CALGARY,
AB, Dec. 7, 2023 /CNW/ - Surge Energy Inc.
("Surge" or the "Company") (TSX: SGY) is pleased to announce its
2024 capital and operating budget as approved by the Company's
Board of Directors, the release of the Company's third annual
sustainability report, as well as the appointment of two Vice
Presidents.
2024 BUDGET GUIDANCE: CONTINUED
FOCUS ON FREE CASH FLOW GENERATION AND SHAREHOLDER
RETURNS
Surge's focus in 2024 will continue to be on disciplined capital
allocation, with cash flow strategically allocated between high
rate of return capital projects, net debt1 repayment,
and further increases to shareholder returns. Surge is
currently returning over $48 million
annually to shareholders through the Company's existing base
dividend of $0.48 per share, per
annum (paid monthly).
Surge's 2024 capital budget will see approximately 95 percent of
its development expenditures directed towards two of the top four
crude oil plays in Canada in its
Sparky (>11,000 boepd; 85% liquids) and SE Saskatchewan (~8,000 boepd; 90% liquids)
core areas, as independently evaluated by a leading brokerage
firm2, which now comprise over 80 percent of the
Company's current production.
Based on Surge's 2024 capital budget, the Company can deliver
production of 25,000 boepd (87 percent liquids), while concurrently
generating an anticipated $105
million of free cash flow1 (before dividends) at
US$75 WTI crude oil
pricing3 – providing investors with an estimated free
cash flow yield1,4 of 15 percent.
Surge Management closely monitors market conditions for
commodity prices, Canadian oil price differentials, as well
as interest and foreign exchange rates. The pace of the
Company's capital expenditures budget is strategically adjusted,
based on market conditions.
2024 BUDGET HIGHLIGHTS
Surge's disciplined 2024 capital and operating budget:
- Maximizes free cash flow, through a focused, $190 million exploration and development capital
program;
- Generates forecast annual cash flow from operating activities
of more than $295 million
($2.95 per share) at US$75 WTI crude oil pricing;
- Results in forecast free cash flow (before dividends) of
$105 million ($1.05 per share1) at US$75 WTI crude oil pricing;
- Substantially increases the Company's waterflood budget, with
approximately $10 million of capital
expenditures directed towards expanding the Company's waterflood
program;
- Targets the drilling of 70 (net) of the Company's most capital
efficient drilling locations; focused predominately in the Sparky
and SE Saskatchewan core areas;
and
- Uses less than seven percent of the Company's internally
estimated drilling locations (i.e. over 1,050 net total estimated
locations currently in inventory)5.
Further details relating to the 2024 budget are set forth
below:
Guidance
|
@ US $75
WTI6
|
Average 2024
production
|
25,000 boepd (87%
liquids)
|
2024(e) Exploration and
development expenditures
|
$190 million
|
2024(e) Cash flow from
operating activities*
|
$295 million
|
Per
share
|
$2.95 per
share
|
2024(e) Free cash flow
(before dividends)
|
$105 million
|
Per
share
|
$1.05 per
share
|
2024(e) All-in payout
ratio7
|
81 %
|
2024(e) Exit net debt
to 2024(e) cash flow from operating activities
ratio7
|
0.7x
|
2024(e) Royalties as a
% of petroleum and natural gas revenue
|
18.00 %
|
2024(e) Net operating
expenses7
|
$19.95 - $20.95 per
boe
|
2024(e) Transportation
expenses
|
$1.50 - $1.75 per
boe
|
2024(e) General &
administrative expenses
|
$2.15 - $2.35 per
boe
|
* Cash flow from
operating activities assumes a nil change in non-cash working
capital.
|
2024 DRILLING PROGRAM: FOCUSED ON
THE SPARKY (MANNVILLE) AND
SE SASKATCHEWAN (FROBISHER)
Surge's 2024 capital program is focused in the Company's Sparky
and SE Saskatchewan core areas,
with approximately 95 percent of 2024 development budget in these
two areas. A total of 70 net wells are planned across all
core areas, with 37 net wells planned in the Sparky, 32 net wells
planned in SE Saskatchewan, and
one well targeting the prolific Doig formation in Surge's
Valhalla core area.
