SGYsome comments from Alpha if we weren't able to get
Surge Energy should generate a ton of cash flow, even after shedding assets
Surge Energy promised to provide an updated guidance by the end of this month, when the asset sale is expected to close, but I wanted to figure out the cash flow potential ahead of the guidance release. While the original guidance assumed the average production rate to increase from 17,000 boe/day to an exit rate of 19,000 boe/day by the end of the first semester and an average production rate of 18,000 boe/day, I will use an unchanged output of 17,000 boe/day (I anticipate some of the 'lost' production will be made up for, but Surge will likely spend a good chunk of the cash on reducing its bank debt as well. As such, I'm using an average output of 17,000 boe/day for the year.
Using a WTI price of US$55/barrel, a differential of approximately US$14/barrel (the current differential is lower) and an USD/CAD exchange rate of 1.25, the received price per barrel of oil will likely come in at around C$51/barrel. An average royalty rate of 14% will reduce the net received amount to C$44/barrel. Using a gas price of C$2.50 on an AECO basis, the average contribution of the gas will be approximately C$13/boe. This results in a weighted average received price of C$39/boe, net of royalties.
I will assume the operating cost of C$18.5/boe won't be materially different. That would result in a netback of C$20.5/boe. Multiplied by 17,000 boe/day and 365 days in the year results in a net cash flow of C$127M.
We still need to deduct the expected interest expenses. The net debt will decrease and I expect Surge Energy to pay C$5M in interest expenses on its convertible debentures while I expect the interest payments on the bank debt to be approximately C$14M (the current interest rate is prime +4.5%). Rounding this up, I expect about C$27M in net interest and lease expenses (C$19M on the financial debt and C$8M on leases). This results in a net operating cash flow of around C$100M.
Assuming the total capex will be around C$55-60M, Surge Energy will generate C$40-45M in free cash flow (with a massive deficit on the balance sheet, I don't think Surge will have to pay corporate taxes anytime soon). I'd like to emphasize again, this is just based on my assumptions and an oil price of US$55/barrel WTI. With WTI currently at close to US$65/barrel, the pro-forma cash flow could be C$35-45M higher if the oil price remains at these levels throughout the year. Some of the oil has already been hedged, and I hope the company continues to hedge a substantial portion of its anticipated oil output to increase the visibility of its cash flows.