Surge Energy Inc. Announces Closing of Strategic $160 Million Southeast Saskatchewan Light Oil Acquisition; Closing of New Credit Facilities; Approval of Share Consolidation; and 2022 Guidance
CALGARY, AB, Aug. 18, 2021 /CNW/ - Surge Energy Inc. ("Surge" or the "Company") (TSX: SGY) is pleased to announce that it has successfully completed the previously announced acquisition (the "Acquisition") of Astra Oil Corp. ("Astra") pursuant to an arrangement (the "Arrangement") under the provisions of the Business Corporations Act (Alberta).
SPECIAL MEETING RESULTS; 95% VOTE IN FAVOR OF ACQUISITION AND GREATER THAN 93% VOTE IN FAVOR OF THE SHARE CONSOLIDATION
All the issued and outstanding common shares of Astra were acquired by Surge for aggregate consideration consisting of: 1) the issuance of approximately 229 million common shares of Surge ("Surge Shares"), and 2) approximately $13.5 million in assumed debt. At the special meeting of Surge shareholders to approve the issuance of Surge Shares pursuant to the Acquisition, held on August 17, 2021 (the "Meeting"), 26.5% of the outstanding Surge Shares were represented and the issuance was approved by 95.0% of the Surge Shares voted at the Meeting.
Additionally, Surge shareholders voted to approve the consolidation of Surge Shares ("Consolidation") on the basis of one (1) post-Consolidation Surge Share for each 8.5 pre-Consolidation Surge Shares. At the Meeting, 26.9% of the outstanding Surge Shares were represented and the Consolidation was approved by 93.2% of the Surge Shares voted at the Meeting.
Accordingly, immediately after the Acquisition, the 608.5 million pre-Consolidation Surge Shares issued and outstanding will be consolidated to approximately 71.6 million Surge Shares on a post-Consolidation basis.
Surge expects trading of Surge Shares on a post-Consolidation basis on the Toronto Stock Exchange ("TSX") will commence 2-3 business days following the closing of the Arrangement. The Company's name and trading symbol will remain unchanged.
2022 OUTLOOK - STRONG OPERATIONAL PERFORMANCE CONFIRMS GUIDANCE
Consistent and disciplined development of the Company's high quality, low cost, conventional crude oil asset base, including Surge's premier Sparky play in Alberta, complemented by the high netback, light oil Southeast Saskatchewan assets obtained through the Acquisition, positions Surge to provide shareholders with significant free cash flow generation in 2022 and beyond.
Today, Surge possesses the key operational indicia and financial attributes required for a successful public oil company, including:
- Over 2.5 billion barrels of net combined, internally estimated, conventional OOIP1 - with a low 6 percent recovery factor to date;
- Combined proven plus probable year end 2020 reserves of over 95 million boe (85 percent liquids);
- Exit 2021 production of more than 20,200 boepd (85 percent liquids weighted);
- A low base corporate decline of 25 percent;
- A large development drilling inventory: >850 net locations (internally estimated)2; providing a development drilling inventory of more than 13 years;
- High operating netbacks3 of >$33 per boe at US$65 WTI;
- A 13 year reserve life index (total proved plus probable);
- Top tier production efficiencies4 (<$15,000 per boepd; IP 180);
- Forecast adjusted funds flow3 per share in 2022 of $2.94 at US$65 WTI (post consolidation);
- Shares outstanding (basic): 71 million (post consolidation);
- An excellent balance sheet with estimated net debt3 to annualized Q4/22 adjusted funds flow of approximately 1 times at US$65 WTI;
- Forecasted free cash flow3 of over $85 million in 2022 at US$65 WTI; and
- Strategically, from an operational perspective, all of Surge's core operating areas independently rank in the top conventional oil plays in Canada5.
Following successful drilling programs by both Surge and Astra in the first half of 2021, the Company confirms it is on track to meet or exceed previously announced guidance for Surge's 2021 exit production rate of 20,200 boepd. Surge also confirms financial and operational guidance for 2022, as detailed below:
| Guidance | @ US $65 WTI* | @ US $70 WTI* | @ US $75 WTI* |
| Exit 2021 production (boepd) | 20,200 |
| Average 2022 production (boepd) | 20,200 |
| % oil and NGL's | 85% |
| 2022 Adjusted funds flow ($MM) | $210 | $235 | $265 |
| 2022 Cash flow from operations ($MM) | $195 | $220 | $250 |
| 2022 Exploration and Development Capital Expenditures ($MM) | $110 | $110 | $110 |
| 2022 Free cash flow ($MM) | $85 | $110 | $140 |
| 2022 All-in payout ratio | 56% | 50% | 44% |
| 2022 Net debt to annualized Q4/22 adjusted funds flow | 1.0x | 0.8x | 0.6x |
| *All pricing variables including differentials (WCS: US$13.50, EDM US$5.00), Fx of $0.80 and AECO of $2.50 per mcf remain constant. Adjusted funds flow and cash flow from operations exclude realized gains/losses from financial derivatives. |
CLOSING OF NEW $215 MILLION CREDIT FACILITIES
In combination with the Acquisition, the Company has also amended and extended its first lien credit facilities.
