CALGARY, AB, March 9, 2022 /CNW/ - Surge Energy Inc. ("Surge"
or the "Company") (TSX: SGY) is pleased to announce its financial
and operating results for the quarter and year ended December 31, 2021, its year end 2021 reserves as
independently evaluated by Sproule Associates Limited ("Sproule"),
and a new net asset value ("NAV") of $16.94 per share for Total Proven Plus Probable
reserves.
The financial and operating results contained herein do not
include a full quarter of contribution from Surge's strategic
$58.8 million light oil acquisition
of Fire Sky Energy Inc. ("Fire Sky"), which closed on November 1, 2021.
2021: POSITIONING FOR THE TURN IN OIL PRICES
In 2020, Surge Management was intensely focused on preserving
stakeholders' capital during the COVID pandemic, increasingly
negative climate change sentiment, the Saudi/Russia oil price war, and the resulting drop
in oil prices from more than US$63
WTI per barrel in January of 2020 to US$11.57 WTI per barrel in April of 2020.
In 2021, Surge shifted focus and prioritized positioning the
Company to be a top performer in its Canadian public oil company
peer group as crude oil prices began to recover. Consequently, over
the last 15 months Surge's Management and Board moved to
strategically high grade and diversify the Company's top
tier1 conventional crude oil asset base, reposition
the Company's balance sheet, and proactively address the
significant reduction in reserve based lending debt capital
available to the Canadian oil and gas industry. In this regard,
during 2021 Surge:
- Sold $106 million of mature
assets at a multiple of 5.3 times cash flow from operating
activities (i.e. inclusive of corporate interest expense savings)
at then strip pricing;
- Closed a successful, oversubscribed $23
million flow-through share offering;
- Acquired two private companies with high operating
netback2, light oil assets focused in SE Saskatchewan (Astra Oil Corp. and Fire Sky)
at a combined 2.6 times cash flow from operating activities
multiple at then strip pricing;
- Completed a strategic $130
million, 5-year term debt financing; replacing a portion of
conventional six month revolving bank debt with stable long term
debt capital;
- Positioned the Company with dominant operational positions in
two of the top1 medium and light gravity, conventional
crude oil plays in Canada (Surge's
Sparky and SE Saskatchewan core
areas); and
- Completely repositioned Surge's balance sheet, with a forecast
2022 exit net debt[2] to cash flow from operating activities ratio
of 0.55 times3; with forecasted annual free cash
flow2 of more than $170
million in 2022 at US$85
WTI4 oil prices.
During the fourth quarter of 2021, Surge delivered adjusted
funds flow5 of $43.3
million (on an average oil price of US $77 WTI during the period), an increase of over
410% as compared to Q4/20 adjusted funds flow of $8.5 million.
Surge reported a realized loss on financial contracts of
$31.0 million in Q4/21, primarily due
to lender mandated fixed price oil hedging requirements instituted
in late 2020. The Company generated adjusted funds flow before
realized gains or losses on financial contracts of $74.4 million in Q4/21, an increase of 405% over
adjusted funds flow before realized gains or losses on financial
contracts of $14.7 million in Q4/20.
The lender mandated fixed price oil hedges entered into in late
2020 expired on December 31,
2021.
Surge continues to execute the Company's ongoing risk management
program, including strategic hedge positions over the next several
quarters for crude oil, natural gas, interest rates and power
costs, as described in Surge's MD&A for the period ended
December 31, 2021 which can be
accessed under the Company's profile on SEDAR at www.sedar.com.
Based on Surge's new independent December
31, 2021 Sproule reserves report, the Company has a Total
Proved Plus Probable NAV6 of $16.94 per basic share, and a Total Proved NAV of
$9.81 per basic share - on Sproule's
2021 year-end price deck that averages approximately US$70 WTI per barrel over the first five years.
Given the significant and rapid increase in both spot and strip
crude oil prices since December 31,
2021, the NAV calculations contained in this press release
may not be reflective of current crude oil prices.
