Surge Energy Inc. Announces 2015 Year End Reserves; Operational Update; and New Net Asset Value of $4.88 per Share

CALGARY, Feb. 8, 2016 /CNW/ - Surge Energy Inc. ("Surge" or the "Company") announced the results of its independent reserves evaluation (the "Surge Sproule Report") effective December 31, 2015 as prepared by Sproule Associates Limited ("Sproule").

Surge delivered record results with respect to the Company's 2015 year end reserves finding and development costs.

Surge's focused operating strategy of utilizing capital to acquire, exploit and waterflood high quality reservoirs continues to provide excellent results.  A large percentage of Surge's current production base is comprised of high netback, large original oil in place ("OOIP"), crude oil reservoirs - with top tier development production efficiencies.  These factors have contributed to a continued reduction in Surge's annual corporate decline rate to 19 percent today.

Excellent drilling results, reductions in future development costs, and strong positive technical revisions across the Company's high quality asset base have allowed Surge to deliver the lowest "all-in" finding and development costs in the Company's six year history.

HIGHLIGHTS

  • Surge's "all-in" proved plus probable finding and development costs (including changes in future development capital ("FDC")) for 2015 were $6.08 per boe – for predominantly light and medium gravity crude oil;
  • Surge's "all-in" proved plus probable producing finding and development costs for wells drilled in 2015 were $7.95 per boe;
  • Year end 2015 reserves totaled 85.8 million barrels (78 percent oil and NGL's) of proved plus probable reserves, which provides a reserve life index of greater than 16 years based on the Company's budgeted 2016 average production rate of 14,000 boepd;
  • Surge's annual corporate decline has been confirmed by the Company's independent reserve engineering firm to be 19 percent for proved developed producing and probable producing reserves;
  • Based on Surge's 2015 unhedged operating netback of $16.63 per boe, the Company generated a recycle ratio of 2.7 times for 2015 proved plus probable reserve additions;
  • Utilizing Surge's 2015 hedged operating netback of $23.81 per boe, the Company generated a recycle ratio of 3.9 times for 2015 proved plus probable reserve additions;
  • In the first half of 2015, Surge closed the sale of several producing oil and gas properties located in Saskatchewan and Manitoba for proceeds of C$465 million to strategically position the Company's balance sheet for a "lower for longer" scenario for crude oil prices. Surge sold approximately 5,200 boepd and 24.9 million boe of proven plus probable reserves, at metrics of approximately $90,000 per flowing boepd, and $18.69 per boe for proved plus probable reserves;
  • Surge's December 31, 2015 net asset value ("NAV")1 per share is $4.88 - utilizing the much lower crude oil price deck posted by Surge's independent engineering evaluators as set forth herein; and
  • Over 55 percent of Surge's December 31, 2015 total reserve value is in the proved developed producing and probable producing categories.

2015 YEAR END RESERVES

Highlights

  • Surge drilled 15 wells in 2015, at a capital cost of $36.6 million, adding 4.6 million boe - providing a simple finding and development cost of $7.95 per boe (proved developed producing and probable producing reserves);
  • Waterflood and improved recovery factors added 1.4 million boe (total proved plus probable reserves);
  • Surge now books 224 total net undeveloped locations in the Company's proved plus probable reserves category - out of a large inventory of 757 net locations. Of the booked locations, 59 are in the Upper Shaunavon play (an increase of 22 net locations) as a result of Surge's very successful 2015 development drilling program; and
  • Total proved plus probable FDC2 is $378 million.

The following table summarizes the Company's reserves evaluated by independent reserves evaluators at December 31, 2015.  The Surge Sproule Report was prepared in accordance with definitions, standards and procedures contained in the Canadian Oil and Gas Evaluation Handbook ("COGE Handbook") and National Instrument 51-101 Standards of Disclosure for Oil and Gas Activities ("NI 51-101"). 






Summary of Reserves3






Oil and

NGLs

(mbbls)

Gas

(mmcf)

Combined

(mboe)

Future Development Capital (FDC)

 ($M)





Discounted @

10%

Undiscounted

Proved Developed Producing

24,121

36,369

30,182

1,122

1,186

Proved Developed Non-Producing

1,115

3,289

1,663

2,107

2,353

Proved Undeveloped

15,104

34,955

20,930

246,951

313,097

Total Proved

40,340

74,612

52,775

250,180

316,636

Probable Additional

26,559

39,045

33,067

128,144

169,527

Total Proved plus Probable

66,899

113,658

85,842

378,324

486,163








Summary of Before Tax Net Present Values (Forecast Pricing)



As at December 31, 2015






BEFORE TAX NET PRESENT VALUE ($M)


