Surge Announces Two High Quality, Light Oil Acquisitions, an Upward Revision to 2013/14 Guidance, and a 19 Percent Increase in Dividend
CALGARY, Oct. 22, 2013 /CNW/ - Surge Energy Inc. ("Surge" or the "Company") announced today two strategic, high quality light oil acquisitions. The first acquisition involves the $147 million purchase of all of the shares of a Calgary based private oil and gas company (the "Privateco"), with high netback, operated, producing light oil assets focused in the Steelman area of SE Saskatchewan, and the Dodsland area of SW Saskatchewan (the "Privateco Assets"). The consideration to be paid to the shareholders of Privateco is comprised of between 15.7 and 20.7 million shares of Surge, subject to the cash consideration elected by Privateco shareholders to a maximum of $30 million, plus the assumption of $23 million of debt (the "Privateco Acquisition").
Holders of approximately 67.6% percent of the fully diluted common shares of Privateco have agreed to enter into lock-up agreements with Surge, pursuant to which they have agreed to tender their shares to Surge. The Board of Directors of Privateco has unanimously approved the Acquisition and recommended that the shareholders of Privateco tender their shares to Surge. The Privateco agreement provides for a mutual non-completion fee of $5 million in the event the Privateco Acquisition is not completed in certain circumstances.
Additionally, Surge has entered into an agreement to acquire high quality, high netback, operated, producing light oil assets primarily located in the SW area of Manitoba (the "Manitoba Assets"). Total consideration of $135 million to be paid to the vendor of the Manitoba Assets is comprised of 14.2 million shares of Surge, and $50 million of cash (the "Asset Acquisition").
Based upon the Privateco Acquisition and the Asset Acquisition (collectively the "Acquisitions"), Surge will now be revising upwards the Company's 2013 exit guidance, and its 2014 full year guidance, as set forth below.
In addition, as a result of these highly accretive Acquisitions, together with better than anticipated operational and drilling results, Surge will now be increasing the Company's dividend 19 percent from $0.42 per year ($0.035 per share per month), to $0.50 per share per year ($0.04166 per share per month).
The closing of the Acquisitions is expected to occur on or about November 15th, 2013 (the "Closing"). Completion of the Acquisitions is subject to certain conditions and the receipt of all regulatory approvals, including the approval of the Toronto Stock Exchange.
As a result of the structure of the Acquisitions, post Closing Surge will maintain the Company's excellent balance sheet and debt to forward cash flow ratio, with over $120 million of credit availability on the Company's bank line. In addition, pro-forma the Acquisitions, there is no change in Surge's very low, "all-in" sustainability ratio of 93 percent.
STRATEGIC RATIONALE
The Acquisitions fit squarely within Surge's defined business strategy of investing growth capital to acquire elite, operated, light and medium gravity crude oil reservoirs, with large original oil in place ("OOIP"1) and low recovery factors.
The Privateco Acquisition provides a strategic entry point for Surge into the prolific Midale Marly, light oil play trend in SE Saskatchewan, and the Viking light oil play in SW Saskatchewan. The Manitoba Assets provide Surge shareholders with exposure to one of the highest quality, highest netback light oil plays in Canada, focused in the Bakken/Three Forks formation located in SW Manitoba.
The Acquisitions are highly accretive to Surge shareholders and provide Surge with exposure to three of the top light oil plays in Canada (collectively the "Assets"). They also provide an excellent operational platform for additional growth on these proven trends.
The Acquisitions comprise and possess large OOIP reservoirs, together with low recovery factors, operatorship and high working interests. They also possess significant upside from low risk development drilling and waterfloods. Furthermore, the Acquisitions include key producing infrastructure, including batteries, pipelines and waterflood facilities.
Corporately, the light oil Acquisitions significantly increase Surge's operating netback by over 11 percent, and increase the Company's oil weighting to over 84 percent.
Post Closing Surge will have over 1 Billion barrels of light and medium gravity original oil in place ("OOIP") under the Company's ownership and management - with a recovery factor of less than 3 percent.
ACQUISITION METRICS
The following sets forth the combined metrics with respect to the Acquisitions:
1. Purchase Price:
The combined purchase price for the Acquisitions is $282 million (the "Purchase Price"), which will be payable at Closing as follows:
a) 29.8 million shares of Surge;2
b) $23 million debt assumption; and
c) $80 million cash.2
2. Long Life; Light Oil Reserves:
The Acquisitions are both independently engineered under NI 51-101 and provide combined Proven and Probable (P+P) reserves of: 9.7 million boe (>98 percent light oil).