The NAV estimates in this press release are based upon Sproule's
independent evaluation of the Company's year end 2021 reserves, and
contain no value for undeveloped land or seismic. Further, Surge
has booked only 456 net P+P locations in its Sproule NAV estimates,
out of a total of 975 net locations in the Company's large
(internally estimated) 13 year conventional drilling
inventory.7
2021 FINANCIAL AND OPERATIONAL HIGHLIGHTS
Highlights from the Company's Q4/21 and Year-End 2021 Financial
Report and operations include:
- Achieved average daily production of 21,163 boepd (85% liquids)
during the fourth quarter of 2021, an increase of 22% as compared
to Q4/20 production of 17,356 boepd (84% liquids);
- Delivered fourth quarter cash flow from operating activities of
$50.4 million and adjusted funds flow
of $43.3 million (on an average oil
price of US $77 WTI during the
period), increases of over 350% and 410% as compared to Q4/20;
- Closed a strategic $130 million
5-year term debt financing on December 9,
2021, significantly reducing the Company's reliance on more
volatile, short-term debt;
- Reduced net debt by $49.6
million;
- Successfully drilled 48 (48.0 net) wells in 2021, with activity
strategically focused in the Company's Sparky and SE Saskatchewan high quality, conventional,
medium and light gravity crude oil core areas;
- Continued the Company's focus on ESG efforts, highlighted by
completing a total of $12.6 million
on abandonment activities, which resulted in Surge abandoning more
than five wells for each new well drilled in 2021. This was funded
using a combination of cash flow from operating activities, as well
as grants received through the Alberta Site Rehabilitation Program
and the Saskatchewan Accelerated Site Closure Program; and
- Achieved several ESG milestones, including:
-
- Published the Company's inaugural ESG report in December 2021; and
- Abandoned over 270 wells in 2021; and
- Completed a 45km gas gathering pipeline in SE Saskatchewan, allowing Surge to reduce
Scope 1 emissions within Surge's SE
Saskatchewan operations by approximately 56% (this included
a 95% reduction for specific facilities in Minard, Steelman, and Viewfield); and
- Completed a gas conservation project in SW Saskatchewan, conserving 70% of Scope 1
emissions in the area.
2021 YEAR END RESERVES HIGHLIGHTS
With Surge's December 31, 2021
Sproule reserve report, the Company delivered:
- A Total Proved Plus Probable NAV of $16.94 per basic share, and a Total Proved NAV of
$9.81 per basic share on Sproule's
2021YE price deck that averages US$70
WTI crude oil over the first five years;
- PDP Finding & Development ("F&D") cost of $9.63/boe, including changes in FDC;
- A 3.8x PDP Recycle Ratio on a 2021 average operating netback
before realized losses on financial contracts of $36.13/boe;
- PDP Finding, Development & Acquisition ("FD&A") cost of
$15.41/boe, resulting in a 2.3x
Recycle Ratio on a 2021 operating netback before realized losses on
financial contracts of $36.13/boe;
and
- An organic Reserves Replacement of 154% on PDP (+9,898 mboe),
168% on TP (+10,824 mboe), and 172% on TPP (+11,053 mboe).
