from RBC Capital Markets Surge Energy's Q1/14 results fell broadly in-line with RBC and the Street consensus with updated guidance expected following the Longview shareholder vote in early June. With fewer oil-weighted assets in the marketplace, the release foreshadowed a transition to higher organic activity to deliver growth which is consistent with our thesis.
Key points:
• In-line quarter, halfway through FY budget. Q1/14 production of 15,024 (84% liquids) and CFPS of $0.31 were broadly in-line with RBC and street consensus, as shown in exhibit 3. Production was negatively impacted by 650 boe/d due to harsh winter weather. Corporate cash
netbacks of $39.45/boe were 3% below our estimate on 4% higher royalties, 8% higher unit opex and 8% higher hedging loss, partially offset by 10% lower G&A/Interest. Surge's Q1 E&D capex totaled $58.4 million (16% above RBC) for 13.96 net wells (20 gross) and $15.3 million
for facilities projects spread across a number of assets.
• Post Longview guidance update to reset market expectations. Surge plans to revisit its 2014 guidance following the Longview shareholder vote, expected on June 3rd. We have assumed an incremental $20 million of maintenance capex for the larger asset base factoring in Surge's pro forma 25% decline rate, and mid $30,000 per flowing corporate capital efficiency. For the record, Longview spent $26.6 million in Q1 as QoQ production dropped.
• Balance sheet outlook: stable. Surge anticipates a $725 million bank line upon completion of the Longview combination, leaving the company with $277 million in remaining liquidity excluding w/c with a 1.8x exit D/CF ratio based on our numbers. We project Surge's basic and effective payout ratios at 39% and 87% respectively in 2014 (vs oil weighted peer averages of 30% and 97%)
• P/NAV valuation in-line with peers. Surge trades at a 2014E EV/DACF multiple of 6.3x (vs. yield paying peers at 5.7x) and a P/NAV of 1.0x (vs. peers at 1.0x) at RBC's price deck. We think future multiple expansion from here requires higher unbooked resource exposure, a lower basic
payout ratio to drive growth, and increased portfolio focus over time.
• We maintain our Sector Perform rating and $7.00 per share 12-month price target. Our price target is driven by our expectation of Surge achieving its 2014 guidance, a stable financial outlook, as it builds scale and generates FCF for visible organic growth.