CALGARY – Surge Energy Inc. (“Surge” or the “Company”) (TSX: SGY) is pleased to announce its 2022 budget guidance, as approved by the Company’s Board of Directors, an update on Surge’s anticipated reinstatement of Management’s shareholder returns focused business model, and an operations update.
Surge’s focus in 2022 continues to be on disciplined capital allocation, with cash flow strategically allocated between capital projects, net debt1 repayment, and a fundamental goal of reinstating the Company’s dividend and shareholder returns focused business model. The Company’s 2022 capital budget will see 85 percent of the expenditures focused in its two, top-tier core medium and light gravity conventional crude oil plays in the Sparky and SE Saskatchewan, which now comprise two thirds of Surge’s current production.
In 2022, the Company can maintain its current production levels of 21,500 boepd, while continuing to increase shareholder’s net asset value2 by generating more than $130 million of free cash flow1 at US$75 WTI3 – providing investors with an estimated free cash flow yield1,4 of over 25 percent.
Surge Energy Wells Drilled and Facility Permits
2022 BUDGET HIGHLIGHTS
Surge’s disciplined 2022 capital expenditure budget:
- Maximizes free cash flow through a returns focused, $124 million exploration and development capital program;
- Generates forecasted 2022 annual cash flow from operating activities in excess of $255 million ($3.06 per share) at US$75 WTI crude oil pricing;
- Generates free cash flow1 of over $130 million ($1.57 per share1) at US$75 WTI crude oil pricing;
- Reduces the Company’s exit 2022 net debt to cash flow from operating activities1 to an estimated 0.75 times at US$75 WTI crude oil pricing;
- Targets 65 of the Company’s most capital efficient drilling locations – focused predominately in its Sparky and SE Saskatchewan core areas;
- Uses less than seven percent of the Company’s internally estimated drilling locations (i.e. over 950 net estimated locations currently in inventory)5; and
- Cost effectively maintains production of 21,500 boepd (86% liquids), maximizing free cash flow.
Further details relating to the 2022 budget are set forth below:29dk2902lhttps://boereport.com/29dk2902l.html
| Guidance | @ US $70 WTI6 | @ US $75 WTI6 | @ US $80 WTI6 |
| Exit 2021 production | 21,500 boepd (86% liquids) | ||
| Average 2022 production | 21,500 boepd (86% liquids) | ||
| 2022(e) Exploration and development expenditures | $124 million | ||
| 2022(e) Cash flow from operating activities ($MM)* | $230 | $255 | $275 |
| Per share | $2.76/sh | $3.06/sh | $3.30/sh |
| 2022(e) Free cash flow ($MM) | $106 | $131 | $151 |
| Per share | $1.27/sh | $1.57/sh | $1.81/sh |
| 2022(e) All-in payout ratio7 | 54% | 49% | 45% |
| 2022(e) Exit net debt to 2022(e) cash flow from operating activities ratio** | 0.98x | 0.75x | 0.64x |
| 2022(e) Royalties as % of petroleum and natural gas revenue | 14.0% – 16.0% | ||
| 2022(e) Net operating expenses7 | $15.75 – $16.50 per boe | ||
| 2022(e) Transportation expenses | $1.00 – $1.25 per boe | ||
| 2022(e) General & administrative expenses | $1.95 – $2.05 per boe |
| * Cash flow from operating activities assumes a nil change in non-cash working capital. |
| **2022(e) exit net debt is prior to any contemplated allocation of 2022(e) free cash flow to shareholder returns through dividends or share buybacks. |
CORPORATE UPDATE –TIMELINE FOR REINSTATEMENT OF SURGE’S MULTI-FACETED SHAREHOLDER RETURNS MODEL
Management’s stated goal is to position the Company as a well-financed energy producer with a significant free cash flow profile that supports consistent shareholder returns through: 1) net asset value per share increases through ongoing debt repayment; 2) sustainable dividends; 3) modest production per share growth; and 4) opportunistic share buybacks.
On December 9, 2021, the Company announced the successful closing of a $130 million, 5-year term debt facility, injecting a significant amount of stable, long term debt into the Company’s capital structure, with the strategic objective of reducing Surge’s reliance on volatile, shorter term debt. Surge will continue to focus on providing shareholder returns through further reductions in net debt over the coming months.
