Surge Energy talks production, omits Q3 P&L from NR
2019-11-04 21:15 ET - News Release
Mr. Paul Colborne reports
SURGE ENERGY INC. ANNOUNCES THIRD QUARTER 2019 RESULTS
Surge Energy Inc. has released its operating and financial results for the quarter ended Sept. 30, 2019.
Message to shareholders
Surge's large original oil in place (OOIP), light- and medium-gravity crude oil asset base continues to outperform management's expectations.
Surge's third quarter 2019 average production rate of 21,217 barrels of oil equivalent per day contains virtually no contribution from the company's third quarter 2019 drilling program, as drilling operations in the quarter did not commence until Sept. 1, 2019.
As set forth in the attached budget to actuals comparison table, over the last four financial quarters, Surge has maintained production within less than 1 per cent of the company's 2019 budgeted production estimates, while drilling 12 (21 per cent) fewer wells than budgeted.
In addition, with drilling and water flood results outperforming expectations, Surge management strategically decided to delay drilling operations in the quarter, picking up the company's rigs on Sept. 1, 2019, rather than on June 15, 2019, as management had previously budgeted. This capital allocation decision allowed the company to continue to reduce net debt (i). Surge has now reduced the company's net debt by $84-million in 2019.
FOURTH QUARTER 2018 TO THIRD QUARTER 2019 BUDGET TO ACTUALS COMPARISON 2018/2019 budget estimates Actuals New wells on production 49 wells budgeted 37 wells drilled Average production* 21,535 boe/d* 21,360 boe/d * Based on fourth quarter 2018 guidance (that is, following the Greater Sawn core area acquisition) and 2019 guidance of 22,000 barrels of oil equivalent per day, adjusted for the 490 boepd non-core disposition that closed in first quarter 2019.
Surge management believes that these excellent operational results are directly related to: (1) the company's high-quality, large OOIP, light- and medium-gravity crude oil assets; (2) the company's talented, hard-working employees; and (3) management's strategic, timely capital allocation/spending decisions.
Based on continued successful drilling and water flood results at Surge's Sparky, Valhalla, Greater Sawn and Shaunavon core areas, the company's third quarter 2019 production rate averaged 21,217 boe per day (85 per cent liquids), which represent an increase of 18 per cent over third quarter 2018 production of 18,029 boe per day (79 per cent liquids).
Additionally, the company achieved a 26-per-cent increase in liquids production in third quarter 2019 when compared with third quarter 2018, by strategically targeting higher-value light and medium oil production with the recent drilling programs and acquisitions.
Third quarter 2019 highlights:
- Surge's third quarter 2019 production of 21,217 boe per day increased by 18 per cent over third quarter 2018 production of 18,029 boe per day.
- Surge's liquids weighting increased 6 per cent, up from 79 per cent in third quarter 2018 to 85 per cent in third quarter 2019.
- The company's third quarter 2019 liquids production increased by 26 per cent as compared with third quarter 2018, up from 14,229 barrels per day to 17,939 barrels per day (96 per cent light and medium oil).
- The company's cash flow from operating activities in third quarter 2019 was $40.2-million, an increase of 8 per cent over third quarter 2018, at $37.2-million.
- Surge's adjusted funds flow (i) in third quarter 2019 was $41.5-million, an increase of 2 per cent over third quarter 2018 at $40.6-million.
- Operating expenses for third quarter 2019 were $14.69 per boe, and net operating expenses (i) were $13.93 per boe, both below the company's 2019 guided range of $14.95 to $15.45 per boe.
- Surge generated $11.2-million of adjusted funds flow in the quarter in excess of exploration and development expenditures and dividends declared (and used to further reduce net debt).
- The company paid dividends of $8.0-million in third quarter 2019, representing 19 per cent of third quarter 2019 adjusted funds flow.
- In the last nine months, Surge has reduced net debt by $84-million.