Reserve acquisition metrics for the Acquisitions are: $29.02 per barrel (P+P). No reserves have been booked in the respective independent engineering reports for waterflood response.
Based on current production, the Acquisitions have a long reserve life index of approximately 9.2 years (P+P).
3. Light Oil Production:
Current production relating to the Acquisitions is approximately 2,900 boepd, composed of more than 98% light, sweet crude oil (38 degree API).
On this basis, Surge is paying approximately $97,250 per flowing barrel of production with respect to the Acquisitions.
4. High Netbacks and Strong Recycle Ratio:
Operating netbacks for the Assets are over $61 per barrel, based on guidance pricing (as set out below). As a result, Surge has a recycle ratio of more than 2 times in relation to the Acquisitions.
5. Annual Cash Flow:
Annual cash flow from the Assets, based on guidance pricing (as set out below) and using current production levels, is estimated to be more than $65 million.
Based on current production and using guidance pricing (as set out below), Surge estimates that the Company is paying approximately 4.3 times annualized cash flow for the Acquisitions.
6. Exciting Upside:
Surge has identified 218 gross (184.4 net) low risk development drilling locations on the lands comprising the Assets. Surge has also identified significant unbooked waterflood upside in relation to the Assets. In this regard, two waterflood projects have already been initiated on the Assets.
7. Producing Infrastructure:
The Acquisitions possess key producing infrastructure, including batteries, pipelines, and waterflood facilities.
8. Operatorship and High Working Interests:
The Assets are 95 percent operated, and have average working interests of greater than 90 percent.
UPWARD REVISION TO GUIDANCE
The following sets forth Surge's upwardly revised guidance for exit 2013 estimates, and for full year 2014 estimates.
The Assets comprising the Acquisitions are quality, light oil assets that have been successfully drilled and developed by two, high growth, junior private oil and gas companies. In Surge's lower, growth/dividend model, and as part of Surge's strategy to maintain its low corporate decline, Surge management will be utilizing 2014 production estimates for the Assets which are more conservative and sustainable than the current combined production levels for these Assets. In this regard, Surge management does not want to build higher decline rates from newly drilled wells into the Company's existing low decline asset base. Accordingly, 2014 production levels will be managed as set forth below.
The Acquisitions are highly accretive to Surge's 2014 guidance estimates - even at these more conservative production levels.
Operational:
| Surge 2014E Guidance (prior to new Acquisitions)3 |
Surge 2014E Guidance (after the new Acquisitions)3 |
|
| 2013E Exit Production (boe/d) | 12,000 (78% Oil/NGLs) | 14,200 (82% Oil/NGLs) |
| 2014E Average Production (boe/d) | 12,100 (78% Oil/NGLs) | 14,450 (82% Oil/NGLs) |
| 2014E Exit Production (boe/d) | 12,500 (78% Oil/NGLs) | 14,750 (82% Oil/NGLs) |
| 2P Reserves4 | 54.6 mmboe | 64.3 mmboe |
| RLI (based on 2013E exit production) | > 12 years | > 12.4 years |
| 2014E Capital Spending | $85 million | $109 million |
| 2014E Wells Drilled | 30 wells | 46.5 wells |
| 2014 Decline | 24% | 25% |
Financial:
| Surge 2014E Guidance (prior to new Acquisitions)3 |
Surge 2014E Guidance (after the new Acquisitions)3 |
|
| 2014E Funds from Operations ("FFO")5 | $146 million ($1.20 per share) | $201 million ($1.33 per share) |
| 2014E Operational Netback | $38.33/boe | $42.65/boe |
| 2014E Cash Flow Netback | $33.94/boe | $38.15/boe |
| Shares Outstanding | 121 million | 151 million |
| Annual Dividend | $51 million | $76 million |
| Yield6 | 6.3% | 7.5% |
| Basic Payout Ratio 2014E | 35% | 38% |
| "All-in" Payout Ratio | 93% | 93% |
| 2014E Exit Net Debt | $205 million | $295 million |
| 2014E Net debt / 2014 FFO | 1.4x | 1.46x |
| Bank Line | $350 million | Estimated at $430 million |
_________________________
1 Original Oil in Place (OOIP) is the equivalent to Discovered Petroleum Initially In Place (DPIIP) for the purposes of this press release. DPIIP is defined as quantity of hydrocarbons that are estimated to be in place within a known accumulation, plus those estimated quantities in accumulations yet to be discovered. There is no certainty that it will be commercially viable to produce any portion of the resources. A recovery project cannot be defined for this volume of DPIIP at this time, and as such it cannot be further sub-categorized.
