Surge Energy Inc. ("Surge" or the "Company") is pleased to announce a number of recent positive operational and financial developments, including: the sale of certain non-core assets, achievement of Management's Phase 2 net debt1 target, an anticipated increase to Surge's base dividend, the intention to institute a normal course issuer bid ("NCIB"), and a large new Sparky crude oil discovery.
In addition, Surge has scheduled a conference call and webcast in respect of this press release to begin promptly at 9:00 am MT (11:00 am ET) on Thursday, May 30, 2024. The conference call dial-in number is: 1-888-664-6392 or (416) 764-8677.
RECENT POSITIVE DEVELOPMENTS AT SURGE
Over the past several weeks, Surge has experienced a number of positive operational and financial developments, including the following:
1. Sale of Non-Core Assets:
On May 29, 2024, Surge closed the sale of two non-core assets at Shaunavon and Westerose (the "Non-Core Assets"), for total net proceeds of $37.4 million (the "Non-Core Asset Sales"). The Non-Core Assets have associated production of 1,100 boepd and generate annual cash flow from operating activities of approximately $10 million2. The net proceeds from the Non-Core Asset Sales have been applied against the Company's outstanding debt on its revolving first lien credit facility. Following the Non-Core Asset Sales, Surge has approximately $40 million of debt drawn on the Company's recently re-confirmed $210 million first lien credit facility.
After giving effect to the $37.4 million of Non-Core Asset Sale proceeds, the associated interest expense savings, and the timing of the dispositions, Surge estimates an impact of only $5 million on the Company's previously announced 2024e cash flow from operating activities guidance of $295 million2 - while substantially accelerating returns to Company shareholders, as set forth below.
2. Commencement of Phase 2 Return of Capital Framework: Share Buy Backs & Increase to Base Dividend:
Surge is pleased to announce that the Company has now reduced its net debt below Management's previously stated $250 million target and has reached Phase 2 of its Return of Capital Framework.
With the commencement of Phase 2 of the Return of Capital Framework, the Company now forecasts having $52 million of excess free cash flow ("FCF")1 (after base dividends) annually to allocate, based on US$75 WTI per barrel oil pricing.
Surge's Board and Management anticipate allocating the $52 million of excess FCF as follows:
a) $48 million is forecast to be directed to share buybacks and continued net debt reduction. Within Phase 2 of Surge's Return of Capital Framework, the Company is now targeting a return of up to 50 percent of excess FCF to its shareholders by way of share buybacks, with the remainder directed to further reductions to Surge's net debt; and
b) $4 million will be allocated to Surge's base dividend; raising the dividend per share from $0.48 annually to an anticipated $0.52 annually (an 8 percent increase), effective for the July 15, 2024 dividend announcement, payable August 15, 2024. Any dividend increase will be subject to the approval of Surge's Board of Directors, with consideration given to the business environment at the time the dividend is approved.
3. Intention to Institute NCIB:
Surge's Board of Directors and Management have determined that the Company will seek TSX approval to institute a NCIB, pursuant to which Surge would be permitted to acquire up to 10 percent of its issued and outstanding common shares that comprise the public float, through the facilities, rules and regulations of the TSX.
Surge plans to file a notice of intention to make a NCIB with the TSX. The NCIB will be subject to receipt of certain approvals, including acceptance of the notice of intention by the TSX. The NCIB will commence following receipt of all such approvals and will continue for a period of up to one year, further particulars of which will be described in a subsequent press release.
The NCIB provides an additional, strategic, capital allocation alternative for the distribution of excess FCF in order to increase returns to the Company's shareholders. Surge's Board and Management believe that at times the prevailing trading price of Surge common shares does not reflect the underlying value of the common shares, and as such, the repurchase of Surge common shares represents an opportunity to enhance per share metrics.
Surge remains focused on a balanced Return of Capital Framework, incorporating base dividend payments, share buybacks and continued net debt repayment.
4. New Phase 3 Net Debt Target:
Given the 1,100 boepd of Non-Core Asset Sales referred to above, Surge has now adjusted the Company's Phase 3 ("terminal") net debt target to $170 million, from $175 million previously, as set forth in the infographic below:
Within Phase 2 of Surge's Return of Capital Framework, the Company is now targeting a return of up to 50 percent of excess FCF to its shareholders by way of share buybacks, with the remainder directed to further reductions to Surge's net debt.
As Surge reaches its Phase 3 "terminal" net debt target of $170 million, Surge's Management and Board will look to return up to 75 percent of excess FCF to shareholders through share buy backs, while considering the addition of an annual production per share growth target (3 to 5 percent per year).
5. New Sparky Oil Discovery at Hope Valley:
Over the last four years, Surge has now assembled a 32.5 net section block of land on an exciting new Sparky play trend, called Hope Valley. As part of the May 29, 2024 Alberta Crown sale, Surge strategically acquired 7.0 net sections of prospective land on the Hope Valley Sparky play trend.
The Company has now drilled 3 successful multi-leg oil wells in Hope Valley, which has established it as an exciting new crude oil discovery in the Sparky formation. Surge has now identified the potential for up to 100 multi-lateral drilling locations3 at Hope Valley. Surge's technical interpretation of its recent 46 square kilometer 3-D seismic program has allowed the Company to de-risk these future drilling locations in Hope Valley.
Production from Surge's latest Hope Valley well (the first well drilled incorporating the new 3-D seismic data) has exceeded Management's type curve with a IP60 day production average of 255 bopd3.
For the balance of 2024, Surge is planning 6 additional multi-lateral wells targeting the Sparky formation at Hope Valley. In addition, Surge is building a multi-well oil battery to accommodate planned future growth in the area.
6. Strategic Hedging Program:
With oil prices continuing to exceed Surge's 2024 budget guidance price of US $75 WTI, and Western Canadian Select ("WCS") differentials dropping well below budget levels, Surge Management has strategically started to lock in oil price and differential hedges at better than budget guidance price levels.
Surge systematically uses primarily fixed price swaps, collars, and put purchases to lock in commodity prices and crude oil differentials, with the objective of protecting Surge's capital program and dividend, while maintaining significant exposure to the upside in crude oil prices.
7. 2024 Guidance Update:
As a result of the Non-Core Asset Sales referred to above, the Company's 2024 exit rate production guidance is now 24,000 boepd (86 percent light/medium oil). Capital expenditures for 2024 remain unchanged at $190 million and forecast cash flow from operating activities for the balance of 2024 has been reduced by $5 million.
OUTLOOK: THE PATH TO VALUE MAXIMIZATION
Surge's strong cash flow from operating activities and low 24 percent annual corporate production decline, together with an annual capital budget of just $190 million, have combined to generate one of the highest FCF yields6 in the Company's Canadian public peer group7.
Given the early achievement of Surge's Phase 2 net debt target, and the Non-Core Asset Sales, the Company now forecasts having $52 million of excess FCF to allocate, after paying its current base dividend to shareholders.
Consequently, the Company now anticipates allocating $48 million of this excess FCF to share buybacks, and to continued net debt reduction. The remaining $4 million of excess FCF is anticipated to be allocated to an 8 percent increase to Surge's base dividend.
As Surge reaches its Phase 3 "terminal" net debt target of $170 million, Surge's Management and Board will consider adding an annual production per share growth target (3 to 5 percent per year), as well as assess the efficacy of additional share buy backs and/or special dividends.