Surge Energy Inc. announces record second quarter 2014 results; closing of Longview transaction; and continued drilling success at Shaunavon
31 Jul, 2014, 06:00 ET
CALGARY, July 31, 2014 /CNW/ - Surge Energy Inc. ("Surge" or the "Company") (TSX: SGY) announces record financial and operating results for the three and six month periods ended June 30, 2014.
Surge's financial and operating results for the period ended June 30, 2014 include only 25 days of contribution from the $429 million strategic business combination with Longview Oil Corp. ("Longview"), which closed late in the second quarter of 2014.
|FINANCIAL AND OPERATING SUMMARY|
|($000s except per share amounts)|
|Three Months Ended June 30,||Six Months Ended June 30,|
|2014||2013||% change||2014||2013||% change|
|Oil and NGL sales||122,193||52,624||132 %||221,954||100,840||120 %|
|Natural gas sales||5,931||5,342||11 %||13,716||10,698||28 %|
|Total oil, natural gas, and NGL revenue||128,148||58,004||121 %||235,715||111,586||111 %|
|Funds from Operations1||65,525||26,812||144 %||119,295||52,049||129 %|
|Per share basic ($)||0.34||0.38||(11)%||0.66||0.73||(10)%|
|Per share diluted ($)||0.34||0.38||(11)%||0.65||0.73||(11)%|
|Net income (loss)||37,927||(15,004)||nm4||41,349||(16,358)||nm|
|Per share basic ($)||0.20||(0.21)||nm||0.23||(0.23)||nm|
|Per share diluted ($)||0.20||(0.21)||nm||0.23||(0.23)||nm|
|Capital expenditures - petroleum & gas properties2||18,975||25,166||(25)%||77,326||65,231||19 %|
|Capital expenditures - acquisitions & dispositions2||473,111||(39,377)||nm||581,823||(40,184)||nm|
|Total capital expenditures2||492,085||(14,212)||nm||659,148||25,046||nm|
|Net debt at end of period3||557,969||193,597||188 %||557,969||193,597||188 %|
|Oil and NGL (bbls per day)||14,246||6,966||105 %||13,475||6,910||95 %|
|Natural gas (mcf per day)||12,893||14,442||(11)%||13,434||15,559||(14)%|
|Total (boe per day) (6:1)||16,395||9,373||75 %||15,714||9,504||65 %|
|Average realized price (excluding hedges):|
|Oil and NGL ($per bbl)||94.25||83.01||14 %||91.01||80.62||13 %|
|Natural gas ($ per mcf)||5.06||4.06||25 %||5.64||3.80||48 %|
|Realized loss on financial contracts ($ per boe)||(5.52)||(2.12)||160 %||(5.30)||(1.28)||314 %|
|Net back (excluding hedges) ($ per boe)|
|Oil, natural gas and NGL sales||85.89||68.00||26 %||82.88||64.87||28 %|
|Royalties||(14.40)||(12.56)||15 %||(14.25)||(11.74)||21 %|
|Operating expenses||(15.71)||(11.97)||31 %||(15.07)||(12.28)||23 %|
|Operating netback||54.07||41.01||32 %||51.75||38.50||34 %|
|Corporate netback||49.71||33.51||48 %||47.38||31.80||49 %|
|Common shares (000s)|
|Common shares outstanding, end of period||217,619||71,918||203 %||217,619||71,918||203 %|
|Weighted average basic shares outstanding||189,969||71,358||166 %||181,566||71,288||155 %|
|Stock option dilution (treasury method)||1,383||—||100 %||1,122||—||100 %|
|Weighted average diluted shares outstanding||191,352||71,358||168 %||182,688||71,288||156 %|
|1||Management uses funds from operations (cash flow from operating activities before changes in non-cash working capital, legal settlement expenses, decommissioning expenditures, 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.|
|2||Please see capital expenditures note.|
|3||The Company defines net debt as outstanding bank debt plus or minus working capital, however, excluding the fair value of financial contracts and other current obligations.|
|4||The Company views this change calculation as not meaningful, or "nm".|
RECORD PRODUCTION, FUNDS FLOW, NETBACKS; AND CLOSING OF STRATEGIC BUSINESS COMBINATION IN THE SECOND QUARTER OF 2014
Surge is pleased to report record funds from operations of $65.5 million in the second quarter, along with record operating netbacks of over $54 per boe, and record production of approximately 16,400 boe per day, which quarterly results include only 25 days of contribution from the Longview business combination, as well as the impact of a planned facility turn-around at Valhalla.
