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.
6 Based on a Surge share price of $6.30.

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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