Surge Energy to acquire Sask. light oil assets
2014-01-13 08:19 ET - News Release
Mr. Paul Colborne reports
SURGE ANNOUNCES $109 MILLION SE SASKATCHEWAN LIGHT OIL ACQUISITION, UPWARD REVISION TO 2014 GUIDANCE, $70 MILLION EQUITY FINANCING, AND FOUR PERCENT INCREASE IN DIVIDEND
Surge Energy Inc. has entered into an agreement to acquire certain high-quality, low-decline, operated, light oil producing assets strategically located in the company's core area of southeastern Saskatchewan. The assets include an estimated annualized 1,250 barrels of oil equivalent per day (boepd) (97 per cent oil) of high netback light crude oil production. The purchase price for the assets is $109-million, payable in cash.
As a result of the acquisition, Surge will be revising upward the company's 2014 guidance, as set forth in the attached table.
In addition, based on the accretive acquisition, and better-than-anticipated operational and drilling results, Surge will be increasing the company's annual dividend 4 per cent from 52 cents per share per year (4.333 cents per share per month), to 54 cents per share per year (4.5 cents per share per month).
Furthermore, pursuant to the accretive acquisition, even with the above increase in Surge's dividend, the company's "all-in" payout/sustainability ratio improves from 92.1 per cent to 91.0 per cent.
The closing of the acquisition is subject to customary conditions including receipt of applicable regulatory approvals and is expected to occur on or about March 3, 2014.
In conjunction with the acquisition, Surge has entered into a $70-million bought deal financing with a syndicate of underwriters led by Macquarie Capital Markets Canada Ltd., which is described in further detail below. Members of the Surge team will be participating in the equity financing. The equity financing is subject to customary conditions including receipt of applicable regulatory approvals and is expected to close on or about Feb. 4, 2014.
Acquisition overview
The acquisition comprises elite, operated, low-decline light oil assets strategically located within Surge's core operating area of southeastern Saskatchewan. The production is focused in several large, high-quality, light oil reservoirs -- with combined original oil in place (OOIP) of over 240 million barrels.
The assets possess a low annual decline of less than 18 per cent, which will provide significant annual free cash flow to Surge. The acquisition fits very well with the company's focused business strategy, and with Surge's dividend-paying/modest growth business model.
Surge management has identified significant upside with respect to the assets, primarily from infill and step-out development drilling, and optimizations.
Acquisition metrics
The following sets forth the metrics with respect to the acquisition.
- Purchase price
- The purchase price for the acquisition is $109-million, subject to normal adjustments based on a Jan. 1, 2014, effective date, and will be payable in cash at closing.
- Long life oil reserves
- The acquisition adds proven and probable (P+P) reserves of 4.6 million boe (barrels of oil equivalent) as at Dec. 31, 2013 (96 per cent crude oil), assessed internally by Surge consistent with NI 51-101 guidelines. On this basis, Surge is paying $23.70 per barrel for P+P reserves.
- Based on current production, the assets have a long reserve life index of more than 10 years (P+P).
- Production metrics
- Estimated annualized production relating to the acquisition is approximately 1,250 boe per day, composed of more than 97 per cent light gravity crude oil (36-degree API).
- On this basis, Surge is paying approximately $87,200 per flowing barrel of production with respect to the acquisition.
- Solid netbacks and strong recycle ratio
- Operating netbacks for the assets are over $51 per barrel, based on guidance pricing (as set out in the table), resulting in a recycle ratio of approximately 2.2 times in relation to the acquisition.
- Annual cash flow
- Annual cash flow from the assets, based on guidance pricing (as set out in the table) and using forecast average production for 2014 (less an annual decline of 18 per cent), is estimated to be more than $21-million.
- On this basis, Surge estimates that the company is paying approximately 5.2 times annualized cash flow for the acquisition.
- Producing infrastructure
- The acquisition possesses key producing infrastructure, including batteries, pipelines and waterflood facilities.
- Undeveloped land
- The assets include approximately 12,000 net acres of undeveloped land.
- Operatorship and high working interests
- The assets have an average working interest of approximately 78 per cent, and the net production acquired is more than 90 per cent operated.