- Achieved a second quarter average production rate of 16,395 boe per day, an increase of 75 percent from 9,373 boe per day in the same period of 2013.
- Funds from operations increased 144 percent to a record $65.5 million in the second quarter of 2014 as compared to the same period of 2013.
- A second quarter capital program (not including acquisitions and divestitures) of $19.0 million, which represents only 29 percent of funds from operations for the quarter.
- Achieved records for both operating and corporate netbacks in the second quarter of 2014. Surge's operating netback increased to $54.07 per boe and its corporate netback increased 48 percent to $49.71 per boe in the second quarter of 2014, from $33.51 per boe in the second quarter of 2013.
- Increased Surge's oil and natural gas liquids production weighting by 18 percent to 87 percent in the second quarter of 2014 from 74 percent in the second quarter of 2013.
- Approximately 95 percent of Surge's revenue resulted from oil and natural gas liquids production in the second quarter of 2014.
- Reduced G&A per boe by 58 percent in the second quarter of 2014 as compared to the same period in 2013. Surge has had excellent results with respect to managing and reducing costs. The Company's G&A costs have dropped from $4.88 per boe in the second quarter of 2013 to $2.06 per boe in the second quarter of 2014.
- Announced the completion of the strategic business combination with Longview. The transaction is accretive to Surge on all metrics, and adds high quality concentrated reserves, production, land, and operations that are contiguous with Surge's three existing core areas.
- Increased the Company's dividend by 11 percent from $0.54 per share per year ($0.045 per share per month), to $0.60 per share per year ($0.05 per share per month, first payment for June production on July 15, 2014) as a result of the accretive Longview transaction.
- Increased the Company's bank line to $725 million during the quarter. With one of the lowest all-in payout ratios in Canada (<90 percent), the Company will maintain its excellent balance sheet giving Surge more than $240 million of capacity on its bank line at year end 2014.
- Subsequent to June 30, the Company has executed definitive agreements to sell approximately $52 million of certain miscellaneous assets, the proceeds of which will be used to reduce debt. These miscellaneous dispositions are expected to close before the end of the third quarter of 2014. Based upon continued excellent development drilling results across the Company's asset base, Surge's 2014 production exit rate of 21,350 boepd is being maintained, in spite of the anticipated dispositions, with only a modest increase in capital spending of $6 million in 2014.
On June 5, 2014, the Company announced that it had closed the previously announced business combination with Longview whereby Surge acquired all of the remaining issued and outstanding common shares of Longview by way of a plan of arrangement transaction.
The Longview acquisition fits squarely within Surge's defined operating strategy of investing growth capital to acquire high quality, operated, light and medium gravity crude oil reservoirs, with large original oil in place ("OOIP5") and low recovery factors. Surge now has over 1.9 billion barrels of light and medium gravity OOIP under the Company's ownership and management, with more than 1,000 lower risk development drilling locations, giving Surge a drilling inventory of more than 15 years.
Surge now has proved plus probable reserves6 of more than 117 million boe (88 percent oil & ngls) resulting in a reserve life index of over 15 years, a forecast decline rate of only 22 percent, pro-forma annualized funds flow of $326 million, and a portfolio of high quality waterflood projects. Surge also has one of the lowest payout ratios in its peer group in Canada at 89.9 percent.
