CALGARY, AB, Oct. 4, 2021 /CNW/ - Surge Energy Inc. ("Surge"
or the "Company") (TSX: SGY) and Fire Sky Energy Inc. ("Fire Sky")
announce that they have entered into an amalgamation agreement (the
"Amalgamation Agreement"), pursuant to which Surge has agreed to
acquire all of the issued and outstanding common shares of Fire Sky
("Fire Sky Shares") by way of a statutory amalgamation (the
"Transaction") for total consideration of approximately
$58 million. The Transaction is to be
funded by the issuance of approximately 11.2 million Surge common
shares ("Surge Shares"), and the assumption of approximately
$3 million of net debt1,
inclusive of transaction costs.
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With the Company's recent acquisition of Astra Oil Corp.
("Astra"), Surge management strategically targeted SE Saskatchewan as a new area of growth based
on its high value light oil netbacks, low-cost production
efficiencies, and quick drilling payouts. Surge's operational track
record of execution in SE
Saskatchewan, combined with its proven in-house technical
expertise, make this an exciting new core area for the Company.
The Fire Sky assets ("Fire Sky Assets") are currently producing
more than 1,500 boepd (>95 percent liquids) of operated, light
oil, focused in Surge's SE
Saskatchewan core area, with an operating
netback1 of more than $52
per boe at US$70 WTI pricing – which
is now less than 2022 average strip pricing.
Following the Transaction, Surge now forecasts average
production in 2022 of 21,500 boepd (86% liquids) of primarily light
and medium gravity crude oil.
STRATEGIC RATIONALE
- The Transaction is accretive to Surge's 2022 free cash
flow1 per share, and debt adjusted cash flow per
share1;
- The Fire Sky Assets are forecast to increase the Company's cash
flow from operating activities by $26
million over the next 12 months at US $70 WTI;
- The Company now estimates that its exit 2022 net debt to
annualized Q4 2022 adjusted funds flow1 ratio will be
approximately 0.7 times at US$70
WTI;
- The Transaction adds highly concentrated light oil reserves,
production, land, and infrastructure in Surge's SE Saskatchewan core area;
- The Fire Sky Assets include a large internally estimated
development drilling inventory of more than 100
locations2;
- The Fire Sky Assets are an excellent operational fit providing
numerous synergies with the attractive light oil assets recently
acquired through the Astra transaction; and
- Fire Sky has an attractive corporate Licensee Liability Rating
("LLR") in Saskatchewan of 3.5,
with a total undiscounted decommissioning liability of only
$9.8 million.
The Transaction is consistent with Surge's defined business
model of acquiring high quality, operated, light and medium gravity
crude oil reservoirs with large original oil in place
("OOIP")3 and low recovery factors. The combined
company possesses high netbacks, an operated light and medium
gravity crude oil asset base, with extensive infrastructure in
place to facilitate years of future development drilling and
waterflood.
TRANSACTION HIGHLIGHTS
The Transaction has the following key benefits to Surge
stakeholders @ US$70 WTI per barrel
pricing4:
- Accelerates Surge's return to its traditional value-based
shareholder returns business model, including the potential for
reinstatement of a dividend and share buy-back program;
- Five percent accretive to Surge's forecast 2022 debt-adjusted
cash flow per share;
- Surge's net debt to annualized Q4 2022 adjusted funds flow
ratio is forecast to decrease to 0.7 times;
- Increases Surge's 2022 adjusted funds flow per boe by
approximately five percent;
- Improves the forecast 2022 all-in payout ratio5 to
47 percent from 50 percent;
- Raises Surge's forecast 2022 free cash flow to over
$120 million ($1.44 per share6); and
- Increases the Company's light oil weighting from 50 percent to
approximately 53 percent.
TRANSACTION METRICS
Purchase
Price
|
$58 million
|
Annual cash flow from
operating activitiesa
|
$26 million
|
Current production
rate
|
>1,500 boepd (95%
light oil)
|
Proved plus probable
reservesb
|
5.8 MMboe (99% light
oil)
|
Proved plus probable
RLIc
|
11 years
|
Licensee Liability
Rating ("LLR")
|
3.5
|
Total Asset Retirement
Obligation ("ARO")
|
$9.8
million
|
a:
|
Based on 2021 pricing
averaging as follows: US$70.00WTI/bbl; CAD$87.50WTI/bbl; EDM
CAD$81.25/bbl; WCS CAD $70.62/bbl; AECO $2.50/mcf
|
b:
|
Based upon Surge's
internally generated total proved plus probable reserve estimate as
of September 1, 2021.
|
c:
|
Based upon Surge's
internally generated total proved plus probable reserve estimate as
of September 1, 2021 divided by production of 1,500
boepd.
