Surge Energy (SGY-T) to acquire light oil assets, increase dividend
Oct 22, 2013 - News Release
Surge Energy Inc. is providing details on two strategic high-quality light oil acquisitions. The first acquisition involves the $147 million purchase of all of the shares of a Calgary based private oil and gas company (the "Privateco"), with high netback, operated, producing light oil assets focused in the Steelman area of SE Saskatchewan, and the Dodsland area of SW Saskatchewan (the "Privateco Assets"). The consideration to be paid to the shareholders of Privateco is comprised of between 15.7 and 20.7 million shares of Surge, subject to the cash consideration elected by Privateco shareholders to a maximum of $30 million, plus the assumption of $23 million of debt (the "Privateco Acquisition"). Holders of approximately 67.6% percent of the fully diluted common shares of Privateco have agreed to enter into lock-up agreements with Surge, pursuant to which they have agreed to tender their shares to Surge. The Board of Directors of Privateco has unanimously approved the Acquisition and recommended that the shareholders of Privateco tender their shares to Surge. The Privateco agreement provides for a mutual non-completion fee of $5 million in the event the Privateco Acquisition is not completed in certain circumstances.
Additionally, Surge has entered into an agreement to acquire high quality, high netback, operated, producing light oil assets primarily located in the SW area of Manitoba (the "Manitoba Assets"). Total consideration of $135 million to be paid to the vendor of the Manitoba Assets is comprised of 14.2 million shares of Surge, and $50 million of cash (the "Asset Acquisition").
Based upon the Privateco Acquisition and the Asset Acquisition (collectively the "Acquisitions"), Surge will now be revising upwards the Company's 2013 exit guidance, and its 2014 full year guidance, as set forth below.
In addition, as a result of these highly accretive Acquisitions, together with better than anticipated operational and drilling results, Surge will now be increasing the Company's dividend 19 percent from $0.42 per year ($0.035 per share per month), to $0.50 per share per year ($0.04166 per share per month).
The closing of the Acquisitions is expected to occur on or about November 15th, 2013 (the "Closing"). Completion of the Acquisitions is subject to certain conditions and the receipt of all regulatory approvals, including the approval of the Toronto Stock Exchange.
As a result of the structure of the Acquisitions, post Closing Surge will maintain the Company's excellent balance sheet and debt to forward cash flow ratio, with over $120 million of credit availability on the Company's bank line. In addition, pro-forma the Acquisitions, there is no change in Surge's very low, "all-in" sustainability ratio of 93 percent.
STRATEGIC RATIONALE
The Acquisitions fit squarely within Surge's defined business strategy of investing growth capital to acquire elite, operated, light and medium gravity crude oil reservoirs, with large original oil in place ("OOIP"1) and low recovery factors.
The Privateco Acquisition provides a strategic entry point for Surge into the prolific Midale Marly, light oil play trend in SE Saskatchewan, and the Viking light oil play in SW Saskatchewan. The Manitoba Assets provide Surge shareholders with exposure to one of the highest quality, highest netback light oil plays in Canada, focused in the Bakken/Three Forks formation located in SW Manitoba.
The Acquisitions are highly accretive to Surge shareholders and provide Surge with exposure to three of the top light oil plays in Canada (collectively the "Assets"). They also provide an excellent operational platform for additional growth on these proven trends.
The Acquisitions comprise and possess large OOIP reservoirs, together with low recovery factors, operatorship and high working interests. They also possess significant upside from low risk development drilling and waterfloods. Furthermore, the Acquisitions include key producing infrastructure, including batteries, pipelines and waterflood facilities.
Corporately, the light oil Acquisitions significantly increase Surge's operating netback by over 11 percent, and increase the Company's oil weighting to over 84 percent.
Post Closing Surge will have over 1 Billion barrels of light and medium gravity original oil in place ("OOIP") under the Company's ownership and management - with a recovery factor of less than 3 percent.
ACQUISITION METRICS
The following sets forth the combined metrics with respect to the Acquisitions:
1. Purchase Price: The combined purchase price for the Acquisitions is $282 million (the "Purchase Price"), which will be payable at Closing as follows:
a) 29.8 million shares of Surge;2
b) $23 million debt assumption; and
c) $80 million cash.2
2. Long Life; Light Oil Reserves:
The Acquisitions are both independently engineered under NI 51-101 and provide combined Proven and Probable (P+P) reserves of: 9.7 million boe (>98 percent light oil).
Reserve acquisition metrics for the Acquisitions are: $29.02 per barrel (P+P). No reserves have been booked in the respective independent engineering reports for waterflood response.
Based on current production, the Acquisitions have a long reserve life index of approximately 9.2 years (P+P).
3. Light Oil Production: Current production relating to the Acquisitions is approximately 2,900 boepd, composed of more than 98% light, sweet crude oil (38 degree API).
On this basis, Surge is paying approximately $97,250 per flowing barrel of production with respect to the Acquisitions.
4. High Netbacks and Strong Recycle Ratio: Operating netbacks for the Assets are over $61 per barrel, based on guidance pricing (as set out below). As a result, Surge has a recycle ratio of more than 2 times in relation to the Acquisitions.
5. Annual Cash Flow: Annual cash flow from the Assets, based on guidance pricing (as set out below) and using current production levels, is estimated to be more than $65 million. Based on current production and using guidance pricing (as set out below), Surge estimates that the Company is paying approximately 4.3 times annualized cash flow for the Acquisitions.
6. Exciting Upside: Surge has identified 218 gross (184.4 net) low risk development drilling locations on the lands comprising the Assets. Surge has also identified significant unbooked waterflood upside in relation to the Assets. In this regard, two waterflood projects have already been initiated on the Assets.
7. Producing Infrastructure: The Acquisitions possess key producing infrastructure, including batteries, pipelines, and waterflood facilities.
8. Operatorship and High Working Interests:
The Assets are 95 percent operated, and have average working interests of greater than 90 percent.
UPWARD REVISION TO GUIDANCE
The following sets forth Surge's upwardly revised guidance for exit 2013 estimates, and for full year 2014 estimates.
The Assets comprising the Acquisitions are quality, light oil assets that have been successfully drilled and developed by two, high growth, junior private oil and gas companies. In Surge's lower, growth/dividend model, and as part of Surge's strategy to maintain its low corporate decline, Surge management will be utilizing 2014 production estimates for the Assets which are more conservative and sustainable than the current combined production levels for these Assets. In this regard, Surge management does not want to build higher decline rates from newly drilled wells into the Company's existing low decline asset base. Accordingly, 2014 production levels will be managed as set forth below.
The Acquisitions are highly accretive to Surge's 2014 guidance estimates - even at these more conservative production levels. |
