Surge Energy Inc.is pleased to announce its successful 32 well 1H/21 drilling program, a strategic $106 million asset sale (the "Sale"), and a positive re-determination of its first lien and second lien credit facilities.
Very Positive Macro Environment for Canadian Crude Oil
2020 was an extremely difficult year for the Canadian oil and gas industry managing through the COVID crisis, and the Saudi-Russia oil price war, which sent oil prices plunging from a high of over US$63 WTI per barrel in January, 2020 to a low of US$11.57 WTI per barrel in April, 2020. Consequently, Surge Management spent much of 2020 working hard to both protect stakeholder's capital, and to position Surge to be a top performer when crude oil prices recovered.
However, in just the last 4 months, oil prices have rallied by over 85%, from a low of US$33.64 per barrel on November 3, 2020 to over US$63 WTI per barrel today. Furthermore, WCS differentials have traded significantly below the long-term average of approximately US$17 per barrel, to less than US$12 per barrel today. Light oil differentials are also trading well below their long-term average of approximately US$6 per barrel, to less than US$2.75 per barrel today.
In conjunction with the improving macroeconomic environment, a number of large investment banks have recently announced significant upward revisions to their crude oil price forecasts, based on expectations for an extremely tight physical oil market in 2021 and 2022. The current (very tight) physical crude oil market, combined with sizable reductions in capital spending on large-scale oil projects, has created a structural daily supply deficit in the oil market, resulting in oil price projections of greater than US$65 WTI per barrel by mid-year 2021.
Positioning Surge for the Turn in Oil Prices
Surge is well positioned to take advantage of the current, very positive, macro environment for crude oil, as follows:
1. In 1H/21 Surge is completing an exciting, 32 well drilling program in the Sparky and Valhalla (Montney) core areas; the Company anticipates adding more than 3,200 boepd (>90% medium/light oil) from the program for an all-in drill, complete, equip and tie-in ("DCET") cost of $39.0 million with this program;
2. Concurrent with the addition of 3,200 boepd from the 1H/21 drilling program, Surge has executed a binding Purchase and Sale Agreement for the sale of 2,700 boepd for total gross proceeds of $106 million (before customary adjustments); the Sale is set to close on or before March 25, 2021;
3. Post-closing of the Sale, Surge has a high quality, low decline, medium and light oil asset base – with large original oil in place ("OOIP")1 reservoirs, high netbacks, and a large internally estimated drilling inventory of over 750 locations2 (>14 year inventory);
4. As a result of crude oil prices spiking, differentials dropping, and the large production additions from the Company's exciting 1H/21 drilling program, Surge has significant positive financial 'torque' to its operating netback;
5. Over the last six years, Surge has amassed a dominant position in its core Sparky crude oil play, which is proving to be one of the most economic, conventional, medium/light oil growth plays in Canada; and
6. In late 2020, Surge injected over $100 million of new capital into the Company's capital structure and balance sheet, including the previously announced BDC financing ($40 million second lien) and a $51 million commitment from EDC into Surge's existing first lien credit facility. Additionally, Surge has received over $12 million to date under Alberta's Site Rehabilitation Program ("SRP"), which is quickly reducing Surge's decommissioning liability.
Management believes that Surge is uniquely positioned to take advantage of the recent, very positive macro changes to the oil industry in Canada. In 1H/21, Surge is forecasting the addition of over 3,200 boepd from the Company's 32 well drilling program at a cost of $39 million, while selling 2,700 boepd for gross proceeds of $106 million pursuant to the Sale, all in the same quarter.
Accretive Asset Sale
Proceeds from the Sale will have a significant immediate, positive impact on the Company, reducing Surge's bank indebtedness by over $100 million, and generating annual interest expense savings of approximately $10 million. On this basis, Surge anticipates receiving a "corporate" cash flow multiple of 5.3 times3 on the Sale.
Post-closing of the Sale, Surge retains a large, highly economic drilling inventory of more than 750 net internally estimated locations4. This provides the Company with a deep, low risk, development drilling inventory of over 14 years, at a pace of approximately 50 wells per year.
As a result of Management's strategic, proactive, capital allocation decisions in 2020 and early 2021, Surge provides investors with exposure to significant growth in cash flow, AND a deep value opportunity to invest in a low risk, conventional, medium/light gravity, public crude oil company. Further, Surge's Sparky play is turning out to be one of the top medium/light oil growth plays in all of Canada, and is completely unique within Surge's Canadian peer group.
National Bank Financial Inc. is acting as financial advisor to Surge with respect to the Sale. McCarthy Tétrault LLP is acting as legal advisor to Surge with respect to the Sale. BMO Capital Markets and Scotiabank have also been appointed strategic advisors to Surge in connection with the Sale.
Positive Credit Facility Re-Determination
In combination with the Sale, the Company is pleased to announce that it has reached an agreement in principle with its respective lender syndicates to re-determine its first and second lien credit facilities.
At the closing of the Sale, Surge anticipates the first lien credit facilities will be re-determined at $215 million, with the Company's next bank review scheduled on or before November 30, 2021. In addition, the previous obligation to conduct an asset sale solicitation process in 2021 is eliminated. This re-determination is forecast to provide the Company with over $25 million of available liquidity5 upon the closing of the Sale, and to significantly reduce Surge's annual interest expense.
The Company appreciates the support and partnership of its lenders through the COVID crisis.
Outlook; Guidance 2021/2022
In just the last 4 months, oil prices have rallied over 85%, from a low of US$33.64 per barrel on November 3, 2020 to over US$63 WTI per barrel today. Furthermore, WCS differentials are trading well below their long-term average of approximately US$17 per barrel at less than US$12 per barrel today. Light oil differentials are also trading below their long-term average of approximately US$6 per barrel to less than US$2.75 per barrel today.
In 1H/21, the Company is completing a low risk $39 million development drilling capital program, adding estimated production of more than 3,200 boepd (>90% medium/light oil) from 32 gross (32.0 net) wells. In addition, prior to the end of Q1/21 Surge anticipates receiving gross proceeds of $106 million from the Sale of 2,700 boepd.
On a go forward basis, Surge is planning a disciplined capital allocation strategy with an emphasis on free cash flow generation in 2H/21. The Company is currently budgeting for a 2H/21 maintenance drilling program, allocating the incremental free cash flow to continued reduction of bank indebtedness.
Surge will be reforecasting 2021, and providing 2022 guidance, after the closing of the Sale on March 25, 2021.
