Surge Energy (SGY-T) April 27, '15 announces that its previously disclosed Upper Shaunavon crude oil discovery in SW Saskatchewan is continuing to expand with excellent on-going delineation drilling results. Surge now believes that this high quality, conventional sandstone pool is over 250 million barrels of net original oil in place ("OOIP"1), with over 200 (net) low risk development drilling locations, and full waterflood upside.
Surge management believes that the Company needs to strategically allocate capital towards the drilling and waterflooding of this exciting new Upper Shaunavon discovery, to the continued development of the Company's large OOIP, high quality Valhalla Doig light oil pool in NW Alberta, and to the continued development and waterflooding of Surge's large OOIP Sparky crude oil assets in SE Alberta. Accordingly, Surge management and Board have agreed to sell the Company's SE Saskatchewan and Manitoba assets (the "Assets") for a purchase price of $430 million (the "Transaction").
Proceeds from the sale of the Assets will be used initially to reduce indebtedness, which will improve the Company's pro forma debt to forward cash flow ratio to 1.25 times (based on April 23rd, 2015 strip pricing), and ultimately be redeployed in accordance with managements capital allocation strategy.
The Transaction is forecast to be greater than 20 percent accretive to production per share, 15 percent accretive to cash flow per share, and 15 percent accretive to proven plus probable reserves per share, to Surge shareholders on a debt-adjusted basis.
Surge confirms that the Company is maintaining its current dividend of $0.30 per share per annum.
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| Original Oil in Place (OOIP) is the equivalent to Discovered Petroleum Initially In Place (DPIIP) for the purposes of this press release. DPIIP is defined as quantity of hydrocarbons that are estimated to be in place within a known accumulation, plus those estimated quantities in accumulations yet to be discovered. There is no certainty that it will be commercially viable to produce any portion of the resources. A recovery project cannot be defined for this volume of DPIIP at this time, and as such it cannot be further sub-categorized.
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I. OVERVIEW
A. Upper Shaunavon Discovery Expanding
For five consecutive quarters Surge management have advised shareholders that the Company's Upper Shaunavon crude oil discovery in SW Saskatchewan has continued to expand. In mid-2013, Surge estimated its 100 percent working interest Upper Shaunavon lands (54 net sections) had approximately 30-40 million barrels of net OOIP, and up to 30 development drilling locations.
Today, after 15 months of excellent delineation drilling results from 11 consecutive successful wells, Surge now estimates that the play has over 250 million barrels of net OOIP, and over 200 (net) development drilling locations. This exciting discovery is a shallow, low risk, conventional sandstone reservoir located in a proven 2 billion barrel OOIP corridor, comprising the largest Upper Shaunavon fields in Saskatchewan history.
Surge's Upper Shaunavon discovery is now more than 12 miles long, and more than seven miles wide, with average net pay estimated at more than six meters.
The Upper Shaunavon play has risked, "all-in", drilling and on-stream production efficiencies of less than $15,000 per flowing bopd. At current oil prices, Surge's Upper Shaunavon wells pay out in less than 13 months, and generate a risked rate of return of over 80 percent. These results provide some of the best all-in production efficiencies and rates of return of any crude oil play in Canada.
Netbacks are very high at Shaunavon due to low operating costs of less than $9 per barrel, and low royalties. Another significant factor as to why the Shaunavon play has such high rates of return is that Surge controls a 10,000 bopd oil battery (and associated gathering and waterflood systems), owns 54 sections of contiguous land, and possesses a large 3-D seismic program over the Company's lands.
In addition to the primary development drilling upside discussed above, this conventional sandstone reservoir also provides significant, low risk, waterflood upside to Surge shareholders. Virtually all of the other Upper Shaunavon reservoirs in this proven 2 billion barrel OOIP trend, including such large pools as Rapdan (143 mm bbls OOIP), Dollard (180 mm bbls OOIP) and Instow (152 mm bbls OOIP), have all experienced excellent waterflood results over the last 50 years - with many of these high quality reservoirs still producing at attractive rates - on recovery factors of well over 30 percent.
With full field development and waterflood implementation, Surge management now estimate an ultimate pool recovery factor of more than 20 percent of the OOIP for the Upper Shaunavon alone.
Surge has booked only 37 Upper Shaunavon locations in its external engineering report. No waterflood upside is booked for the Upper Shaunavon in Surge's external engineering report.
B. Lower Oil Price Environment; Capital Allocation Strategy
In the strong equity markets from May of 2013 through September of 2014, Surge transitioned from a high growth junior to a modest growth/dividend paying model, acquiring over $1.2 billion of high quality, large OOIP assets, focused in just four main operating areas. Surge management grew the Company's OOIP from approximately 300 million barrels to over 2.1 billion barrels today.
Production increased from 8,300 boepd (65 percent oil) in May of 2013, to over 20,000 boepd (85 percent oil) today. Surge's drilling inventory grew from approximately 175 development drilling locations to over 1,000 low risk locations. The Company's corporate decline dropped from 38 percent, as a high growth junior, to less than 22 percent today (and 23% pro forma the Transaction).
During this period of higher oil prices, the trading price for Surge common shares increased over 190 percent from approximately $3.00 per share to $8.80 per share, and Surge also returned over $0.60 per share of dividends to shareholders. This was one of the best total rates of return of any dividend paying oil and gas company in Canada over this 16 month period.