The Longview acquisition was highly accretive to Surge shareholders on all metrics, including funds flow, production and reserves per share. In addition, Surge's net asset value per share increased by more than 18 percent to an estimated $8.23.
OPERATIONS REVIEW - CONTINUED DRILLING SUCCESS AT SHAUNAVON
In the second quarter of 2014 Surge experienced better than anticipated development drilling results, drilling 7 gross (4.6 net) wells, with reduced drilling activity levels relating to normal spring break up conditions. This very successful drilling program consisted of 2 gross (2 net) development Upper Shaunavon wells, 1 gross (1 net) well at Valhalla, 1 gross (1 net) Sparky well at Provost, and 3 gross (0.6 net) Viking wells as part of Surge's strategic farmout of exploration lands in this area. Production from only 1 gross (1 net) well was included in the quarter, with 6 wells (3.6 net) to be brought on in the third quarter.
In addition, Surge successfully integrated the producing assets and operating staff associated with the Longview combination from the closing date on June 5th, 2014, adding approximately 5,600 boepd of production strategically located in Surge's three key operating areas.
As a follow up to Surge's successful first quarter Upper Shaunavon discovery well at 191/16-36-005-19W3, the Company drilled two additional step-out Upper Shaunavon wells (100% working interest) in the second quarter. These successful new wells were drilled off a pad approximately 400 meters west of the initial discovery well. Both wells encountered excellent reservoir in the Upper Shaunavon formation throughout. The first well extended the width of the fairway a full mile to the south of the discovery well. The second well was a direct offset to the discovery well, and its original reservoir pressure did not indicate any depletion as a result of the production from the discovery well, which has cumulative production to date of over 33,000 barrels.
These two new wells were brought on production in mid-July, and are currently each producing at over 325 bopd with low water cuts; the water cuts for both wells continue to decrease as the load fluid is recovered.
In addition, the original Upper Shaunavon discovery well is still producing approximately 300 bopd at a low water cut after four and a half months. This exciting discovery well has netbacks of over $65 per bbl, and paid out in less than 100 days.
Surge management now believe that this discovery contains more OOIP than the 125 million net barrels originally press released by the Company on April 8th, 2014. Surge is presently updating its technical evaluation of the OOIP relating to this exciting, internally generated new play. In addition, Surge now anticipates that there will be more than 64 net additional drilling locations in relation to this large, high quality, medium gravity, conventional sandstone oil pool.
Surge plans to drill up to six more Upper Shaunavon wells before the end of the year; two in the third quarter, stepping out from the previous drills to expand the current trend, and up to four in the fourth quarter, including a significant step out well on a separate trend which has been identified using the same geophysical parameters as the ones used to drill on the current successful trend.
|5||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.|
|6||Pro-forma December 31, 2013 reserves.|
In addition, also at its Shaunavon property, the Company brought on production 4 gross (3 net) Lower Shaunavon wells in the second quarter that were drilled in the first quarter. These wells have now been optimized for production and are exceeding average type curve expectations.
During the second quarter, Surge drilled and completed a successful well in the NW area of the Company's large OOIP light oil Doig pool at Valhalla. This well proved up additional pay and reserves, further extending the pool. Initial results upon completion were well above type curve expectations.
Additionally, Surge conducted a planned turnaround on its Valhalla oil battery, coinciding with a major planned turnaround at the third-party Sexsmith gas plant. These turnaround activities combined to negatively impact second quarter production by approximately 2,450 boepd for the 20 day turnaround cycle, or 535 boepd for the quarter.
Surge has identified, and is in negotiations with, two additional third-party processing facilities in the immediate vicinity. The Company expects to begin delivering a significant portion of the Valhalla pool's solution gas to these facilities early in the fourth quarter, which will significantly reduce the reliance on, and interruptions experienced with, the Sexsmith Plant.