2 Assumes maximum cash election by Privateco shareholders. Depending on the amount of the cash elected, the number of shares issued by Surge will range between 29.8 million and 34.8 million, and the total cash component for the combined Acquisitions will range from $50 to $80 million.
3 Based on 2014 Edmonton Par $90.45/bbl; 2014 AECO gas $3.69/mcf and a 2014 CAD/USD exchange rate of $0.985.
4 Based on independent engineering reports as of December 31, 2012 or later.
5 Management uses funds from operations (cash flow from operations before changes in non-cash working capital, legal settlement expenses, transaction costs and current tax on disposition) to analyze operating performance and leverage. Funds from operations as presented does not have any standardized meaning prescribed by IFRS and, therefore, may not be comparable with the calculation of similar measures for other entities.
6 Based on a Surge share price of $6.70.
INCREASED DIVIDEND
As a result of the highly accretive Acquisitions, together with better than anticipated operational and drilling results, Surge's Board of Directors have now approved a 19 percent increase in the Company's annual dividend.
Accordingly, effective November 15, 2013, Surge's annual dividend will be increased from $0.42 per share per year ($0.035 per share per month) to $0.50 per share per year ($0.04166 per share per month).
On this basis, Surge shareholders of record on November 29, 2013 will receive the increased dividend for November production payable on December 16th, 2013.
Another positive aspect of the Acquisitions is that Surge will assume all existing crude oil hedges of the Privateco. These hedges include 975 bbl/d of WTI swap transactions at CAD$98.18 per barrel for 2014.
As a result of the structure of the Acquisitions, post-Closing Surge will maintain the Company's excellent balance sheet and debt to forward cash flow ratio, with over $120 million of credit availability on the Company's bank lines. In addition, pro-forma the Acquisitions there is no change in Surge's very low, "all-in" sustainability ratio of 93 percent.
ADVISORS
Macquarie Capital Markets Canada Ltd. is acting as financial advisor to Surge with respect to the Privateco Acquisition. CIBC World Markets Inc. and Scotia Capital Inc. are acting as strategic advisors to Surge with respect to the Privateco Acquisition.
GMP Securities L.P. is acting as financial advisor to Surge with respect to the Asset Acquisition. National Bank Financial Inc. is acting as strategic advisor to Surge with respect to the Asset Acquisition.
Macquarie Capital Markets Canada Ltd. is acting as lead transaction advisor to Surge with respect to both Acquisitions.
Peters & Co. Limited acted as financial advisor to the Privateco.
FirstEnergy Capital Corp. acted as exclusive financial advisor to the Asset Acquistion.
FORWARD LOOKING STATEMENTS:
This press release contains forward-looking statements. More particularly, it contains forward-looking statements concerning: (i) targeted growth in reserves, production and cash flow per share, (ii) the sustainability of dividends, (iii) potential growth through acquisitions, (iv) ultimate recovery factors at certain of Surge's properties, (v) planned drilling, development and waterflood activities, (vi) the potential number of drilling locations at certain of Surge's properties, (vii) estimated Q1 2014 production, (viii) estimated 2014 average and exit rates of production, (ix) estimated 2014 capital expenditures, wells drilled, decline rates, funds from operations, operating netback, cash flow netback and payout ratio,* estimated 2013 year end net debt and net debt to funds from operations ratio; and (xi) the anticipated exceeding by Surge of the previously estimated 2013 exit rate of production.
This press release contains forward-looking statements. More particularly, this press release contains statements concerning anticipated: (i) timing and completion of the Acquisitions, expectations and assumptions concerning timing of receipt of required regulatory approvals and the satisfaction of other conditions to the completion of the Acquisitions, (ii) potential development opportunities and drilling locations associated with the Acquisitions, expectations and assumptions concerning the success of future drilling and development activities, the performance of existing wells, the performance of new wells, the successful application of technology and the geological characteristics of the Acquisitions, (iii) the timing and amount of future dividend payments, (iv) oil & natural gas production growth during 2013 and 2014, (v) debt and bank facilities, (vi) capital expenditures, (vii) primary and secondary recovery potentials and implementation thereof, (viii) decline rates, (ix) funds from operations, * operating and cash flow netbacks, and (xi) realization of anticipated benefits of acquisitions.
