Colbourne - surge - dividend
The market is screaming what needs to be done
CALGARY — A new high-profile chief executive and a plan to start paying dividends are being credited for a one-month 50 per cent “surge” in the share price of Surge Energy Inc.
The Calgary junior oil and gas producer’s share price has climbed to near $5.50 from a close of just $3.50 on May 7, the day before it announced chairman Paul Colborne would take over as president and CEO.
Since then the founder of Crescent Point Energy Corp. and other successful Calgary producers has been on the road, marketing Surge to investors throughout North America.
In a cellphone interview Friday from the back of a New York City taxi between meetings, Colborne told the Herald he decided to step in when health issues slowed president and CEO Dan O’Neil, in part because he was offended by the market’s lack of respect for Surge.
“I feel it’s one of the highest quality asset bases I’ve ever seen in a junior company in Canada and I felt that the market really overpunished the company in 2012,” he recalled.
“Then they went on the best drilling run in the company’s history in Q1, just before breakup, and the stock traded down further!”
Surge produces about 9,000 barrels of oil equivalent per day (70 per cent oil and liquids) in Alberta and Manitoba and has proved plus probable reserves of over 40 million boe.
The news release a month ago noted that O’Neil would retire but stay on the board, that Colborne would inject additional equity of $2.5 million and that the company “will be considering a strategic conversion to a moderate growth/dividend business model.”
Analysts said that last paragraph caught the attention of investors who have largely been ignoring the Canadian junior energy sector.
“I think it’s the proposed conversion to a dividend-paying corp that’s striking a chord with the market right now,” said Cody Kwong of FirstEnergy Capital.
“Institutional clients ... are mostly coming into stocks that are dividend-paying corporations instead of the traditional, where money was thrown at growth stories.”
He said Surge is still considered a cheap stock because of how far it’s fallen — it hit an all-time high of more than $11 in March 2012 — which makes it appealing for bargain hunters as well as those attracted to its potential yield.
Dundee Securities analyst Chad Ellison said Surge had a great first quarter operationally but agreed the share price lift has more to do with management and strategy changes.
“Paul has a great track record of being a consolidator of large, oil-in-place assets and we expect to see that happen along with this dividend; we expect see an acquisition as well,” he said.
Colborne said he plans to take a dividend proposal to the board in about two weeks and, if approved, payouts to shareholders could start by September.
“I really like the model,” he said, noting several of his previous companies have paid dividends, including Startech Energy Inc., Crescent Point and Star Point Energy Trust.
“With oil at $96 WTI, I don’t think people realize what kind of excellent cash flow a good light oil company can throw off to return capital to shareholders every month.”
He said the company has to strengthen its balance sheet — it just closed the sale of assets in North Dakota for $42.75 million to be applied to debt — while restricting drilling, using hedging to lock in commodity prices and growing through acquisitions of slow decline assets.
Colborne said his goal is to get the corporate decline rate — the loss of reserves through production — to less than 25 per cent per year.
A preliminary budget suggests the company can grow three per cent, pay a dividend and still have a cash surplus in 2014, he said.
On Friday, Crescent Point announced Colborne had resigned from its board to concentrate on Surge. He has also stepped down from the board of Cequence Energy Inc.
Surge was formed from junior Zapata Energy Corp. which was recapitalized in April 2010 and took on the management and board of directors, including Colborne and O’Neil, from Breaker Energy Ltd.
Breaker had been sold to NAL Oil & Gas Trust in late 2009 for $330 million.