Surge Energy Inc. Announces Year-End Results and Files Annual Information Form

CALGARY, March 20, 2014 /CNW/ - Surge Energy Inc. ("Surge" or the "Company") (TSX: SGY) is pleased to announce its financial and operating results for the year ended December 31, 2013 and has filed its Annual Information Form ("AIF") for the year ended December 31, 2013 on SEDAR.

Surge's financial and operating results for the quarter ended December 31, 2013 include only a partial quarter of results from the three significant acquisitions of high netback, operated, low decline, crude oil producing assets completed during the fourth quarter of 2013, which acquisitions totaled $359 million.

HIGHLIGHTS

  • Funds from operations increased 44 percent to $133.2 million in 2013 as compared to 2012.

  • Increased Surge's oil and natural gas liquids production weighting by 13 percent to 79 percent in 2013 from 70 percent in 2012. Surge forecasts this to increase to 84 percent in 2014.

  • Approximately 93 percent of Surge's revenue resulted from oil and natural gas liquids production in 2013.

  • Increased the Company's bank line to $470 million from $290 million during 2012. Surge expects a further increase in the bank line as a result of the year end reserve review.

  • Increased Surge's dividend 73 percent during 2013, from an initially anticipated $0.30 per share per year in July 2013, to $0.52 per share per year at December 31, 2013, with a further increase to $0.54 per share per year early in 2014.

  • Maintained consistent risk management program which supports the protection of Surge's balance sheet. The Company currently has approximately 50 percent of its current oil and NGL (after royalties) production hedged for 2014, at an average WTI floor price in excess of $97 CAD per barrel.

  • Reduced G&A per boe by 29 percent in the fourth quarter of 2013 as compared to the same period in 2012. Surge anticipates further reductions in G&A per boe in 2014.

  • Achieved a 98 percent success rate during 2013 drilling 37 gross (31.12 net) wells.

  • Achieved a fourth quarter average production rate of 12,014 boe per day (with 1,104 boe per day of fourth quarter 2013 production shut in due to an extended third party facility turn around at Valhalla), increased 35 percent from 8,919 boe per day in the same period of 2012.

  • In 2013 Surge completed four accretive acquisitions that added approximately 6,000 bopd of high netback light and medium gravity crude oil production.

  • Reduced the Company's corporate decline rate from more than 37 percent in 2012 to a forecast 24 percent in 2014, as a result of Surge's low risk operating strategy and waterflood initiatives.

  • Expanded Surge's crude oil drilling inventory to 773 gross (708 net) locations, and significantly increased the Company's internally estimated OOIP1 to greater than 1.4 billion net barrels (including the SE Saskatchewan light oil acquisition closed February 14, 2014 noted below):

    

Property OOIP (MMbbls) 
(gross/net)
Locations
(gross/net)
Western Alberta 335/322 118/109
SE Alberta 435/365 143/137
SW Saskatchewan 393/381 407/374
Williston Basin 453/376 105/88
TOTAL 1,616/1,444 773/708

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.

  • Made significant waterflood progress, reducing the Company's annual decline to a forecast 24 percent in 2014:
    • Silver/Wainwright (Lloyd/Cummings and Sparky): continued positive oil response from expanded waterflood initiative in two zones. Surge expects ultimate recovery of 39 percent in the Silver area and 37 percent in the Wainwright area.
    • Nipisi (Slave Point): waterflood pilot commenced during the second quarter of 2013. Surge estimates recovery of at least 20 percent of the estimated 78 mmbbls of OOIP in the northern pool. A third injector will be implemented in the first quarter of 2014.
    • Southwest Saskatchewan (Lower Shaunavon): commenced waterflood pilot in the fourth quarter of 2013. Three analog pilots are showing response.
    • Macoun (Midale): implemented the first horizontal injector in the pool in the fourth quarter of 2013. Nearby analog pool has successfully been waterflooded.
    • Manson (Bakken): implemented two injectors in the third quarter of 2013 with a positive response to date. Nearby analog pool has been successfully waterflooded.
    • Windfall (Bluesky): 52,000 m3 injected to date with offset declines flattening.
    • Surge plans to expand its waterflood program in 2014 by implementing pilots at Eyehill, Provost, Valhalla and Saskatchewan Viking.
  • Increased Proved plus Probable reserves by 59 percent to 73.5 million boe over December 31, 2012 reserves of 46.1 million boe.