Surge plans to drill an additional 2 gross (0.9 net) Doig wells in the third quarter.
Provost/Wainwright/Eyehill - Sparky
During the second quarter, Surge successfully drilled and completed 1 gross (1 net) Sparky development well at its high quality, medium gravity large OOIP pool at Provost. This well was placed on production early in the third quarter at attractive rates. Surge also continued its Sparky development drilling program into the third quarter with the drilling of 1 gross (1 net) Sparky development well at Wainwright, which is currently on production and recovering load fluid. The Company also completed the drilling of 2 gross (2 net) development wells at Eye Hill, which will be on production in the third quarter.
Additionally, Surge expanded its gathering system at Eye Hill in preparation for the third quarter drilling program, with the construction of a water injection pipeline related to the waterflood pilot at Eye Hill. Water injection is expected to commence on this high quality, medium-gravity, large OOIP asset late in the third quarter.
Macoun - Midale
Early in the third quarter, Surge completed a frac of an existing horizontal light oil well in the Midale formation. The well was open hole stimulated using an inflatable straddle assembly with six fracs at three tonnes per stage on July 11, 2014. The Company experienced excellent initial inflow and expects this well to stabilize at nearly three times the pre-stimulation production rate of 38 bopd.
Surge plans to drill three more Midale wells prior to the end of the year; two in the third quarter and one in the fourth quarter, stepping out from the previous drills to expand the current Midale trend. The Company also plans to optimize the Midale waterflood by adding source water and converting 1 to 2 wells to injectors.
Pinto - Midale
Late in the second quarter, Surge fraced an existing Midale well at 13-16, where the well was stimulated with five tonnes of sand per stage on June 25, 2014. Prior to stimulation, the well was producing 16.5 bopd with a water cut of 62 percent. Presently the well is cleaning up on pump at attractive rates. Due to wet weather in the Pinto area, this well did not come on production until July 10, 2014.
Surge intends to drill two more wells before the end of the year within the current Midale trend.
Surge has 115 net sections of land (including 85 net sections of fee land) on this exciting Midale trend, and over 90 net drilling locations.
Viking Farmout - Southwest Saskatchewan
The farm-in operator drilled 3 gross (0.6 net) Viking wells late in the second quarter. Two of these wells were completed and brought on production in July. Subsequent to the second quarter, the operator successfully rig released 6 gross (1.2 net) Viking wells to date. Surge anticipates having a further 12 gross (2.4 net) Viking farm-in wells drilled and on production in the third quarter.
OUTLOOK AND GUIDANCE: WELL POSITIONED FOR SUSTAINABLE GROWTH AND DIVIDENDS
As a result of the successful implementation of the Company's focused business plan, Surge is one of the best positioned light and medium gravity crude oil growth and dividend-paying companies in Canada.
Based upon continued excellent development drilling success across the Company's asset base, Surge's 2014 production exit rate of 21,350 boepd is being maintained, in spite of the $52 million in anticipated miscellaneous dispositions referred to above, with only a modest increase in capital spending of $6 million in 2014.