On this basis, Surge is initially targeting a reduction of net debt to a range of $250 to $265 million, at which point the Company will look to resume its historical, shareholder returns focused business model, including the reinstatement of a dividend. Management will also evaluate the potential for opportunistic share buybacks. A reduction of net debt to the targeted range will also add approximately $0.60 to $0.75 per share to the net asset value of the Company (based on approximately 83.4 million shares outstanding).
At current commodity price levels, Management estimates that Surge will be within its targeted net debt range before mid-year in 2022.
OPERATIONS UPDATE – UNLOCKING SIGNIFICANT INCREMENTAL VALUE IN SPARKY AND SE SASKATCHEWAN
Surge finished 2021 on a strong operational note. The Company continued to successfully develop its dominant land position in its core Sparky asset, using its traditional low risk single-leg multi-stage frac design, with results continuing to outperform internal type curve expectations8. In addition, Surge has now successfully tested multi-leg, open hole lateral development in portions of its Sparky core area where the multi-stage frac design is not optimal.
To date, Surge has drilled four multi-leg laterals in the Sparky formation with the average of the four wells exceeding the Company’s internal type curve expectations. Encouragingly, two of the wells have been brought on production with rates over 220 bopd each on an IP30 basis. At current pricing these two wells paid out in just 115 days.
Additionally, given that the rock properties of the Sparky formation are analogous to that of the Clearwater formation, Surge is testing drilling mud systems that have proven to be effective in the Clearwater play, in three separate multi-leg Sparky wells. On this basis, the Company is piloting an oil based mud system, offsetting wells drilled with variations of KCL brine-based mud systems. Initial results on the oil based pilot well are encouraging, and as such, Surge will expand the pilot of this oil based mud system in its 2022 drilling program.
Going forward, Surge views multi-leg lateral development as complimentary to its existing single-leg multi-frac drilling program. The addition of the multi-leg design will upgrade a meaningful portion of the Company’s existing Sparky core area drilling inventory, which currently consists of over 425 internally estimated locations8. Based on the strong initial well results, Surge is now budgeting eight additional multi-leg Sparky wells in its 2022 drilling program, along with 27 single-leg multi-frac Sparky wells.
In Surge’s newly acquired, high operating netback, light oil core area of SE Saskatchewan, recent development drilling has yielded impressive results. In the Minard area, two wells drilled in August had initial production rates over 320 bopd and have already produced a total of 30,000 barrels of oil each. These wells each paid out in less than 55 days. In 2022 SE Saskatchewan will be an important component of the Company’s drilling activity, with 36 gross (27.7 net) wells budgeted.
Surge has continued its Q4/21 operational momentum by securing services, having commenced its 2022 drilling program in December of 2021. The Company currently has 3 drilling rigs operating in its core areas: one rig drilling single-leg multi-frac Sparky wells, one drilling multi-leg open hole Sparky wells, and one drilling horizontal wells in SE Saskatchewan. To date, the Company has rig released eight net wells of its planned 27.1 net well Q1/22 drilling program.
OUTLOOK – POSITIONED FOR OUTPERFORMANCE IN 2022
Surge’s Management and Board are excited about the Company’s outlook for 2022, as previous lender mandated fixed price crude oil hedging contracts expired at the end of 2021. Management continues to strategically assess, analyze and position the Company based on its strong competitive corporate advantages, including Surge’s long 15 year reserve life index9, low conventional corporate decline, high crude oil operating netbacks, top tier production efficiencies, large 13 year drilling inventory10, and the Company’s substantial $1.0 billion tax pool base.
Surge’s lower risk, high operating netback, conventional crude oil asset and opportunity base matches very well with Management’s conservative returns based business strategy. The Company’s large OOIP9 conventional reservoirs provide top tier production efficiencies, shallow declines, and significant free cash flow – underpinning Management’s strategic plan to return to a dividend plus, share buy backs, business model.
At US$75 WTI per barrel, Surge anticipates delivering a free cash flow yield of over 25 percent to investors in 2022.
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