Scotia Bank on Surge Surge Energy Inc.
September 7, 2016
2016 Program Increased; Preliminary 2017 Guidance Anticipates ~5% Growth
SGY's 2016 exit production guidance increase was expected, with the company exceeding 13 mboe/d (its previous guidance) early in Q3/16. The company also signaled a potential capital budget increase to the Street during the summer. Preliminary 2017 capital and production guidance are generally in line with our previous estimates (we had the same capital and modestly lower production), with higher-than- expected cash flow guidance (we previously had a 99% total payout at US$60/bbl WTI) due to lower operating cost expectations. Overall, we continue to view SGY as a good name for oil torque, but still see US$55-60/bbl WTI as a key hurdle for more comfort on the payout profile.
KEY POINTS:
2016 Program Increased.
SGY increased its 2016 capital budget ~20% to $66M (from $55M) and upped its exit guidance ~4% to 13.5 mboe/d (from 13 mboe/d). Consensus estimates had the company averaging >13.1 mboe/d during 2H/16, so an increase in production guidance was widely expected. With the increased capital program, the company's trailing 2016 payout (excluding A&D capital/proceeds) increases to 119%-134% (SGY's estimate and our estimate).
Preliminary 2017 Guidance.
SGY expects to run a 2017 capital program of $85M (70% drilling and completion capital) and is guiding average and exit production of 13.7 mboe/d and 14.2 mboe/d, respectively. The 2017 exit guidance represents ~5% production growth versus the company's updated 2016 exit guidance. Operating costs are guided at $11.45-$11.95 – down 4%-8% versus the H1/16 average of ~$12.50/boe. The company expects its capital program and dividend payout to be sustainable down to US$50/bbl WTI (we are modelling a 94% payout at US$60/bbl WTI).
One year price target is C$3.00. Sector perform.