Surge Energy Inc. Announces Acquisition of Light Oil Resource Play Asset, $40 Million Bought Deal Financing, Increased 2010 Guid
23 September 2010 - 2:04PM
Marketwired Canada
NOT FOR DISTRIBUTION TO UNITED STATES NEWSWIRE SERVICES OR FOR DISSEMINATION IN
THE UNITED STATES.
Surge Energy Inc. ("Surge" or the "Company") (TSX VENTURE:SGY) is pleased to
announce that it has entered into an agreement with a major independent Canadian
corporation to acquire a high working interest, operated property currently
producing 726 boe/d in the Valhalla South area located in western Alberta (the
"Property") for a total consideration of $75 million (the "Acquisition"). The
current production consists of vertical oil wells producing from an extensive
tight sand with up to 50 meters of gross light oil pay in the Triassic Doig
Formation. Management has a proven track record of optimizing value in the
tight, compartmentalized Doig Formation (Fireweed) and plans to drill the
Property using horizontal multi-frac technology. The Acquisition adds a fourth
early stage, high impact, light oil resource play to Surge's portfolio.
Surge is also pleased to announce a $40 million bought deal financing of
7,620,000 Subscription Receipts at a price of $5.25 per Subscription Receipt
(the "Financing"), increased 2010 guidance, and preliminary 2011 guidance.
ACQUISITION HIGHLIGHTS & STRATEGIC RATIONALE
Through the Acquisition, Surge is acquiring a low decline asset (less than 15%)
with all season access that has significant light oil (40 degree API) upside
with internal company estimates of more than 100 million barrels of Total
Petroleum Initially In Place(1) ("TPIIP"), and cumulative oil recovery to date
of less than three percent of TPIIP. The Doig field is approximately 12
kilometers long by two kilometers wide and up to 50 meters thick. Using existing
vertical well control and complete 3D seismic coverage, management has
identified up to 24 horizontal multi-frac infill drilling locations, which have
the potential to more than quadruple production on the Property to over 3000
boe/d (greater than 60% oil and NGL's) over the next three years. The Property
is a light oil analogue to the Fireweed Doig gas asset which management
successfully developed in 2009 at a previous entity. Production in the Fireweed
Doig was increased from approximately 800 boe/d to greater than 2,500 boe/d by
drilling three infill horizontal multi-frac wells.
To date, the Property has only been drilled with vertical wells and has
recovered less than three percent of TPIIP. The company plans to significantly
increase recovery utilizing horizontal multi-frac technology. Surge plans to
drill, complete, and tie-in infill horizontal multi-frac wells at a cost of
approximately $4.2 million with internally estimated rates of return in excess
of 200% and approximate recoveries between 600,000 and 800,000 boe per well.
Management forecasts full cycle finding, development and acquisition (FD&A)
costs of less than $10.00/boe resulting in a recycle ratio of greater than three
times. Surge plans to drill its first horizontal multi-frac well on the Property
before year end with production coming on stream by the end of the first quarter
in 2011.
As a result of the Acquisition, Surge is increasing its guidance for 2010 exit
production to 4,500 Boe/d (greater than 60% oil and NGL's) from 3,800 boe/d
(greater than 60% oil and NGL's) and forecasting a 2011 exit production rate of
6,500 boe/d (greater than 70% oil and NGL's).
The Acquisition has the following characteristics:
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Current Production: 726 boe/d (approximately 37% light oil
and NGL's)
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Proved plus Probable Reserves: (2) 3,308 mboe
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Proved plus Probable Reserves Metric: $22.67/boe
(2)
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Gross (Net) Land: 10,560 (8,613) acres
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Total Unbooked Light Oil Horizontal 24
Multi-Frac Drilling Locations:
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Operating Netback per boe: (3) $18.88/boe
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Proved plus Probable RLI: 12.5 years
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Company Estimated TPIIP: greater than 100 million barrels
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Recovery Factor to Date: less than 3%
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Rates of Return: (per infill greater than 200%
horizontal wells with multi-stage
fracs):
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Effective Date: July 1, 2010
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Expected Closing Date: November 1, 2010
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The Acquisition is forecast to be accretive to Surge in 2011 on several key
metrics, including cash flow per share (fully diluted) and production per share
(fully diluted).
INCREASED 2010 GUIDANCE
Surge's revised 2010 guidance below includes the addition of the Property's
forecast production volumes with capital included to drill one infill horizontal
multi-frac well on the Property, which is scheduled to commence production by
the end of the first quarter in 2011.
