Surge Energy is a 24kboepd medium and light oil producer in two of the most economic plays in NA; the Sparky and the Frobisher. The company has the best leverage to oil price of any of its Canadian peers at 87% oil exposure. Their sensitivity to every $1.00 change in WTI equals $8.9M in cashflow. Over half of their production is levered to WCS and tightening differentials with TMX coming on stream. Current differentials are $14.50 USD from $21.50 USD in Q4 which should only tighten further for the long term. Expected FCF for the quarter based on $75 WTI is ~$50M with half going to their NCIB and 50% to debt repayment.
- Not only does Surge have an enviable asset base they have one of the top management teams are extremely adept at M&A, building four of the most successful companies in Canada.
- The result of a combination of building great assets, top technical teams and capital markets prowess. This was reflected in their most recent asset sales of 1100 boepd of high op cost production for $37.4M. As a result, SGY was able to increase their dividend from $0.48/share to $0.52 (7% dividend yield) and implement an NCIB. The Company has already utilized their allowable NCIB for June. They also have other non-core assets they could sell.
- The company has multiple drilling catalysts with their new discovery at Hope Valley which is ~200MMBOIP with ~100 drilling locations. They also continue to drill the top performing Frobisher wells in SE Saskatchewan.
- The company currently has >900 internally generated locations with 75% considered top tier (< 1.5 year pay out). Surge boasts 2.5BBOIP yet only booked at a 12% recovery factor with many analogous fields recovering over 30%. They also offer a very low decline of 24% providing stability with the ability to pivot with changing oil prices. High netbacks of >$40/bbl.
- They trade at an extreme discount to their total proved NPV of $10.86 and just a slight premium to their PDP NPV of $5.69 and $1.4B in tax pools.
Surge offers the best value proposition of their peers, with multiple catalysts and biggest beneficiary of oil price increases.
The stock is defiantly due for a rerate.