FINANCIAL AND OPERATING HIGHLIGHTS
FINANCIAL AND
OPERATING HIGHLIGHTS
|
Three Months Ended
December 31,
|
Years Ended
December 31,
|
($000s except per
share amounts)
|
2021
|
2020
|
%
Change
|
2021
|
2020
|
%
Change
|
Financial
highlights
|
|
|
|
|
|
|
Oil sales
|
131,019
|
55,565
|
136 %
|
374,658
|
199,208
|
88 %
|
NGL sales
|
3,846
|
1,745
|
120 %
|
10,283
|
4,613
|
123 %
|
Natural gas
sales
|
8,516
|
2,597
|
228 %
|
25,122
|
7,228
|
248 %
|
Total oil, natural
gas, and NGL revenue
|
143,381
|
59,907
|
139 %
|
410,063
|
211,049
|
94 %
|
Cash flow from
operating activities
|
50,417
|
11,000
|
358 %
|
100,484
|
72,190
|
39 %
|
Per share - basic
($)
|
0.63
|
0.28
|
129 %
|
1.83
|
1.83
|
0 %
|
Per share diluted
($)
|
0.63
|
0.28
|
129 %
|
1.79
|
1.83
|
(2)%
|
Adjusted funds
flow1
|
43,320
|
8,467
|
412 %
|
100,438
|
59,872
|
68 %
|
Per share - basic
($)1
|
0.55
|
0.21
|
157 %
|
1.83
|
1.51
|
21 %
|
Per share diluted
($)
|
0.54
|
0.21
|
154 %
|
1.79
|
1.51
|
18 %
|
Net income
(loss)3
|
42,868
|
(57,727)
|
nm2
|
407,608
|
(747,297)
|
nm
|
Per share basic
($)
|
0.54
|
(1.44)
|
nm
|
7.42
|
(18.90)
|
nm
|
Per share diluted
($)
|
0.53
|
(1.44)
|
nm
|
7.28
|
(18.90)
|
nm
|
Expenditures on
property, plant and equipment
|
22,456
|
14,276
|
57 %
|
103,786
|
52,773
|
97 %
|
Net acquisitions and
dispositions
|
78,004
|
-
|
nm
|
65,413
|
(6,038)
|
nm
|
Net capital
expenditures
|
100,460
|
14,276
|
604 %
|
169,199
|
46,735
|
262 %
|
Net debt1,
end of period
|
331,434
|
381,023
|
(13)%
|
331,434
|
381,023
|
(13)%
|
|
|
|
|
|
|
|
Operating
highlights
|
|
|
|
|
|
|
Production:
|
|
|
|
|
|
|
Oil (bbls per
day)
|
17,192
|
13,788
|
25 %
|
14,280
|
14,558
|
(2)%
|
NGLs (bbls per
day)
|
720
|
726
|
(1)%
|
600
|
600
|
(0)%
|
Natural gas (mcf per
day)
|
19,503
|
17,050
|
14 %
|
16,571
|
16,906
|
(2)%
|
Total (boe per day)
(6:1)
|
21,163
|
17,356
|
22 %
|
17,642
|
17,976
|
(2)%
|
Average realized
price (excluding hedges):
|
|
|
|
|
|
|
Oil ($ per
bbl)
|
82.84
|
43.80
|
89 %
|
71.88
|
37.39
|
92 %
|
NGL ($ per
bbl)
|
58.10
|
26.14
|
122 %
|
46.95
|
21.00
|
124 %
|
Natural gas ($ per
mcf)
|
4.75
|
1.66
|
187 %
|
4.15
|
1.17
|
256 %
|
|
|
|
|
|
|
|
Netback ($ per
boe)
|
|
|
|
|
|
|
Petroleum and natural
gas revenue
|
73.65
|
37.52
|
96 %
|
63.68
|
32.08
|
99 %
|
Realized gain (loss)
on commodity and FX contracts
|
(15.95)
|
(3.91)
|
308 %
|
(14.29)
|
3.05
|
(568)%
|
Royalties
|
(12.03)
|
(4.07)
|
196 %
|
(9.08)
|
(3.72)
|
144 %
|
Net operating
expenses1
|
(16.91)
|
(15.99)
|
6 %
|
(17.37)
|
(14.72)
|
18 %
|
Transportation
expenses
|
(1.27)
|
(1.18)
|
8 %
|
(1.10)
|
(1.48)
|
(26)%
|
Operating
netback1
|
27.49
|
12.37
|
122 %
|
21.84
|
15.21
|
44 %
|
G&A
expense
|
(2.00)
|
(1.86)
|
8 %
|
(2.06)
|
(1.90)
|
8 %
|
Interest
expense
|
(3.24)
|
(5.21)
|
(38)%
|
(4.19)
|
(4.20)
|
(0)%
|
Adjusted funds
flow1
|
22.25
|
5.30
|
320 %
|
15.59
|
9.11
|
71 %
|
|
|
|
|
|
|
|
Common shares
outstanding, end of period
|
83,357
|
39,975
|
109 %
|
83,357
|
39,975
|
109 %
|
Weighted average
basic shares outstanding
|
79,469
|
39,975
|
99 %
|
54,931
|
39,536
|
39 %
|
Stock option
dilution
|
1,108
|
-
|
nm
|
1,061
|
-
|
nm
|
Weighted average
diluted shares outstanding
|
80,577
|
39,975
|
102 %
|
55,992
|
39,536
|
42 %
|
|
|
|
|
|
|
|
1 This is
a non-GAAP and other financial measure which is defined in the
Non-GAAP and Other Financial Measures section of this
document.
