Surge Energy Inc. (TSX: SGY) is pleased to announce an increase to its dividend, the Company's financial and operating results for the three and six month periods endedJune 30, 2013 and a reiteration of 2013/2014 guidance.
DIVIDEND INCREASE
Based upon: 1) better than anticipated drilling results at Valhalla, Silver and Nipisi South; 2) better than anticipated early waterflood response at Nipisi; 3) significantly better than forecasted North American crude oil prices; and 4) continued execution of Surge's ongoing hedging/risk management program, the Company is increasing its dividend by five percent.
Surge's Board of Directors (the "Board") has approved an increase in the Company's annual dividend from CAD$0.40per share ($0.0333 per share per month) to CAD$0.42 per share ($0.035 per share per month).
Accordingly, on September 16, 2013 the Company will be paying its first monthly dividend of CAD $0.035 per share ($0.42 per share annually) for August production.
CHANGES TO SENIOR MANAGEMENT/NON-CORE ASSET SALE
On May 9, 2013, the Board announced the appointment of Mr. Paul Colborne as the President and CEO of Surge on that date. In addition, Mr. Murray Bye was appointed the Vice President of Production of Surge.
The Board also announced Mr. Dan O'Neil's retirement from his role as CEO and President of the Company. The Board thanks Mr. O'Neil for his efforts and service on behalf of Surge shareholders. Mr. O'Neil will continue as a director of the Company and will provide technical assistance.
On May 9, 2013 Surge also announced the sale of its non-core, primarily non-operated assets in North Dakota for a purchase price of approximately USD$42.75 million. This transaction closed on May 31, 2013.
The non-core assets sold comprised production of approximately 650 barrels of oil per day, with independently proved plus probable reserves of 2.2 million boe, and a net present value of $36.8 million (discounted at ten percent before tax as of December 31, 2012).
STRATEGIC TRANSITION TO SUSTAINABLE GROWTH + DIVIDEND MODEL
On June 11, 2013, Surge announced the orderly transition of the Company to a sustainable, moderate growth dividend paying oil and gas company with high quality, focused, operated light and medium gravity crude oil assets.
Surge has a high quality, high netback, reserves, production and cash flow base focused primarily in just four operated, crude oil properties. Over 95 percent of the Company's assets are concentrated in these four elite properties at Valhalla and Nipisi in western Alberta, the Silver area in SE Alberta, and the Shaunavon area of SW Saskatchewan. These core assets are characterized by large Original Oil in Place ("OOIP")1 reservoirs, low recovery factors, significant upside from infill and step-out development drilling, and successful waterflood implementation.
In addition, in the first half of 2013, Surge delivered the best drilling program in the Company's history, with three significant exploration discoveries at its core properties of Valhalla, Nipisi and Silver, respectively.
In spite of these very positive developments, Surge continued to trade at a significant discount to the Company's net asset value. At year-end 2012, Surge's independent engineering report provided an estimate net asset value of $8.21per basic share2, before tax, based on proved plus probable reserves (PV10).
Consequently, given that Surge has an elite, high quality crude oil asset and opportunity base, and that the Company's true value as a growth junior was being significantly discounted, Surge's Board and management approved an orderly transition to a sustainable growth plus dividend business model for the Company on a go-forward basis.
On this basis, Surge will now:
- Grow, cost effectively, 3 to 5 percent per year on a reserves, production and cash flow per share basis; and
- Provide a sustainable, resilient, annual dividend to shareholders payable monthly; and
- Provide additional growth through accretive acquisitions of new, high quality, large OOIP assets with low recovery factors.
$240 MILLION ACQUISITION OF AN ELITE, LARGE OOIP, CRUDE OIL ASSET; $247.5 MILLION BOUGHT DEAL FINANCING
On June 11, 2013, Surge also announced an accretive acquisition of an operated, medium gravity crude oil producing asset in the Southwest area of Saskatchewan (the "Acquisition") with OOIP of more than 250 million barrels and a recovery factor of less than 1.4 percent. Surge estimates over 260 (net) lower risk development drilling locations on the acquired assets, together with full waterflood upside.
In conjunction with the Acquisition, Surge entered into a $247.5 million bought deal equity financing (the "Equity Financing") with a syndicate of underwriters. The Acquisition and the Equity Financing closed on July 3, 2013.
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 Based on Sproule's independent engineering report as at December 31, 2012 (pre-Acquisition/Disposition, and pre-equity financing).