Sparky (Mannville)
Surge's 2024 capital program in the Sparky core area (>85%
liquids; 23° API average crude oil gravity) is focused on
development drilling, with 37 net wells budgeted to be drilled in
the Company's large original oil in place ("OOIP")8
pools at Cadogan, Sounding Lake, Betty
Lake – as well as the Company's emerging multi-lateral
Sparky/Mannville play in the Hope
Valley/Giltedge area.
This capital program will consist of 25 net single-leg frac'ed
Sparky horizontal wells, 8 net multi-leg Sparky wells, and 4 net
horizontal wells in the Lloydminster formation. In 2024,
Management is focused on the continued growth of Surge's
multi-lateral well footprint in the Mannville, with approximately 30 percent of
drilling capital directed to multi-lateral development.
SE
Saskatchewan
In the Company's SE
Saskatchewan core area, Surge is currently budgeting the
drilling of 32 (net) conventional Mississippian horizontal wells,
with 25 of these wells targeting the Frobisher formation, and 7 wells targeting the
Midale and Lodgepole
formations.
Over the past number of years, the Company has endeavored to
optimize reservoir contact by drilling two and three leg stacked
multi-lateral wells within the Frobisher. In 2024, 19 (75
percent) of Surge's planned Frobisher wells will be drilled as
multi-lateral horizontal wells.
ANNUAL SUSTAINABILITY REPORT
RELEASED
Surge has released its third annual Sustainability Report,
outlining the Company's advancement of its environmental, social
and governance practices, and their impact on Surge's business and
operating strategy.
The Company's third annual Sustainability Report reaffirms
Surge's commitment to be a leader in reducing the impact of oil and
gas operations on the environment. The report covers
performance metrics for the 2020, 2021, and 2022 calendar years and
aligns with guidance set forth by the Task Force on Climate-Related
Financial Disclosure.
The Sustainability Report was approved by Surge's Management
team, as well as the Company's Board of Directors, and is intended
to allow all Surge stakeholders to better understand the Company's
commitment to sustainable, responsible oil and gas operations.
Surge's latest annual Sustainability Report can be accessed
through the Company's website.
APPOINTMENT OF VICE
PRESIDENTS
Surge's Board and Management is pleased to announce the addition
of two new Vice Presidents to the leadership team of the
Company.
Mr. Dan Kelly, CA, CPA has been promoted to Vice
President, Finance and Controller. Mr. Kelly is an
experienced energy finance professional with over 15 years of
industry experience, and has been with Surge for over 9 years.
Mr. Grant Cutforth, P. Geol. has
been promoted to Vice President, Business Development. Mr. Cutforth
is a seasoned professional Geologist and business development
professional with over 24 years of industry experience, and has
been with the Company for over 9 years.
FORWARD-LOOKING
STATEMENTS
This press release contains forward-looking statements. The use
of any of the words "anticipate", "continue", "estimate", "expect",
"may", "will", "project", "should", "believe" and similar
expressions are intended to identify forward-looking statements.
These statements involve known and unknown risks, uncertainties and
other factors that may cause actual results or events to differ
materially from those anticipated in such forward-looking
statements.
More particularly, this press release contains statements
concerning: Surge's continued focus on free cash flow generation
and shareholder returns; Surge's plans for the allocation of cash
flow; Surge's expectations regarding commodity prices; the
anticipated usage of funds allocated in its 2024 capital and
operating budget; anticipated 2024 free cash flow yield free cash
flow yield; Surge's planned drilling program; Surge's drilling
locations; and Surge's 2024 guidance, including average 2024(e)
production; 2024(e) exploration and development expenditures;
2024(e) cash flow from operating activities; 2024(e) free cash
flow; 2024(e) all-in payout ratio; 2024(e) exit net debt to 2024(e)
cash flow from operating activities ratio; 2024(e) royalties as a %
of petroleum and natural gas revenue; 2024(e) net operating
expenses; 2024(e) transportation expenses; and 2024(e) general
& administrative expenses.
