Surge Energy Inc. Announces a 52 Percent Increase in 2014 Year End Reserves, New Net Asset Value of $7.36 Per share; Sale of Non-core Assets for $35.6 Million; Record Weekly Production; New Bank Line Review

CALGARY, Feb. 11, 2015 /CNW/ - Surge Energy Inc. ("Surge" or the "Company") delivered excellent results with respect to the Company's 2014 year end reserves.

Highlights:

  • Surge's net asset value (NAV)1 per share for December 31, 2014 is $7.36 utilizing the lower crude oil price deck used by Surge's external engineers.

  • Increased Proved plus Probable reserves by 52% to 112.0 million boe as compared to December 31, 2013 reserves of 73.5 million boe.

  • Increased Proved plus Probable reserves per share by 15% as compared to December 31, 2013.

  • Over 50% of Surge's December 31, 2014 $2.0 billion NPV10 Total Proved plus Probable reserve value is in the proved developed producing category.

  • Surges "all–in" FD&A costs for 2014 were $19.55 per boe, generating a better than 2.2 times recycle ratio.

  • Surge delivered record production for the week of January 18th through January 25th, 2015 of more than 22,700 boe per day (85% oil and NGLs) - well above management's stated 2014 exit rate target of 21,350 boe per day.

  • Surge delivered record production of 18,070 boe per day in 2014, which is a 68% increase over 2013.

  • Surge sold certain non-core assets on February 11, 2015 for $35.6 million - which proceeds have been utilized to reduce bank indebtedness.

  • The Company has reconfigured its 2015 crude oil swap positions by monetizing the Company's 2015 crude oil swaps at a profit of more than $35 million, and re-hedging on a "costless collar" basis, at a floor of over C$62 WTI per barrel and a ceiling of over C$82 WTI per barrel, for the remainder of 2015 on approximately 45% of Surge's net crude oil production. The proceeds of this hedge reconfiguration have been utilized to reduce bank indebtedness.

  • The Company's 2015 bank line review has been initiated and Surge's bank line is expected to remain unchanged at the $725 million level based on the Company's strong reserve results - despite a large drop in the crude oil price deck utilized by Surge's lenders.

2014 YEAR END RESERVES:

Surge reports the following 2014 year-end reserves highlights based on the Sproule Associates Limited ("Sproule") and McDaniel & Associates Consultants Ltd. ("McDaniel")   independent assessments of the Company's reserves dated effective December 31, 20142 (the "Surge Sproule Report") and (the "Surge McDaniel Report").  The results presented below used the following unaudited estimated values3: total capital expenditures for 2014 of approximately $726 million including acquisitions and dispositions.

RESERVES:

  • Achieved Proved plus Probable finding, development and acquisition (FD&A) cost of $19.55 per boe, including the change in FDC.

  • Achieved an 'all-in' Proved plus Probable recycle ratio of more than 2.2, including the change in FDC and based on Surge's estimated 2014 operating netback of $43.18 per boe.

  • Surge's Net Asset Value (NAV) is estimated at $7.36 per basic share based on Net Present Value discounted at 10 % Before Tax ("NPV10 BT") Proved plus Probable (2P) reserves of $2.0 billion as at December 31, 2014.

  • Surge's PDP Net Asset Value (NAV) is estimated at $3.06 per basic share based on Net Present Value discounted at 10 % Before Tax ("NPV10 BT") Proved Producing reserves (PDP) reserves of $1.04 billion as at December 31, 2014.

  • Surge's PDP Reserves account for over 52% of Total Reserves NPV value.

  • Increased Proved plus Probable reserves by 52% to 112.0 million boe as compared to December 31, 2013 reserves of 73.5 million boe.

  • Achieved Proved plus Probable Finding and Development Costs (F&D) of $25.99 per boe, including the change in Future Development Capital (FDC).

  • Increased Proved plus Probable Oil and NGLs reserves by 58% to 90.2 million barrels over December 31, 2013 reserves of 57.1 million barrels. Oil and NGLs made up 81% of the Company's total Proved plus Probable reserves.

  • Proved plus Probable FDC discounted at 10% of $553 million represents less than 2.3 times 2014 forecast average funds flow.

  • Achieved a Proved plus Probable Reserve Life Index (RLI) of 15.0 years based on the Company's 2014 fourth quarter average production rate of approximately 20,448 boe per day.

2014 OPERATIONS:

  • Achieved record 2014 annual production of 18,070 boe/d (85% oil and NGLs), an increase of 68% compared to 2013.                       
  • Drilled 73 (43 net) wells with a 98% success rate.

