Surge Energy Inc. is pleased to announce its financial and operating results for the quarter ended June 30, 2021.
Improving Macro Environment for Oil
Demand for crude oil continues to recover from the dramatic plunge caused by the COVID-19 pandemic in 2020. The recovery, combined with historical reductions in capital spending on world-wide oil projects, has resulted in a very tight physical market for oil, and a large, ongoing, structural deficit for crude oil supply. This tight physical oil market is evidenced by a number of large weekly draws on US crude oil inventories in Q2/21, erasing much of the crude oil inventory accumulations that occurred during the COVID-19 pandemic in 2020.
As world oil demand continues to return to pre-COVID-19 levels, oil prices have recovered quickly and continued to improve throughout the second quarter of 2021, with WTI averaging US$66.07 per bbl during the period. Oil prices are currently trading over US$73 per bbl. Furthermore, Canadian crude oil differentials continue to trade well below their long-term historical averages, resulting in a very positive pricing environment for Canadian oil weighted producers.
SGY – Positioning For The Turn In Oil Prices
Surge's primary corporate goal is to be the best positioned, top performing, intermediate public oil company in Canada in 2022 and beyond. As such, Surge's management team spent the past nine months strategically positioning the Company for success in an increasingly positive macro environment for crude oil. Key actions executed by Management include:
- Successful receipt of $40 million in 2nd lien financing, led by BDC (November, 2020);
- Credit commitment from EDC into Surge's existing 1st lien credit facility for $50.6 million (November, 2020);
- Alberta Site Rehabilitation Program grants of $14 million (ongoing);
- Completion of a highly accretive, debt-adjusted, asset sale for gross proceeds of $106 million (closed March 25, 2021);
- Completion of an upsized bought deal flow-through financing for gross proceeds of $23 million (closed May 13, 2021);
- Entered into an Arrangement Agreement on June 22, 2021 to acquire Astra Oil Corp. ("Astra") – a privately held light oil producer with high operating netback1 assets focused in SE Saskatchewan, producing 4,100 boepd (90% liquids), for total consideration of approximately $160 million. The Company anticipates that this strategic acquisition will close on or about August 18, 2021; and
- In conjunction with the Astra acquisition, Surge negotiated a new, $215 million, single-tranche first lien revolving credit facility ("RBL") with the next bank review scheduled to be on or before November 30, 2021. Maturity of Surge's RBL will be extended from July 1, 2022 to November 30, 2022.
The culmination of the above strategic transactions has quickly and efficiently repositioned the Company's balance sheet, reducing net debt1 by nearly $90 million in just 6 months' time. Surge recently announced preliminary 2022 guidance, and Management is now forecasting a further reduction in net debt by way of significant free cash flow1 generation at strip pricing through the back half of 2021, and throughout 2022.
Based on the above, with oil prices currently trading over US$73 per bbl, the Company now anticipates Surge's exit 2022 net debt to annualized Q4/22 adjusted funds flow2 will be 0.8x at US$70 per bbl, and 0.6x at US$75 WTI per bbl pricing. Additionally, at these price levels, Surge now anticipates generating $110 to $140 million in free cash flow in 2022 alone.
Q2 2021 FINANCIAL & OPERATING HIGHLIGHTS
In the second quarter of 2021, petroleum and natural gas revenue per boe increased by 200 percent, from $19.58 per boe in Q2/20, to $58.74 per boe in Q2/21, and increased by nearly 10 percent from the $54.07 per boe realized in Q1/21.
The Company closed an oversubscribed bought deal public offering of flow-through common shares during the quarter for gross proceeds of $23 million, extending the first lien credit facilities to July 1, 2022, and further reducing net debt. Proceeds from the flow-through share offering are being used to execute a disciplined 2H/21 drilling program, directing development capital predominately to the Company's low risk, large OOIP, high operating netback Sparky core area.
While Surge's realized commodity pricing benefitted from the improving commodity price environment during the quarter, the Company's cash flow from operating activities and adjusted funds flow were materially impacted by realized losses on required commodity contracts. In the second quarter of 2021 Surge generated $8.3 million of cash flow from operating activities, and $13.6 million of adjusted funds flow, after realized hedging losses of $20.9 million.