|
2 The
Company views this change calculation as not meaningful, or
"nm".
|
3 For the
year ended December 31, 2021, the Company recorded net income of
$407.6 million, including a non-cash impairment reversal of $333.5
million, primarily due to an increase in forward oil and gas
commodity prices used in the independent reserve evaluators price
forecast.
|
2021 YEAR-END RESERVES
The Company's reserves were independently evaluated by Sproule
in accordance with National Instrument 51-101 – Standards of
Disclosure for Oil and Gas Activities ("NI 51-101") effective
December 31, 2021. Surge's Annual
Information Form (the "AIF") for the year ended December 31, 2021 contains Surge's reserves data
and other oil and natural gas information as mandated by NI
51-101.
The following tables summarize Surge's working interest oil,
natural gas liquids and natural gas reserves and the net present
values ("NPV") of future net revenue for these reserves (before
taxes) using forecast prices and costs as evaluated in the Sproule
Report. The evaluation is based on Sproule's forecast pricing
and exchange rates at December 31,
2021 which is available on their website www.sproule.com.
All references to reserves in this release are to gross Company
reserves, meaning Surge's working interest reserves before
deductions of royalties and before consideration of the Company's
royalty interests. The amounts in the tables may not add due to
rounding.
RESERVES SUMMARY AND NET PRESENT VALUE
Gross
Reserves(a)
|
Crude Oil
and NGLs (Mbbl)(b)
|
Natural
Gas (MMcf)(c)
|
Oil Equivalent
Total Reserves (Mboe)
|
Before Tax NPV of
Future Net
Revenue(d) Discounted at
|
5% ($MM)
|
10% ($MM)
|
15% ($MM)
|
Proved:
|
|
|
|
|
|
|
|
Proved
Producing
|
29,790
|
31,689
|
35,071
|
674(e)
|
623
|
569
|
|
Proved
Non-Producing
|
1,714
|
2,009
|
2,048
|
50
|
41
|
35
|
|
Proved
Undeveloped
|
30,234
|
34,846
|
36,042
|
630
|
485
|
383
|
Total
Proved
|
61,737
|
68,544
|
73,161
|
1,354
|
1,149
|
986
|
|
Probable
|
27,356
|
29,281
|
32,236
|
793
|
595
|
467
|
Total Proved Plus
Probable
|
89,093
|
97,825
|
105,397
|
2,147
|
1,744
|
1,453
|
|
|
a)
|
Amounts may not add
due to rounding.
|
b)
|
Includes light,
medium, heavy and natural gas liquids.
|
c)
|
Includes
non-associated and natural gas, solution gas and coal bed
methane.
|
d)
|
Total ADR
(Abandonment, Decommissioning, Reclamation) is included in the
reserves report, as it is best practice stated in the COGE
Handbook.
|
e)
|
As discounting
decreases, abandonment costs become more significant.