Equity financing
In connection with the acquisition, Surge has entered into an agreement on a bought deal basis with a syndicate of underwriters led by Macquarie Capital Markets Canada Ltd., and including GMP Securities LP, National Bank Financial Inc., CIBC World Markets Inc., Scotia Capital Inc., Dundee Securities Ltd., FirstEnergy Capital Corp., Cormark Securities Inc., TD Securities Inc. and Raymond James Ltd. for an offering of 11,112,000 subscription receipts of the company at a price of $6.30 per subscription receipt with each subscription receipt entitling the holder to receive one common share of the company for aggregate gross proceeds of $70,005,600. The underwriters will have an overallotment option to purchase up to an additional 15 per cent of the subscription receipts, on the same terms, exercisable in whole or in part at any time up to the 30th day following initial closing of the equity financing.
The company will apply to list the subscription receipts and the common shares issuable pursuant to the equity financing on the Toronto Stock Exchange.
The net proceeds from the issuance of subscription receipts will be used to partially finance the acquisition.
The equity financing will be completed by way of short form prospectus in all of the provinces of Canada and on a private placement basis in the United States pursuant to exemptions from the registration requirements of the U.S securities laws. The equity financing is subject to customary conditions including receipt of applicable regulatory approvals and is expected to close on or about Feb. 4, 2014.
The gross proceeds from the sale of subscription receipts will be held in escrow pending the satisfaction of all conditions to the completion of the acquisition, provided that the closing date of the acquisition is on or before April 30, 2014, upon which time each subscription receipt will entitle the holder to receive a common share, without further payment or action on the part of the holder, upon the closing of the acquisition. If the acquisition is not completed on or before April 30, 2014, or is terminated at an earlier time, holders of subscription receipts will receive, for each subscription receipt held, a cash payment equal to the offering price and any interest earned thereon during the term of the escrow.
The subscription receipts will be eligible to receive all dividends that accrue from the date hereof and prior to conversion of the subscription receipts into common shares.
Upward revision to 2014 guidance
The acquisition is accretive to Surge's 2014 guidance estimates on a reserves, production and cash flow per share basis.
Furthermore, pursuant to the accretive acquisition, even with the increase in Surge's dividend referred to herein, the company's all-in payout/sustainability ratio improves from 92.1 per cent to 91.0 per cent.
The attached tables set forth Surge's upwardly revised guidance for full year 2014 estimates.
OPERATIONAL Surge 2014E guidance Surge 2014E guidance (after the acquisition (prior to the and the equity acquisition) financing) 2014E average production (boe/d) 15,250 (83% oil/NGLs) 16,125 (84% oil/NGLs) 2014E exit production (boe/d) 15,500 (83% oil/NGLs) 16,550 (84% oil/NGLs) 2P reserves 69.7 mmboe 74.3 mmboe RLI (based on 2013E exit production) greater than 12.5 years greater than 12.5 years 2014E capital spending $114.5-million $116-million 2014E wells drilled (gross/net) 38/36.1 wells 39/37.1 wells 2014 decline 24% 24%
FINANCIAL Surge 2014E guidance Surge 2014E guidance (after the acquisition (prior to the and the equity acquisition) financing) 2014E funds from $221-million ($1.33 per $236-million ($1.34 per operations (FFO) share) weighted average share) 2014E operational netback $44.04/boe $44.45/boe 2014E cash flow netback $39.69/boe $40.08/boe Basic shares outstanding 167 million 178 million Annual dividend $87-million $95-million 2014E dividend $0.52 per share $0.54 per share Yield 8.3% 8.6% Basic payout ratio 2014e 39.6% 41.2% All-in payout ratio 92.1% 91.0% 2014E exit net debt $287-million $326-million 2014E exit net debt/FFO less than 1.39x less than 1.39x
Increased dividend
As a result of the accretive acquisition, together with better-than-expected operational and drilling results, Surge will be increasing the company's annual dividend 4 per cent from 52 cents per share per year (4.333 cents per share per month) to 54 cents per share per year (4.5 cents per share per month).
Advisers
CIBC World Markets Inc., National Bank Financial Inc. and Scotia Capital Inc. acted as financial advisers to Surge with respect to the acquisition.
We seek Safe Harbor.
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