Drilling & Completions | Quarterly / Earnings Reports | Fourth Quarter (4Q) Update | Reserves | Financial Results | Capital Markets | Drilling Activity

Surge Energy Details Fourth Quarter 2019 Ops, Financial Results

Email    |    Print    |    Bookmark

You Need to login first

   |    Tuesday,March 10,2020

Surge Energy Inc. reported its financial and operating results for the quarter and year ended December 31, 2019.

2019 Financial & Reserve Highlights

• Average daily production increased by 17 percent in 2019 to 21,175 boepd, from 18,058 boepd in 2018;
• Achieved an all-in payout ratio of 91 percent for 2019;
• Increased liquids weighting by 3 percent in 2019 to 84 percent, as compared to 81 percent in 2018;
• Reduced net debt by $79 million from December 31, 2018 to December 31, 2019;
• Operating netbacks increased by more than 27 percent, to $27.66/boe for the year ended December 31, 2019, compared to $21.73/boe in the prior year;
• Increased Total Proved (“TP”) reserves per debt adjusted share⁵ by 4 percent in 2019;
• Delivered PDP FD&A costs of $16.09/boe in 2019, including changes in future development capital, with a recycle ratio of 1.76 times;
• Maintained a Total P+P reserve life index of approximately 15 years;
• Organically added 21.6 MMboe of Total P+P reserves over the past three years, replacing 109 percent of production;
• Increased Total P+P reserves in the Sparky core area by 7.3 MMboe, replacing over 94 percent of Surge’s total 2019 corporate production;
• Surge’s 428 net (458 gross) booked locations of undeveloped reserves in the Company’s new Sproule December 31, 2019 engineering report, have a Finding & Development⁵ (“F&D”) cost of $13.03/boe⁶ on a Proved plus Probable Undeveloped (“P+PUD”) reserves basis;
• The Company’s 2019 drilling program (35.6 net wells) added PDP reserves at an F&D cost of $12.90/boe⁷;
• Oil and natural gas liquids make up more than 86 percent of Total P+P reserves;
• Estimated Total P+P Net Asset Value5 of $4.27 per basic share; and
• Estimated Total Proved Net Asset Value of $2.37 per basic share.

2019 Operational Highlights

Surge’s disciplined operating strategy of focusing on high quality conventional, large OOIP, light and medium gravity crude oil assets continued to provide strong operational results in 2019.

In total, the Company spent $119.5 million of exploration and development capital in 2019 ($15 million less than budgeted), drilling 36 gross (35.6 net) wells, along with waterflood injector conversions, associated infrastructure, land, seismic and corporate overheads.

Through step-out delineation drilling and strategic land acquisitions, the Company was able to increase Surge’s drilling inventory to more than 850 gross (800 net) net internally estimated locations, replacing more than two years of corporate drilling inventory during the year.

Sparky Core Area

In the Sparky core area, Surge drilled 25 gross (24.6 net) wells in four separate pools during the year.

In addition to continued successful drilling at Eyehill and Provost, the Company also drilled seven successful wells at Betty Lake, further de-risking this large OOIP, Sparky discovery. Peak production from the Betty Lake asset was over 850 boepd (>90 percent oil), and six additional successful wells have now been drilled into the pool in Q1, 2020. With over 120 net internally estimated locations remaining at Betty Lake and Betty Lake North, this large OOIP Sparky asset is very well-positioned for long term, sustainable growth, as well as waterflood upside.

At Surge’s large OOIP Sounding Lake pool, the Company drilled its first Sparky horizontal infill well in Q4, 2018, which was subsequently followed up with two additional successful wells drilled in Q1 of 2019. Four additional wells have now been successfully drilled at Sounding Lake off a single pad in the Q1, 2020 drilling program.

With drill, complete and equipment costs of under $1.2 million, year-round access, well-developed infrastructure, proven waterflood performance, and over 500 net internally identified locations, the Sparky core area is a cornerstone growth asset in Surge’s business model.

Valhalla Core Area

At Valhalla, Surge successfully drilled and completed 5 gross (5 net) wells in 2019. Four of these wells were drilled into the Doig formation, and each well had an average 30 day initial production oil rate (IP30) of over 800 bopd.

Excitingly, during Q4, 2019 the Company drilled and brought on production its first horizontal well into Surge’s large 40 MMbbl net OOIP, conventional Montney light oil pool, with a IP30 oil rate of over 1,000 bopd. This prolific well continues to produce at over 700 bopd of high netback light oil today. The Company has now identified a number of follow-up Montney locations.

Throughout 2019 Surge continued to expand its drilling inventory in this stacked, light oil, multi-zone area. The Company has 78 net internally estimated locations in the Doig, Montney, and Charlie Lake formations.

Greater Sawn Core Area

Surge’s core operating area at Greater Sawn provides a low decline light oil production base, underpinned by large OOIP, with conventional carbonate reef reservoirs that have proven waterflood upside. These high quality, light oil assets continue to provide a stable production and cash flow base, complementing Surge’s low decline, growth and dividend paying business model.