The following table summarizes the Company's reserves evaluated by independent reserves evaluators at December 31, 2014.  The Surge Sproule Report and Surge McDaniel Report were 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").  Additional reserve information as required under NI-51-101 will be included in the Company's Annual Information Form, which will be filed on SEDAR by March 30, 2015.

Summary of Reserves4


Oil&NGLs

(mbbls)

Gas

(mmcf)

Combined

(mboe)

Future Development Capital (FDC)

($M)





Discounted @ 10%

Undiscounted

Proved Developed Producing

36,834

51,587

45,431

347

351

Proved Developed

Non-Producing

733

2,424

1,137

2,342

2,615

Proved Undeveloped

16,647

30,628

21,752

355,745

413,871

Total Proved

54,214

84,639

68,320

358,434

416,837

Probable Additional

36,017

46,156

43,710

194,650

237,747

Total

Proved plus Probable

90,230

130,795

112,030

553,084

654,584

 

Summary of Before Tax Net Present Values
(Forecast Pricing)

As at December 31, 20145

BEFORE TAX NET PRESENT VALUE ($M)

Discount Rate

DESCRIPTION

0%

5%

10%

15%

20%

Proved Developed Producing

1,723,347

1,286,740

1,037,971

875,850

761,396

Proved Developed non-Producing

43,659

31,641

24,627

20,036

16,789

Undeveloped

570,150

378,462

261,196

183,797

129,924

Total Proved

2,337,156

1,696,842

1,323,794

1,079,683

908,109

Probable Additional

1,953,614

1,036,264

660,588

464,023

345,315

Total Proved plus Probable[6]

4,290,771

2,733,107

1,984,382

1,543,707

1,253,424

Per basic share

19.50

12.42

9.02

7.02

5.70

 

CAPITAL PROGRAM EFFICIENCY

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:






2014

2013

Five Year
Weighted
Average

Excluding Future Development Costs
Proved ($/boe)








F&D costs7

$

23.99

$

19.54

$

19.45


FD&A costs8

$

22.88

$

36.18

$

26.79

Proved plus probable ($/boe)








F&D costs7

$

29.61

$

13.69

$

14.31


FD&A costs8

$

15.97

$

22.32

$

17.68

Proved plus Probable Recycle ratio9








F&D costs


1.5x


3.0x


2.7x


FD&A costs


2.7x


1.9x


2.2x

Including Future Development Costs
Proved ($/boe)








F&D costs7

$

22.57

$

27.92

$

26.57


FD&A costs8

$

26.66

$

42.10

$

29.72

Proved plus probable ($/boe)








F&D costs7

$

25.99

$

17.03

$

22.35


FD&A costs8

$

19.55

$

27.27

$

22.14

Proved plus Probable Recycle ratio9








F&D costs


1.7x


2.5x


1.8x


FD&A costs


2.2x


1.5x


1.8x





Operating netback per boe9

$

43.18

$

41.74

$

39.26

 

RECORD PRODUCTION:

As a result of the excellent drilling results experienced in late 2014, Surge's daily production for the week of January 18 to January 25 was more than 22,700 boe per day (85% oil and NGL's) – well above management's stated 2014 exit rate target of 21,350 boe per day.

In accordance with the Company's Press Release dated January 7th, 2015 Surge anticipates average production of 20,000 boe per day for the first half of 2015.

HEDGE RECONFIGURATION:

The forward curve for world crude oil prices has changed dramatically in just a few short months. In June of 2014, crude oil prices spiked to US$108 WTI per barrel and the forward curve for oil became backwardated. Accordingly, Surge management locked-in significant hedge positions in range of C$96-103 per barrel pricing for 2014 and 2015. These hedge positions are now significantly "in the money".

From June of 2014 to the present world crude oil prices have dropped precipitously from US$108 WTI per barrel to a low of US$43 WTI in February. With world oil demand at record levels, and massive capital spending cuts for crude oil drilling occurring worldwide, the shape of the forward curve for crude oil has moved into a very strong contango position.

Accordingly, Surge management has now monetized its existing forward fixed swap positions at a profit of $35 million. Surge management has now "re-hedged", on a costless collar basis, approximately 45 percent of the Company's net crude oil production for the rest of 2015 - with a floor of over C$62 per barrel, and a ceiling of over C$82 per barrel, at no cost to Surge. Proceeds from this hedge reconfiguration will be utilized to reduce bank indebtedness.

Surge management has elected to maintain its natural gas hedge at C$4.14/MCF for approximately 50 percent of the Company's natural gas production for all of 2015.

SALE OF NON-CORE ASSETS:

On February 11, 2015 Surge closed the sale of certain non-core producing oil assets in the Dodsland area of SW Saskatchewan for a purchase price of $35.6 million. This sale represents a flowing per barrel metric of approximately $75,000 boe per day based on Surge expected average production rate from these non-core assets in 2015.