Discount Rate

DESCRIPTION

0%

5%

10%

15%

20%

Proved Developed Producing

839,764

617,465

489,636

406,465

348,017

Proved Developed Non-Producing

38,564

31,004

25,435

21,251

18,040

Proved Undeveloped

446,255

296,273

202,178

140,885

99,408

Total Proved

1,324,583

944,742

717,249

568,601

465,465

Probable Additional

1,166,187

647,234

420,354

297,120

221,488

Total Proved plus Probable4

2,490,770

1,591,976

1,137,603

865,721

686,953

Per basic share

11.27

7.20

5.15

3.92

3.11

The reserves evaluation was based on Sproule forecast pricing and foreign exchange rates at January 1, 2016 as outlined below. The Sproule January 1, 2016 forecast pricing for West Texas Intermediate ("WTI") oil and natural gas at AECO are US$45.00 per bbl and C$2.25 per MMBtu respectively.






Price Forecast 

Edmonton Light Crude Oil

WTI Oil

AECO Natural Gas

Foreign Exchange Rate


(CDN$/bbl)

 (US$/bbl)

(CDN$/mmbtu)

(US$/CDN$)

2016

55.20

45.00

2.25

0.75

2017

69.00

60.00

2.95

0.80

2018

78.43

70.00

3.42

0.83

2019

89.41

80.00

3.91

0.85

2020

91.71

81.20

4.20

0.85

2021

93.08

82.42

4.28

0.85

2022

94.48

83.65

4.35

0.85

2023

95.90

84.91

4.43

0.85

2024

97.34

86.18

4.51

0.85

2025

98.80

87.48

4.59

0.85

2026

100.28

88.79

4.67

0.85

Thereafter

1.5%/year

1.5%/year

1.5%/year

0.85






FINDING AND DEVELOPMENT COSTS AND CAPITAL PROGRAM EFFICIENCY

In 2015 Surge enjoyed strong technical revisions across the Company's high quality, waterflooded, large OOIP, light/medium gravity crude oil asset base. Layered in on top of this low base decline, Surge also delivered top tier drilling production efficiencies (with excellent rates of return) at the Company's three core properties at Shaunavon, Valhalla and Sparky.

Surge also benefited from a significant reduction in all service costs with respect to drilling and completions. This has been reflected in the reduction of future development costs assigned to booked drilling locations.

Operationally, Surge successfully executed two mono-bore, Sparky development wells at Eyehill. The lower well costs associated with this well design were incorporated in the estimate of FDC for all of Surge's Sparky locations.

Based on the evaluation of our petroleum and natural gas reserves prepared in accordance with NI 51-101 by our independent reserve evaluators, the historical efficiency of our capital programs is summarized as follows:








Five Year


2015

2014

Weighted




Average

Excluding Future Development Costs




Proved ($/boe)





F&D costs5

$14.03

$23.99

$20.71


FD&A costs6

N/A

$22.88

$25.25

Proved plus probable ($/boe)





F&D costs5

$15.33

$29.61

$15.70


FD&A costs6

N/A

$15.97

$17.65

Proved plus Probable Recycle ratio





F&D costs5

1.6x

1.5x

2.3x


FD&A costs6

N/A

2.7x

2.0x

Including Future Development Costs2




Proved ($/boe)





F&D costs5

$6.67

$22.57

$26.47


FD&A costs6

N/A

$26.66

$28.37

Proved plus probable ($/boe)





F&D costs5

$6.08

$25.99

$22.68


FD&A costs6

N/A

$19.55

$21.15

Proved plus Probable Recycle ratio7





F&D costs5

3.9x

1.7x

1.6x


FD&A costs6

N/A

2.2x

1.7x





Operating netback per boe7

$23.81

$43.18

$35.51

OPERATIONAL UPDATE

In the first quarter of 2016 Surge budgeted for the drilling of three wells, and the completion of the Company's new pipeline/compression project at Valhalla in NW Alberta.

At Shaunavon, Surge has drilled two 100 percent operated infill wells into the Upper Shaunavon formation. Both of these wells have been completed with multi-stage frac's and are flowing oil wells - producing well above Surge's type curve.

At Valhalla, Surge drilled a 100 percent working interest Doig infill well at the northern extension of the Company's 160 million barrel OOIP, operated light oil pool. The well was drilled to 1,100 meters in horizontal length, and will be completed in the next few days with 17 frac stages. The well will be on production in early February.

Based on these continued excellent development drilling results, Surge anticipates adding over 1,200 bopd of light/medium net crude oil production from the first quarter of 2016 drilling program for a total capital expenditure of less than $6.9 million.

The Valhalla pipeline/compression project will be completed by the end of February, 2016 and will allow Surge to lower the Valhalla field pressures significantly. This project will also allow Surge to take up to 14 mmcf/d of associated sweet gas at Valhalla to nearby sweet plants – lowering the Company's processing fees from $1.25/mcf to $0.60/mcf, and substantially reducing downtime at this core asset.

