Surge is set to report its Q1 on May 12, before market.
We are forecasting production of 15,050 BOE/d and CFPS, f.d. of $0.32, consensus is looking for 15,124 BOE/d and $0.32 per share. Surge recently provided an ops update on its Q1 drilling activity, highlighted by an Upper Shaunavon pool discovery, strong Valhalla farm-in well, and SE Alberta and SE Sask wells all above type curve. We will be looking for a longer production history from these wells, as well as potential waterflood response at Shaunavon, Manson, Macoun and Nipisi as additional catalysts.
As we roll our valuation forward to 2015, Surge benefits from reduced hedging losses as well as debt reduction from its low Total Payout Ratio rather than significant production growth as part of its managed production, low decline strategy.
We now forecast the company’s Total Payout Ratio dropping to 83% in 2014 and 2015, resulting in $60 million in potential debt reduction (Trailing D/CF improves to 1.2x in 2015 from 1.6x in 2014). Alternatively, with the free cash flow in 2015, we estimate Surge could increase its dividend as much as 47% to $0.88 and maintain a 100% total payout ratio.
We reiterate our BUY recommendation and consider Surge a TOP PICK with an increased target price of $9.25 (from $8.50), based on a 6.0x 2015E EV/DACF multiple (from 6.5x 2014E) supplemented by $1.17 (from $0.96) in risked Valhalla and Shaunavon upside.