Proceeds from the non-core asset sale have been utilized to reduce bank indebtedness.

BANK REVIEW:

Based upon the Company's excellent 2014 reserve addition results, Surge's bank line review has been initiated and Surge's bank line is expected to remain unchanged at the $725 million level, despite a large drop in the 2015 crude oil price deck utilized by Surge's lenders. This does not include the impact of any bank line reduction due to the non-core asset disposition or the crude oil swap reconfiguration. 

In this regard, as a result of excellent 2014 reserve additions, Surge's 2014 Proved Developed Producing ("PDP") reserve value is now higher than in 2013. Over half of Surge 2014 reserve value is in the PDP category. 

RESERVES NOTE:

In accordance with National Instrument 51-101 - Standards of Disclosure for Oil and Gas Activities (NI 51-101), a report was prepared by each of Sproule and McDaniel. These reports evaluated, as at December 31, 2014, all of Surge's oil, natural gas, and natural gas liquids reserves. 

The tables in this press release disclose in the aggregate the Company's gross and net proved and proved plus probable reserves and Net Present Value (NPV) as estimated in both the Surge Sproule Report and the Surge McDaniel Report.  These estimates were calculated using Sproule forecast prices and costs. 

"Forecast prices and costs" means future prices and costs used by Sproule in the Surge Sproule Report and in the Surge McDaniel Report that are generally accepted as being a reasonable outlook of the future, or fixed or currently determinable future prices or costs to which the Company is bound.

"Gross" reserves equate to those reserves that are referred to as "Company Gross" reserves by the Canadian Securities Administrators (CSA) in NI 51-101.  Gross Reserves are Company gross reserves, which are the Company's working interest (operating or non-operating) share before deduction of royalties and without including any royalty interests of the Company. 

"Net After Royalty" reserves are the Company's working interest (operating or non-operating) share after deduction of royalty obligations plus the Company's royalty interests in reserves. 

The net present value of future net revenue attributable to Surge's reserves is stated without provision for interest costs and general and administrative costs, but after providing for estimated royalties, production costs, development costs, other income, future capital expenditures, and well abandonment costs for only those wells assigned reserves by Sproule and McDaniel's. It should not be assumed that the undiscounted or discounted net present value of future net revenue attributable to Surge's reserves estimated by Sproule and McDaniel's represent the fair market value of those reserves.  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.  Other assumptions and qualifications relating to costs, prices and future production and other matters are summarized herein.  The recovery and reserve estimates of Surge's oil, natural gas, and NGL reserves provided herein are estimates only and there is no guarantee that the estimated reserves will be recovered. Actual reserves may be greater than or less than the estimates provided herein. 

FORWARD LOOKING STATEMENTS:

This press release contains forward-looking statements. More particularly, this press release contains statements concerning Surge's expectations regarding its average daily production; the impact of the commodity pricing; its balance sheet, ability to reduce debt; bank line availability; its capital spending program for 2015 and ability to be flexible in its capital budgeting over the course of 2015; forecast decline rates; reserve life; drilling inventory; drilling and development plans and enhanced recovery projects and the timing and results to be expected thereof; net-asset-value and net-asset-value/share; netbacks; the Company's declared focus and primary goals;; anticipated services cost savings and other cost reduction initiatives; the ability of the Company to weather the present commodity price environment; the Company's ability to liquidate hedge positions; the reduction in the Company's dividend to $0.30 per share per year; and the timing, amount and sustainability of future dividend payments.

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, worldwide supply and demand for oil and natural gas; 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, prevailing weather conditions, exchange rates, licensing requirements, the successful completion of the disposition transactions, the impact of completed facilities on operating costs and the availability, costs of capital, labour and services, the creditworthiness of industry partners and the approval of the lenders under Surge's bank line.

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 required approvals from the lenders under Surge's bank line to increases thereto. Certain of these risks are set out in more detail in Surge's Annual Information Form dated March 19, 2014 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 day.

Test Results and Initial Production Rates

Any references in this news 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.     

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 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, 2014.
2 Using Sproule forecast prices and costs
3 As Surge plans to release its audited financial statements before the end of March 2015, certain financial estimates have been made herein.  Readers are advised to that these financial estimates are subject to audit and may be revised.
4 Please see reserves note of this press release
5 Based on Sproule's December 31, 2014 Revised Price Forecast
6 Numbers may not add due to rounding.
7 The aggregate of the exploration and development costs incurred in the financial year and change during that year in estimated future development costs generally will not reflect total finding and development costs related to reserve additions for that year.
8 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.
9 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; Max Lof, CFO, Surge Energy Inc., Phone: (403) 930-1021, Fax: (403) 930-1011, Email: mlof@surgeenergy.ca

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