CALGARY, Oct. 28, 2014 /CNW/ - Surge Energy Inc. ("Surge" or the "Company") is providing a sustainability outlook based on lower crude oil prices, and an operations update for the third quarter of 2014. The Company has experienced better than expected drilling, optimization and waterflood results across Surge's high quality, long life, light oil asset base, including continued successful step-out drilling results in the Upper Shaunavon formation in SW Saskatchewan, the Midale play in SE Saskatchewan and the Sparky play in SE Alberta.
In addition, Surge is pleased to announce the appointment of Mr. Gerry de Leeuw to the position of Vice President of Geosciences.
SUSTAINABILITY OUTLOOK; RESILIANT DIVIDEND
With the low Canadian dollar Surge continues to realize WTI pricing of over CAD$91 per barrel1. Reduced differentials and the Company's strategic ongoing hedging programs, enhance and further protect Surge's monthly cash flows. Surge has over 40 percent of the Company's net crude oil production locked in at over C$100 per barrel through July, 2015.
In the third quarter, Surge closed on the sale of several minor assets, including 400 boepd of non-core production, for proceeds of approximately $52 million, thereby reducing the Company's debt. As always, Surge will continue to look for opportunities to reinvest these proceeds into core area asset acquisitions, if and when they become available.
As a result of better than anticipated development drilling and waterflood results discussed below, Surge still anticipates exiting 2014 at production guidance of 21,350 boepd (85 percent oil and NGL's) - even after the sale of the 400 boepd of non-core assets referred to above.
Surge has a low decline asset base, with over 2.0 billion barrels of original oil in place ("OOIP"2) - and an estimated recovery factor of just eight percent. The Company has a 12 year inventory of over 1,000 low risk development drilling locations, and a suite of high quality waterflood projects.
In the past several weeks world crude oil prices have fallen. In this regard, Surge management have recently completed a "stress test" in relation to the Company's 2015 capex program, and the sustainability of the Company's dividend.
As discussed above, Surge has a high quality, large OOIP, light oil asset base, a low corporate decline of less than 22 percent, a low all-in payout ratio, and high netbacks. The Company has a strong balance sheet, and an ongoing risk management hedging program. In addition, Surge has top quartile production efficiencies of under $29,000 per flowing boe relating to Surge's primary drilling opportunities. On this basis, management is very excited with respect to Surge's ability to deliver on management's growth estimates, and the payment of the Company's dividend - even in a lower crude oil pricing environment.
Consequently, in 2015 (utilizing US$79.50 WTI per barrel pricing) Surge now anticipates delivering more than 17 percent growth in average daily production over 2014 (five percent growth in production per weighted average share), and paying the Company's current $0.60 per share annual dividend, while maintaining an all-in payout ratio3 of under 94 percent!
This sustainability outlook confirms managements low risk business strategy and highlights Surge's corporate fundamentals and resiliency.
Management's stated goal at Surge is to deliver shareholders a low risk, long term, sustainable 12-14 percent annualized total rate of return, on a risk adjusted basis, with an increasing compounding dividend.
EXCELLENT DRILLING AND OPERATIONAL RESULTS CONTINUE
In the third quarter of 2014 Surge experienced excellent drilling results across the Company's entire asset base, drilling 11 net wells with a 100 percent success ratio.
Upper Shaunavon - Continued Drilling Success
In the Shaunavon area of SW Saskatchewan, Surge continued the development of the Company's exciting new discovery in the Upper Shaunavon formation, drilling three new step-out development wells from the discovery well to delineate the size and scope of this large, 100 percent working interest, medium gravity crude oil pool.
The discovery well at 191/16-36-005-19W3 came on production at over 300 bopd, paid out in approximately 100 days, and is still producing over 180 bopd after eight months at an 80 percent oil cut.
Each of the three new step-out wells also came on production at over 300 bopd and look to be similar wells to the discovery well. With all-in drilling and completion costs of $2 million per well, and utilizing 175,000 bbls/well of risked reserve additions, Surge anticipates a recycle ratio of more than 5.5 times in relation to the development of the Upper Shaunavon play.
Subsequent to the end of the third quarter Surge has drilled, cased and fracced two additional Upper Shaunavon wells, which are 800 m step-out development wells, to the west of the initial wells. These wells have been placed on production.
In addition, Surge has also successfully drilled and cased its first Upper Shaunavon well on a separate new offsetting trend to the Company's original wells. Surge plans to drill two net additional Upper Shaunavon wells prior to the end of 2014.
