Surge Energy (SGY-T to acquire Sask. light oil assets and increase annual dividend.
Jan 13, 2013 - News Release
Surge Energy Inc. has entered into an agreement to acquire certain high-quality, low-decline, operated, light oil producing assets strategically located in the company's core area of southeastern Saskatchewan. The Assets include an estimated annualized 1,250 boepd (97 percent oil) of high netback light crude oil production. The purchase price for the Assets is $109 million, payable in cash (the "Purchase Price").As a result of the Acquisition, Surge will be revising upward the Company's 2014 guidance, as set forth below.
In addition, based on the accretive Acquisition, and better than anticipated operational and drilling results, Surge will be increasing the Company's annual dividend four percent from $0.52 per share per year ($0.04333 per share per month), to $0.54 per share per year ($0.045 per share per month).
Furthermore, pursuant to the accretive Acquisition, even with the above increase in Surge's dividend, the Company's "all-in" payout/sustainability ratio improves from 92.1% to 91.0%.
The closing of the Acquisition is subject to customary conditions including receipt of applicable regulatory approvals and is expected to occur on or about March 3rd, 2014 (the "Closing").
In conjunction with the Acquisition, Surge has entered into a $70 million bought deal financing (the "Equity Financing") with a syndicate of underwriters led by Macquarie Capital Markets Canada Ltd., which is described in further detail below. Members of the Surge team will be participating in the Equity Financing. The Equity Financing is subject to customary conditions including receipt of applicable regulatory approvals and is expected to close on or about February 4, 2014.
ACQUISITION OVERVIEW
The Acquisition comprises elite, operated, low decline light oil assets strategically located within Surge's core operating area of SE Saskatchewan. The production is focused in several large, high quality, light oil reservoirs - with combined original oil in place ("OOIP")(1) of over 240 million barrels.
The Assets possess a low annual decline of less than 18 percent, which will provide significant annual free cash flow to Surge. The Acquisition fits very well with the Company's focused business strategy, and with Surge's dividend-paying / modest growth business model.
Surge management has identified significant upside with respect to the Assets, primarily from infill and stepout development drilling, and optimizations.
ACQUISITION METRICS
The following sets forth the metrics with respect to the Acquisition:
1. Purchase Price:
The Purchase Price for the Acquisition is $109 million, subject to normal adjustments based on a January 1, 2014 effective date, and will be payable in cash at Closing.
2. Long Life Oil Reserves:
The Acquisition adds Proven and Probable (P+P) reserves of 4.6 million boe as at December 31, 2013 (96 percent crude oil), assessed internally by Surge consistent with NI 51 - 101 guidelines. On this basis, Surge is paying $23.70 per barrel for P+P reserves.
Based on current production, the Assets have a long reserve life index of more than 10 years (P+P).
3. Production Metrics:
Estimated annualized production relating to the Acquisition is approximately 1,250 boe per day, composed of more than 97 percent light gravity crude oil (36 degree API).
On this basis, Surge is paying approximately $87,200 per flowing barrel of production with respect to the Acquisition.
4. Solid Netbacks and Strong Recycle Ratio:
Operating netbacks for the Assets are over $51 per barrel, based on guidance pricing (as set out below), resulting in a recycle ratio of approximately 2.2 times in relation to the Acquisition.
5. Annual Cash Flow:
Annual cash flow from the Assets, based on guidance pricing (as set out below) and using forecast average production for 2014 (less an annual decline of 18 percent), is estimated to be more than $21 million.
On this basis, Surge estimates that the Company is paying approximately 5.2 times annualized cash flow for the Acquisition.
6. Producing Infrastructure:
The Acquisition possesses key producing infrastructure, including batteries, pipelines, and waterflood facilities.
7. Undeveloped Land:
The Assets include approximately 12,000 net acres of undeveloped land.
8. Operatorship and High Working Interests:
The Assets have an average working interest of approximately 78 percent, and the net production acquired is more than 90 percent operated.
EQUITY FINANCING
In connection with the Acquisition, Surge has entered into an agreement on a "bought-deal" basis with a syndicate of underwriters (the "Underwriters") led by Macquarie Capital Markets Canada Ltd., and including GMP Securities LP, National Bank Financial Inc., CIBC World Markets Inc., Scotia Capital Inc., Dundee Securities Ltd., FirstEnergy Capital Corp., Cormark Securities Inc., TD Securities Inc., and Raymond James Ltd. for an offering of 11,112,000 subscription receipts ("Subscription Receipts") of the Company at a price of CDN$6.30 per Subscription Receipt (the "Offering Price") with each Subscription Receipt entitling the holder to receive one common share of the Company ("Common Share") for aggregate gross proceeds of $70,005,600. The Underwriters will have an over-allotment option to purchase up to an additional 15 percent of the Subscription Receipts, on the same terms, exercisable in whole or in part at any time up to the 30th day following initial closing of the Equity Financing.
The Company will apply to list the Subscription Receipts and the Common Shares issuable pursuant to the Equity Financing on the Toronto Stock Exchange.
The net proceeds from the issuance of Subscription Receipts will be used to partially fund the Acquisition.
The Equity Financing will be completed by way of short form prospectus in all of the provinces of Canada and on a private placement basis in the United States pursuant to exemptions from the registration requirements of the U.S securities laws. The Equity Financing is subject to customary conditions including receipt of applicable regulatory approvals and is expected to close on or about February 4, 2014.
The gross proceeds from the sale of Subscription Receipts will be held in escrow pending the satisfaction of all conditions to the completion of the Acquisition, provided that the closing date of the Acquisition is on or before April 30, 2014, upon which time each Subscription Receipt will entitle the holder to receive a Common Share, without further payment or action on the part of the holder, upon the closing of the Acquisition. If the Acquisition is not completed on or before April 30, 2014 or is terminated at an earlier time, holders of Subscription Receipts will receive, for each Subscription Receipt held, a cash payment equal to the Offering Price and any interest earned thereon during the term of the escrow.
The Subscription Receipts will be eligible to receive all dividends that accrue from the date hereof and prior to conversion of the Subscription Receipts into Common Shares.
UPWARD REVISION TO 2014 GUIDANCE
The Acquisition is accretive to Surge's 2014 guidance estimates on a reserves, production, and cash flow per share basis.
Furthermore, pursuant to the accretive Acquisition, even with the increase in Surge's dividend referred to herein, the Company's "all-in" payout/sustainability ratio improves from 92.1% to 91.0%.
Increased Dividend
As a result of the accretive Acquisition, together with better than expected operational and drilling results, Surge will be increasing the Company's annual dividend four percent from $0.52 per share per year ($0.04333 per share per month) to $0.54 per share per year ($0.045 per share per month). |