Given the significant recent drop in world crude oil prices from US $108 WTI per barrel in June of 2014, to a low of US $42 WTI per barrel in March of 2015, Surge management undertook a number of aggressive and pro-active steps to protect shareholders capital, and the Company's net asset value, including:
Reduced discretionary spending for land and seismic immediately;
Reduced drilling capital significantly;
Reduced G&A from $3.50 per boe to $1.72 per boe in Q4/14;
Reduced the Company's dividend on January 7th, 2015;
Unwound the Company's fixed price hedges to realize a $35 million gain and reduce debt;
Sold certain non-core assets in the Dodsland area of SW Saskatchewan for $36.5 million to reduce debt;
Delivered excellent 2014 all-in FD&A reserve replacement costs of $19.55 per boe(P+P);
Exceeded the Company's 2014 production exit rate target of 21,350 boepd;
Increased Surge's December 31st, 2014 net asset value per share from $6.95 to $7.36 – despite the large decrease in the Company's external engineering year end price deck; and
Sought an early redetermination of Surge's bank line with the Company's lenders – wherein Surge's bank line was maintained – despite the significant drop in the bank syndicate's crude oil lending price deck.
As a result of these aggressive and proactive steps Surge management were able to maintain (and even increase) Surge's NAV per share, and protect shareholders capital, despite the swift and large drop in world crude oil prices. In addition, Surge has also maintained over $130 million of availability on the Company's existing bank lines (and an estimated $240 million of availability pro forma the Transaction).
Given the new lower trading range for world crude oil prices, and Surges rapidly expanding drilling inventory on the Shaunavon play (together with the Company's expanding Sparky and Valhalla plays), management have reassessed Surge's capital allocation strategy going forward.
Accordingly, Surge has determined to sell the Company's SE Saskatchewan and Manitoba assets as set forth below. Management believes this will allow the Company to thrive, compete and grow in the present lower crude oil price environment. It will also allow Surge shareholders to enjoy the significant per share upside growth leverage inherent in the Company's Upper Shaunavon (and Lower Shaunavon), Sparky and Valhalla plays.
C. Sale of SE Saskatchewan and Manitoba Assets
Based on the above analysis of the current business environment, Surge has signed a definitive purchase and sale agreement with a Canadian oil and gas company to sell all of its SE Saskatchewan and Manitoba assets for a purchase price of $430 million. The closing date for the sale of the Assets is set for June 15th, 2015.
The Assets comprise over 23 mmboe of independently engineered Proven plus Probable reserves, and approximately 4,750 bopd of crude oil production.
Macquarie Capital Markets Canada Ltd. acted as exclusive financial advisor in connection with the Transaction. GMP Securities L.P., and Scotia Waterous acted as strategic advisors.
As discussed above, during the strong equity markets from May of 2013 until September 2014, Surge acquired a number of high quality, large OOIP crude oil reservoirs, including the Assets being divested. It is Surge managements view and experience, that high quality reservoirs attract and provide quality metrics and returns on an acquisition or on a sale of such assets – at any point in the commodity price cycle. Accordingly, Surge's management and Board are of the view that the sale of the Assets represents excellent value for both Surge and its shareholders, in the present market place.
The Transaction has the following characteristics:
Total Purchase Price:
| C$430.0 million
| Current Production:
| ~4,750 boe/d
| Proved Reserves:
| ~13.6 mmboe
| Proved plus Probable Reserves:
| ~23.0 mmboe
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The associated Transaction metrics are as follows:
TV / Current Production:
| ~$90,526/boe/d
| TV / Proved Reserves:
| ~$31.60/boe
| TV / Proved plus Probable Reserves:
| ~$18.70/boe
| TV / Cash Flow:
| 8.8x (April strip pricing)
| Recycle Ratio (Proved plus Probable):
| 1.5x
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II. PROFORMA SURGE
The Transaction is forecast to be greater than 20 percent accretive to production per share, 15 percent accretive to cash flow per share, and 15 percent accretive to proven plus probable reserves per share, to Surge shareholders on a debt-adjusted basis.
Following the sale of the Assets, Surge will have the following corporate characteristics:
Reserves: 86.3 mmboe Total Proven plus Probable (76 percent oil)
RLI: >15 years
Decline: 23 percent
Production: >14,250 boepd (77 percent oil)
Net Debt: $135 million
Forward Debt to Cash Flow: 1.25 times (based on April 23rd, 2015 strip pricing)
Bank line: > $375 million (E)
Drilling Inventory: 749/731 (gross/net) total locations; 146 booked
Land: 285,000 gross (260,000 net) undeveloped acres
Operatorship: 100 percent of Surge's 3 core areas
NAV: $6.28 per share (year-end external engineering report)
Operating Expenses: $14 per boe
Dividend: $0.30 per share per annum ($0.025 per share per month)As previously disclosed, Surge management will be presenting a budget for the second half of 2015 in late June after reassessing market conditions at that time.
Paul Colborne, President and CEO, Surge Energy Inc.,
Phone: (403) 930-1507,
Fax: (403) 930-1011,
Email: pcolborne@surgeenergy.ca ;
Max Lof, CFO, Surge Energy Inc.,
Phone: (403) 930-1021,
Fax: (403) 930-1011,
Email: mlof@surgeenergy.ca |