Surge now maps more than 200 million barrels of OOIP on it's lands as a result of the Upper Shaunavon discovery. In addition, the Company now estimates that it has added over 100 low risk, development drilling locations on this play.
Surge plans to drill up to 12 additional net wells for Upper Shaunavon production in 2015.
Macoun/Pinto - Midale
In SE Saskatchewan, Surge also experienced successful drilling results on the Company's light oil Midale trend. At Macoun, Surge drilled 2 (1.5 net) Midale, multi-frac, oil wells that are now on production with rates well above the Company's type curve. Surge also executed on two fracs of existing producing horizontal well bores - more than doubling the production rates from each of these wells. In addition, Surge will be converting one well at Macoun to injection during the fourth quarter to continue the implementation of a full waterflood program. Surge is very excited about the development drilling and waterflood upside relating to this operated, 60 million OOIP, light oil Midale pool.
At Pinto, Surge participated in the drilling of two successful Midale light oil wells (30 % WI, each) with gross production for each well at over 200 bopd, which is well above the Company's type curve. In addition, Surge is currently participating in the drilling of a third well which is also at 30% WI.
Also at Pinto, Surge has successfully drilled, and is currently fraccing, its first two operated Midale wells (100 % WI), which Surge anticipates will be on stream in November.
Surge now has over 115 sections of prospective land, and over 90 net drilling locations, on this high quality, light oil play. Over 60 sections of Surge's land on this play are fee (royalty free) lands.
Eyehill/Wainwright/Provost - Sparky
At Eyehill in Central Alberta, during the third quarter of 2014 Surge successfully drilled two (2 net) wells into the Sparky formation. The wells are producing above Surge's expected 180 day type curve rate. As a result of successful industry farm-ins, and successful step-out development drilling results, Surge now estimates over 100 million barrels of net OOIP in the Sparky formation at Eyehill, with less than one percent recovered to date. Surge also initiated conversion of a horizontal well to water injection in the third quarter of 2014 and expects to be on injection by the end of October. The Company now has over 47 (45 net) development locations at Eyehill based on 400 meter inter-well spacing, however, with full development and waterflood, this well count could double. In the last 18 months, Surge has organically grown production at Eyehill to over 800 boepd.
Subsequent to the end of the third quarter, at Eyehill Surge has successfully drilled a significant, step out and earning well in the Sparky formation. The well is currently being fracced and will be on production early in November.
At Wainwright in Central Alberta, during the third quarter Surge drilled its first multi-frac Sparky horizontal well. The well is now on production and performing at the 90 day expected type curve. This success has resulted in the identification of numerous follow-up locations.
Also in the third quarter at Wainwright Surge closed a 76 boe/d Sparky asset acquisition at a purchase price of $59,210 per flowing boe. This complementary production acquisition also included six sections of highly prospective undeveloped Sparky land. In the fourth quarter, Surge has now successfully drilled and is currently fraccing a horizontal Sparky oil well on these lands. A successful well will confirm at least 5 more Sparky, horizontal, development locations.
At Provost, Surge drilled one (1 net) horizontal, multi-frac, Sparky well. The well was brought on production early in the third quarter of 2014, and is producing at expected 180 day type curve rates. The battery facilities have been expanded at Provost on this 45 million barrel OOIP pool to accommodate the conversion of a well to injection, which is planned for first quarter of 2015. Surge has over 18 net development locations remaining at Provost.
Manson - Bakken/Torquay
At Manson in SW Manitoba, during the third quarter of 2014 Surge focused on an expansion of the waterflood through the conversion of two (2 net) additional horizontal Bakken wells to injection. The gathering and water injection pipeline system was also expanded to accommodate the single well battery development locations that were drilled in 2013. Waterflood approval was received for two additional sections of this high quality, high netback 76 million barrels OOIP light oil pool. Surge now has six injectors at Manson, and the waterflood is responding with better than expected results.
At Nipisi in NW Alberta, a third horizontal injector was added to the pool during the third quarter of 2014. The net waterflood response to date from the existing injectors has been excellent. This high netback, 80 million barrel OOIP, Slave Point light oil pool has a recovery factor of less than one percent, has numerous follow-up locations, and further waterflood upside. Surge is currently drilling one (1 net) well at Nipisi in the fourth quarter. Surge anticipates expanding both its drilling and water flood programs at Nipisi in 2015.
At Valhalla in NW Alberta, Surge drilled and completed two (0.9 net) successful wells at the Company's large 160 million barrel OOIP light oil Doig pool, during the third quarter of 2014. Both of these wells are on stream and producing at or above type curve expectations.
