2022 BUDGET GUIDANCE – CONTINUED FOCUS ON SHAREHOLDER RETURNS & SUSTAINABILITY
Surge's focus in 2022 continues to be on disciplined capital allocation, with cash flow strategically allocated between capital projects, net debt1 repayment, and a fundamental goal of reinstating the Company's dividend and shareholder returns focused business model. The Company's 2022 capital budget will see 85 percent of the expenditures focused in its two, top-tier core medium and light gravity conventional crude oil plays in the Sparky and
In 2022, the Company can maintain its current production levels of 21,500 boepd, while continuing to increase shareholder's net asset value2 by generating more than
2022 BUDGET HIGHLIGHTS
Surge's disciplined 2022 capital expenditure budget:
- Maximizes free cash flow through a returns focused,
$124 million exploration and development capital program; - Generates forecasted 2022 annual cash flow from operating activities in excess of
$255 million ($3.06 per share) atUS$75 WTI crude oil pricing; - Generates free cash flow1 of over
$130 million ($1.57 per share1) atUS$75 WTI crude oil pricing; - Reduces the Company's exit 2022 net debt to cash flow from operating activities1 to an estimated 0.75 times at
US$75 WTI crude oil pricing; - Targets 65 of the Company's most capital efficient drilling locations - focused predominately in its Sparky and
SE Saskatchewan core areas; - Uses less than seven percent of the Company's internally estimated drilling locations (i.e. over 950 net estimated locations currently in inventory)5; and
- Cost effectively maintains production of 21,500 boepd (86% liquids), maximizing free cash flow.
Further details relating to the 2022 budget are set forth below:
Guidance | @ US | @ US | @ US |
Exit 2021 production | 21,500 boepd (86% liquids) | ||
Average 2022 production | 21,500 boepd (86% liquids) | ||
2022(e) Exploration and development expenditures | |||
2022(e) Cash flow from operating activities ($MM)* | |||
Per share | |||
2022(e) Free cash flow ($MM) | |||
Per share | |||
2022(e) All-in payout ratio7 | 54% | 49% | 45% |
2022(e) Exit net debt to 2022(e) cash flow from operating activities ratio** | 0.98x | 0.75x | 0.64x |
2022(e) Royalties as % of petroleum and natural gas revenue | 14.0% - 16.0% | ||
2022(e) Net operating expenses7 | |||
2022(e) Transportation expenses | |||
2022(e) General & administrative expenses |
* Cash flow from operating activities assumes a nil change in non-cash working capital. |
**2022(e) exit net debt is prior to any contemplated allocation of 2022(e) free cash flow to shareholder returns through dividends or share buybacks. |
CORPORATE UPDATE –TIMELINE FOR REINSTATEMENT OF SURGE'S MULTI-FACETED SHAREHOLDER RETURNS MODEL
Management's stated goal is to position the Company as a well-financed energy producer with a significant free cash flow profile that supports consistent shareholder returns through: 1) net asset value per share increases through ongoing debt repayment; 2) sustainable dividends; 3) modest production per share growth; and 4) opportunistic share buybacks.
On
On this basis, Surge is initially targeting a reduction of net debt to a range of
At current commodity price levels, Management estimates that Surge will be within its targeted net debt range before mid-year in 2022.
OPERATIONS UPDATE – UNLOCKING SIGNIFICANT INCREMENTAL VALUE IN SPARKY AND
Surge finished 2021 on a strong operational note. The Company continued to successfully develop its dominant land position in its core Sparky asset, using its traditional low risk single-leg multi-stage frac design, with results continuing to outperform internal type curve expectations8. In addition, Surge has now successfully tested multi-leg, open hole lateral development in portions of its Sparky core area where the multi-stage frac design is not optimal.
To date, Surge has drilled four multi-leg laterals in the Sparky formation with the average of the four wells exceeding the Company's internal type curve expectations. Encouragingly, two of the wells have been brought on production with rates over 220 bopd each on an IP30 basis. At current pricing these two wells paid out in just 115 days.
Additionally, given that the rock properties of the Sparky formation are analogous to that of the
Going forward, Surge views multi-leg lateral development as complimentary to its existing single-leg multi-frac drilling program. The addition of the multi-leg design will upgrade a meaningful portion of the Company's existing Sparky core area drilling inventory, which currently consists of over 425 internally estimated locations8. Based on the strong initial well results, Surge is now budgeting eight additional multi-leg Sparky wells in its 2022 drilling program, along with 27 single-leg multi-frac Sparky wells.
In Surge's newly acquired, high operating netback, light oil core area of
Surge has continued its Q4/21 operational momentum by securing services, having commenced its 2022 drilling program in December of 2021. The Company currently has 3 drilling rigs operating in its core areas: one rig drilling single-leg multi-frac Sparky wells, one drilling multi-leg open hole Sparky wells, and one drilling horizontal wells in
OUTLOOK – POSITIONED FOR OUTPERFORMANCE IN 2022
Surge's Management and Board are excited about the Company's outlook for 2022, as previous lender mandated fixed price crude oil hedging contracts expired at the end of 2021. Management continues to strategically assess, analyze and position the Company based on its strong competitive corporate advantages, including Surge's long 15 year reserve life index9, low conventional corporate decline, high crude oil operating netbacks, top tier production efficiencies, large 13 year drilling inventory10, and the Company's substantial
Surge's lower risk, high operating netback, conventional crude oil asset and opportunity base matches very well with Management's conservative returns based business strategy. The Company's large OOIP9 conventional reservoirs provide top tier production efficiencies, shallow declines, and significant free cash flow – underpinning Management's strategic plan to return to a dividend plus, share buy backs, business model.
