2014 Surge Energy (SGY-T) Jan 8th 2014 will spend a budgeted $114.5 million, and deliver the following: - Growth in annual production of more than 40% over 2013; in 2014 Surge is targeting record annual production of 15,250 boepd (15,500 boepd exit rate);
- A production mix of over 83% light and medium gravity crude oil;
- Growth in annual funds flow from operations ("FFO") of more than 65% over 2013 to an estimated $221 million ($1.33 FFO per share), based on guidance pricing set forth below;
- A low "all-in" payout/sustainability ratio of 92.1% , based on guidance pricing set forth below;
- Capital efficiencies of $29,650 per boepd;
- A low 2014 exit debt to FFO ratio of less than 1.39 times (with over $180 million of unutilized credit availability on the Company's bank line);
- A high quality, low risk, development drilling program of approximately 38 drilling locations for light and medium gravity crude oil (selected out of Surge's deep inventory of over 600 net drilling locations);
- Top quartile operating costs of $12.75 per boe, and G&A costs of $2.05 per boe;
- A significant portion of 2014 capital spending will be strategically focused to waterflood projects relating to Surge's high quality, large original oil in place reservoirs ("OOIP")1; by the end of 2014 Surge now anticipates that more than 80% of the Company's producing assets will be under waterflood.
Capital Spending Breakdown
In 2014 Surge is planning to spend $114.5 million focussed to high quality, light and medium gravity crude oil projects. This capital will be strategically allocated over the Company's elite, operated, crude oil assets at Valhalla, Nipisi, Silver, Macoun, Manson and Dodsland.
Record Production in 2014
Surge is budgeting record average production of 15,250 boepd in 2014 - with an exit rate of 15,500 boepd. This represents growth of more than 40% over 2013 average production volumes.
The Company's production mix in 2014 is expected to increase to over 83% high netback, light and medium gravity crude oil - up from 79% in 2013.
Given Surge's high quality, large OOIP reservoirs, disciplined capital spending program, and diligent focus on waterflood activities, management now believes that the Company's corporate decline rate has dropped to approximately 24% today as a modest growth/dividend paying company.
Excellent Sustainability; Financial
Surge has a low "all-in" payout/sustainability ratio of 92.1% based on guidance pricing. The Company has no dividend reinvestment plan.
The Company also has an excellent balance sheet with a low 2014 exit debt to FFO ratio of less than 1.39 times. Surge has attractive replacement metrics estimated at $29,650 boepd, and an operating netback of over $44 per boe.
Surge also has a disciplined, ongoing risk management program with over 43% of 2014 net crude oil volumes locked in at an attractive average price of C$95.98 WTI per barrel. This program secures the availability of cash flow for capital expenditures and dividends.
2014 Hedging Activities:
Surge has 4,500 barrels per day of WTI oil hedged at CAD$96.54 in the first half of 2014, 4,350 barrels per day of WTI oil hedged at CAD$95.42 in the second half of 2014 and 2,000 barrels per day of WTI oil hedged at CAD$93.27 for 2015.
In addition the Company has 2,000 barrels per day of WCS oil differential hedged at WTI less US$22.71 for 2014 and 2015, and 1,000 barrels per day of sweet oil differential hedged at WTI less US$8.00 for February to June, 2014. Surge has 7,586 mcf per day of AECO natural gas hedged at CAD$3.61 for 2014.
Costs Reduction Initiatives
Surge has had excellent results with respect to managing and reducing costs. The Company's G&A costs have dropped from over $3.50 per boe in the second quarter of 2013 to an estimated $2.05 per boe in Surge's 2014 budget.
The Company's initiative of lowering operating cost has also met with good early results. In the Company's 2014 budget, however, Surge management have elected to keep operating costs flat with 2013 levels (i.e $12.75 per boe) until the Company has demonstrated tangible results from its 2014 operating cost saving initiatives over several months.
Exciting Outlook for 2014
Surge will continue to implement the Company's disciplined business strategy of focussing capital towards elite, large OOIP crude oil reservoirs. The Company will also pursue continued, year over year increases in recovery factors from these high quality assets through low risk development activities, including:
- in-fill and step out development drilling;
- up to date completion techniques, including horizontal frac technology;
- optimizations;
- waterfloods.
Pursuant to this focussed business strategy, Surge targets conservative annual per share growth in reserves, production and cash flow of 3 to 5%. In addition, Surge provides an attractive cash yield of 7.8% based on the Company's current trading price of its shares.
Accretive acquisitions of other elite assets will provide incremental growth over and above these estimates. |