NEW NET ASSET VALUE

In the third quarter of 2015 Surge provided shareholders with an estimate of the Company's NAV of $4.64 per share – utilizing Sproule's lower third quarter 2015 price deck for crude oil and natural gas.

Surge's new NAV, as of December 31, 2015, is estimated to be $4.88 per share – utilizing a much lower price deck than that used by Sproule in the third quarter of 2015.

Surge's December 31, 2015 detailed NAV calculation is set forth below:


NAV ($M except share amounts)

Proved Plus Probable Reserve Value NPV10 BT (incl. FDC)

$

1,137,614

Undeveloped Land and Seismic

$

105,977

Estimated Net Debt (unaudited)

$

(164,000)

Total Net Assets

$

1,079,591



Basic Shares Outstanding (000's)


221,033

Fully Diluted Shares Outstanding (000's)


227,051




Estimated NAV per Basic Share

$

4.88

Estimated NAV per Fully Diluted Share

$

4.75

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.

DISCLAIMERS

Unaudited Financial Information
Certain financial and operating information included in this press release for the quarter and year ended December 31, 2015, such as finding and development costs, production information, operating netbacks, recycle ratios and net asset value calculations are based on unaudited financial results for the year ended December 31, 2015 and are subject to the certain limitations as discussed under forward-looking statements outlined at the end of this news release.  These estimated amounts may change upon completion of the audited financial statements for the year ended December 31, 2015 and those changes may be material.

Per share information is based on the total common shares outstanding, as at December 31, 2015.

For certain calculations, Management used an estimate of $76.7 million for total capital expenditures for 2015 including acquisitions and dispositions.

Information Regarding Disclosure on Oil and Gas Reserves
The reserve data provided in this news release presents only a portion of the disclosure required under NI 51-101.  The oil and gas disclosure statements for the year ended December 31, 2015, which will include complete disclosure of Surge's oil and gas reserves and other oil and gas information in accordance with NI 51-101, will be contained within Surge's Annual Information Form which will be available on Surge's SEDAR profile on or before March 31, 2016 at www.sedar.com.

There are numerous uncertainties inherent in estimating quantities of crude oil, natural gas and NGL reserves and the future cash flows attributed to such reserves. The reserve and associated cash flow information set forth above are estimates only. In general, estimates of economically recoverable crude oil, natural gas and NGL reserves and the future net cash flows therefrom are based upon a number of variable factors and assumptions, such as historical production from the properties, production rates, ultimate reserve recovery, timing and amount of capital expenditures, marketability of oil and natural gas, royalty rates, the assumed effects of regulation by governmental agencies and future operating costs, all of which may vary materially. For those reasons, estimates of the economically recoverable crude oil, NGL and natural gas reserves attributable to any particular group of properties, classification of such reserves based on risk of recovery and estimates of future net revenues associated with reserves prepared by different engineers, or by the same engineers at different times, may vary. The Company's actual production, revenues, taxes and development and operating expenditures with respect to its reserves will vary from estimates thereof and such variations could be material.

All evaluations and reviews of future net revenue are stated prior to any provisions for interest costs or general and administrative costsand after the deduction of estimated future capital expenditures for wells to which reserves have been assigned. The after-tax net present value of the Company's oil and gas properties reflects the tax burden on the properties on a stand-alone basis and utilizes the Company's tax pools.  It does not consider the corporate tax situation, or tax planning.  It does not provide an estimate of the after-tax value of the Company, which may be significantly different.  The Company's financial statements and the management's discussion and analysis should be consulted for information at the level of the Company.

The estimates of reserves and future net revenue for individual properties may not reflect the same confidence level as estimates of reserves and future net revenue for all properties, due to effects of aggregations. The estimated values of future net revenue disclosed in this press release do not represent fair market value. There is no assurance that the forecast prices and cost assumptions used in the reserve evaluations will be attained and variances could be material.

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 and boepd means barrel of oil equivalent per day.

Type Wells Disclosure
Surge's Upper Shaunavon type curve is based on internal best estimates and publicly available data and is consistent with Sproule reserve bookings.

Forward Looking Statements
This press release contains forward-looking statements.  The use of any of the words "anticipate", "continue", "estimate", "expect", "may", "will", "project", "should", "believe" and similar expressions are intended to identify forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in such forward-looking statements.

More particularly, this press release contains statements concerning: (i) the Company'sestimated decline rate; (ii) the timing and completion methods with respect to Surge's wells in Valhalla; (iii) the timing of the completion of Surge's Valhalla pipeline and compression project, the estimated savings to be achieved in connection therewith and reduced downtime access to Valhalla; and (iv) the timing of the filing of Surge's Annual Information Form and the information to be contained therein.