These required fix priced oil hedge positions were primarily entered into during the volatile price environment in 2020, and Surge projects that the cash flow impact from these hedge positions will continue to moderate over the remainder of 2021 as the remaining fixed crude oil hedges expire over the next 2 fiscal quarters.
Production in Q2/21 averaged 15,132 boe per day, down from Q1/21 production levels of 16,582 boe per day. This decrease was primarily a result due to the 2,700 boe per day of production that was sold for gross proceeds of $106 million on March 25, 2021. This decrease in production has now been fully offset by the Company's successful 28 (net) well 1H/21 drilling program, which added approximately 2,675 boe per day in Q2/21 for a total "all-in" onstream cost of $35 million ($13,080 per flowing boe).
Production in Q2/21 was impacted by approximately 650 boepd of third-party outages and plant turnarounds.
OUTLOOK – A TOP PERFORMER IN 2022
Surge Management remain very excited regarding the Company's cash flow "torque" to rising crude oil prices in 2022. As the Company's required fixed price crude oil hedges continue to expire over the course of 2H/21, Surge anticipates generating very attractive netbacks and cash flows in 2022 at current commodity prices.
Surge's exciting, $160 million acquisition of Astra is expected to close on or about August 18, 2021, and is consistent with Surge's defined business model of acquiring high quality, operated, light and medium gravity, conventional crude oil reservoirs with large OOIP3 and low recovery factors.
Upon closing, the combined Surge/Astra will be a well-positioned, 20,200 boepd (85 percent liquids) intermediate producer with over 850 internally estimated net development drilling locations4, providing a lower risk 13 year development drilling inventory. As previously announced on June 22, 2021, in conjunction with the acquisition of Astra, the Company has reached an agreement in principle with its lending syndicate to extend the maturity of its RBL to November 30, 2022 upon close of the transaction.
Surge's 2H/21 drilling program is now well underway and will focus on the Company's premier Sparky assets, building on the momentum achieved during the successful first half 2021 drilling program in that core area. The Company's management team is now working to finalize details of a second half development program for the high operating netback SE Saskatchewan light oil assets acquired with the acquisition of Astra.
Surge also remains focused on its ongoing ESG initiatives, and anticipates the completion of a 45-kilometer gas gathering infrastructure system to conserve gas at critical facilities in the newly-acquired SE Saskatchewan core area in the third quarter of 2021. This project is anticipated to reduce greenhouse gas emissions by over 95 percent from several operating fields when completed.
The Company (after giving effect to the Astra acquisition) is currently on track to exceed on Managements upwardly revised exit 2021 production guidance of 20,200 boe per day.
UPDATE ON ENVIRONMENTAL, SOCIAL AND GOVERNANCE MATTERS ("ESG")
Surge continues to strive to be a leader in reducing the impact of its operations on the environment and is pleased to report that it has abandoned 379 wells between October 1, 2020 and June 30, 2021. This represents over 30 percent of the Company's previously inactive, unabandoned wells.
The reduction in the Company's environmental footprint has been funded through a combination of Surge's ongoing internal abandonment program and approximately $14 million in total grant funding under the Alberta Government's Site Rehabilitation Program ("SRP"). During the second quarter of 2021, Surge spent a total of $1.1 million of its own funds and $0.45 million of SRP grants, for a combined $1.6 million directed towards abandonment activities. Year-to-date, Surge has now spent a total of $3.5 million on abandonment activities.
Surge anticipates spending a further $6.5 to $8.5 million on abandonment activities in the second half of 2021, through a combination of its internal abandonment program and the SRP abandonment program, which will continue to significantly reduce the Company's decommissioning liability.
Surge will also be participating in a significant emissions reduction project in conjunction with the Astra acquisition, whereby the Company will complete a 45km pipeline project to conserve natural gas from a number of operated fields in SE Saskatchewan. The project will cost approximately $12 million and is partially funded by the Natural Resources Canada Emissions Reduction fund, and will reduce flared gas volumes in the area by approximately 95 percent. This project is expected to be completed in Q4/21.
In addition, Surge is proceeding with a gas conservation project at its operated Shaunavon asset in SW Saskatchewan that will tie in approximately 90 percent of the gas volumes currently being flared from that asset. This project is also expected to be completed in Q4/21.
Surge strives to be a leader in reducing the impact of its operations on the environment and is committed to producing energy in a safe, responsible, and sustainable manner.