The forward-looking statements contained in this press release are based on certain key expectations and assumptions made by Surge, including expectations and assumptions concerning the success of future drilling, development and completion activities, the performance of existing wells, the performance of new wells, the viability of waterflood projects, the availability and performance of facilities and pipelines, the geological characteristics of Surge's properties, the successful application of drilling, completion and seismic technology, prevailing weather conditions, commodity prices, royalty regimes and exchange rates, the application of regulatory and licensing requirements and the availability of capital, labour and services.
Although Surge believes that the expectations and assumptions on which the forward-looking statements are based are reasonable, undue reliance should not be placed on the forward-looking statements because Surge can give no assurance that they will prove to be correct. Since forward-looking statements address future events and conditions, by their very nature they involve inherent risks and uncertainties. Actual results could differ materially from those currently anticipated due to a number of factors and risks. These include, but are not limited to, risks associated with the oil and gas industry in general (e.g., operational risks in development, exploration and production; delays or changes in plans with respect to exploration or development projects or capital expenditures; the uncertainty of reserve estimates; the uncertainty of estimates and projections relating to production, costs and expenses, and health, safety and environmental risks), commodity price and exchange rate fluctuations and uncertainties resulting from potential delays or changes in plans with respect to exploration or development projects or capital expenditures. Certain of these risks are set out in more detail in Surge's Annual Information Form which has been filed on SEDAR and can be accessed at www.sedar.com.
The forward-looking statements contained in this press release are made as of the date hereof and Surge undertakes no obligation to update publicly or revise any forward-looking statements or information, whether as a result of new information, future events or otherwise, unless so required by applicable securities laws.
Financial Outlooks
The estimates of 2013 year end net debt, 2014 funds from operations and 2014 operating netback and cash flow netback contained in this press release are financial outlooks within the meaning of applicable securities laws. These financial outlooks have been prepared by management of Surge to provide an outlook of Surge's anticipated funds from operations and netbacks for a full year of operations with its current assets and based on management's expectations and assumptions as to a number of factors, including commodity pricing, production, operating expenses and royalties. Readers are cautioned that this information may not be appropriate for any other purpose. Management does not have firm commitments for all of the costs, expenditures, prices or other financial assumptions used to prepare the financial outlooks or assurance that such results will be achieved. The actual results of Surge will likely vary from the amounts set forth in the financial outlooks and such variation may be material.
Surge and its management believe that the financial outlooks have been prepared on a reasonable basis, reflecting the best estimates and judgments, and represent, to the best of management's knowledge and opinion, Surge's expected expenditures and results of operations following completion of the Acquisitions. However, because this information is highly subjective and subject to numerous risks, including the risks discussed under the note regarding Forward Looking Statements, it should not be relied on as necessarily indicative of future results. Except as required by applicable securities laws, Surge undertakes no obligation to update this information.
Note: Boe means barrel of oil equivalent on the basis of 1 boe to 6,000 cubic feet of natural gas. Boe may be misleading, particularly if used in isolation. A boe conversion ratio of 1 boe for 6,000 cubic feet of natural gas is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. Boe/d means barrel of oil equivalent per day.
In this press release: (i) mcf means thousand cubic feet; (ii) mcf/d means thousand cubic feet per day (iii) mmcf means million cubic feet; (iv) mmcf/d means million cubic feet per day; (v) bbls means barrels; (vi) mbbls means thousand barrels; (vii) mmbbls means million barrels; (viii) bbls/d means barrels per day; (ix) bcf means billion cubic feet; * mboe means thousand barrels of oil equivalent; and (xi) mmboe means million barrels of oil equivalent
Neither the TSX nor its Regulation Services Provider (as that term is defined in the policies of the TSX) accepts responsibility for the adequacy or accuracy of this release.
SOURCE: Surge Energy Inc.
Paul Colborne, President & CEO
Surge Energy Inc.
Phone: (403) 930-1507
Fax: (403) 930-1011
Email: [email protected]
Max Lof, CFO
Surge Energy Inc.
Phone: (403) 930-1021
Fax: (403) 930-1011
Email: [email protected]
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