CALGARY, Sept. 6, 2016 /CNW/ - Surge Energy Inc. ("Surge" or the "Company") (TSX: SGY) announces preliminary guidance for 2017, with production averaging more than 13,650 boepd, and a 2017 production exit rate of 14,150 boepd. In addition, Surge announces an upward revision to the Company's previously announced 2016 production exit rate estimate from 13,000 boepd to 13,500 boepd.
PRELIMINARY GUIDANCE FOR 2017
In 2017 Surge plans to deliver approximately five percent growth in production per share from low risk development drilling and waterflood activities – funded entirely from existing funds flow at US$50 WTI pricing for crude oil1. Average production for 2017 is forecast to be 13,650 boepd (81 percent liquids), with an exit rate of 14,150 boepd (82 percent liquids).
Surge's preliminary guidance for 2017 is set forth below:
| | | |
| | Preliminary 2017 Guidance at
US$50 WTI1 | Preliminary 2017 Guidance at
US$60 WTI2 |
| OPERATIONAL | | |
| 2017 Average Production (boe/d) 2017 Exit Production (boe/d) | 13,650 (81 percent liquids) 14,150 (81 percent liquids) | 13,650 (81 percent liquids) 14,150 (81 percent liquids) |
| Total Capital Spending | $85 million | $85 million |
| Est. Base Decline | <24% | <24% |
| Operating Expenses | $11.45/boe to $11.95/boe | $11.45/boe to $11.95/boe |
| Transportation Expenses | $1.50/boe | $1.50/boe |
| Royalties as a % of Revenue | 11.5% to 12.5% | 13% to 14% |
| Corporate Oil Price Discount to Edmonton light | -$11/bbl to -$12/bbl | -$11/bbl to -$12/bbl |
| Estimated Funds Flow from Operations3 | $102 million to $107 million | $129 million to $134 million |
| Funds Flow from Operations per Share | $0.45 to $0.48 per share | $0.58 to $0.60 per share |
| FINANCIAL | | |
| Basic Shares Outstanding | 222.2 million | 222.2 million |
| Annual Dividend Payable | $16.7 million ($0.075 per share per annum) | $16.7 million ($0.075 per share per annum) |
| Exit 2017 Debt | $138 million to $143 million | $112 million to $117 million |
| Debt/Cash Flow | 1.40x to 1.28x | 0.90x to 0.84x |
| Payout/Sustainability Ratio4 | 95% to 100% | 76% to 79% |
The Company anticipates spending 70 percent of its preliminary 2017 capital budget on drilling activity. The great majority of the drilling activity will be focused at Surge's three core areas of Shaunavon, Sparky and Valhalla.
In the event of commodity prices above the US$50 WTI base case, Surge management will evaluate all capital allocation options for the resultant free cash flow.
In conjunction with this preliminary 2017 guidance, the Company has restructured its 2017 CAD WTI collar positions as follows:
| | | |
| | 1H 2017 | 2H 2017 |
| Previous Floor ($CAD WTI/bbl) | CAD$49.00 | CAD$53.33 |
| Revised Floor ($CAD WTI/bbl)5 | CAD$61.71 | CAD$60.00 |
| Previous Volume | 2,500bbl/d | 1,500bbl/d |
| Revised Volume | 3,500bbl/d | 1,500bbl/d |
Accordingly, Surge now has a CAD$61.71 WTI floor on 3,500 bbl/d of production in 1H 2017 and 1,500 bbl/d of production in 2H 2017.
Surge's ongoing strategic hedging program protects the execution of the Company's 2017 drilling program through spring break-up, at a crude oil price level as low as US$39 WTI, while maintaining a 1H 2017 debt-to-cash flow ratio of under 2.0 times.
UPWARD REVISION TO 2016 EXIT RATE
As disclosed in the Company's press release dated August 3, 2016, Surge has experienced successful development drilling results at its three core areas of Shaunavon, Sparky and Valhalla - recently adding over 2,200 boepd (85 percent oil), at an "all-in" on-stream cost6 of under $20 million, from the Company's recent 14 well development drilling program. This drilling program provides exceptional netbacks7, with incremental operating expenses under $5/boe and royalty rates of 2.5 to 5 percent8.
Accordingly, having now exceeded managements projected 2016 production exit rate target of 13,000 boepd, Surge is now revising upward the Company's 2016 guidance as follows:
| | |
| | Revised 2016 Guidance9 |
| OPERATIONAL | |
| 2016(e) Exit Production (boe/d) | 13,500 (79% liquids) |
| Total Capital Spending | $66 million |
| Operating Expenses | $11.95/boe to $12.45/boe |
| Transportation Expenses | $1.50/boe |
| Royalties as a % of Revenue | 11% to 12% |
| Corporate Oil Price Discount to Edmonton light | -$11/bbl to -$12/bbl |
| Estimated Funds Flow from Operations | $74 million |
| | |
| FINANCIAL | |
| Basic Shares Outstanding | 222.2 million |
| Annual Dividend Payable | $16.7 million ($0.075 per share per annum) |
| Estimated Year End 2016 Debt | $138 million |
In order to protect the majority of the cash flows from the increased 2016 drilling program, Surge management has acquired an additional 2,000 barrels per day of WTI puts at CAD $60/bbl for the fourth quarter of 2016. Accordingly, the Company has now hedged the maximum amount of Q4 2016 WTI exposure allowable under its risk management policy.
OUTLOOK
Surge's goal is to be the best positioned light/medium crude oil, growth and dividend paying company in Canada. During the extended downturn in world crude oil prices, Surge management focused on creating balance sheet flexibility, and implementing rigorous cost cutting initiatives. Management also high-graded and optimized the Company's asset base into high quality, large OOIP crude oil reservoirs in Surge's three core areas - through low risk development drilling, and the implementation of successful waterfloods.
Importantly, Surge management has also preserved significant per share growth potential for shareholders. This ensures that the Company is one of the few in its peer group in Canada who are able to add a substantial, organic, production per share growth component to management's estimates in the second half of 2016 and through 2017 – all within existing cash flow - at strip pricing for crude oil.
Surge's 2017 production exit rate guidance of 14,150 boepd referred to above, represents a 16% increase in organic production per share, over the Company's reported Q2 2016 production level of 12,182 boepd.