|
FUTURE DEVELOPMENT CAPITAL ("FDC")
|
Total Proved
Developed
Producing
|
Total
Proved
|
Total Proved
Plus Probable
|
|
($MM)
|
($MM)
|
($MM)
|
2022
|
6
|
111
|
122
|
2023
|
5
|
154
|
158
|
2024
|
4
|
165
|
170
|
2025
|
4
|
137
|
191
|
2026
|
3
|
63
|
129
|
Remaining
|
19
|
40
|
62
|
Total
(Undiscounted)
|
41
|
670
|
832
|
Total (Discounted at
10%)
|
26
|
530
|
637
|
ORGANIC F&D AND FD&A
|
|
Recycle
Ratios
|
|
PDP
|
TP
|
TPP
|
PDP
|
TP
|
TPP
|
|
|
|
|
|
|
|
Organic
F&D
|
$9.63/boe
|
$7.38/boe
|
$5.73/boe
|
3.75
|
4.89
|
6.31
|
FD&A
|
$15.41/boe
|
$16.29/boe
|
$15.34/boe
|
2.34
|
2.22
|
2.36
|
OPERATIONS UPDATE
In 2021, Surge drilled a total of 48.0 net wells with a 100%
success rate, spending a total of $103.8
million for expenditures on property, plant, and equipment.
The Company focused drilling operations primarily to its core
Sparky and SE Saskatchewan medium
and light gravity oil plays.
In addition, Surge has continued the Company's operational
momentum into early 2022, with three drilling rigs active in its
Sparky and SE Saskatchewan core
areas. Surge plans to drill 65.0 net wells in 2022, comprised of
36.0 net Sparky wells, 27.5 net SE
Saskatchewan wells, and 1.5 net wells at Valhalla and Greater Sawn.
The Company commenced its winter drilling program in December of
2021, and has now completed the drilling of 14.0 net Sparky
locations, including five Sparky multi-leg laterals, and 11 gross
(9.5 net) wells in southeast Saskatchewan. The first 3 gross (2.5 net)
wells from the SE Saskatchewan
light oil program have been brought on production, with initial
gross 30-day production rates averaging over 325 barrels of oil per
day8 each. All wells from both the Sparky and
SE Saskatchewan programs are
anticipated to be completed and on production prior to March 31, 2022.
In early February 2022, the
Company contained a small fire at one of its SE Saskatchewan oil batteries. Thanks to the
efforts of Surge's Emergency Response Committee and local service
providers, the Company is pleased to report no injuries or
significant environmental impacts occurred in relation to the fire.
Production from the affected areas resumed in late February. The
Company estimates that the incident will have a minor impact on
average annual production of approximately 125 boepd for 2022.
With Q1/22 drilling results to date exceeding internal type
curve expectations, the Company continues to forecast average
production for 2022 at 21,500 boepd.
ENVIRONMENTAL, SOCIAL, AND GOVERNANCE
Surge published its inaugural ESG report in December 2021, which is available on the
Company's website. Additionally, the Company achieved several other
important ESG milestones in 2021, including deploying $6.7 million of cash flow from operating
activities and $5.9 million of SRP
grants to abandon over 270 wells in 2021. This represents
approximately 25% of the Company's previously inactive, unabandoned
wells and has resulted in Surge abandoning over 460% more wells
than it drilled in the year, with the Company abandoning
approximately 5.6 net wells for every net well drilled in the
year.
Further, the Company completed a 45km gas gathering pipeline in
SE Saskatchewan, allowing Surge to
reduce Scope 1 emissions within the Company's SE Saskatchewan operations by approximately
56% (this included a 95% reduction for specific facilities in
Minard, Steelman, and Viewfield).
Surge also completed a gas conservation project in SW Saskatchewan, conserving 70% of Scope 1
emissions in the area.
Surge is a leader and trusted steward in the responsible
development of Canadian resources. Through sustainable asset
development and continuous engagement with stakeholders, the
Company is dedicated to creating value for current and future
generations.
OUTLOOK: SGY – POSITIONED FOR OUTPERFORMANCE IN 2022
Management is excited regarding Surge's exposure to rising crude
oil prices in 2022, following the execution of the Company's
strategic corporate initiatives throughout 2021. The Company
anticipates generating significantly higher operating netbacks and
cash flow from operating activities in 2022 at current strip
commodity prices as compared to 2021.
Surge is now a 21,500 boepd (86 percent liquids) intermediate
light and medium gravity oil producer, with over 975 internally
estimated net development drilling locations, providing an
estimated 13 year development drilling inventory.