During 2019, the Company brought on production 4 gross (4 net) wells at Sawn. Combined to date, these wells have produced over 175,000 barrels of high netback light oil, and continue to produce at a combined rate of over 465 bopd.

Waterflood has proven to be very successful in the Sawn pool with five gross horizontal wells having now been converted to water injection. On this basis, Surge undertook a comprehensive reservoir simulation study in 2019, in order to optimize future infill drilling and waterflood development.

Shaunavon Core Area

Surge successfully drilled 4 gross (4 net) wells at its Shaunavon core area in the past year, targeting both the Upper and Lower Shaunavon formations. Strategically positioned in Southwest Saskatchewan, Shaunavon receives Fosteron grade crude oil pricing, which has historically traded at a premium to WCS. Accordingly, Shaunavon has one of the highest operating netbacks in the Company and generates cash flow in excess of the properties exploration and development capital expenditures, providing cash flow that can be deployed across Surge’s asset base.

Message to Shareholders

Surge had a solid year in 2019. The Company’s 2019 production averaged 21,175 boepd (84% oil and NGLs), an increase of more than 17 percent as compared to 2018 average production volumes of 18,058 boepd (81% oil and NGLs).

During the year Surge was able to maintain production to within 1.5 percent of the Company’s 2019 budget production guidance, while drilling 12 (21 percent) fewer net wells, and spending $15 million less capital than originally budgeted. These results were achieved due to drilling and waterflood programs outperforming expectations, as well as improved capital efficiencies.

In 2019, Surge achieved an all-in payout ratio¹ of 91 percent, with dividends paid representing only 18 percent of adjusted funds flow¹. Through a combination of reduced capital spending and non-core asset sales, Surge was able to reduce net debt1 by $79 million in 2019.

Operationally, the Company’s high quality, large original oil in place² (“OOIP”), conventional reservoirs continue to deliver consistent results. The Company delivered Finding, Development and Acquisition² (“FD&A”) costs of $16.09 per boe on a Proved Developed Producing (“PDP”) basis in 2019, driving a 1.76 times recycle ratio². On a three-year basis, the Company organically replaced 109 percent of production2 on a Total Proved plus Probable (“Total P+P”) basis, with a reserve life index² of approximately 15 years.

Furthermore, Surge’s highly economic 2019 Sparky capital program (24.6 net wells) replaced more than 94 percent of the Company’s total 2019 production, adding Total P+P reserves of more than 7.3 MMboe.

Strategically, during 2019 Surge continued to grow its dominant position in the medium to light crude oil window of the large Sparky play trend, acquiring over 23 net sections of highly prospective land in the Company’s Sparky core area. All of these lands are defined by detailed geological and geophysical mapping, which is supported by both vertical well control and production. Portions of these lands will be drilled as part of Surge’s 2020 Sparky drilling program, which will further de-risk the Company’s future drilling inventory. 

Corporately, the Company’s core area land acquisitions organically added 133 net internally estimated drilling locations³,  replacing more than 2 years of annual drilling inventory for Surge, at a low total cost of $8.49 million.

In Surge’s Sparky core area, the Company has now amassed a conventional, low cost, low risk, medium/light oil play that has the following characteristics:

• > 1.0 billion bbls of net internally estimated OOIP;
• Delivered production growth of over 490 percent, from 1,500 boepd five years ago, to more than 8,900 boepd (>90% oil) today;
• An extensive, low risk, 500 location, >10-year drilling inventory – with waterflood upside;
• Per well economics that deliver quick payouts and excellent rates of return;
• Top tier production efficiencies⁴ of $9,565 per boepd (i.e. 115 boepd 90 day initial production rate⁴ (“IP90”) for a total cost of $1.1 mm);
• Proven waterflood results, and excellent long-term profit to investment ratios; and
• The Company has “de-risked” its Sparky core area geologically, operationally, and financially, drilling 138 horizontal wells with a success rate of 99 percent.

Based on the recent volatility stemming from the COVID-19 outbreak, Surge’s management and Board of Directors continue to closely monitor the impact on global crude oil prices. In response to this volatility, the Company has acted quickly to shift capital from Q1, 2020 into the second half of the year, providing Surge with greater operational and financial flexibility for the balance of 2020.

Furthermore, the drastic drop in world crude oil prices, from US$63.05 WTI per barrel on January 3, 2020, to a low of US $27.62 WTI per barrel on March 8, 2020, has caused Surge to re-evaluate the current level of its dividend. Surge’s management and Board assess market conditions on a weekly and monthly basis with respect to protecting the Company’s balance sheet, weighing the efficacy of capital expenditures, and assessing the appropriate level of the Company’s dividend.

In this regard, until such time as Surge’s management and Board see a sustainable recovery in world crude oil prices, Surge anticipates reducing the Company’s dividend from $0.10 per share per year to $0.01 per share per year, effective with the March 2020 dividend payable in April 2020.