The forward-looking statements are based on certain key
expectations and assumptions made by Surge, including expectations
and assumptions around the performance of existing wells and
success obtained in drilling new wells; anticipated expenses, cash
flow and capital expenditures; the application of regulatory and
royalty regimes; prevailing commodity prices and economic
conditions; development and completion activities; the performance
of new wells; the successful implementation of waterflood programs;
the availability of and performance of facilities and pipelines;
the geological characteristics of Surge's properties; the
successful application of drilling, completion and seismic
technology; the determination of decommissioning liabilities;
prevailing weather conditions; exchange rates; licensing
requirements; the impact of completed facilities on operating
costs; the availability and costs of capital, labour and services;
and the creditworthiness of industry partners.
Although Surge believes that the expectations and assumptions on
which the forward-looking statements are based are reasonable,
undue reliance should not be placed on the forward-looking
statements because Surge can give no assurance that they will prove
to be correct. Since forward-looking statements address future
events and conditions, by their very nature they involve inherent
risks and uncertainties. Actual results could differ materially
from those currently anticipated due to a number of
factors and risks. These include, but are not
limited to, risks associated with the condition
of the global economy, including trade, public health
(including the impact of COVID-19) and other geopolitical risks;
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; and
failure to obtain the continued support of the lenders under
Surge's bank line. Certain of these risks are set out in more
detail in Surge's AIF dated March 8,
2023 and in Surge's MD&A for the period ended
December 31, 2022, both of which have
been filed on SEDAR+ and can be accessed at www.sedarplus.ca.
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.
Oil and Gas Advisories
The term "boe" means barrel of oil equivalent on the basis of 1 boe to 6,000 cubic feet of natural gas. Boe may be misleading,
particularly if used in isolation. A boe conversion ratio of 1 boe
for 6,000 cubic feet of natural gas is based on an energy
equivalency conversion method primarily applicable at the burner
tip and does not represent a value equivalency at the
wellhead. "Boe/d"
and "boepd" mean barrel of oil equivalent per day. Bbl means barrel of oil and "bopd" means barrels
of oil per day. NGLs means natural gas liquids.
This press release contains certain oil and gas metrics and
defined terms which do not have standardized meanings or standard
methods of calculation and therefore such measures may not be
comparable to similar metrics/terms presented by other issuers and
may differ by definition and application.
Original Oil in Place ("OOIP") means Discovered Petroleum
Initially In Place ("DPIIP"). DPIIP is derived by Surge's internal
Qualified Reserve Evaluators ("QRE") and prepared in accordance
with National Instrument 51-101 and the Canadian Oil and Gas
Evaluations Handbook ("COGEH"). DPIIP, as defined in COGEH, is that
quantity of petroleum that is estimated, as of a given date, to be
contained in known accumulations prior to production. The
recoverable portion of DPIIP includes production, reserves and
Resources Other Than Reserves (ROTR). OOIP/DPIIP and potential
recovery rate estimates are based on current recovery technologies.
There is significant uncertainty as to the ultimate recoverability
and commercial viability of any of the resource associated with
OOIP/DPIIP, and as such a recovery project cannot be defined for a
volume of OOIP/DPIIP at this time.
As of January 1, 2023, Surge's
internally estimated OOIP of the Sparky Core area is 1.1 billion
barrels of oil, with a total estimate of 127 million barrels of oil
produced.
Reserves data set forth in this press release is based upon an
evaluation of the Company's reserves prepared by Sproule as set
forth in the Sproule Report. The reserves referenced in this press
release are gross reserves. The estimates of reserves contained in
the Sproule Report and referenced in this press release 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 contained in the Sproule Report and
referenced in this press release. The estimates of reserves for
individual properties may not reflect the same confidence level as
estimates of reserves for all properties, due to the effects of
aggregation. Readers should refer to the Surge's AIF for the year
ended December 31, 2022, which is
available on SEDAR+ at www.sedarplus.ca or on Surge's website at
www.surgeenergy.ca, for a complete description of the Sproule
Report (including reserves by the specific product types) and the
material assumptions, limitations and risk factors pertaining
thereto.
Drilling Inventory
This press release discloses drilling locations in two
categories: (i) booked locations; and (ii) unbooked locations.
Booked locations are proved locations and probable locations
derived from an internal evaluation using standard practices as
prescribed in COGEH and account
for drilling locations
that have associated proved and/or probable
reserves, as applicable.