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Average 2010 Production: 3,000 boe/d (greater than 60% oil and
NGL's)
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Exit 2010 Production: 4,500 boe/d (greater than 60% oil and
NGL's)
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2010 Capital Expenditure: $226 million ($40 million net of
acquisitions)
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2010 Cash Flow(4): $27 million
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Year End Shares Outstanding: 55.5 basic, 59.5 fully diluted
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Year End Net Debt: $47 million
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Anticipated Bank Line: $90 million
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Anticipated Unutilized Bank Line: $43 million
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2011 GUIDANCE
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Average 2011 Production: 5,500 boe/d (greater than 65% oil and
NGL's)
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Exit 2011 Production: 6,500 boe/d (greater than 70% oil and
NGL's)
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2010 Capital Expenditure (net of $80 million
dispositions):
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2011 Cash Flow(5): $58
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2011 Cash Flow per Share (basic): $1.04
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Annualized 2011 Exit FFO: (6) $77 million
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Annualized 2011 Exit FFO per share $1.40
(basic):
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Proved plus Probable Reserves: (7) 17.6 mmboe
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Proved plus Probable RLI: (6) 10 years
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Net Undeveloped Land: approx. 400,000 acres
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Total Development Drilling Locations: greater than 200 gross (170 net)
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Operating Netback: $34.40
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Shares Outstanding: 55.5 basic, 59.5 fully diluted
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Year End Debt: $70 million
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Anticipated Bank Line: $90 million
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Anticipated Unutilized Bank Line: $20 million
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THE FINANCING
In conjunction with the Acquisition, Surge is also pleased to announce that it
has entered into an agreement with a syndicate of underwriters led by National
Bank Financial Inc. and including FirstEnergy Capital Corp., GMP Securities
L.P., Macquarie Capital Markets Canada Ltd., BMO Capital Markets Corp., Scotia
Capital Inc., CIBC World Markets Inc., and Peters & Co. Limited (collectively,
the "Underwriters") pursuant to which the Underwriters have agreed to purchase
7,620,000 subscription receipts ("Subscription Receipts") at a price of $5.25
per Subscription Receipt for gross proceeds of $40,005,000. The Underwriters
will have the option to acquire up to an additional 381,000 Subscription
Receipts at the same issue price for additional gross proceeds of $2,000,250,
for total gross proceeds of $42,005,250.
Each Subscription Receipt shall entitle the holder thereof to receive, for no
additional consideration and without further action, one common share ("Common
Share") of the Company, upon satisfaction of the Escrow Release Conditions
(defined below). The gross proceeds of the Subscription Receipt offering (the
"Escrowed Funds") will be held in escrow and will be released to the Company
upon satisfaction of the following conditions ("Escrow Release Conditions"): (i)
the closing of the Acquisition in accordance with the terms and conditions of
the definitive agreement; and (ii) receipt by the Company of all necessary
regulatory and other approvals for the Financing and Acquisition. In the event
that the Escrow Release Conditions are not satisfied at or before 5:00 pm
(Calgary time) on December 1, 2010, the Escrowed Funds, together with accrued
interest thereon, shall be returned to the holders of the Subscription Receipts.
Pursuant to the Financing, the Subscription Receipts will be offered by way of
private placement in all provinces of Canada (except Quebec) and by way of
private placement in the United States pursuant to exemptions from the
registration requirements pursuant to Rule 144A and/or Regulation D of the
United States Securities Act of 1933.
Surge has also agreed to use its commercially reasonable efforts to file and
obtain a receipt for a (final) short form prospectus (the "Receipt") qualifying
the Common Shares issuable pursuant to the Subscription Receipts in all
provinces of Canada, except Quebec, within 45 days of the closing of the
Financing (the "Prospectus Deadline Date"). If the Receipt is not issued by the
Prospectus Deadline Date, the Company shall issue to each holder of Subscription
Receipts, for no additional cost to and without further action on the part of
such holder, an additional 0.1 of a Common Share for each Common Share to be
issued to such holder pursuant to the Subscription Receipts held by such holder.
The Subscription Receipt offering is expected to close on or about October 20,
2010, and the Acquisition is expected to close on or about November 1, 2010.
The Acquisition will be financed with the Company's bank line, which is expected
to be increased to $90 million upon the closing of the Acquisition.
Surge is an oil focused junior oil and gas company with operations throughout
Alberta and southwest Manitoba. Surge's Common Shares trade on the TSX Venture
Exchange under the symbol SGY. Upon closing of the Acquisition, Surge will have
approximately 55.5 million basic and 59.5 million fully diluted shares
outstanding.
Forward Looking Statements:
This press release contains forward-looking statements. More particularly, this
press release contains statements concerning the potential exploration and
development opportunities associated with the Acquisition, the anticipated
accretive impact of the Acquisition on Surge, the potential impact of technology
and techniques on production and recovery, the anticipated bank line increase
from $80 million to $90 million, the anticipated date for the closing of the
Acquisition, the anticipated date for the closing of the Financing, the
anticipated date for the closing of the anticipated bank line increase from $80
million to $90 million, and Surge's projected 2010 and 2011 exit and average
rates of production. 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, the failure to obtain
necessary regulatory approvals or satisfy the conditions to closing the bank
line increase, 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 reserves 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 document 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.
(1) Total Petroleum Initially in Place (TPIIP) is defined as the 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 economically viable or technically feasible to produce
any portion of this TPIIP except for those identified as proved or probable
reserves.
(2) Reserves evaluated by GLJ as at July 1, 2010. Gross Company Reserves means
the Company's working interest reserves before the calculation of royalties, and
before the consideration of the Company's royalty interests.
(3) Based on September 20, 2010 forward strip and calculated by subtracting
royalties and operating costs from revenues
(4) Based on CDN $74.99 Edmonton Par (US$77.08 WTI) and CDN $3.93/mcf AECO
(5) Based CDN $80.71 Edmonton Par (US$80.00 WTI) and CDN $4.00/mcf AECO using a
CAD/USD of 0.95
(6) Based on forecast exit 2010 production
(7) Evaluated by GLJ as at July 1, 2010
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