Accordingly, the following sets forth Surge's revised guidance estimates for 2014, including the $52 million of anticipated miscellaneous dispositions referred to above:
|Surge 2014E Guidance||Previous 2014E Guidance|
|2014E Exit Production (boe/d)||21,350 (84% Oil/NGLs)||21,350 (84% Oil/NGLs)|
|RLI||>15 years based on 2014E exit production||>15 years based on 2014E exit production|
|2014E Capital Spending||$142 million||$136 million|
|2014E Wells Drilled||66/43.5 gross/net wells||63/40.5 gross/net wells|
|Surge 2014E Guidance||Previous 2014E Guidance|
|Annualized Funds from Operations ("FFO")||$326 million||$326 million|
|Annualized FFO per share||$1.50 per share||$1.50 per share|
|2014E Operational Netback per BOE||$45.28||$45.37|
|2014E Cash Flow Netback per BOE||$40.48||$40.60|
|Basic Shares Outstanding||217 million||217 million|
|Annual Dividend||$130 million||$130 million|
|Basic Payout Ratio 2014E||40.1%||41.9%|
|"All-in" Annualized Payout Ratio||89.7%||89.8%|
|2014E Exit Net Debt||$486 million||$512 million|
|Annualized Net debt / FFO||1.39x||1.48x|
|7||Includes 20 farmed out Viking locations at an average net working interest of 20%.|
|8||Management uses funds from operations (cash flow from operating activities before changes in non-cash working capital, legal settlement expenses, transaction costs, decommissioning expenditures and current tax on dispositions) 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 2014 Edmonton Par $101.60/bbl; 2014 AECO gas $4.90/mcf and a 2014 CAD/USD exchange rate of $0.91.|
|10||Current guidance assumes a four percent growth rate on exit 2014 production of 21,350 boe/d and the annualized Q4 2014 FFO of $314 million|
|11||Previously based on a Surge share price of $7.00, current guidance is based on a Surge share price of $8.00|
|12||Current guidance assumes the annualized FFO per note 10, including repayment of debt with excess cashflow of $32 million. This results in ending debt of $446 million.|
In accordance with Surge's guidance set forth above, with a low "all-in" payout ratio of less than 90 percent, the Company forecasts its debt will be reduced by more than $31 million on an annualized basis.
Surge will continue to focus capital towards elite, large OOIP crude oil reservoirs. Management's primary goals for Surge include achieving three to five percent organic annual per share growth in reserves, production and cash flow, a sustainable and growing 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 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, continuing to improve sustainability 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 hortizontal frac technology and optimizations.
Surge is well positioned to offer solid annual per share growth, plus a competitive increasing dividend, through its organic development drilling program, and the Company's high quality waterflood projects - for the foreseeable future.
FINANCIAL STATEMENTS AND ACCOMPANYING MDA:
Surge has filed with Canadian securities regulatory authorities its financial statements and accompanying MD&A for the three months ended June 30, 2014. These filings are available for review at www.sedar.com or www.surgeenergy.ca.
FORWARD LOOKING STATEMENTS:
This press release contains forward-looking statements. More particularly, this press release contains statements concerning: (i) expectations with respect to Surge's balance sheet and anticipated year ended bank line availability; (ii) the completion, timing and use of proceeds of the $52 million of disposition transactions; (iii) the anticipated increase in capital spending for 2014; (iv) anticipated increases in drilling inventory; (v) forecast decline rates; (vi) Surge's drilling and development plans and enhance recovery projects and the timing and results to be expected thereof; (vii) the proposed delivery of solution gas to new facilities for certain Valhalla wells and Surge's reduction in reliance on the Sexsmith plant; (viii) management's expectations with respect to the Company's waterflood program, results therefrom and quantity of producing assets that will be placed under waterflood; (ix) Surge's operational guidance, including year-end exit production rate, capital spending, total wells drilled, decline rates, year-end net-asset-value/share, annualized funds from operations, including on a per share basis, operational and cash flow netback, including on a per BOE basis, the number of shares outstanding, total annual dividend and expected yield, basic payout ratios, "all-in" pay-out ratios, estimated year-end net debt to funds from operation ratio and year-end exit debt; (xii) the Company's declared focus and primary goals; and (xiii) the sustainability of dividends.
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, 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 receipt of approval of the lenders under Surge's bank line to increases thereto.
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.
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. 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.
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.
SOURCE: Surge Energy Inc.
For further information:
Paul Colborne, Chairman, President & CEO
Surge Energy Inc.
Phone: (403) 930-1507
Fax: (403) 930-1011
Email: [email protected]
Max Lof, CFO
Surge Energy Inc.
Phone: (403) 930-1021
Fax: (403) 930-1011
Email: [email protected]
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