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CALGARY, May 5, 2020 /CNW/ - Surge Energy Inc.
("Surge" or the "Company") (TSX: SGY) is pleased to announce its
financial and operating results for the quarter ending March 31st, 2020.
Q1/2020 CORPORATE UPDATE – NAVIGATING THE PANDEMIC
Massive crude oil demand destruction from the COVID-19 pandemic,
together with increased oil production from OPEC and Russia, contributed to a dramatic decrease in
the price of oil in 1H/20. Consequently, Surge's management and
Board acted decisively to protect the Company's balance sheet and
net asset value as follows:
- On March 9, 2020, Surge became
one of the first oil companies in Canada to reduce its dividend (by 90
percent);
- In early March the Company suspended all major capital
expenditures providing operational and financial flexibility for
the balance of 2020;
- On April 14, 2020, the Company
was one of the first oil companies in Canada to implement temporary production
curtailments. This included up to 4,400 boepd (~21 percent of March
volumes) of lower netback production in order to maximize corporate
cashflows;
- Also, on April 14, 2020, Surge
suspended the Company's dividend in its entirety until market
conditions improve;
- In Q1 and early Q2/20, the Company successfully continued to
lock in very attractive forward WTI crude oil prices, significantly
above current spot prices, pursuant to its strategic ongoing
hedging program (see below); and
- Prior to suspending Q1/20 capital expenditures, Surge completed
an outstanding Q1 development drilling program drilling 19
consecutive successful Sparky wells (i.e. of a budgeted 26 well
program). The Company added more than 2,500 boepd (>90 percent
medium/light oil) with this reduced program at an all-in cost of
$22 million, providing top tier
capital efficiencies of $8,800 per
boepd.
Given the unprecedented circumstances facing world crude oil
markets, together with management's aforementioned production
curtailments, on April
14th the Company suspended its previously
announced 2020 guidance and capital program of $98.5 million. Surge's remaining 2020 capital
program will be re-guided as crude oil prices improve.
In addition to the capital allocation decisions set forth above,
in accordance with management's strategic plan the Company has
continued to reduce net debt1 significantly from Q1/19
as compared to Q1/20 by more than $53
million, a decrease of over 12 percent.
Furthermore, the Company has identified approximately
$40 million of annualized operating
and G&A cash reductions through temporary production
curtailments, workforce optimizations and minimization or
elimination of discretionary corporate costs. As a result of
management's proactive capital allocation decisions, these cash
reductions, combined with the suspension of the Company's dividend,
are expected to result in aggregate annualized cost savings of
approximately $73 million per
year.
FINANCIAL AND OPERATING HIGHLIGHTS
|
|
|
Three Months Ended
March 31,
|
($000s except per
share amounts)
|
2020
|
2019
|
%
Change
|
Financial
highlights
|
|
|
|
Oil sales
|
61,211
|
91,128
|
(33)%
|
NGL sales
|
1,063
|
2,425
|
(56)%
|
Natural gas
sales
|
1,432
|
4,315
|
(67)%
|
Total oil, natural
gas, and NGL revenue
|
63,706
|
97,868
|
(35)%
|
Cash flow from
operating activities
|
43,138
|
28,908
|
49 %
|
Per share - basic
($)
|
0.13
|
0.09
|
44 %
|
Adjusted funds
flowi
|
30,028
|
41,851
|
(28)%
|
Per share - basic
($)i
|
0.09
|
0.14
|
(36)%
|
Net
lossii
|
(615,227)
|
(7,983)
|
7,607 %
|
Per share basic
($)
|
(1.85)
|
(0.03)
|
6,067 %
|
Total exploration and
development expenditures
|
32,504
|
41,261
|
(21)%
|
Total acquisitions
& dispositions
|
—
|
(27,807)
|
(100)%
|
Total capital
expenditures
|
32,504
|
13,454
|
142 %
|
Net debt, end of
period
|
384,686
|
438,150
|
(12)%
|
|
|
|
|
Operating
highlights
|
|
|
|
Production:
|
|
|
|
Oil (bbls per
day)
|
16,891
|
17,542
|
(4)%
|
NGLs (bbls per
day)
|
564
|
644
|
(12)%
|
Natural gas (mcf per
day)
|
17,409
|
20,663
|
(16)%
|
Total (boe per day)
(6:1)
|
20,357
|
21,630
|
(6)%
|
Average realized
price (excluding hedges):
|
|
|
|
Oil ($ per
bbl)
|
39.82
|
57.72
|
(31)%
|
NGL ($ per
bbl)
|
20.72
|
41.86
|
(51)%
|
Natural gas ($ per
mcf)
|
0.90
|
2.32
|
(61)%
|
|
|
|
|
Netback ($ per
boe)
|
|
|
|
Petroleum and natural
gas revenue
|
34.39
|
50.27
|
(32)%
|
Realized gain (loss)
on commodity and FX contracts
|
7.29
|
(0.37)
|
(2,070)%
|
Royalties
|
(4.59)
|
(5.68)
|
(19)%
|
Net operating
expensesi
|
(14.29)
|
(15.12)
|
(5)%
|
Transportation
expenses
|
(1.64)
|
(1.98)
|
(17)%
|
Operating
netbacki
|
21.16
|
27.12
|
(22)%
|
G&A
expense
|
(1.84)
|
(1.78)
|
3 %
|
Interest
expense
|
(3.10)
|
(3.84)
|
(19)%
|
Adjusted funds
flowi
|
16.22
|
21.50
|
(25)%
|
|
|
|
|
|
|
|
|
Common shares
outstanding, end of period
|
335,069
|
313,980
|
7 %
|
Weighted average
basic shares outstanding
|
332,188
|
309,448
|
7 %
|
Stock option
dilution
|
—
|
—
|
—%
|
Weighted average
diluted shares outstanding
|
332,188
|
309,448
|
7 %
|
|
i This is a non-GAAP
financial measure which is defined in the Non-GAAP Financial
Measures section of this document.