With 2.6 billion of net (internally estimated) original oil in
place9, a 6.5% recovery factor to date, and dominant
positions in two top medium and light gravity crude oil growth
plays, Surge believes that the Company is poised to deliver strong
results on an operational basis in 2022 and
beyond. Further, with more than $170
million of free cash flow forecast for 2022 at US$85 WTI10 crude oil prices, over
$1.3 billion in tax pools, and an
attractive balance sheet, Surge anticipates that the Company will
be positioned to deliver to its stakeholders a combination of:
- Continued net debt repayment (increasing Surge's NAV per
share);
- A reinstated, sustainable, base monthly dividend;
- Share buybacks;
- A modest production growth wedge; and
- Potential for variable or special dividends.
Management re-confirms that the Company is targeting a reduction
of net debt to a range of $250 to
$265 million, at which point the
Company will look to resume its historical, shareholder returns
focused business model, including the reinstatement of a dividend.
Management will also evaluate the potential for opportunistic share
buybacks. A reduction of net debt to the targeted range will also
add approximately $0.60 to
$0.75 per share to the net asset
value of the Company (based on approximately 83.4 million shares
outstanding).
At current commodity price levels, Management estimates that
Surge will be within its targeted net debt range before mid-year in
2022.
Surge's previously announced Board approved 2022 guidance is as
follows:
Guidance
|
@ US $80
WTI
|
@ US $85
WTI
|
@ US $90
WTI
|
Exit 2021
production
|
21,500 boepd (86%
liquids)
|
Average 2022
production
|
21,500 boepd (86%
liquids)
|
2022(e) Expenditures on
property, plant, and equipment
|
$124
million
|
2022(e) Cash flow from
operating activities ($MM)*
|
$275
|
$295
|
$315
|
Per
share
|
$3.30/sh
|
$3.54/sh
|
$3.78/sh
|
2022(e) Free cash flow
($MM)
|
$151
|
$171
|
$191
|
Per
share
|
$1.81/sh
|
$2.05/sh
|
$2.29/sh
|
2022(e) All-in payout
ratio11
|
45%
|
42%
|
39%
|
2022(e) Exit net debt
to 2022(e) cash flow from operating activities ratio**
|
0.64x
|
0.55x
|
0.44x
|
2022(e) Royalties as %
of petroleum and natural gas revenue
|
15.5%
|
16.25%
|
17.0%
|
2022(e) Net operating
expenses
|
$15.75 - $16.50 per
boe
|
2022(e) Transportation
expenses
|
$1.00 - $1.25 per
boe
|
2022(e) General &
administrative expenses
|
$1.95 - $2.05 per
boe
|
|
* Cash flow from
operating activities assumes a nil change in non-cash working
capital.
|
** 2022(e) exit net
debt is prior to any contemplated allocation of 2022(e) free cash
flow to shareholder returns through dividends or share
buybacks.
|
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 declared focus and primary goals; management's
expectations and plans with respect to the development of its
assets and the timing thereof; the timing of bringing recently
drilled wells onto production; Surge's drilling inventory and
locations; Surge's drilling program and timing matters related
thereto; the estimated impact of the Minard fire on average
annual production for 2022; the Company's dedication to creating
value for current and future generations; Surge's expectations
regarding the generation of significantly higher operating netbacks
and cash flow from operating activities in 2022; Surge's belief
that it is poised to deliver strong results on an operational
basis; the Company's expectation that it will be positioned to
deliver to its stakeholders a combination of: continued net debt
repayment, a reinstated, sustainable, base monthly dividend; share
buybacks; a modest production growth wedge; and potential for
variable or special dividends; and Surge's 2022 guidance,
including, management's estimates regarding average 2022
production, 2022 expenditures on property, plant, and equipment,
2022 cash flow from operating activities, including on a per share
basis; 2022 free cash flow, including on a per share basis, 2022
all-in payout ratio, 2022 exit net debt to 2022 cash flow from
operating activities ratio, 2022 royalties as % of petroleum and
natural gas revenue; 2022 net operating expenses, 2022
transportation expenses and 2022 general & administrative
expenses.
