CALGARY, AB, Nov. 1, 2021 /CNW/ - Surge Energy Inc. ("Surge"
or the "Company") (TSX: SGY) is pleased to announce the completion
of the previously announced acquisition of Fire Sky Energy Inc.
("Fire Sky") pursuant to an amalgamation (the "Transaction") under
the provisions of The Business Corporations Act
(Saskatchewan).
FIRE SKY ACQUISITION CLOSED
Surge has been advised by Fire Sky that the amalgamation was
approved by 97.6% of the Fire Sky Shares voted at the special
meeting of Fire Sky shareholders to approve the Transaction, held
on October 27, 2021.
The purchase price payable by Surge under the Transaction was
$58 million, comprised of: 1) the
issuance of approximately 11.2 million Surge common shares; and 2)
the assumption of approximately $3.0
million of Fire Sky net debt1, inclusive of
transaction costs.
CORPORATE OUTLOOK; UPWARD REVISISION TO PRELIMINARY 2022
GUIDANCE
Surge anticipates significant free cash
flow1 generation (at current strip pricing) in
2022, through consistent and disciplined development of its high
quality, conventional crude oil asset base, including Surge's
premier Sparky play in Alberta,
complemented by its high operating netback1, light oil
Southeast Saskatchewan assets.
Following the completion by Surge and Fire Sky of their
respective drilling programs to date in 2021, Surge anticipates
achieving its previously announced guidance for the Company's 2021
exit production rate of 21,500 boepd.
Surge confirms the Company's upwardly revised financial and
operational guidance for 2022, as detailed below:
Guidance
|
@ US $75
WTI*
|
@ US $80
WTI*
|
@ US $85
WTI*
|
Exit 2021
production
|
21,500 boepd (86%
liquids)
|
Average 2022
production
|
21,500 boepd (86%
liquids)
|
2022 Exploration and
Development Capital Expenditures
|
$120
million
|
2022 Adjusted funds
flow1 ($MM)
|
$270
|
$295
|
$315
|
2022 Adjusted funds
flow per share1
|
$3.23
|
$3.53
|
$3.77
|
2022 Cash flow from
operating activities ($MM)
|
$255
|
$280
|
$300
|
2022 Free cash flow
($MM)
|
$135
|
$160
|
$180
|
2022 Free cash flow
per share
|
$1.62
|
$1.92
|
$2.16
|
2022 All-in payout
ratio1
|
47%
|
43%
|
40%
|
2022 Exit Net debt to
annualized Q4/22 adjusted funds flow1
|
0.6x
|
0.5x
|
0.4x
|
|
*All additional
pricing assumptions (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 operating activities assume $nil change in non-cash
working capital.
|
Following the completion of the Transaction, Surge has the
following operational indicia and financial attributes:
- Over 2.6 billion barrels of net combined, internally estimated,
conventional OOIP2 - with a recovery factor to date of 6
percent;
- Combined proven plus probable year end 2020 reserves of over
100 million boe (86 percent liquids), generating a 13 year reserve
life index;
- Exit 2021 production forecast of 21,500 boepd (86 percent
liquids weighted);
- Estimated base corporate decline of 26 percent;
- A development drilling inventory of over 975 net locations
(internally estimated)3; providing a development
drilling inventory of more than 13 years;
- Production efficiencies2 of ~$15,600 per boepd (IP 180);
- Shares outstanding (basic): 83.4 million; and
- An estimated exit 2022 net debt to annualized Q4/22 adjusted
funds flow of approximately 0.6 times at US$75 WTI.
ADVISORS
National Bank Financial Inc. acted as exclusive financial
advisor, and ATB Capital Markets and Scotiabank acted as strategic
advisors, to Surge with respect to the Transaction. McCarthy
Tétrault LLP acted as legal advisor to Surge with respect to the
Transaction.
Peters & Co. Ltd. acted as exclusive financial advisor to
Fire Sky. TingleMerrett LLP acted as legal advisor to Fire Sky with
respect to the Transaction.
FORWARD LOOKING STATEMENTS:
This news release includes statements containing certain
"forward-looking information" within the meaning of applicable
securities law ("forward-looking
statements"). Forward-looking-statements in this release
include, but are not limited to, the opinions and beliefs of
management. Forward-looking statements are frequently characterized
by words such as "plan", "continue", "expect", "project", "intend",
"believe", "anticipate", "estimate", "may", "will", "potential",
"proposed" and other similar words, or statements that certain
events or conditions "may" or "will" occur. 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.
Various assumptions were used in drawing the conclusions or
making the projections contained in the forward-looking statements
throughout this news release. Forward-looking statements are based
on the opinions and estimates of management at the date the
statements are made, and are subject to a variety of risks and
uncertainties and other factors that could cause actual events or
results to differ materially from those projected in the
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; Surge's revised guidance for the remainder of 2021
and preliminary guidance for 2022; and management's beliefs and
expectations regarding its OOIP, drilling inventory, decline rates;
exit 2021 production; and estimated 2022 exit net debt
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,
and expressly disclaims any intention or 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 drilling,
completion, equipping and tie in 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, "adjusted funds flow", "operating netback", "free cash
flow", "all-in payout ratio", 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:
Adjusted Funds Flow (per share) and Operating
Netback
The Company adjusts cash flow from operating activities in
calculating adjusted funds flow for changes in decommissioning
expenditures and transaction costs. 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 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 shares used in calculating income per
share.
The following table reconciles forecast cash flow from operating
activities to adjusted funds flow along with operating netback:
|
|
|
2022e
|
($millions)
|
@ US $75
WTI
|
@ US $80
WTI
|
@ US $85
WTI
|
Petroleum and natural
gas revenue
|
539
|
580
|
622
|
Royalties
|
(74)
|
(79)
|
(86)
|
Net operating
expenses
|
(118)
|
(118)
|
(118)
|
Transportation
expenses
|
(9)
|
(9)
|
(9)
|
Loss on financial
contracts
|
(34)
|
(45)
|
(59)
|
Operating
netback
|
304
|
329
|
350
|
G&A
expense
|
(14)
|
(14)
|
(14)
|
Interest
expense
|
(20)
|
(20)
|
(20)
|
Adjusted funds
flow
|
270
|
295
|
315
|
Changes in non-cash
working capital
|
-
|
-
|
-
|
Lease
repayments
|
(9)
|
(9)
|
(9)
|
Abandonments
|
(6)
|
(6)
|
(6)
|
Cash flow from
operating activities
|
255
|
280
|
300
|
Barrels of oil
equivalent (mmboe)
|
7.8
|
7.8
|
7.8
|
Free Cash Flow
Free cash flow is calculated as cash flow from operating
activities 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.
All-in Payout Ratio
All-in payout ratio is calculated as exploration and development
expenditures divided by cash flow from operating activities.
Net Debt and Net Debt to Q4/22 Adjusted Fund
Flow
There is no comparable measure in accordance with IFRS for net
debt. Net debt is calculated as bank debt, term debt, dividends
payable 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 Q4/22 adjusted funds flow 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.
Additional information relating to non-IFRS measures can be
found in the Company's most recent management's discussion and
analysis MD&A, which may be accessed through the SEDAR website
(www.sedar.com).
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 Oil and Gas Advisories section of this document for further
information.
|
3 See
the Drilling Inventory section of this document for further
information.
|
SOURCE Surge Energy Inc.