|
ii For the period
ended March 31, 2020, the Company incurred a net loss of $615.2
million, including a non-cash asset impairment charge of $590.6
million recognized in the first quarter of 2020 primarily due to a
decrease in the average independent engineering price forecasts.
The impairment charge does not impact the Company's adjusted funds
flow, and is reversible in future periods should there be any
indicators that the value of the assets has increased.
|
STRATEGIC HEDGING PROGRAM; CONTINUED DEBT REDUCTION
Surge achieved excellent hedging results in the last few weeks
capturing a large portion of the significant (record) contango in
the forward curve for crude oil prices, and "blending it" in with
the Company's much higher pre-existing crude oil hedges.
As disclosed on April 14, 2020
Surge has a strong "in the money" hedge book in which the Company
reported 5,500 bbl/d of production hedged for Q2 at attractive
crude oil pricing (i.e. above C$80/bbl). In addition, Surge has continued to
act quickly and decisively to add further hedges to protect the
Company's balance sheet, given the near-term crude inventory
concerns that are negatively impacting near term crude oil
prices.
For example, during the week of April
13-17, 2020 Surge successfully took advantage of the
significantly higher future prices in the forward WTI crude oil
curve by adding an additional 1,500 bbl/d of hedges (3-ways and
swaps) for the period of May 2020
through June 2021. This further
protects Surge's near-term crude oil price realizations against a
falling spot price, with floors on the incremental 1,500 bbl/d
between US$32 and US$36 WTI, and with upside participation to more
than US$40 per bbl on a significant
portion of these hedges.
Additionally, as global inventory concerns continued to grow, on
April 17, 2020 Surge executed an
incremental 1,000 bbl/d of WTI swaps for the month of June, which
average nearly C$42 per bbl
(US$30 per bbl). Currently the June
WTI futures contract is trading at approximately US$25 WTI per bbl.
Considering management's strategic decision to proactively
curtail up to 21 percent of Surge's oil production, the Company is
now even better hedged on a percentage basis. For example, Surge
has now hedged approximately 71 percent of the Company's forecasted
after Crown royalty crude oil production in June at over
C$67 per bbl.
In late 2019, management proactively reacquired all of the puts
that Surge sold pursuant to its 1H/20 3-way hedge transactions for
a minimal total cost of $0.4 million.
This defensive, proactive step provides approximately C$13.9 million2 in incremental
hedging gains to the Company, representing a return of
approximately 3,500 percent on the decision to reacquire the
puts.
In summary, set forth below is a breakdown Surge's current crude
oil hedge book, which now locks in production through Q1/2021:
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In addition, Surge has also hedged over 65 percent of its light
oil production differentials at US$WTI -$5 per bbl for Q2 and Q3/20.
As a result of Surge's strategic, ongoing, and disciplined
hedging program, the Company has now been independently reported as
having one of the best commodity hedge positions for 2020 in its
Canadian peer group, as set forth below:
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In addition to the capital allocation decisions set forth above,
in accordance with management's strategic plan the Company has
continued to reduce net debt significantly from Q1/19 as compared
to Q1/20 by more than $53 million, a
decrease of over 12 percent.
OPERATIONS UPDATE – PRODUCTION CURTAILMENT - RECORD SPARKY
DRILLING RESULTS
On April 14, 2020, the Company
announced its strategic decision to temporarily curtail up to 4,400
boepd (~21 percent) of lower netback production in order to
maximize corporate cash flows. Surge has the ability to restart
this production in short order, as commodity prices increase.