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,
2022 and in Surge's MD&A for the period ended
December 31, 2021, both of which can
be accessed under the Company's profile 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.
Reserve life index is calculated as total Company share reserves
divided by the annualized fourth quarter production.
F&D is calculated on the capital and divided by the reserves
category in which F&D is being calculated.
Replacement of production/Production replacement is calculated
as the total organic reserve additions (i.e. excluding acquisitions
and dispositions) divided by annual production for the year in
which its being calculated.
Net Asset Value is the total discounted (10%) Before Tax value
of reserves less net debt, divided by the number of shares.
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.
Assuming a Jan 1, 2022 reference
date, the Company will have over >1,050 gross (>975 net)
drilling locations identified herein; of these >550 gross
(>500 net) are unbooked locations. Of the 456 net booked
locations identified herein, 362 net are Proved locations and 95
net are Probable locations based on Sproule's 2021YE reserves.
Assuming an average number of wells drilled per year of 75, Surge's
>1,050 locations provide 13 years of drilling.
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 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
Qualifies 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, "adjusted funds flow",
"all-in payout ratio", "free cash flow", "net debt", "net debt to
cash flow from operating activities", "net operating expenses", and
"operating netback" 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, and as
applicable, reconciliations to the most directly comparable GAAP
measure for the year ended December 31,
2021, have been provided to demonstrate the calculation of
these measures:
Adjusted Funds Flow
Adjusted funds flow is a non-GAAP financial measure. 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
property acquisitions and dispositions, debt restructuring and
employee severance costs, 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 a non-GAAP ratio, calculated
using the same weighted average basic and diluted shares used in
calculating income per share.
|
Three Months Ended
December 31,
|
Years Ended
December 31,
|
($000s except per
share amounts)
|
2021
|
2020
|
2021
|
2020
|
Cash flow from
operating activities
|
50,417
|
11,000
|
100,484
|
72,190
|
Change in non-cash
working capital
|
(15,659)
|
(5,084)
|
(18,144)
|
(16,721)
|
Decommissioning
expenditures
|
2,089
|
2,551
|
6,738
|
4,305
|
Cash settled
transaction and other costs
|
6,473
|
-
|
11,360
|
98
|
Adjusted funds
flow
|
$
|
43,320
|
$
|
8,467
|
$
|
100,438
|
$
|
59,872
|
Per share -
basic
|
$
|
0.55
|
$
|
0.21
|
$
|
1.83
|
$
|
1.51
|
All-in Payout Ratio
All-in payout ratio is a non-GAAP ratio, calculated as
expenditures on property, plant and equipment divided by cash flow
from operating activities. Management uses this measure to
determine the amount of cash from operating activities that is used
to reinvest in the exploration and development of its asset
base.
Free Cash Flow
Free cash flow is a non-GAAP financial measure, calculated as
cash flow from operating activities less expenditures on property,
plant and equipment. 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.
|
|
|
Years ended
December 31,
|
($000s)
|
2021
|
2020
|
Cash flows from
operating activities
|
100,484
|
72,190
|
Less: expenditures on
property, plant and equipment
|
(103,786)
|
(52,773)
|
Free Cash
Flow
|
(3,302)
|
19,417
|
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
the 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 assess the time
(in years) that it would take to fund net debt based on the
annualized cash flow from operating activities.
