Surge Energy Inc (Alberta) T.SGY

Share Price vs. Fair Value

[zack50]

Thought this might be of interest to some of you. The calculations determine that the Fair Value... an estimate of what Surge's share price is worth today, based on the cash flows that Surge is expected to generate in the future... is $19.30 which would indicate that SGY is presently trading at a discount of 57.3% to yesterday's closing price of $8.23.

 Below are the data sources, inputs and calculation used to determine the intrinsic value for Surge Energy.

 

TSX:SGY Discounted Cash Flow Data Sources

Data Point	Source	Value
Valuation Model		2 Stage Free Cash Flow to Equity
Levered Free Cash Flow	Average of 2 Analyst Estimates (S&P Global)	See below
Discount Rate (Cost of Equity)	See below	8.1%
Perpetual Growth Rate	5-Year Average of CA Long-Term Govt Bond Rate	1.6%

An important part of a discounted cash flow is the discount rate, below we explain how it has been calculated.

Calculation of Discount Rate/ Cost of Equity for TSX:SGY

Data Point	Calculation/ Source	Result
Risk-Free Rate	5-Year Average of CA Long-Term Govt Bond Rate	1.6%
Equity Risk Premium	S&P Global	4.2%
Oil and Gas Unlevered Beta	Simply Wall St/ S&P Global	1.33
Re-levered Beta	= 0.33 + [(0.66 * Unlevered beta) * (1 + (1 - tax rate) (Debt/Market Equity))] = 0.33 + [(0.66 * 1.332) * (1 + (1 - 26.5%) (50.13%))]	1.551
Levered Beta	Levered Beta limited to 0.8 to 2.0 (practical range for a stable firm)	1.551
Discount Rate/ Cost of Equity	= Cost of Equity = Risk Free Rate + (Levered Beta * Equity Risk Premium) = 1.56% + (1.551 * 4.24%)	8.14%

 

Discounted Cash Flow Calculation for TSX:SGY using 2 Stage Free Cash Flow to Equity

The calculations below outline how an intrinsic value for Surge Energy is arrived at by discounting future cash flows to their present value using the 2 stage method. We use analyst's estimates of cash flows going forward 10 years for the 1st stage, the 2nd stage assumes the company grows at a stable rate into perpetuity.

TSX:SGY DCF 1st Stage: Next 10 years cash flow forecast

	Levered FCF (CAD, Millions)	Source	Present Value Discounted (@ 8.14%)
2022	128.66	Analyst x5	118.98
2023	121	Analyst x2	103.48
2024	116.78	Est @ -3.49%	92.35
2025	114.48	Est @ -1.97%	83.72
2026	113.43	Est @ -0.91%	76.71
2027	113.24	Est @ -0.17%	70.82
2028	113.63	Est @ 0.35%	65.72
2029	114.44	Est @ 0.71%	61.21
2030	115.55	Est @ 0.97%	57.15
2031	116.87	Est @ 1.14%	53.45
Present value of next 10 years cash flows			CA$783

 

TSX:SGY DCF 2nd Stage: Terminal Value

	Calculation	Result
Terminal Value	FCF2031 × (1 + g) ÷ (Discount Rate – g) = CA$116.872 x (1 + 1.56%) ÷ (8.14% - 1.56% )	CA$1,804.8
Present Value of Terminal Value	= Terminal Value ÷ (1 + r)10 CA$1,805 ÷ (1 + 8.14%)10	CA$825.47

 

TSX:SGY Total Equity Value

	Calculation	Result
Total Equity Value	= Present value of next 10 years cash flows + Terminal Value = CA$783 + CA$825	CA$1,608.47
Equity Value per Share (CAD)	= Total value / Shares Outstanding = CA$1,608 / 83	CA$19.3

TSX:SGY Discount to Share Price

	Calculation	Result
Value per share (CAD)	From above.	CA$19.3
Current discount	Discount to share price of CA$8.23 = (CA$19.3 - CA$8.23) / CA$19.3	57.3%