Statements relating to "reserves" are also deemed to be forward looking statements, as they involve the implied assessment, based on certain estimates and assumptions, that the reserves described exist in the quantities predicted or estimated and that the reserves can be profitably produced in the future.

The forward-looking statements are based on certain key expectations and assumptions made by Surge, including expectations and assumptions concerning the performance of existing wells and success obtained in drilling new wells, anticipated expenses, cash flow and capital expenditures, the application of regulatory and royalty regimes, prevailing commodity prices and economic conditions, development and completion activities, the performance of new wells, the successful implementation of waterflood programs, the availability of and performance of facilities and pipelines, the geological characteristics of Surge's properties, the successful application of drilling, completion and seismic technology, the determination of decommissioning liabilities, the continuation of the Corporation's normal course issuer bid, prevailing weather conditions, exchange rates, licensing requirements, the impact of completed facilities on operating costs and the availability, costs of capital, labour and services, the creditworthiness of industry partners.

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 constraint in the availability of services, adverse weather or break-up conditions, uncertainties resulting from potential delays or changes in plans with respect to exploration or development projects or capital expenditures or failure to obtain the continued support of the lenders under Surge's bank line. Certain of these risks are set out in more detail in Surge's Annual Information Form dated March 19, 2015 and in Surge's MD&A for the period ended September 30, 2015, both of which have 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.

Drilling Inventory

This press release discloses drilling locations that are booked locations as well as unbooked locations. Proved locations and probable locations, which are sometimes collectively referred to as "booked locations", are derived from the Surge Reserves Report and account for drilling locations that have associated proved or probable reserves, as applicable. Unbooked locations are internal estimates based on the Company's prospective acreage and an assumption as to the number of wells that can be drilled per section based on industry practice and internal review. Unbooked locations do not have attributed reserves or resources. Unbooked locations have specifically been identified by management as an estimation of our multi-year drilling activities based on evaluation of applicable geologic, seismic, engineering, production and reserves data on prospective acreage and geologic formations. The drilling locations on which we actually drill wells will ultimately depend upon the availability of capital, regulatory approvals, seasonal restrictions, oil and natural gas prices, costs, actual drilling results and other factors.

Test Results and Initial Production Rates

Any references in this press release to initial, early and/or test production/performance rates are useful in confirming the presence of hydrocarbons, however, such rates are not determinative of the rates at which such wells will continue production and decline thereafter. While encouraging, readers are cautioned not to place reliance on such rates in calculating aggregate production. The initial production rate may be estimated based on other third party estimates or limited data available at this time. Initial production or test rates are not necessarily indicative of long-term performance of the relevant well or fields or of ultimate recovery of hydrocarbons.

Non-IFRS Measures

This press release contains the terms "operating netback", and "NAV" which do not have a standardized meaning prescribed by International Financial Reporting Standards ("IFRS") and therefore may not be comparable with the calculation of similar measures by other companies. Management uses funds generated by operations to analyze operating performance and leverage. Management believes "operating netbacks" are a useful supplemental measures of the amount of revenues received after royalties and operating and transportation costs. Additional information relating to these non-IFRS measures can be found in the Company's most recent management's discussion and analysis MD&A, which may be accessed through the SEDAR website (www.sedar.com).

Select Definitions

bbl

barrel


bbls

barrels


Mbbls

thousand barrels


MMBtu 

million British thermal units


NGLs 

natural gas liquids


mcf 

thousand cubic feet


mmcf   

million cubic feet


mmcf/d

million cubic feet per day


boe  

barrel of oil equivalent on the basis of 1 boe to 6 Mcf of natural gas.


mboe

thousand boe


$M

thousands of dollars


_____________________________________
1 Net asset value ("NAV") is calculated as proved plus probable (before tax discounted at 10%) reserve value, plus undeveloped land value and seismic data value, less debt, as at December 31, 2015, per basic share.
2 FDC is discounted at 10 percent.
3 Please see Information Regarding Disclosure on Oil and Gas Reserves of this press release.
4  Number may not add due to rounding.
5 The aggregate of the exploration and development costs incurred in the financial year and change during that year in estimated future development costs (discounted at 10 percent) generally will not reflect total finding and development costs related to reserve additions for that year.
6 The capital expenditures include the announced purchase price of corporate acquisitions rather than the amounts allocated to property, plant and equipment for accounting purposes. The capital expenditures also exclude capitalized administration costs.
7 Recycle ratio is calculated as operating netback divided by FD&A costs (proved plus probable). Operating netback is calculated as revenue (including realized hedging gains and losses) minus royalties, production and operating expenses and transportation expenses.

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.com; Paul Ferguson, CFO, Surge Energy Inc., Phone: (403) 930-1021, Fax: (403) 930-1011, Email: pferguson@surgeenergy.ca


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