Environmental, Health & Safety | Capital Markets | Capital Expenditure | Capital Expenditure - 2021

Surge Energy Details 2021 Budget, Talks ESG Initiatives

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   |    Friday,January 29,2021

Surge Energy Inc. detailed its 2021 capital plan, as well as an update on Surge’s ongoing Environmental, Social and Governance program.

2021 Budget

Surge’s focus in 2021 continues to be on disciplined capital allocation, with cash flow strategically allocated between capital projects, net bank debt¹ repayment, and the Company’s substantial abandonment and reclamation program. As a result of Surge’s very low 19 percent annual corporate decline, and focusing drilling operations to the top tier production efficiencies associated with the Company’s core Sparky play, Surge can grow its production in 2021 while continuing to pay down net bank debt at current prices.

In 2021, the Company is budgeting to spend $55 million of exploration and development capital (including corporate overhead charges), which includes bringing on production 32 gross (32 net), wells of which 9 gross (9 net) wells were rig released in late Q4/20.

The 2021 capital budget is primarily focused on Surge’s Sparky core area. Additionally, Surge intends to drill a well at Valhalla, offsetting the Company’s prolific Montney well that came on production in late 2019, which has produced over 200,000 barrels of oil to date. This medium/light oil focused drilling program is fully funded by cash flow, increases Surge’s production by six percent, from 17,000 boepd exit 2020 to 18,000 boepd on average for 2021, and pays down net bank debt at current prices.

2021 BUDGET HIGHLIGHTS

The Company’s 2021 budget:

• Increases production from 17,000 boepd currently, to over 19,250 boepd at the conclusion of the 1H/21 drilling program, with average production for 2021 currently forecast at 18,000 boepd;
• Maximizes 2H/21 free cash flow, through a Q1/21 weighted, returns focused capital program;
• Continues to pay down net bank debt at current prices;
• Maintains operational flexibility to adjust to changes in the commodity price environment; and
• Provides disciplined capital allocation, with cash flow strategically allocated between capital projects, net bank debt repayment and the Company’s substantial abandonment and reclamation program.

With the emphasis on free cash flow generation in 2H/21, the Company’s 2021 budget provides for a second half maintenance capital program. However, as global crude oil prices continue to strengthen, Surge anticipates providing an update on the size and scope of a potential, more substantial second half drilling program in early Q3/21.

• This program is anticipated to add over 3,575 boepd of production on an IP180 basis, for drilling and completions expenditures of $39 million (inclusive of Q4/20 costs of approximately $9 million), generating top-tier production efficiencies³ of $10,900 per flowing boe;
• The program involves drilling 31 net highly economic, operated locations in 5 separate, large OOIP³, shallow, conventional Sparky reservoirs;
• An additional follow-up well will be drilled at Valhalla, offsetting Surge’s initial horizontal Montney well, which came on production at over 1,250 boepd and is currently producing at approximately 400 boepd; and
• The capital program continues to focus on Surge’s extensive, 14 year drilling inventory³ of over 500 Sparky locations – across multiple large OOIP, shallow, conventional Sparky reservoirs.

Financing Update

As previously announced on November 17, 2020, Surge executed definitive agreements with the Business Development Bank of Canada (“BDC”), in partnership with the Company’s syndicate of lenders (the “Syndicate”), for a non-revolving facility of $40 million, providing attractive interest rates over a four-year term.

Additionally, Surge also announced an extension of the Company’s existing $335 million first-lien credit facility (“Credit Facility”). Maturity of the Credit Facility has been extended from March 31, 2021 to December 31, 2021 and the Company’s next semi-annual borrowing base redetermination has been extended to June 30, 2021.

Concurrent with the above Credit Facility reconfirmation, Export Development Canada (“EDC”) provided $50.6 million in funding into Surge’s existing $335 million credit facility. This large capital injection provides the Company with a significant new Syndicate banking partner in the Credit Facility.

This addition of more than $90 million in new credit commitments provides Surge with significant additional long-term liquidity at reasonable interest rates, allowing the Company to pursue attractive development opportunities, with a view to generating net asset value growth for its stakeholders.

ESG

As part of the Company’s commitment to ESG stewardship, Surge and its service providers submitted more than 1,700 applications under the Government of Alberta’s Site Rehabilitation Program (“SRP”) to abandon and reclaim well bores, pipelines and well sites. The Government of Alberta is administering the SRP in various phases, providing grant funding through service providers for the abandonment or remediation of oil and gas sites.

To date, the Company has received more than $11 million in grant funding from the Alberta Site Rehabilitation Program. Surge’s abandonment budget, complimented by this grant funding, will significantly increase the number of inactive wells, pipelines, and facilities the Company can abandon in 2021. In addition, Surge has received funding from the Saskatchewan Accelerated Site Closure Program to complete abandonments on the Company’s Saskatchewan properties.  Through these programs, Surge expects to receive the benefit of additional funding in subsequent grants.

Surge’s internal ongoing abandonment program, together with the enhanced SRP abandonment program, will significantly reduce the Company’s decommissioning liability over the next 12 months. The Company has already abandoned over 260 wells over the past four months, and anticipates abandoning an additional 60 wells by March, 2021. Once completed, this will result in the abandonment of over 26 percent of Surge’s total inactive wells.

Surge remains actively engaged with the Government of Alberta regarding additional SRP developments, as well as new developments in both Federal and Government of Saskatchewan programs, in order to accelerate the decommissioning of the Company’s asset retirement obligations.