At
FORWARD LOOKING STATEMENTS:
This press release contains forward-looking statements. The use of any of the words "anticipate", "continue", "estimate", "expect", "may", "will", "project", "should", "believe" and similar expressions are intended to identify forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in such forward-looking statements. More particularly, this press release contains statements with respect to Surge's declared focus and primary goals, including its goal of returning to a shareholder returns-based business model; management's expectations regarding increases to Surge's net asset value; management's expectations and plans with respect to the development of its assets and the timing thereof; Surge's annual exploration and development capital expenditure program and budget; Surge's drilling program and inventory; management's 2022 guidance, including estimated production levels, exploration and development capital expenditures, cash flow from operating activities, free cash flow and free cash flow yield, all-in payout ratio; exit net debt to cash flow from operating activities ratio, royalties as a percentage of petroleum and natural gas revenue; net operating expenses, transportation expenses and general and administrative expenses; management's expectations regarding net bank debt repayment at current prices and the timing thereof; commodity prices; and Surge's reserve life index, corporate decline and tax pool base.
The forward-looking statements are based on certain key expectations and assumptions made by Surge. 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 condition of the global economy, including trade, public health (including the impact of COVID-19) and other geopolitical risks; 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 constraint in the availability of services, adverse weather or break-up conditions; uncertainties resulting from potential delays or changes in plans with respect to exploration or development projects or capital expenditures; and failure to obtain the continued support of the lenders under Surge's bank line. Certain of these risks are set out in more detail in Surge's AIF dated
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.
Oil and Gas Advisories
The term "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" and "boepd" mean barrel of oil equivalent per day. Bbl means barrel of oil and "bopd" means barrels of oil per day. NGLs means natural gas liquids.
This press release contains certain oil and gas metrics and defined terms which do not have standardized meanings or standard methods of calculation and therefore such measures may not be comparable to similar metrics/terms presented by other issuers and may differ by definition and application. All oil and gas metrics/terms used in this document are defined below:
Original Oil in Place ("OOIP") means
Reserve life index is calculated as total Company share 2020YE reserves divided by the annualized fourth quarter 2020 production.
Net asset value is calculated as the total discounted (10%) value of reserves plus undeveloped land and seismic value, less net debt, divided by the number of basic shares outstanding.
Drilling Inventory
This press release discloses drilling locations in two categories: (i) booked locations; and (ii) unbooked locations. Booked locations are proved locations and probable locations derived from an external evaluation using standard practices as prescribed in the Canadian Oil and Gas Evaluations Handbook and account for drilling locations that have associated proved and/or probable reserves, as applicable.
Unbooked locations are internal estimates based on prospective acreage and assumptions as to the number of wells that can be drilled per section based on industry practice and internal review. Unbooked locations do not have attributed reserves or resources. Unbooked locations have been identified by Surge's internal certified Engineers and Geologists (who are also Qualified Reserve Evaluators) as an estimation of our multi-year drilling activities based on evaluation of applicable geologic, seismic, engineering, production and reserves information. There is no certainty that the Company will drill all unbooked drilling locations and if drilled there is no certainty that such locations will result in additional oil and gas reserves, resources or production. The drilling locations on which the Company actually drills wells will ultimately depend upon the availability of capital, regulatory approvals, seasonal restrictions, oil and natural gas prices, costs, actual drilling results, additional reservoir information that is obtained and other factors. While certain of the unbooked drilling locations have been de-risked by drilling existing wells in relative close proximity to such unbooked drilling locations, the majority of other unbooked drilling locations are farther away from existing wells where management has less information about the characteristics of the reservoir and therefore there is more uncertainty whether wells will be drilled in such locations and if drilled there is more uncertainty that such wells will result in additional oil and gas reserves, resources or production.
Net of Surge's
Also net of Surge
Surge's internally developed type curves (for Surge, Astra and Fire Sky) were constructed using a representative, factual and balanced analog data set, as of
Non-GAAP and Other Financial Measures
This press release includes references to non-GAAP and other financial measures used by the Company to evaluate its financial performance, financial position or cash flow. These specified financial measures include non-GAAP financial measures and non-GAAP ratios, are not defined by IFRS and therefore are referred to as non-GAAP and other financial measures. Certain secondary financial measures in this press release – namely, "all-in payout ratio", "free cash flow", "free cash flow yield", "net debt", "net debt to cash flow from operating activities", "net operating expenses", and "operating netback" are not prescribed by GAAP. These non-GAAP and other financial measures are included because management uses the information to analyze business performance, cash flow generated from the business, leverage and liquidity, resulting from the Company's principal business activities and it may be useful to investors on the same basis. None of these measures are used to enhance the Company's reported financial performance or position. The non-GAAP and other financial measures do not have a standardized meaning prescribed by IFRS and therefore are unlikely to be comparable to similar measures presented by other issuers. They are common in the reports of other companies but may differ by definition and application. All non-GAAP and other financial measures used in this document are defined below, and as applicable, reconciliations to the most directly comparable GAAP measure for the year ended
All-in Payout Ratio
All-in payout ratio is a non-GAAP ratio, calculated as exploration and development expenditures divided by cash flow from operating activities. Management uses this measure to determine the amount of cash from operating activities that is used to reinvest in the exploration and development of its asset base.
