Quarterly / Earnings Reports | Third Quarter (3Q) Update

Surge Energy Reports Q3 2019 Results

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Surge Energy Inc. reported its Q3 2019 results.

Shareholder Message

Surge's large original oil in place ("OOIPⁱ"), light and medium gravity crude oil asset base continues to outperform management's expectations.

Surge's Q3/19 average production rate of 21,217 boepd contains virtually no contribution from the Company's Q3/19 drilling program, as drilling operations in the quarter did not commence until September 1, 2019.

As set forth in the chart below, over the last four financial quarters Surge has maintained production within less than 1 percent of the Company's 2019 budgeted production estimates, while drilling 12 (21 percent) fewer wells than budgeted.

In addition, with drilling and waterflood results outperforming expectations, Surge management strategically decided to delay drilling operations in the quarter, picking up the Company's rigs on September 1, 2019, rather than on June 15, 2019 as management had previously budgeted. This capital allocation decision allowed the Company to continue to reduce net debtⁱⁱ. Surge has now reduced the Company's net debt by $84 million in 2019.

Surge management believes that these excellent operational results are directly related to: 1) the Company's high quality, large OOIP, light and medium gravity crude oil assets; 2) the Company's talented, hard-working employees; and 3) management's strategic, timely, capital allocation/spending decisions.

Based on continued successful drilling and waterflood results at Surge's Sparky, Valhalla, Greater Sawn and Shaunavon core areas, the Company's Q3/19 production rate averaged 21,217 boepd (85% liquids), which represents an increase of 18 percent over Q3/18 production of 18,029 boepd (79% liquids).

Additionally, the Company achieved a 26 percent increase in liquids production in Q3/19 when compared to Q3/18, by strategically targeting higher value light and medium oil production with the recent drilling programs and acquisitions.

Q3/19 Highlights

• Surge's Q3/19 production of 21,217 boepd increased by 18 percent over Q3/18 production of 18,029 boepd.
  
  
• Surge's liquids weighting increased six percent, up from 79 percent in Q3/18 to 85 percent in Q3/19.
  
  
• The Company's Q3/19 liquids production increased by 26 percent as compared to Q3/18, up from 14,229 bblpd to 17,939 bblpd (96 percent light and medium oil).
  
  
• The Company's cash flow from operating activities in Q3/19 was $40.2 million, an increase of eight percent over Q3/18, at $37.2 million.
  
  
• Surge's adjusted funds flowⁱⁱ in Q3/19 was $41.5 million, an increase of two percent over Q3/18 at $40.6 million.
  
  
• Operating expenses for Q3/19 were $14.69 per boe and net operating expensesⁱⁱ were $13.93 per boe, both below the Company's 2019 guided range of $14.95 - $15.45 per boe.
  
  
• Surge generated $11.2 million of adjusted funds flow in the quarter in excess of exploration and development expenditures and dividends declared (and was used to further reduce net debt).
  
  
• The Company paid dividends of $8.0 million in Q3/19, representing 19 percent of Q3/19 adjusted funds flow.
  
  
• In the last nine months Surge has reduced net debt by $84 million.

Ops Highlights

Surge spent a total of $22.2 million of exploration and development capital in the third quarter of 2019 for the drilling of 4 gross (4 net) successful wells, the completion of 1 gross (1 net) successful well ($10.3 million on drilling and completions), together with waterflood injector conversions, associated infrastructure, land and seismic.  

Surge also spent $4.9 million on facilities, equipment, and pipelines during the quarter, focused on optimizing and expanding the Company's waterfloods.

Included in capital spending for Q3/19 are two key, core area, land acquisitions of a total of $5.7 million.

Based on Surge's recent internal 2019 type curve reviewⁱⁱⁱ, management now estimates Surge has approximately 10 years of economic drilling inventory at US$50/bbl WTI, and approximately 13 years of highly economic drilling inventory at US$60 WTI.

SPARKY CORE AREA

During the quarter, Surge brought on production four, better than type-curve, horizontal Sparky wells in Provost that were drilled in Q2/19 on the Company's first ever four well drilling pad. Due to pad efficiencies, the average "all-in" cost to drill, complete, equip and tie-in the wells at Provost was $1.05 million per well, compared to a budget of $1.25 million per well.  Combined, these four wells produced over 750 bopd for the month of August.

Surge has more than 70 net drilling locationsⁱⁱⁱ remaining at the Company's large, 90 million net OOIPⁱ, Sparky pool at Provost. As a result of Surge's drilling results at Provost, operating expenses in this area are currently $6.75 per boe.