  • Achieved organic Proved plus Probable finding and development costs (F&D) of $17.03 per boe, including the change in future development capital ("FDC").

  • Achieved Proved plus Probable finding, development and acquisition costs (FD&A) of $27.27 per boe, including the change in future development capital.

  • Achieved a corporate recycle ratio of 2.5 with F&D costs of $17.03 per boe, including the change in FDC and based on Surge's 2013 netback of $41.80 per boe.

  • Increased Proved plus Probable Oil and NGLs reserves by 79 percent to 57.1 million barrels over December 31, 2012 reserves of 31.9 million barrels.

  • Oil and NGLs made up 78 percent of the Company's total Proved plus Probable reserves.

  • Increased Surge's corporate netback by 24 percent from $29.21 per boe for the year ended December 31, 2012 to $36.25 per boe for the year ended December 31, 2013. Surge's current corporate netback is over $42 per boe.

  • Increased Net Present Value discounted at 10 percent Before Tax ("NPV10 BT") of Proved plus Probable reserves by 86 percent to $1.4 billion compared to $732 million as at December 31, 2012.

Three Acquisitions of Elite, Operated, Low Decline, Crude Oil Assets in the Fourth Quarter of 2013, and a 24 Percent Increase in Dividend

On November 13, 2013, Surge closed two strategic, high quality light oil acquisitions. The first acquisition involved the $147 million purchase of all of the shares of a Calgary based private oil and gas company, with high netback, operated, producing light oil assets focused in SE Saskatchewan and SW Saskatchewan.

The second acquisition involved the $135 million purchase of high quality, high netback, operated, producing light oil assets primarily located in the SW area of Manitoba.

As a result of these two accretive acquisitions, together with better than anticipated operational and drilling results, Surge increased the Company's annual dividend by 19 percent, from $0.42 per share per year to $0.50 per share per year.

On December 3, 2013 Surge closed 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, for net consideration of $77 million. The Assets included over 980 barrels per day of medium gravity crude oil production (with a historical nine percent annual decline), and over 210 million barrels of estimated OOIP. In conjunction with the acquisition, Surge completed a $63.3 million bought deal equity financing.

As a result of this third accretive acquisition, together with better than anticipated operational and drilling results, Surge increased the Company's annual dividend by four percent, from $0.50 per share per year to $0.52 per share per year.

Certain selected financial and operations information for the three months and year ended December 31, 2013 and the 2012 comparative information are outlined below and should be read in conjunction with Surge's audited annual and unaudited interim Consolidated Financial Statements and accompanying Management Discussion and Analysis ("MD&A").

FINANCIAL AND OPERATING SUMMARY                        
($000s except per share amounts)                        
    Three Months Ended December 31,   Years Ended December 31,
    2013   2012   % Change   2013   2012   % Change
Financial highlights                        
Oil and NGL sales    69,701    44,017   58 %    253,688    176,474   44 %
Natural gas sales    3,778    5,410   (30)%    18,150    16,129   13 %
Other revenue    38    3   nm5    94    57   65 %
Total oil, natural gas, and NGL revenue    73,517    49,430   49 %    271,932    192,660   41 %
Funds from Operations2    36,659    24,061   52 %    133,165    92,232   44 %
Per share basic ($)    0.26    0.34   (24)%    1.31    1.30   1 %
Per share diluted ($)    0.26    0.34   (24)%    1.31    1.30   1 %
Net income (loss)    (2,848)    (68,187)   96 %    (9,886)    (53,243)   81 %
Per share basic ($)    (0.02)    (0.96)   98 %    (0.10)    (0.75)   87 %
Per share diluted ($)    (0.02)    (0.96)   98 %    (0.10)    (0.75)   87 %
Capital expenditures - petroleum & gas properties3    40,318    44,975   (10)%    125,546    180,714   (31)%
Capital expenditures - acquisitions & dispositions3    369,216    (2,662)   nm    571,471    109,729   nm
Total capital expenditures3    409,534    42,313   868%    697,017    290,443   nm
Net debt at end of period4    305,349    220,578   38 %    305,349    220,578   38 %
                         