Unbooked locations are internal estimates
based on prospective acreage and assumptions as to the number of wells that can
be drilled per section based on industry
practice and internal
review. Unbooked locations
do not have attributed reserves or resources.
Unbooked locations have been identified by Surge's internal
certified Engineers and Geologists (who are also Qualified Reserve
Evaluators) as an estimation of our multi-year drilling activities
based on evaluation of applicable geologic, seismic, engineering,
production and reserves information. There is no certainty that the
Company will drill any or all unbooked drilling locations
and if drilled there is no certainty
that such locations will result in additional oil and gas reserves,
resources or production. The drilling
locations on which the Company
actually drills wells will ultimately depend upon the
availability of capital, regulatory approvals, seasonal
restrictions, oil and natural gas prices, costs, actual drilling
results, additional reservoir information that is obtained and
other factors. While certain of the unbooked drilling locations
have been de-risked by drilling existing wells in relative close
proximity to such unbooked drilling locations, the majority of
other unbooked drilling locations are farther away from existing
wells where management has less information about the
characteristics of the reservoir and therefore there is more
uncertainty whether wells will be drilled in such locations and if
drilled there is more uncertainty that such wells will result in
additional oil and gas reserves, resources or production.
Assuming a January 1, 2023
reference date, the Company will have over >1,150 gross
(>1,050 net) drilling locations identified herein; of these
>625 gross (>575 net) are unbooked locations. Of the 488.5
net booked locations identified herein, 366.1 net are Proved
locations and 122.4 net are Probable locations based on Sproule's
2022 year-end reserves. Assuming an average number of wells drilled
per year of 80, Surge's >1,050 net locations provide 13 years of
drilling.
Assuming a January 1, 2023
reference date, the Company will have over >480 gross (>480
net) Sparky Core area drilling locations identified herein; of
these >300 gross (>300 net) are unbooked locations. Of the
182 net booked locations identified herein, 126 net are Proved
locations and 56 net are Probable locations based on Sproule's 2022
year-end reserves. Assuming an average number of wells drilled per
year of 40, Surge's >480 net locations provide >12 years of
drilling.
Assuming a January 1, 2023
reference date, the Company will have over >325 gross (>275
net) SE Saskatchewan drilling
locations identified herein; of these >140 gross (>120 net)
are unbooked locations. Of the 154 net booked locations identified
herein, 105 net are Proved locations and 49 net are Probable
locations based on Sproule's 2022 year-end reserves. Assuming
an average number of wells drilled per year of 40, Surge's >275
net locations provide ~7 years of drilling.
Assuming a subset of SE
Saskatchewan inventory, and a January
1, 2023 reference date, the Company will have over >190
gross (>160 net) SE Saskatchewan Frobisher drilling locations
identified herein; of these >80 gross (>75 net) are unbooked
locations. Of the 89 net booked locations identified herein, 56 net
are Proved locations and 33 net are Probable locations based on
Sproule's 2022 year-end reserves.
Surge's internally used type curves were constructed using a
representative, factual and balanced analog data set, as of
January 1, 2022. All locations were
risked appropriately, and estimated ultimate recoverable ("EUR")
reserves were measured against OOIP estimates to ensure a
reasonable recovery factor was being achieved based on the
respective spacing assumption. Other assumptions, such as capital,
operating expenses, wellhead offsets, land encumbrances, working
interests and NGL yields were all reviewed, updated and accounted
for on a well by well basis by Surge's Qualified Reserve
Evaluators. All type curves fully comply with Part 5.8 of the
Companion Policy 51 – 101CP.
Non-GAAP and Other Financial
Measures
This press release includes references to non-GAAP and other
financial measures used by the Company to evaluate its financial
performance, financial position or cash flow. These specified
financial measures include non-GAAP financial measures and non-GAAP
ratios, are not defined by IFRS and therefore are referred to as
non-GAAP and other financial measures. Certain secondary
financial measures in this press release
– namely "free cash flow", "free cash flow per
share", "free cash flow yield", "net debt", "net debt to cash flow
from operating activities", "all-in payout ratio", "net operating
expenses", and "net operating expenses per boe" are not prescribed
by GAAP. These non-GAAP and other financial measures are included
because management uses the information to analyze business
performance, cash flow generated from the business, leverage and
liquidity, resulting from the Company's principal business
activities and it may be useful to investors on the same basis.