In late Q3/19, Surge drilled 3 additional gross (3 net) Sparky wells at Provost from a four well pad.  The fourth (4^th net) well from this pad was subsequently drilled in early October, and all four wells were completed and brought on production in early Q4/19.

Commercial Waterflood Response at Eyehill

Surge has seen an excellent waterflood response from its horizontal waterflood program at the Company's 170 million net OOIP, 29 degree API oil asset at Eyehill. 

Surge currently has 10 wells at Eyehill which have been receiving pressure support from seven offset horizontal water injectors for a period of more than one year. Aggregate production from these 10 wells is currently over 700 boepd, representing 29 percent of the total 2,400 boepd production from the pool. Due to the conventional nature of this large reservoir (i.e. a sandstone with 29 percent porosity, and good permeability), the wells receiving pressure support from the waterflood have experienced an arresting of the production decline. 

In addition to the arrested decline, over the past nine months the Company is now seeing a significant increase in oil production (i.e. a classic "oil bank" response) - with a static producing well count.

Accordingly, the production receiving support from the waterflooded area at Eyehill has now increased by over 250 boepd since June 2018. Further, Surge drilled and brought on production an additional eleventh well offsetting injection in Q1/19 which is still producing at over 80 boepd after eight months on production, and is showing positive signs of waterflood support.

The Company has now drilled 62 consecutive successful wells at Eyehill, increasing production by 480 percent from 500 boepd in 2015 to its peak of over 2,900 boepd in May of 2017.  In addition, management has identified an additional 58 low-risk, follow up development drilling locationsⁱⁱⁱ at Eyehill, together with full-field waterflood implementation.

Surge will continue to implement this proven, disciplined operating strategy of:

1. delivering higher initial drilling growth and value creation; and
2. strategically transitioning the Company's high quality, large OOIP, Sparky sandstone reservoirs into low decline waterfloods (i.e. thereby delivering long term adjusted funds flow in excess of exploration and development expenditures, and excellent profit to investment ratios).

This conservative, low risk, operating strategy continues to lower the Company's corporate decline, and increase sustainability, which is key to Surge's growth plus dividend paying business model. This operating strategy will also continue to be applied at the Company's Sparky core, large OOIP sandstone reservoirs assets at: Eyehill, Eyehill South, Betty Lake, Betty Lake North, Provost, Sounding MM, Sounding East, Lakeview, Macklin, and Cadogan.

VALHALLA CORE AREA

At Valhalla, Surge successfully drilled and completed a 100 percent working interest, light oil Doig horizontal well in Q3/19.  This is Surge's fourth 200 meter horizontal in-fill well drilled into the Doig reservoir, and further validates the continued downspacing of this large, 150 million barrel net OOIP, light oil pool.

Surge estimates an inventory of more than 75 net light oil locationsⁱⁱⁱ at Valhalla in the Doig, Charlie Lake and Montney formations, providing a drilling inventory of more than 15 years.

Hedging

Surge has a hedging program in place to protect the Company's adjusted funds flow. For the remainder of 2019, Surge has hedged 6,750 bbl/d of WTI crude oil with an average floor price of CAD $72/bbl. This represents approximately 47 percent of Surge's forecasted after royalty crude oil production for Q4/19. Surge has also retained further upside to WTI price increases on 56 percent of the hedged volumes, with an average ceiling of CAD $99/bbl.

Furthermore, Surge has hedged approximately 45 percent of forecasted 2020 gas production at weighted average floor of CAD $2.05/GJ, more than 40 percent higher than the Q3/19 year to date average of CAD $1.44/GJ.

Outlook

Management's stated goal is to be the best positioned, top performing, light/medium gravity crude oil growth and dividend paying public company in its peer group in Canada.

Surge's high quality, large OOIP, light and medium gravity crude oil asset base continues to outperform management's expectations.

The Company now has over 2.5 Billion barrels of internally estimated OOIP, with a low 6.2 percent recovery factor to date, and a deep inventory of over 800 highly economic drilling locationsⁱⁱⁱ - providing a 13 year drilling inventory. In addition, the Company has a low 23 percent annual corporate decline, with over 55 percent of Surge's asset base under various stages of waterflood.

In the last four financial quarters, Surge has maintained production within less than one percent of budget guidance, while drilling 21 percent (12) less wells than estimated. Furthermore, the Company has now reduced net debt by $84 million in the last nine months, while maintaining an attractive dividend yield of over nine percent, representing 19 percent of Q3/19 adjusted funds flow.

Surge anticipates confirming 2020 guidance in early January 2020.