Operating highlights                        
Production:                        
Oil and NGL (bbls per day)    10,354    6,398   62 %    8,489    6,181   37 %
Natural gas (mcf per day)    9,958    15,129   (34)%    13,679    16,151   (15)%
Total (boe per day) (6:1)    12,014    8,919   35 %    10,769    8,873   21 %
Average realized price (excluding hedges):                        
Oil and NGL ($per bbl)    73.17    74.78   (2)%    81.87    78.01   5 %
Natural gas ($ per mcf)    4.12    3.89   6 %    3.64    2.73   33 %
Realized loss on financial contracts ($ per boe)    (1.26)    1.72   nm    (2.13)    0.11   nm
                         
Net back (excluding hedges) ($ per boe)                        
Oil, natural gas and NGL sales    66.52    60.24   10 %    69.18    59.33   17 %
Royalties    (12.13)    (11.36)   7 %    (12.64)    (10.81)   17 %
Operating expenses    (12.66)    (12.68)   (0)%    (12.57)    (11.61)   8 %
Transportation expenses    (2.03)    (2.56)   (21)%    (2.17)    (2.26)   (4)%
Operating netback    39.70    33.65   18 %    41.80    34.65   21 %
G&A expenses    (2.19)    (3.08)   (29)%    (3.10)    (3.34)   (7)%
Interest expense    (2.53)    (2.56)   (1)%    (2.45)    (2.10)   17 %
Corporate netback    34.98    28.00   25 %    36.25    29.21   24 %
                         
Common shares (000s)                        
Common shares outstanding, end of period   166,543   71,217   134 %   166,543   71,217   134 %
Weighted average basic shares outstanding   142,981   71,196   101 %   101,606   70,962   43 %
Stock option dilution (treasury method)    —    —   nm    —    —   nm
Weighted average diluted shares outstanding   142,981   71,196   101 %   101,606   70,962   43 %

 

Management uses funds from operations (cash flow from operating activities 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.
3   Please see capital expenditures note. 
The Company defines net debt as outstanding bank debt plus or minus cash-based working capital and dividends payable, and excluding the fair value of financial contracts and other current obligations
The Company views this change calculation as not meaningful, or "nm".

SUBSEQUENT EVENTS

Acquisition of High Quality, Operated, Low Decline, Light Oil Assets, $80.5 Million Equity Financing and Four Percent Increase in Dividend

On February 14, 2014 Surge closed the acquisition of a high quality, low decline, operated, light oil producing asset strategically located in the Company's core area of Southeast Saskatchewan, for net consideration of $109 million. In conjunction with the acquisition, Surge completed an $80.5 million bought deal equity financing.

The acquired assets include an estimated annualized 1,250 boepd (97 percent oil) of high netback light crude oil production and OOIP 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.

As a result of the accretive acquisition, Surge's Board of Directors approved an increase in the Company's annual dividend of four percent from $0.52 per share per year, to $0.54 per share per year. The dividend will be paid on April 15, 2014 in respect of March 2014 production, for the shareholders of record on March 31, 2014.

Surge Acquires 19.8 Percent Block of Longview Oil Corp. Shares

On February 28, 2014 Surge announced that it has acquired ownership and control of 9.3 million common shares ("Common Shares") of Longview Oil Corp. ("Longview"), representing 19.8 percent of the outstanding Common Shares, at a purchase price of $4.45 per Common Share (the "Block"). The Common Shares were acquired pursuant to a bought deal secondary offering of Common Shares, which were sold by an existing shareholder of Longview.

Surge's intent with respect to the acquisition of the Block is to obtain a large, strategic equity position in Longview, at a competitive cost base, and to pursue a mutually beneficial business combination with Longview. Surge, however, has no legal obligation to pursue any such business combination.

Given Surge's excellent balance sheet and low debt levels6 pro-forma the investment in the Block, Surge will maintain a peer group low "all-in" payout/sustainability ratio of less than 89 percent, and an excellent balance sheet with a 2014 exit debt to Q4 2014 annualized FFO ratio of less than 1.2 times6. Pro-forma the investment in the Block, Surge forecasts more than $175 million of credit availability on the Company's bank lines.

OUTLOOK & GUIDANCE

Surge's Board of Directors has approved a 2014 capital budget of $116 million, plus an additional $42 million for the investment in the Block of Longview shares. The capital program aims to achieve a balanced approach of production growth (approximately 50 percent growth in annual production over 2013), and unlocking additional value in its high quality, large OOIP light and medium oil assets. Surge has allocated approximately $90 million to its 2014 drilling program, $16 million to waterflood implementation and optimization, and $10 million to a combination of facilities and plants, land and seismic, and capitalized G&A expenditures. Surge expects that the Company's bank line will be increased from $470 million as a result of the year end reserves review. The expected increase in the bank line, along with Surge's forecast all-in sustainability ratio of less than 89 percent will provide flexibility to execute the Company's 2014 capital program.