Sunset - Montney
At Sunset in NW Alberta, Surge optimized the production of an existing 100% WI, horizontal Montney oil well with a frac, and more than tripled the production rate to over 100 bopd. Surge now estimates the OOIP for this light oil Montney pool to be over 60 million bbls. Surge anticipates it will commence the development of this high quality asset in 2015 through horizontal drilling, and the further optimization of the existing waterflood.
EXECUTIVE APPOINTMENT - MR. GERRY DE LEEUW
Surge is pleased to announce the executive appointment of Mr. Gerry de Leeuw, who will be taking on the new role of Vice President of Geosciences. Mr. de Leeuw previously served for Devon Canada in a variety of senior executive positions over the past ten years. Prior to Devon, Gerry held positions with Northstar Energy, TCPI, Amoco and Texaco. Through these positions he gained experience with senior technical and management positions in business development, marketing and his key focus, exploration.
Gerry graduated from the University of Waterloo with a Bachelor of Science with Honors in Earth Science. Following this, he continued his education at the University of British Columbia where he completed his Masters of Business Admin. Surge management, Board and employees are very excited to welcome Gerry to the Company's management team.
Surge is an oil-weighted production and development company with high quality, large OOIP, crude oil reservoirs. Management is focused on delivering to its shareholders solid per share organic growth, sustainable monthly dividends, and further growth through accretive acquisitions of additional elite oil reservoirs. For further information visit our website at www.surgeenergy.ca.
FORWARD LOOKING STATEMENTS:
This press release contains forward-looking statements. More particularly, this press release includes, without limitation, forward-looking statements concerning: (i) anticipated operating cost reductions on the Longview properties; (ii) Surge's number of drilling locations and drilling, development and waterflood opportunities, (iii) estimated production decline rates, (iv) Longview's estimated annual funds flow; (v) the estimated 2014 exit production rate of Surge; (vi) estimated 2014 capital expenditures and drilling activity; (vii) estimated Q4 2014 annualized funds flow from operations, (viii) estimated 2014 operational and cash flow netback, (ix) estimated 2014 exit net debt, * estimated ratio of 2014 net debt to Q4 2014 annualized cash flow, (xi) forecast annual reductions in Surge's debt, (xii) targeted rates of growth in reserves, production and cash flow, (xiii) the sustainability of and potential for increases in Surge's dividend, and (xiv) targeted annualized rates of total return.
The forward-looking statements contained in this press release are based on certain key expectations and assumptions made by Surge, including, but not limited to, expectations and assumptions concerning the success of future drilling, development and completion activities, the performance of existing wells, the performance of new wells, the viability of waterflood projects, the availability and performance of facilities and pipelines, the geological characteristics of Surge's properties, the successful application of drilling, completion and seismic technology, prevailing weather conditions, commodity prices, royalty regimes and exchange rates, the application of regulatory and licensing requirements and the availability of capital, labour and services. Although Surge believes that the expectations and assumptions on which the forward-looking statements are based are reasonable, undue reliance should not be placed on the forward-looking statements because Surge can give no assurance that they will prove to be correct.
Since forward-looking statements address future events and conditions, by their very nature they involve inherent risks and uncertainties. Actual results could differ materially from those currently anticipated due to a number of factors and risks. These include, but are not limited to, risks associated with the oil and gas industry in general (e.g., operational risks in development, exploration and production; delays or changes in plans with respect to exploration or development projects or capital expenditures; the uncertainty of reserve estimates; the uncertainty of estimates and projections relating to production, costs and expenses, and health, safety and environmental risks), commodity price and exchange rate fluctuations and uncertainties resulting from potential delays or changes in plans with respect to exploration or development projects or capital expenditures. Certain of these risks are set out in more detail in Surge's Annual Information Form which has been filed on SEDAR and can be accessed at www.sedar.com.
The forward-looking statements contained in this press release are made as of the date hereof and Surge undertakes no obligation to update publicly or revise any forward-looking statements or information, whether as a result of new information, future events or otherwise, unless so required by applicable securities laws.
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.
Certain references to 2014 and 2015 targets and anticipated results contained in this news release may be considered 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.
1 Assumes US$ WTI of $81.50. CAD/USD of $0.8950
2 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.
3 Payout ratio is defined as (dividends plus capital expenditures) divided by funds flow from operations.
SOURCE: Surge Energy Inc.
For further information:
Paul Colborne, 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]