|
Acquisition cost per
boepd
|
$38,650/boepd
|
Operating Netback @
US$70 WTI
|
$52/boe
|
Proved plus probable
reservesb acquisition cost
|
$10/boe
|
Proved plus probable
recycle ratio7
|
5.2 x
|
COMBINED COMPANY HIGHLIGHTS – A SUSTAINABLE, INTERMEDIATE OIL
PRODUCER
Operational platform to continue to execute on sustainable
business model:
- A 21,500 boepd light and medium gravity oil producer (86
percent oil and liquids weighted);
- Over 2.6 billion barrels of net combined, internally estimated,
conventional OOIP - with a low 6 percent recovery factor to
date;
- Combined Total Proven Plus probable year end 2020 reserves of
over 104 million boe (86 percent total
liquids)8;
- A low corporate base decline of approximately 26 percent;
- Large development drilling upside: >975 net
locations9 (internally estimated); providing a
development drilling inventory of more than 13 years; and
- A long 13 year reserve life index (total proved plus
probable).
Financial platform to deliver shareholder returns at less
than strip pricing of US$70 WTI per
bbl:
- 2022 forecast adjusted funds flow of more than $255 million ($3.06
per share10);
- Full cycle corporate production efficiencies8 of
less than $21,500 per flowing boepd
(IP-180); and
- 2022 forecast free cash flow of over $120 million ($1.44
per share10), providing a free cash flow
yield11 of over 25 percent12.
Upward Revision to 2021 Exit PRODUCTION Rate & 2022
Guidance
The following is the Company's increased guidance for Surge's
2021 exit production rate, as well as preliminary financial and
operational guidance for 2022 (after giving effect to the
Transaction):
Upwardly Revised
Guidance
|
@ US $65
WTI*
|
@ US $70
WTI*
|
@ US $75
WTI*
|
Exit 2021 production
(boepd)
|
21,500
|
Average 2022
production (boepd)
|
21,500
|
% oil and
NGL's
|
86%
|
2022 Adjusted funds
flow ($MM)
|
$230
|
$255
|
$275
|
2022 Cash flow from
operations ($MM)
|
$215
|
$240
|
$260
|
2022 Exploration and
Development Capital
Expenditures ($MM)
|
$120
|
$120
|
$120
|
2022 Free cash flow
($MM)
|
$95
|
$120
|
$140
|
2022 All-in payout
ratio
|
56%
|
50%
|
46%
|
2022 Net debt to
annualized Q4/22 adjusted
funds flow11
|
0.9x
|
0.7x
|
0.5x
|
*
|
All pricing variables
including differentials (WCS: US$13.50, EDM US$5.00), Fx of $0.80
and AECO of $2.50 per mcf remain constant.
Adjusted funds flow and cash flow from operations exclude realized
gains/losses from financial derivatives.
|
TRANSACTION DETAILS
The purchase price payable by Surge under the Transaction is
$58 million, comprised of: 1) the
issuance of approximately 0.1438 Surge Shares for every issued and
outstanding Fire Sky Share; and in addition, 2) the assumption of
approximately $3 million of Fire Sky
net debt, inclusive of transaction costs.
The Transaction is expected to close on or before October 30, 2021. Completion of the Transaction
is subject to the approval of at least 66 2/3 of the
voting Fire Sky shareholders. Completion of the Transaction is also
subject to, among other things, the receipt of regulatory
approvals, including the approval of the Toronto Stock Exchange for
the issuance of the Surge Shares under the Transaction, and other
customary closing conditions.
All of the directors and officers of Fire Sky, as well as Fire
Sky's largest shareholders, collectively holding approximately 73
percent of the outstanding Fire Sky Shares, have entered into
support agreements pursuant to which they have agreed to vote their
Fire Sky Shares in favor of the Transaction. Certain of such
shareholders have additionally agreed not to sell any Surge Shares
received by them pursuant to the Transaction for specified periods
following the completion of the Transaction, subject to certain
exceptions.
Each of Fire Sky and Surge has agreed to pay a termination fee
of $2 million to the other party in
certain circumstances, including in the case of Fire Sky, if Fire
Sky recommends, approves, or enters into an agreement with respect
to a superior proposal. Fire Sky has agreed not to solicit or
initiate any discussions regarding any other acquisition proposals
or sale of material assets. Fire Sky has also granted Surge a three
business day right to match any superior proposal.
ADVISORS
National Bank Financial Inc. is acting as exclusive financial
advisor to Surge with respect to the Transaction. ATB Capital
Markets and Scotiabank have been appointed strategic advisors to
Surge on the Transaction. McCarthy Tétrault LLP is acting as legal
advisor to Surge with respect to the Transaction.
Peters & Co. Limited is acting as exclusive financial
advisor to Fire Sky. TingleMerrett LLP is acting as legal advisor
to Fire Sky with respect to the Transaction.