FINANCIAL AND OPERATING SUMMARY ($000s except per-share amounts) Three months ended Nine months ended Sept. 30, Sept. 30, 2019 2018 (2) 2019 2018 Financial highlights Oil sales $93,818 $85,946 $289,333 $233,954 NGL sales 1,958 3,598 6,032 8,546 Natural gas sales 1,250 1,492 7,194 3,920 ---------- ---------- ---------- ---------- Total oil, natural gas and NGL revenue 97,026 91,036 302,559 246,420 ---------- ---------- ---------- ---------- Cash flow from operating activities 40,228 37,197 114,943 95,137 Per share -- basic ($) 0.13 0.16 0.37 0.41 Adjusted funds flow 41,513 40,638 134,106 107,403 Per share -- basic ($) 0.13 0.18 0.43 0.46 Total exploration and development expenditures 22,247 28,701 88,705 86,954 Total acquisition and dispositions 12,077 6,279 (44,896) 28,733 ---------- ---------- ---------- ---------- Total capital expenditures 34,324 34,980 43,809 115,687 ---------- ---------- ---------- ---------- Net debt (1), end of period 377,409 282,394 377,409 282,394 ---------- ---------- ---------- ---------- Operating highlights Production Oil (bbl per day) 17,170 13,560 17,358 13,120 NGLs (bbl per day) 769 669 713 595 Natural gas (Mcf per day) 19,668 22,797 20,342 20,004 ---------- ---------- ---------- ---------- Total (boe per day) (6:1) 21,217 18,029 21,461 17,049 ---------- ---------- ---------- ---------- Average realized price (excluding hedges) Oil ($ per bbl) 59.39 68.89 61.06 65.32 NGL ($ per bbl) 27.69 58.46 30.97 52.57 Natural gas ($ per Mcf) 0.69 0.71 1.30 0.72 ---------- ---------- ---------- ---------- Netback ($ per boe) Petroleum and natural gas revenue 49.71 54.89 51.64 52.94 Realized gain (loss) on financial contracts (0.86) (1.91) (0.84) (1.84) Royalties (7.12) (8.32) (6.61) (7.68) Net operating expenses (1) (13.93) (14.36) (14.36) (14.37) Transportation expenses (1.42) (1.55) (1.58) (1.48) ---------- ---------- ---------- ---------- Operating netback 26.38 28.75 28.25 27.57 ---------- ---------- ---------- ---------- G&A expense (1.81) (1.98) (1.82) (2.08) Interest expense (3.31) (2.27) (3.54) (2.42) ---------- ---------- ---------- ---------- Adjusted funds flow (1) 21.26 24.50 22.89 23.07 ---------- ---------- ---------- ---------- (1) This is a non-generally accepted accounting principle financial measure. (2) International financial reporting standard 16 was adopted Jan. 1, 2019, using the modified retrospective approach, and as such, comparative information for 2018 that may have been impacted has not been restated. Refer to the changes in accounting policies section of management's discussion and analysis for additional information.
In accordance with industry practice, the company uses adjusted funds flow to analyze the cash flow generated from its continuing principal business activities. On this basis, both adjusted funds flow and cash flow from operating activities are provided for comparative purposes.
Operational highlights
Surge spent a total of $22.2-million of exploration and development capital in the third quarter of 2019 for the drilling of four gross (four net) successful wells and the completion of one gross (one net) successful well ($10.3-million on drilling and completions), together with water flood injector conversions, associated infrastructure, land and seismic.
Surge also spent $4.9-million on facilities, equipment and pipelines during the quarter, focused on optimizing and expanding the company's water floods.
Included in capital spending for third quarter 2019 are two key, core-area land acquisitions of a total of $5.7-million.
Based on Surge's recent internal 2019 type curve review, management now estimates Surge has approximately 10 years of economic drilling inventory at $50 (U.S.) per bbl WTI (West Texas Intermediate), and approximately 13 years of highly economic drilling inventory at $60 (U.S.) WTI.
Outlook -- consistent production; sustainable dividend
Management's stated goal is to be the best-positioned, top-performing, light/medium-gravity crude oil growth and dividend-paying public company in its peer group in Canada.
Surge's high-quality, large OOIP, light- and medium-gravity crude oil asset base continues to outperform management's expectations.
The company now has over 2.5 billion barrels of internally estimated OOIP, with a low 6.2-per-cent recovery factor to date and a deep inventory of over 800 highly economic drilling locations -- providing a 13-year drilling inventory. In addition, the company has a low 23-per-cent annual corporate decline, with over 55 per cent of Surge's asset base under various stages of water flood.
In the last four financial quarters, Surge has maintained production within less than 1 per cent of budget guidance, while drilling 21 per cent (12) fewer wells than estimated. Furthermore, the company has now reduced net debt by $84-million in the last nine months, while maintaining an attractive dividend yield of over 9 per cent, representing 19 per cent of third quarter 2019 adjusted funds flow.
Surge anticipates confirming 2020 guidance in early January, 2020.
(i) This is a non-generally accepted accounting principle financial measure.
We seek Safe Harbor.
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