($000s)
|
As at Dec 31,
2021
|
As at Dec 31,
2020
|
Accounts
receivable
|
55,738
|
29,796
|
Prepaid expenses and
deposits
|
3,152
|
5,253
|
Accounts payable and
accrued liabilities
|
(84,330)
|
(51,265)
|
Bank debt
|
(98,066)
|
(260,908)
|
Term debt
|
(133,993)
|
(32,718)
|
Convertible
debentures
|
(73,935)
|
(71,181)
|
Net Debt
|
(331,434)
|
(381,023)
|
Net Operating Expenses
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 when analyzed by management.
|
Years ended
December 31,
|
($000s)
|
2021
|
2020
|
Operating
expenses
|
116,413
|
101,640
|
Less: processing
income
|
(4,575)
|
(4,772)
|
Net operating
expenses
|
111,838
|
96,868
|
Operating Netback
Operating netback is a non-GAAP financial measure, calculated as
petroleum and natural gas revenue and processing and other income,
less royalties, realized gain (loss) on commodity and FX contracts,
operating expenses, and transportation expenses. Operating netback
per boe is calculated as operating netback divided by total barrels
of oil equivalent produced during a specific period of time. There
is no comparable measure in accordance with IFRS. This metric is
used by management to evaluate the Company's ability to generate
cash margin on a unit of production basis.
|
Three Months Ended
December 31,
|
Years Ended
December 31,
|
($000s)
|
2021
|
2020
|
2021
|
2020
|
Petroleum and natural
gas revenue
|
143,381
|
59,907
|
410,063
|
211,049
|
Processing and other
income
|
1,336
|
1,006
|
4,575
|
4,772
|
Royalties
|
(23,414)
|
(6,493)
|
(58,465)
|
(24,498)
|
Realized gain (loss)
on commodity and FX contracts
|
(31,048)
|
(6,247)
|
(91,990)
|
20,099
|
Operating
expenses
|
(34,257)
|
(26,531)
|
(116,413)
|
(101,640)
|
Transportation
expenses
|
(2,468)
|
(1,892)
|
(7,098)
|
(9,766)
|
Operating
netback
|
53,530
|
19,750
|
140,672
|
100,016
|
G&A
expense
|
(3,894)
|
(2,968)
|
(13,238)
|
(12,486)
|
Interest
expense
|
(6,317)
|
(8,315)
|
(26,996)
|
(27,658)
|
Adjusted funds
flow
|
43,320
|
8,467
|
100,438
|
59,872
|
Barrels of oil
equivalent (boe)
|
1,946,873
|
1,596,718
|
6,439,384
|
6,579,239
|
Operating netback ($
per boe)
|
$
|
27.49
|
$
|
12.37
|
$
|
21.84
|
$
|
15.21
|
Adjusted funds flow
($ per boe)
|
$
|
22.25
|
$
|
5.30
|
$
|
15.59
|
$
|
9.11
|
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 Per
Raymond James Research, dated January 25, 2022.
|
2 This is a non-GAAP and other
financial measure which is defined in the Non-GAAP and Other
Financial Measures section of this document.
|
3 Cash flow from operating activities
assumes a nil change in non-cash working capital; 2022 exit net
debt is prior to any contemplated allocation of 2022 free cash flow
to shareholder returns through dividends or share
buybacks.
|
4 Additional pricing assumptions:
(WCS: US$13.00, EDM/Cromer US$3.50 differentials), Fx of $0.79 and
AECO of $3.25 per mcf.
|
5 This is a non-GAAP and other
financial measure which is defined in the Non-GAAP and Other
Financial Measures section of this document.
|
6 NAV
is the Company's Net Asset Value as of 2021YE (on a Before Tax
basis), evaluated by an independent auditor (Sproule) and in
accordance with COGE Handbook, minus debt, then divided by the
company's basic share count as of Dec 31, 2021. Surge's NAV does
not include any value for Land or Seismic.
|
7 See
Drilling Inventory section
|
8 The
three gross SE Saskatchewan wells brought on production in late
February 2022 have gross IP30 rates of 405 bbl/d, 325 bbl/d &
257 bbl/d.
|
9 See
Oil and Gas Advisories section of this document for further
information.
|
10 Additional pricing assumptions:
(WCS: US$13.00, EDM/Cromer US$3.50 differentials), Fx of $0.79 and
AECO of $3.25 per mcf.
|
11 This is a non-GAAP and other
financial measure which is defined in the Non-GAAP and Other
Financial Measures section of this document.
|
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SOURCE Surge Energy Inc.