TD 0n Surge Event
Surge announces the corporate acquisition of Mount Bastion Oil and Gas Corp., a
private producer with operations in the Slave Point carbonate trend of central Alberta,
as well as a concurrent 25% hike in dividend.
Impact: POSITIVE
The transaction will be funded through a combination of cash and SGY
shares which equates to a total consideration of $320mm. The consideration
will include 75.4mm in shares and $145mm in cash, which will be funded by
the company's credit facility which is expected to be expanded to $525mm (from
$350mm). Although the transaction is being partially funded through leverage, our
pro forma 2019E D/CF remains unchanged at 1.6x. The company also announced
a 25% increase in the dividend to $0.125/share annually (from $0.10), at a date
to be determined following the closing of the acquisition.
The acquired assets are located near Surge's core area at Nipisi, Alberta
and include 5,500 BOE/d (98% light oil) and 2P reserves of 25 mmBOE (98%
light oil). In our view, the implied metrics of 3.8x cash flow, $58,182/BOE/d, and
$12.80/BOE (2P) are in line with the recent light oil corporate transaction metrics.
Production is largely from the Slave Point (Beaverhill Lake Group), with attractive
operating netbacks of >$42/BOE (using US$65/bbl WTI). Surge estimates a total
of 100 locations on these lands (60 of which are currently booked), excluding
future downspacing opportunities. Surge is planning to spend $38mm (~24%) of
its 2019 budget on these assets, which include 10 wells.
Pro forma 2019 budget includes capex of $160mm and average production
of 23,000 BOE/d (85% liquids). At US$65 WTI, this is expected to drive $230mm
of cash flow, which implies a 70% payout before the increased dividend. The
acquisition drives a meaningful increase in our cash flow netback estimate to
$31.77/BOE (from $28.50 previously) and is 10% accretive to our 2019E CFPS
estimate.
TD Investment Conclusion
In our view, the acquisition of light-oil focused assets in an existing core area
strengthens the company on all levels, including sustainability, scale, and valuation.
Our 2019 estimates are positively affected and drive an increase in our target price
to $3.50 (from $ 3.25) . And we reitierate our Buy Recommendation.