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Surge Energy Inc. First Quarter 2021 Results

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   |    Friday,May 14,2021

Surge Energy Inc. reported its Q1 2021 results.

Overview

Pre-COVID-19, world oil demand was more than 100 million barrels per day; growing by approximately one million barrels per day each year. Without significant capital investment, world oil production has been estimated to have an annual decline of 5-6 million barrels per day. The COVID-19 pandemic, the Saudi/Russia oil price war, and the subsequent collapse of world crude oil prices in 2020 triggered significant, world-wide upstream capital spending reductions for crude oil drilling and associated projects both large and small. In this regard, US and Canadian oil rig counts plunged to multi-decade lows in the summer of 2020.

As world oil demand continues to return to pre-COVID-19 levels, crude oil prices have risen by more than 450 percent in just the last 13 months; from a low of US$11.57 WTI per barrel in April of 2020, to over US$65 WTI per barrel today.

Against this backdrop of quickly improving crude oil price fundamentals, Surge possesses 4 of the key operational indicia for highly successful oil companies, namely:

  1. A very low annual corporate decline (less than 21 percent per year);
  2. Top tier production efficiencies1 (Sparky PE’s are ~$13,000 boepd on an IP180 basis);
  3. A large drilling location inventory (>750 locations2, providing a deep 14 year drilling inventory); and
  4. High operating netbacks3.

Accordingly, rapidly improving crude oil prices, combined with these 4 key operational indicia, provide Surge with significant adjusted funds flow per share3 growth, and free cash flow3, at current strip pricing.

Q1 2021 Financial & Ops Highlights

As previously announced on April 28, 2021, the Company achieved production levels of 16,582 boepd in Q1/21, and generated cash flow from operating activities in the quarter of $15.6 million (after realized hedging losses of $16.8 million).

Given the impact of the COVID-19 pandemic, and the significant commodity price volatility that resulted, Surge entered into certain fixed crude oil hedges over the course of 2H/20, ensuring the Company’s ability to continue deploying capital into its low decline, low cost, large OOIP1, conventional asset base. While the resulting realized losses on commodity contracts had a large negative impact on Q1/21 cash flow, Surge expects the impact will moderate over the remainder of 2021 as these crude oil hedges expire.

During the first quarter, Surge completed a successful 32 well winter drilling program. The Company anticipates it will bring on an estimated 3,400 boepd of production from this drilling program, with results to date meeting or exceeding management’s expectations. This program was completed for “all-in” drilling and completion expenditures of $38 million, delivering excellent estimated production efficiencies of $11,175 per flowing boe.

The Company’s significant 3,400 boepd production addition in Q1/21 was completed in the same quarter as Surge strategically sold 2,700 boepd of production, for gross proceeds of $106 million.

Commodity prices continued to strengthen over the quarter, with petroleum and natural gas revenue per boe increasing by 57 percent, from $34.39 per boe in Q1/20, to $54.07 per boe in Q1/21. The improving crude oil price environment, combined with the Company’s successful winter drilling program and strategic Q1/21 asset sale, resulted in a significant $124 million, or 39 percent reduction in net bank debt4 from Q1/20 through Q1/21. The Company also meaningfully reduced net debt4 by $81 million from Q1/20 through Q1/21, a 21 percent reduction in the last four quarters.

Subsequent to the first quarter, as previously announced on May 13th, 2021, Surge successfully closed its bought deal public offering of 39.0 million flow-through common shares (the “Offering”) for gross proceeds of $23.0 million. Accordingly, with the closing of the Offering, Surge has significantly reduced net debt and repositioned the Company’s balance sheet over the past 6 months, with the completion of the following financing activities totaling more than $230 million:

  • $40 million, 4-year term, 2nd Lien BDC credit facility;
  • $50 million credit commitment by Export Development Canada into Surge’s 1st Lien credit facility;
  • Over $14 million in grants under the Alberta Government’s Site Rehabilitation program;
  • Gross proceeds of $106 million from the Company’s previously announced strategic asset sale; and
  • Gross proceeds of $23 million from Surge’s over-subscribed, upsized flow-through common share financing.

Proceeds from the Offering, combined with free cash flow, will be used for an expanded 2H/21 development program, building upon the Company’s 1H/21 drilling program, which targeted the Sparky and Montney formations. This program has been strategically designed to allocate capital towards top-tier production efficiencies in the Company’s Sparky core area.

Concurrent with the close of the Offering, on May 13th the Company also released preliminary 2022 production and operating guidance. The Company’s preliminary 2022 capital expenditure budget is highly disciplined, with a continued focus on production maintenance and free cash flow generation.

Surge anticipates generating approximately $160 million5 ($0.42 per share6) in adjusted funds flow in 2022 at US$65 WTI per barrel. With its low decline, large OOIP, conventional asset base, the Company is budgeting $83 million for its 2022 exploration and development capital program, which maintains production at 16,500 boepd (85% liquids).

ESG Update

Surge continues to strive to be a leader in reducing the impact of its operations on the environment and is pleased to report that it has abandoned 310 wells between October 1, 2020 and March 31, 2021. This represents nearly 30 percent of the Company’s previously inactive, unabandoned wells.

The reduction in the Company’s environmental footprint has been funded through a combination of Surge’s ongoing internal abandonment program and approximately $14 million in total grant funding under the Alberta Government’s Site Rehabilitation Program (“SRP”). During the first quarter of 2021, Surge spent a total of $1.5 million of its own funds and $0.5 million of SRP grants, for a combined $2.0 million going towards abandonment activities.

Surge anticipates spending a further $8.0 to $10.0 million on abandonment activities in 2021, through a combination of its internal abandonment program and the SRP abandonment program, which will continue to significantly reduce the Company’s decommissioning liability.

Surge strives to be a leader in reducing the impact of its operations on the environment. Surge is committed to producing energy in a safe, responsible, and sustainable manner.

 


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