In 2014 Surge will continue to focus capital towards elite, large OOIP crude oil reservoirs. Management's primary goals for Surge include achieving 3-5 percent organic annual per share growth in reserves, production and cash flow, maintaining a sustainable dividend, continued debt reduction, together with the pursuit of high quality, accretive acquisitions. Management will continue maintaining balance sheet flexibility with an effective risk management program and confirming the commercial viability of the Company's waterflood program. By the end of 2014 Surge now anticipates that over 75 percent of the Company's producing assets will be under waterflood. The implementation of the waterflood pilots are an integral piece of Surge's strategy of increasing oil recovery factors throughout the Company's deep crude oil portfolio, lowering corporate decline rates and maximizing shareholder value. The Company will also pursue continued, year over year increases in recovery factors from these high quality assets through low risk development activities, including in-fill and step out development drilling, up-to-date completion techniques, including horizontal frac technology and optimizations.

_______________________

6 Regarding the strategic purchase of the Block of Longview shares: Net Debt is calculated excluding the $41.4 million value of the Longview Block. Interest expense on the $41.4 million as well as $3.7 million of dividend income from March to December 2014 is included in 2014E FFO.

Surge has had excellent results with respect to managing and reducing costs. The Company's G&A costs have dropped from over $3.50 per boe in the second quarter of 2013 to an estimated $2.05 per boe in Surge's 2014 guidance.

With this 2014 budget, Surge expects to achieve approximately 50 percent growth in average production year over year with a production mix of over 84 percent light and medium gravity crude oil. Surge also expects greater than 80 percent growth year over year in annual funds from operations while maintaining an excellent balance sheet. The Company anticipates exiting 2014 with a low debt to Q4 2014 annualized FFO ratio of less than 1.2 times6. Surge has attractive replacement metrics and an operating netback of over $45 per boe.

Including the strategic purchase of the Block of Longview shares for $41.4 million, Surge's updated guidance is as follows:

Operational:   

  Surge 2014E Guidance
   
2014E Average Production (boe/d) 16,125 (84% Oil/NGLs)
2014E Exit Production (boe/d) 16,550 (84% Oil/NGLs)
RLI (based on 2013 Q4 average production) >16 years
2014E Capital Spending & Longview Block Purchase $158 million
2014E Wells Drilled 39/37.1 gross/net wells
2014 Decline 24%

Financial:

  Surge 2014E Guidance6 7 8 9
   
2014E Funds from Operations ("FFO") $246 ($1.37 per share)
2014E Operational Netback $45.67/boe
2014E Cash Flow Netback $41.24/boe
Basic Shares Outstanding 179 million
Annual Dividend $96 million
Yield 9.2%
Basic Payout Ratio 2014E 39.8%
"All-in" Payout Ratio 87.4%
2014E Exit Net Debt $308 million
2014E Net debt / Q4 2014 annualized FFO 1.19x
Bank Line $470 million

Surge is an oil focused oil and gas company with operations throughout Alberta, Saskatchewan and Manitoba. Surge's common shares trade on the Toronto Stock Exchange under the symbol SGY. At year end, the Company had 166.5 million basic and 170.9 million fully diluted common shares outstanding.

AUDITED FINANCIAL STATEMENTS, MD&A AND AIF:

Surge has filed with Canadian securities regulatory authorities its audited financial statements and accompanying MD&A for the three months and year ended December 31, 2013.  Surge has also filed the Company's Annual Information Form for the year ended December 31, 2013. These filings are available for review at www.sedar.com or www.surgeenergy.ca.

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 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.
9 Based on a Surge share price of $5.85.

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 water flood 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) reductions in general and administrative expenses, (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 water flood 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.

Test Results and Initial Production Rates

A pressure transient analysis or well-test interpretation has not been carried out and thus certain of the test results provided herein should be considered to be preliminary until such analysis or interpretation has been completed. Test results and initial production rates disclosed herein may not necessarily be indicative of long term performance or of ultimate recovery.

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

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.

SOURCE: Surge Energy Inc.

For further information:

Paul Colborne, 
President and 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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