FINANCIAL AND OPERATING SUMMARY:
| ($000s except per share amounts) | |||||||||||||||||
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||
| 2013 | 2012 | % change | 2013 | 2012 | % change | ||||||||||||
| Financials highlights | |||||||||||||||||
| Oil and NGL sales | 52,624 | 45,610 | 15% | 100,840 | 92,977 | 8% | |||||||||||
| Natural gas sales | 5,342 | 3,308 | 61% | 10,698 | 6,986 | 53% | |||||||||||
| Other revenue | 38 | 9 | nm | 48 | 24 | nm | |||||||||||
| Total oil, natural gas, and NGL revenue | 58,004 | 48,927 | 19% | 111,586 | 99,987 | 12% | |||||||||||
| Funds from Operations3 | 26,812 | 24,315 | 10% | 52,049 | 48,322 | 8% | |||||||||||
| Per share basic ($) | 0.38 | 0.34 | 12% | 0.73 | 0.68 | 7% | |||||||||||
| Per share diluted ($) | 0.38 | 0.34 | 12% | 0.73 | 0.67 | 9% | |||||||||||
| Net income (loss)6 | (15,004) | 13,273 | nm | (16,358) | 15,930 | nm | |||||||||||
| Per share basic ($) | (0.21) | 0.19 | nm | (0.23) | 0.23 | nm | |||||||||||
| Per share diluted ($) | (0.21) | 0.18 | nm | (0.23) | 0.22 | nm | |||||||||||
| Capital expenditures - petroleum & gas properties4 | 25,166 | 27,707 | (9%) | 65,231 | 82,605 | (21%) | |||||||||||
| Capital expenditures - acquisitions & dispositions4 | (39,377) | 9,347 | nm | (40,184) | 113,745 | nm | |||||||||||
| Total capital expenditures4 | (14,212) | 37,054 | nm | 25,046 | 196,350 | (87%) | |||||||||||
| Net debt at end of period5 | 193,597 | 171,692 | 13% | 193,597 | 171,692 | 13% | |||||||||||
| Operating highlights | |||||||||||||||||
| Production: | |||||||||||||||||
| Oil and NGL (bbls per day) | 6,966 | 6,568 | 6% | 6,910 | 6,339 | 9% | |||||||||||
| Natural gas (mcf per day) | 14,442 | 16,246 | (11%) | 15,559 | 16,822 | (8%) | |||||||||||
| Total (boe per day) (6:1) | 9,373 | 9,275 | 1% | 9,504 | 9,142 | 4% | |||||||||||
| Average realized price (excluding hedges): | |||||||||||||||||
| Oil and NGL ($ per bbl) | 83.01 | 76.31 | 9% | 80.62 | 80.59 | 0% | |||||||||||
| Natural gas ($ per mcf) | 4.06 | 2.24 | 81% | 3.80 | 2.28 | 67% | |||||||||||
| Realized loss on financial contracts ($ per boe) | (2.12) | (0.29) | nm | (1.28) | (0.61) | nm | |||||||||||
| Net back (excluding hedges) ($ per boe) | |||||||||||||||||
| Oil, natural gas and NGL sales | 68.00 | 57.97 | 17% | 64.87 | 60.09 | 8% | |||||||||||
| Royalties | (12.56) | (9.69) | 30% | (11.74) | (10.94) | 7% | |||||||||||
| Operating expenses | (11.97) | (10.63) | 13% | (12.28) | (11.14) | 10% | |||||||||||
| Transportation expenses | (2.46) | (2.59) | (5%) | (2.35) | (2.19) | 7% | |||||||||||
| Operating netback | 41.01 | 35.06 | 17% | 38.50 | 35.82 | 7% | |||||||||||
| G&A expenses | (4.88) | (3.50) | 39% | (4.03) | (3.56) | 13% | |||||||||||
| Interest expense | (2.62) | (1.87) | 40% | (2.67) | (1.81) | 48% | |||||||||||
| Corporate netback | 33.51 | 29.69 | 13% | 31.80 | 30.45 | 4% | |||||||||||
| Common shares (000s) | |||||||||||||||||
| Common shares outstanding, end of period | 71,918 | 71,065 | 1% | 71,918 | 71,065 | 1% | |||||||||||
| Weighted average basic shares outstanding | 71,358 | 71,058 | 0% | 71,288 | 70,766 | 1% | |||||||||||
| Stock option dilution (treasury method) | - | 1,080 | (100%) | - | 1,403 | (100%) | |||||||||||
| Weighted average diluted shares outstanding | 71,358 | 72,138 | (1%) | 71,288 | 72,169 | (1%) | |||||||||||
3 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.
4 Please see capital expenditures note in the Management Discussion and Analysis dated June 30, 2013.
5 The Corporation defines net debt as outstanding bank debt plus or minus working capital, including the deposit on acquisition and excluding the fair value of financial contracts.
6 The Corporation views this change calculation as not meaningful, or "nm".
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