Following Thursday close of Surge Energy Inc.’s $48.3-million convertible debenture offering, National Bank Financial analyst Dan Payne sees “improved strength of positioning of the company in the prevailing environment, both through high sensitivity to the commodity and strength of execution in high-interest asset types, each in support of its ultimate value proposition.” Resuming coverage of the Calgary-based company, Mr. Payne thinks an expanded return on its capital is “imminent.”
“To the point of the improved quality of the business, a recent management update continued to highlight a highly sustainable model, backstopped by an ample duration (10-15 years) of low capital efficiency oil development prospects (approximately $20,000 per barrels of oil equivalent per day) from which to harvest maximum free cash flow off a low associated decline (23 per cent) in a rising commodity price environment,” he said.
“For context, the company sees a 10-15-per-cent cash flow per share sensitivity to a $5 per barrel rise in WTI pricing (potentially augmented by WCS differential tailwinds) that should have a disproportionate impact on FCF sensitivity (25-per-cent upside) in support of accelerating its inflection point of return of capital. Management expects to reach Phase 2 of its return of capital paradigm (50-per-cent FCF returns at debt less than $250-million, or less than 0.7 times D/CF [debt to cash flow] at $80 per barrel) by the end of Q1/24 (at strip), at which point, its return of capital (through base dividend and buyback) could 2 times and support a more than 10-per-cent potential cash yield (and prospectively a doubling of its equity value under the assumption of a static yield).”
Touting its “conventional cornerstones,” the analyst raised his target for Surge shares by $1 to $13, reiterating an “outperform” rating. The average is $12.55.
“Underlying that remains a solid asset quality in the Sparky and SE Sask Conventional assets, where execution continues to delineate high returns in large OOIP conventional reservoirs. Notably, its Sparky asset continues to be a standout (having grown from 1,000 to 11,000 barrels of oil equivalent per day; asset profile highlighted within), to prove the strength and sustainability of the economics of the play (predominantly through multi-frac well design to date), which could be complemented (high-grading inventory and returns) through the deployment of multilateral wells in the halo of the play (i.e., 2 times historical results at a 25-per-cent greater cost) and compounding returns with continued deployment of EOR. Ultimately, its leadership in the conventional realm (extending that analogy into SK) has foreshadowed the renaissance of interest there, and as we map the potential value tailwinds for the sector, its equity continues to stand out as a key benefactor.”
Elsewhere, BMO’s Mike Murphy resumed coverage with a $10.50 target, up from $9, with a “market perform” recommendation.
“With debt-reduction targets in sight, we view the company as having the ability to accelerate returns to shareholders while also achieving modest growth through accretive acquisitions or development of its core areas,” said Mr. Murphy.