Al42 wrote: April 8, 2016
Surge Energy Inc.
Lowers payout with updated guidance
Our view:
Surge Energy announced updated 2016 guidance in conjunction
with a 50% reduction of its annual dividend to $0.075/share. Although the
revised 2016 effective payout ratios remain above 100%, Surge's balance
sheet remains in good shape with the basic payout now in reasonable
territory.
Key points:
•
Dividend reduced by 50% commencing with April payment.
Surge's
reduced $0.075/share annual dividend rate maps to a 3.5% cash yield
based on yesterday's close. Surge also updated its 2016 production
guidance and expects to exit the year at 13,000 boe/d (76% liquids).
We have lowered our average production outlook from 13,800 boe/d to
13,200 boe/d, factoring in 720 boe/d in recent asset sales and 350-400
boe/d of production shut in due to low oil prices. Surge increased its
capital spending program to $55 million from $50 million. Based on our
model, implied capital efficiency maps to roughly $17,800 per flowing
boe, which is achievable in the context of recent drilling results, in our
view.
•
Beginning 2016 program.
Surge plans to spud its first 100% w.i. Valhalla
Doig well within a week and plans to begin the majority of its 2016
capital program at the beginning of Q3/16. Results from Surge's Valhalla
Doig wells have been strong, with its 15-06 well producing 195 mbbl and
its 04-16 well producing 176 mbbl of oil in 2015. The wells were two
of the top producing oil wells in Western Canada last year and Valhalla
remains key to 2016 execution.
•
Balance sheet remains in good shape, basic payout in reasonable
territory.
We project Surge's 2016 net-debt-to-trailing-cash-flow ratio
at 2.3x with approximately $273 million in undrawn capacity on its $400
million line, including $43 million in disposition proceeds. We estimate
the dividend cut will save Surge $11 million during 2016 and $17 million
the following year. Surge's revised simple and effective payout ratios are
36% and 134% in 2016 respectively, at our US$40/bbl WTI price deck.
•
In line EV/DACF valuation is fair in our view.
Surge trades at a 9.3x
2016E EV/DACF multiple, including hedges (vs. oil-weighted peers at
9.3x) and a P/NAV ratio of 0.7x (vs. peers at 1.1x) at RBC's price deck.
•
Maintaining Sector Perform rating and $3.00 price target.
Our 12-
month price target and rating is driven by our expectation of Surge
executing its 2016 business plan, a stable financial outlook, and with a
total return proposition weighted to its recently-adjusted basic payout.
https://www.rbcinsight.com/WM/ResearchViewer/1924-410955-1/1654?docType=PDF&