Canaccord Genuity increases SGY Price Target to $1.00 Asset sale strengthens balance sheet; Robust Q1
drilling program replaces sold production
On Friday, Surge provided a positive operational update and announced an asset sale
of the company's working interest in its Nipisi and Provost assets for gross proceeds
of $106M. The assets to be sold include ~2,700 boe/d, which equates to ~$39,250/
flowing, which we view as an attractive price to garner for the assets, considering SGY
pre deal was trading at just ~$32,700/flowing. Additionally, the company expects to
replace the bulk of the sold production with a $39M H1/21 drilling program. The net
effect is a muted impact to our production and cash flow estimates, and a major boost
to the company's balance sheet. As such, we view the asset sale favourably for Surge,
and we believe it positions the company to capitalize on strengthening oil prices.
With the release, the company also announced its bank line had been re-determined at
$215M, with the next review scheduled for November. With current estimated bank debt
of ~$185M, SGY maintains a healthy level of financial liquidity, in our view, particularly
considering the company is forecast to generate significant free cash flow over the next
three quarters at current commodity prices.
We continue to rate SGY a SPECULATIVE BUY, but have increased our price target to
$1.00 (from $0.50), as the materially improved balance sheet has derisked its NAV,
in our view. More specifically, we now credit SGY with its full probable reserve value,
adding ~$0.25 to our C-NAV (Figure 3), and have increased our multiple to 1.0x (0.7x
previously). Our updated target maps to a 2021E EV/DACF of 5.8x (vs 4.5x previously).
Highlights from the release:
Asset sale. Surge has entered into a binding purchase and sale agreement to sell
~2,700 boe/d to TVE for gross proceeds of $106M. The sale is expected to close March
25, 2021. Following the disposition, SGY notes it still has an estimated drilling inventory
of over 750 locations.
Operations update.
SGY plans to complete a 32-well drilling program in H1/21 in
the company's Sparky and Valhalla (Montney) areas. The program is expected to add
~3,200 boe/d for total DCET costs of $39M.
Balance sheet.
As previously announced, SGY received commitments for a nonrevolving
$40M four-year term facility from the BDC, as well as a credit commitment
of $51M from the EDC. The $51M from the EDC will form part of SGY's existing credit
facility. Pro forma the disposition, we estimate SGY will have net debt of ~$289M, or ~
$219M less notes.
2021 guidance.
SGY previously released its 2021 capital program of $55M, with
average annual production expected to be ~18,000 boe/d. With the release, the
company noted it will update its 2021 guidance (and provide 2022 guidance) following
the close of the asset sale in late March. On our numbers, after adjusting for the sale
and a robust Q1 drilling program, we have increased spending to $70M for the year, and
have that driving production of ~16,300 boe/d vs 17,200 previously (Figure 1).
2021 sensitivity.
With oil prices strengthening considerably, we supply a cash flow
sensitivity for SGY at US$60 and US$70 WTI in Figure 2. As shown, at $60WTI (~$4
below current strip prices), SGY is trading at just 2.9x 2021E EV/DACF (despite the
recent run in share price) with a D/CF of 1.6x. A return to even a 4.0x multiple at this
pricing level suggests a share price of $1.16 (a 68% return to SGY's current share
price).