Additionally, Surge is selectively choosing to work over wells that
meet the Company's internal economic hurdle rate of a six to
nine-month payout at current strip prices.
Following this announcement crude prices have continued to fall
precipitously. On this basis, Surge is reviewing the temporary
curtailment of additional production where the economics of such a
curtailment are advantageous to the Company.
Surge's high quality, large original oil in
place3 ("OOIP"), conventional reservoirs continued
to deliver excellent results during Q1/2020. Surge completed a
reduced Q1/20 drilling program in early March, drilling 19
successful horizontal wells (of an originally budgeted 26 wells) in
seven different Sparky pools, which included the delineation of two
new Sparky pool discoveries on its lands at Betty Lake North and
Eyehill South.
Currently, 14 of the wells drilled in the quarter are on stream,
with initial production results performing at or above management's
expectations. Given Surge's very successful Q1/20 drilling results,
the Company's production exceeded 21,000 boepd in March (prior to
the temporary production curtailments), with five additional Sparky
wells to be brought on production following breakup, and as crude
oil prices improve.
As discussed above (see "STRATEGIC HEDGING PROGRAM; CONTINUED
DEBT REDUCTION"), management acted decisively during the week of
April 13-17, 2020 to take advantage
of the significantly higher forward crude oil pricing curve that
was available, and captured a significant, incremental, positive
hedge position before crude oil strip pricing dropped further.
OUTLOOK – BALANCE SHEET MANAGEMENT AND RIGOROUS COST
CUTTING
In light of the COVID-19 pandemic, Surge has taken many steps to
protect its staff, their families, service providers, stakeholders
and the general public. The Company's dedicated "COVID-19 Team"
ensures that Surge is staying up to date with the latest
information and data surrounding the virus outbreak, including
heeding the government's advice for physical distancing. These
measures protect the health of Surge staff while they work
diligently to ensure the safety and security of the Company's
facilities as well as continuing to deliver reliable production.
All of Surge's Calgary office
staff are working remotely and all field locations have implemented
enhanced distancing, cleaning and sanitation measures. The
management and COVID-19 teams will continue to monitor the
situation, taking guidance from health authorities.
Massive crude oil demand destruction from the COVID-19 pandemic,
together with increased oil production from OPEC and Russia, contributed to a dramatic decrease in
the price of oil in 1H/20. Consequently, Surge's management and
Board acted decisively to protect the Company's balance sheet and
net asset value, including suspending the Company's dividend and
deferring all major capital expenditures indefinitely.
Furthermore, in Q1 and early Q2/20, the Company successfully
continued to lock in very attractive forward crude oil prices
pursuant to Surge's strategic ongoing hedging program, through to
June 2021.
Furthermore, the Company has identified approximately
$40 million of annualized operating
and G&A cash reductions through temporary production
curtailments, workforce optimizations and minimization or
elimination of discretionary corporate costs. As a result of
management's proactive capital allocation decisions, these cash
reductions, combined with the suspension of the Company's dividend,
are expected to result in aggregate annualized cost savings of
approximately $73 million per
year.
Given the unprecedented circumstances facing world crude oil
markets, together with management's aforementioned production
curtailments, on April 14, 2020 the
Company suspended its previously announced 2020 guidance and
capital program of $98.5 million.
Surge's remaining 2020 capital program will be re-guided as crude
oil prices improve.
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: Management's expectations and plans with respect to the
development of its assets and the timing thereof; Surge's assets
and performance, and the characteristics thereof; Surge's
operational and financial flexibility for the balance of 2020; the
ability of Surge to maximize corporate cash flows; Surge's declared
focus and primary goals,; the impacts of COVID-19 on our business
and measures taken in response thereto; the societal, economic and
governmental response to COVID-19; Surge's capital expenditure
program and its flexibility to make adjustments thereto; Surge's
current and potential production curtailments and its ability to
restart such production; Surge's cost reduction efforts and the
anticipated results and benefits therefrom; commodity prices and
management's ability to react to changes thereto; Surge's risk
management program; Surge's hedging program and the characteristics
thereof; the select working-over of wells by Surge; and the
suspension of Surge's dividend and the timing for
reimplementation.
The forward-looking statements are based on certain key
expectations and assumptions made by Surge, including expectations
and assumptions 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 9,
2020 and in Surge's MD&A for the period ended
December 31, 2019, both of which have
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.
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. "Bopd" and "bbl/d" 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. "Internally estimated" means an
estimate that is derived by Surge's internal QRE's and prepared in
accordance with National Instrument 51-101 - Standards of
Disclosure for Oil and Gas Activities. All internal estimates
contained in this new release have been prepared effective as of
Jan 1, 2020.