Free Cash Flow and Free Cash Flow Yield
Free cash flow is a non-GAAP financial measure, calculated as cash flow from operating activities less exploration and development capital expenditures. Management uses free cash flow to determine the amount of funds available to the Company for future capital allocation decisions.
Free cash flow per share is a non-GAAP ratio, calculated using the same weighted average basic and diluted shares used in calculating income per share.
Free cash flow yield is a non-GAAP ratio, calculated as free cash flow divided by the number of basic shares outstanding, divided by the Company's share price at the date indicated herein. Management uses this measure as an indication of the cash flow available for return to shareholders based on current share prices.
Free Cash Flow | ||||
( | 2020 | |||
Cash flows from operating activities | 72,190 | |||
Less: Exploration and development capital expenditures | (52,773) | |||
Free Cash Flow | 19,417 |
Net Debt and Net Debt to Cash Flow from Operating Activities
Net debt is a non-GAAP financial measure, calculated as bank debt, term debt, plus the liability component of the convertible debentures plus current assets, less current liabilities, however, excluding the fair value of financial contracts, decommissioning obligations, and lease and other obligations. There is no comparable measure in accordance with IFRS for net debt. This metric is used by management to analyze the level of debt in the Company including the impact of working capital, which varies with the timing of settlement of these balances.
Net debt to cash flow from operating activities is a non-GAAP ratio, calculated as exit net debt divided by cash flow from operating activities. Management uses this ratio to assess the time (in years) that it would take to fund net debt based on the annualized cash flow from operating activities.
Net debt | ||||
( | 2020 | |||
Bank debt | (260,908) | |||
Term debt | (32,718) | |||
Accounts receivable | 29,796 | |||
Prepaid expenses and deposits | 5,253 | |||
Accounts payable and accrued liabilities | (51,265) | |||
Convertible debentures | (71,181) | |||
Net debt | (381,023) |
Net Operating Expenses
Net operating expenses is a non-GAAP financial measure, determined by deducting processing income, primarily generated by processing third party volumes at processing facilities where the Company has an ownership interest. It is common in the industry to earn third party processing revenue on facilities where the entity has a working interest in the infrastructure asset. Under IFRS this source of funds is required to be reported as revenue. However, the Company's principal business is not that of a midstream entity whose activities are dedicated to earning processing and other infrastructure payments. Where the Company has excess capacity at one of its facilities, it will look to process third party volumes as a means to reduce the cost of operating/owning the facility. As such, third party processing revenue is netted against operating costs when analyzed by management.
Net Operating Expenses | ||||
( | 2020 | |||
Operating expenses | 101,640 | |||
Less: processing income | (4,772) | |||
Net operating expenses | 96,868 |
Operating Netback
Operating netback is a non-GAAP financial measure, calculated as petroleum and natural gas revenue and processing and other income, less royalties, realized gain (loss) on commodity and FX contracts, operating expenses, and transportation expenses. Operating netback per boe is calculated as operating netback divided by total barrels of oil equivalent produced during a specific period of time. There is no comparable measure in accordance with IFRS. This metric is used by management to evaluate the Company's ability to generate cash margin on a unit of production basis.
Operating Netback | ||||
( | 2020 | |||
Petroleum and natural gas revenue | 59,907 | |||
Processing income | 1,006 | |||
Royalties | (6,493) | |||
Realized gain (loss) on commodity and FX contracts | (6,247) | |||
Operating expenses | (26,531) | |||
Transportation expenses | (1,892) | |||
Operating netback | 19,750 | |||
Barrels of oil equivalent (boe) | 1,597 | |||
Operating netback ($ per boe) | 12.37 |
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.
1 This is a non-GAAP and other financial measure which is defined in the Non-GAAP and Other Financial Measures section of this document. |
2 See the Oil and Gas Advisories section of this document for further information. |
3 Additional pricing assumptions: (WCS: |
4 Free cash flow yield of 25 percent is calculated as |
5 See the Drilling Inventory section of this document for further information. |
6 All additional pricing assumptions (WCS: |
7 This is a non-GAAP and other financial measure which is defined in the Non-GAAP and Other Financial Measures section of this document. |
8 See the Drilling Inventory section of this document for further information. |
9 See the Oil and Gas Advisories section of this document for further information. |
10 See the Drilling Inventory section of this document for further information. |
SOURCE
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