It’s The Oil BusinessHigh Risk at the best of times and it’s NOT the best of times!
With the benefit of hindsight, the share buy back possibly wasn’t a good move. At the time PC was expecting that the Oil price recovery would begin in late 2015 and instead it crashed.
They didn’t overpay for the shares bought but more debt than anticipated was used.
That said when PC realized that his optimism re the Oil price was wrong he didn’t waste much time making adjustments, reduced capex, slashed the dividend and made 2 relatively small non core asset sales.
The debt is creeping up a bit. On Dec 31, 2015 there was $149m drawn on the credit facility, and on June 30, 2016 it is down to $135m. At first that looks good but they received $43m for the asset sales. Basically they spent $29m more in H1 than their cash flow.
We won’t know until the Q2 results are released in 3-4 weeks where the money was spent. Abt. $12.5m was for dividends in H1 (at the current rate it will be abt. $8m in H2) and they acquired 9 sections in the “Sparky” area for an undisclosed amount that will account for some of the spending.
They also started their H2 capex program 6 weeks early in Q2. Whatever they spent there won’t have to be spent in H2 and more barrels will come on line sooner than originally planed.
Their 2016 capex program appears to be very effective!
When we consider how low the Oil price was in Q1 all things considered Surge got through H1 2016 quite well.
Due to the uncertainty re the Oil price in the near-mid term now is not the time for an aggressive drilling program. IF the Oil price stays in the low $40s or worse for another year or so the result will be INCREASED DEBT. As laid out in the June presentation as the Oil price improves they will increase the capex and production.
Asset acquisition could make some sense but only if whatever they acquire strengthens their asset base in a core area (which they have done at “Sparky”) AT THE RIGHT PRICE!
For the time being Surge should continue to do what they have been doing. Work on reducing their costs and improving operating efficiency which they are having success at and execute a modest effective capex program which they are doing. IF a further reduction or elimination of the dividend is required to get through this downturn in the Oil market it will be done.
The reduction in the borrowing base was not a surprise. The Lenders are being cautious and conservative.
As I previously said if Surge hadn’t sold the SE Sask. assets when they did for what they got the situation would have been very different. They probably would have been forced to sell them for 50-70% less than they got and as well as a Borrowing Base Reduction been stuck with a Term Loan to deal with like several of their peers have.
You Can Make Some Of The People Happy Some Of The Time But You Can’t Make All The People Happy All The Time.
There is no shortage of Companies in the Western Canadian Oil and NG Industry to chose from. Anyone that doesn’t like the Surge Business Model (Dividend, Modest Growth, 100% All In POR target without a DRIP) or how Surge is navigating this Low Commodity Price environment should simply move on.
All things considered, although PC misjudged the timing for a recovery in the Oil price he has adapted and in my opinion he is doing a much better job than many of his peers. When the Oil price actually recovers Surge will still be in the game well positioned to move forward.
As Always; Do Your Own Due Diligence; It’s Your Money !!