Non-GAAP Financial Measures
Certain secondary financial measures in this press release –
namely, "adjusted funds flow", "adjusted funds flow per share",
"net debt", "net operating expenses", "operating netback", and
"adjusted funds flow per boe" are not prescribed by GAAP. These
non-GAAP 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 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 financial measures used in this document are defined
below:
Adjusted Funds Flow & Adjusted Funds Flow per
Share
The Company adjusts cash flow from operating activities in
calculating adjusted funds flow for changes in non-cash working
capital, decommissioning expenditures and cash settled transaction
and other costs. Management believes the timing of collection,
payment or incurrence of these items involves a high degree of
discretion and as such may not be useful for evaluating Surge's
cash flows.
Changes in non-cash working capital are a result of the timing
of cash flows related to accounts receivable and accounts payable,
which management believes reduces comparability between periods.
Management views decommissioning expenditures predominately as a
discretionary allocation of capital, with flexibility to determine
the size and timing of decommissioning programs to achieve greater
capital efficiencies and as such, costs may vary between periods.
Transaction and other costs represent expenditures associated with
acquisitions, which management believes do not reflect the ongoing
cash flows of the business, and as such reduces comparability. Each
of these expenditures, due to their nature, are not considered
principal business activities and vary between periods, which
management believes reduces comparability.
Adjusted funds flow per share is calculated using the same
weighted average basic and diluted shares used in calculating
income per share.
The following table reconciles cash flow from operating
activities to adjusted funds flow and adjusted funds flow per share
for the three months ended March 31, 2020:
|
Three Months Ended
March 31,
|
($000s except per
share amounts)
|
2020
|
2019
|
Cash flow from
operating activities
|
43,138
|
28,908
|
Change in non-cash
working capital
|
(14,748)
|
11,042
|
Decommissioning
expenditures
|
1,540
|
1,707
|
Cash settled
transaction and other costs
|
98
|
194
|
Adjusted funds
flow
|
$
|
30,028
|
$
|
41,851
|
Per share -
basic
|
$
|
0.09
|
$
|
0.14
|
Net Debt
There is no comparable measure in accordance with IFRS for net
debt. Net debt is calculated as bank debt plus the liability
component of the convertible debentures plus or minus working
capital, however, excluding the fair value of financial contracts,
decommissioning obligations and lease and other obligations. 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.
|
As at March
31,
|
As at December
31,
|
As at March
31,
|
($000s)
|
2020
|
2019
|
2019
|
Bank debt
|
(305,804)
|
(316,404)
|
(398,666)
|
Accounts
receivable
|
29,738
|
41,486
|
50,814
|
Prepaid expenses and
deposits
|
4,672
|
4,875
|
7,465
|
Accounts payable and
accrued liabilities
|
(43,718)
|
(40,848)
|
(56,839)
|
Dividends
payable
|
(279)
|
(2,719)
|
(2,616)
|
Convertible
debentures
|
(69,295)
|
(68,699)
|
(38,308)
|
Total
|
$
|
(384,686)
|
$
|
(382,309)
|
$
|
(438,150)
|
Net Operating Expenses
Net operating expenses are determined by deducting processing
and other revenue 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.
Operating Netback & Adjusted Funds Flow Netback
Operating netback and adjusted funds flow per boe for the three
months ended March 31, 2020 are calculated on a per unit
basis as follows:
|
Three Months Ended
March 31,
|
($000s)
|
2020
|
2019
|
Petroleum and natural
gas revenue
|
63,706
|
97,868
|
Processing and other
income
|
1,720
|
474
|
Royalties
|
(8,505)
|
(11,061)
|
Realized gain (loss)
on commodity and FX contracts
|
13,509
|
(716)
|
Operating
expenses
|
(28,199)
|
(29,913)
|
Transportation
expenses
|
(3,046)
|
(3,863)
|
Operating
netback
|
39,185
|
52,789
|
G&A
expense
|
(3,416)
|
(3,470)
|
Interest
expense
|
(5,741)
|
(7,468)
|
Adjusted funds
flow
|
30,028
|
41,851
|
Barrels of oil
equivalent (boe)
|
1,852,414
|
1,946,676
|
Operating netback
($ per boe)
|
$
|
21.16
|
$
|
27.12
|
Adjusted funds
flow ($ per boe)
|
$
|
16.22
|
$
|
21.50
|
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.accuracy of this
release.
____________________________
|
1
|
This is a non-GAAP
financial measure which is defined in the Non-GAAP Financial
Measures section of this document.
|
2
|
Based on May 5, 2020
strip pricing.
|
3
|
See the Oil and Gas
Advisories section of this document for further
details.
|
SOURCE Surge Energy Inc.