None of these measures are used to enhance the Company's reported
financial performance or position. The non-GAAP and other financial
measures do not have a standardized meaning prescribed by IFRS
and therefore are unlikely to be comparable to similar measures
presented by other issuers. They are common in the reports of other
companies but may differ by definition and application. All
non-GAAP and other financial measures used in this document are
defined below.
Free Cash Flow, Free Cash Flow per Share and Free Cash Flow
Yield
Free cash flow is a non-GAAP financial measure, calculated as
cash flow from operating activities, before changes in non-cash
working capital, less expenditures on property, plant, equipment,
and dividends paid. Management uses free cash flow to determine the
amount of funds available to the Company for future capital
allocation decisions.
Free cash flow per share is a non-GAAP ratio, calculated using
the same weighted average basic and diluted shares used in
calculating income per share. Free cash flow yield is a non-GAAP
ratio, calculated as free cash flow per share divided by the
current share price.
Net Debt and Net Debt to Cash Flow from Operating
Activities
Net debt is a non-GAAP financial measure, calculated as bank
debt, term debt, plus the liability component of the convertible
debentures plus current assets, less current liabilities, however,
excluding the fair value of financial contracts, decommissioning
obligations, and lease and other obligations. There is no
comparable measure in accordance with IFRS for net debt. This
metric is used by management to analyze the level of debt in the
Company including the impact of working capital, which varies with
timing of settlement of these balances.
Net debt to cash flow from operating activities is a non-GAAP
ratio, calculated as exit net debt divided by cash flow from
operating activities. Management uses this ratio to measure the
Company's overall debt position and to measure the strength of the
Company's balance sheet. Surge monitors this ratio and uses this as
a key measure in making decisions regarding financing, capital
expenditures and dividend levels.
All-in payout ratio
All-in payout ratio is a non-GAAP ratio, calculated as
exploration and development expenditures, plus dividends paid,
divided by cash flow from operations. This capital management
measure is used by management to analyze allocated capital in
comparison to the cash being generated by the principal business
activities.
Net Operating Expenses and Net Operating Expenses
per boe
Net operating expenses is a non-GAAP financial measure,
determined by deducting processing income primarily generated by
processing third party volumes at processing facilities where the
Company has an ownership interest. It is common in the industry to
earn third party processing revenue on facilities where the entity
has a working interest in the infrastructure asset. Under IFRS this
source of funds is required to be reported as revenue. However, the
Company's principal business is not that of a midstream entity
whose activities are dedicated to earning processing and other
infrastructure payments. Where the Company has excess capacity at
one of its facilities, it will look to process third party volumes
as a means to reduce the cost of operating/owning the facility. As
such, third party processing revenue is netted against operating
costs in the MD&A.
Net operating expenses per boe is a non-GAAP ratio, calculated
as net operating expenses divided by total barrels of oil
equivalent produced during a specific period of time.
Neither the TSX nor its Regulation Services Provider (as that term is defined
in the policies of the TSX) accepts
responsibility of the accuracy of this release.
1
|
This is a non-GAAP and
other financial measure which is defined under Non-GAAP and Other
Financial Measures section of this document.
|
2
|
Source: Peters &
Co. Limited (January 9, 2023 North American Oil and Natural Gas
Plays).
|
3
|
Additional pricing
assumptions: (WCS: US$16.00, EDM US$3.50 differentials), CAD/USD FX
of $0.725 and AECO of $2.95 per mcf.
|
4
|
Free cash flow yield of
15 percent is calculated as $105 million of free cash flow (before
dividends), divided by 100.3 million basic shares outstanding,
divided by a SGY share price of $7.00/sh.
|
5
|
See the Drilling
Inventory section of this document for further
information.
|
6
|
Additional pricing
assumptions (WCS: US$16.00, EDM US$3.50 differentials), CAD/USD FX
of $0.725 and AECO of $2.95 per mcf.
|
7
|
This is a non-GAAP and
other financial measure which is defined in the Non-GAAP and Other
Financial Measures section of this document.
|
8
|
See the Oil & Gas
Advisory section of this document for further
information.
|
SOURCE Surge Energy Inc.