Surge's fully conforming first lien revolving credit facilities are now $215 million, with the Company's next bank review scheduled to be on or before November 30, 2021. Additionally, the maturity of Surge's first lien revolving credit facilities has been extended from July 1, 2022 to November 30, 2022.
This amendment and extension is forecast to provide the Company with ample available liquidity upon the closing of the Acquisition, return the Company to a standard, single-tranche first lien credit facility, and significantly reduce Surge's annual interest expense going forward.
ONGOING COMMITMENT TO ESG
Surge's ongoing commitment to be an ESG leader in its Canadian peer group is demonstrated by the establishment of an internal ESG team to drive the Company's ESG strategy and evaluate potential projects and opportunities. Surge's inaugural ESG report will be published in the fourth quarter of 2021.
Recent ESG highlights include:
- Abandoned over 300 of total inactive wells over the last 10 months;
- Forecast abandonment and reclamation spends of $6 million in 2021; plus an additional $4 - $6 million of incremental abandonment and reclamation projects funded by the Alberta Site Rehabilitation Program ("SRP"). Surge has received $14 million in SRP funding to date;
- Ongoing capital projects to reduce GHG emissions;
- A gas conservation project underway at the Company's operated Shaunavon asset in SW Saskatchewan that will tie in approximately 90% of the gas volumes currently being flared by Q4/21; and
- A significant emissions reduction project in conjunction with the Astra acquisition will result in the completion of a 45km pipeline project to conserve natural gas from operated fields in SE Saskatchewan;
- Emphasis on a diversified Board of Directors; 33% proven, qualified female directors.
- Active community engagement and consultation with key stakeholders in Surge's core operating areas; and
- Ongoing supporter of charitable organizations in the communities in which the Company operates.
COMPLETION OF SHARE CONSOLIDATION
Surge has filed articles of amendment to effect the Consolidation of its issued and outstanding Surge Shares on the basis of one (1) post-Consolidation Common Share for every 8.5 pre-Consolidation Surge Shares.
The post-Consolidation Surge Shares are anticipated to commence trading on the Toronto Stock Exchange 2-3 business days following the closing of the Arrangement. There is no name change to the Company and no change to the stock symbol. The new CUSIP is 86880Y877.
The 608.5 million Surge Shares issued and outstanding on a pre-Consolidation basis were reduced to approximately 71.6 Surge Shares on a post-Consolidation basis, which number includes the Surge Shares issued to former holders of shares in the capital of Astra Oil Corp. by way of a plan of arrangement closing immediately prior to the Consolidation, pursuant to which Surge acquired all of the issued and outstanding shares of Astra ("Astra Shares").
Letters of transmittal were mailed to registered shareholders of Surge on July 23, 2021, requesting them to deposit their direct registration system ("DRS") statement(s) or share certificate(s), together with a duly completed letter of transmittal, with the Corporation's transfer agent for its Surge Shares, Odyssey Trust Company ("Odyssey"), in exchange for a DRS statement or share certificate representing the number of post-Consolidation Surge Shares to which they will be entitled. If a registered shareholder did not receive a letter of transmittal, please contact Odyssey at corp.actions@odysseytrust.com. Registered holders of Astra Shares were mailed a letter of transmittal on July 23, 2021 in connection with the Arrangement and are not required to submit a separate letter of transmittal with respect to the Consolidation.
Non-registered shareholders holding Surge Shares through an intermediary (a securities broker, dealer, bank, or financial institution) should be aware that the intermediary may have different procedures for processing the Consolidation than those that will be put in place by the Corporation for the registered shareholders. If shareholders hold Surge Shares through an intermediary and they have questions in this regard, they are encouraged to contact their intermediaries.
As a result of the Consolidation and in accordance with the terms of the applicable debenture indenture, the conversion rate of the 5.75% convertible subordinated debentures of Surge due on December 31, 2022 (the "Initial Debenture") (TSX: SGY.DB) and 6.75% convertible unsecured subordinated debentures of Surge due on June 30, 2024 (the "Series 2 Debenture") (TSX: SGY.DB.A) have been adjusted as follows: (i) the conversion rate of the Initial Debenture has decreased from 366.2876 Surge Shares for each $1,000 principal amount of Initial Debentures to 43.0927 Surge Shares for each $1,000 principal amount of Initial Debentures; and (ii) the conversion rate of the Series 2 Debenture has decreased from 444.4444 Surge Shares for each $1,000 principal amount of Series 2 Debentures to 52.2876 Surge Shares for each $1,000 principal amount of Series 2 Debentures.
Further details with regard to the background, reasoning, and impact of the Consolidation are contained in the joint management information circular of the Corporation and Astra dated July 16, 2021, copies of which have been filed on SEDAR and can be accessed at www.sedar.com.
ADVISORS
Scotiabank is acting as exclusive financial advisor to Surge with respect to the Arrangement and has provided a fairness opinion to the Surge Board of Directors. ATB Capital Markets, and BMO Capital Markets have been appointed strategic advisors to Surge on the Arrangement. McCarthy Ttrault LLP is acting as legal advisor to Surge with respect to the Arrangement.
National Bank Financial Inc. is acting as exclusive financial advisor to Astra. Burnet, Duckworth & Palmer LLP is acting as legal advisor to Astra with respect to the Arrangement.