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 assumptions concerning the
anticipated benefits of the Transaction and the transaction metrics
related thereto; the timing of various matters in connection with
the Transaction and the conditions to completion of the
Transaction; and Surge's revised guidance for the remainder of 2021
and preliminary guidance for 2022. 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.
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,
2021 and in Surge's MD&A for the year ended December 31, 2020, 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 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. All oil and gas
metrics/terms used in this document are defined below:
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, 2021.
Net of Surge disposition from March 25,
2021, the pro forma Company (Surge + Astra + Fire Sky) will
have 2020YE TPP reserves of 104.5mmboe. Fire Sky reserves
have been evaluated by Sproule from 2016YE through to 2020YE.
Similarly, Sproule has evaluated all of Surge's assets from 2015YE
to 2020YE.
Production efficiencies are calculated by dividing capital
expenditures of a project by the average production from that
project for a given period of time. IP180 is the average production
rate of a well over the first 180 days on production.
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 the Canadian Oil and Gas Evaluations Handbook 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 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.
Surge's review of Fire Sky's inventory supports > 100 gross
(>100 net) internally estimated drilling locations. Fire
Sky's February 2021 Year End reserves
has 118.4 net booked locations. Of these, 68.2 net are Proved
locations and 50.2 net are Probable locations based on Sproule's
evaluation.
Net of Surge March 25, 2021
disposition, the pro forma Company (Surge + Fire Sky) will have
over >1,050 gross (>975 net) drilling locations identified
herein, of these >450 gross (>400 net) are unbooked
locations. Of the 562 net booked locations identified herein, 415
net are Proved locations and 147 net are Probable locations based
on Sproule's 2020YE reserves. Assuming an average number of net
wells drilled per year of 75, Surge's >975 net locations provide
13 years of drilling.
Surge's internally developed type curves (for both Surge and
Fire Sky) were constructed using a representative, factual and
balanced analog data set, as of Jan 1,
2021 for Surge type curves and July
1, 2021 for Fire Sky type curves. All locations were risked
appropriately, and EUR's 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 Financial Measures
Certain secondary financial measures in this press release –
including, "cash flow", "adjusted funds flow", "free cash flow",
and "net debt" 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:
Cash Flow & Adjusted Funds Flow
Cash flow is defined as cash from operating activities before
changes in non-cash working capital. The Company further adjusts
cash flow from operating activities in calculating adjusted funds
flow for changes in decommissioning expenditures and 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.
Free Cash Flow
Free cash flow is calculated as cash flow from operating
activities before changes in non-cash working capital less
exploration and development capital expenditures. 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 calculated using the same weighted
average basic and diluted shares used in calculating income per
share.
Free cash flow yield is calculated as free cash flow divided by
the Company's share price at the date indicated herein. Management
uses this measure as an indication of the cash flow return to
shareholders based on current share prices.
Net Debt
There is no comparable measure in accordance with IFRS for net
debt. Net debt is calculated as bank debt, term 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.
Net debt to annualized adjusted funds flow ratio is calculated
as net debt divided by annualized three month adjusted funds flow
(adjusted funds flow for the quarter multiplied by four).
Management uses this ratio to assess the period of time that it
would take to fund net debt based on the adjusted funds flow from
the quarter.
All-in payout ratio
All-in payout ratio is calculated as exploration and development
expenditures divided by cash flow.
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
|
This is a non-GAAP
financial measure which is defined in the Non-GAAP Financial
Measures section of this document.
|
2
|
See the Drilling
Inventory section of this document for further details.
|
3
|
See the Oil and Gas
Advisories section of this document for further details.
|
4
|
Based on the
following price assumptions: US$70.00WTI/bbl; CAD$87.50WTI/bbl; EDM
CAD$81.25/bbl; WCS CAD $70.62/bbl; AECO $2.50/mcf
|
5
|
This is a non-GAAP
financial measure which is defined in the Non-GAAP Financial
Measures section of this document.
|
6
|
Calculated using
approximately 83.4 million basic shares outstanding following the
completion of the Transaction.
|
7
|
Recycle ratio is
calculated as operating netback of $52/boe divided by the
acquisition cost of proved plus probable reserves of
$10.00/boe.
|
8
|
See the Oil and Gas
Advisories section of this document for further details.
|
9
|
See the Drilling
Inventory section of this document for further details.
|
10
|
Calculated using
approximately 83.4 million basic shares outstanding following the
completion of the Transaction.
|
11
|
This is a non-GAAP
financial measure which is defined in the Non-GAAP Financial
Measures section of this document.
|
12
|
Calculated as $1.44
per share of free cash flow, divided by a SGY share price of $5.27
(closing share price as of October 1, 2021).
|
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SOURCE Surge Energy Inc.