Surge Energy Inc. Announces Intent To Reinstitute Base Dividend On July 15, 2022; Large New Light Oil Pool Extension And Land Acquisition At Steelman In SE Saskatchewan; Update On Term Debt And Credit Facility; Intent To Redeem 5.75% Convertible Debentures; First Quarter Financial & Operating Results; And 2022 Outlook


CALGARY, AB, May 5, 2022 /CNW/ – Surge Energy Inc. (“Surge” or the “Company”) (TSX: SGY) is pleased to announce: 1) the intent to reinstitute the Company’s base dividend on July 15, 2022;  2) the successful acquisition of strategic, core area lands in SE Saskatchewan at a recent Crown sale;  3) the receipt of an additional $30 million of term debt financing under the same terms and conditions as its existing 5-year term debt facility (the “Term Debt Facility”);  4) the intent to redeem the Company’s $44.5 million of 5.75% convertible debentures for cash;  5) the reconfirmation and extension of Surge’s $150 million first lien credit facility (the “First Lien Credit Facility”);  6) the Company’s financial and operating results for the quarter ended March 31, 2022; and  7) Surge’s 2022 Outlook.

INTENT TO REINSTITUTE BASE DIVIDEND ON JULY 15, 2022

With crude oil prices now in excess of US$100 WTI per barrel, which is significantly above the Company’s US$85 WTI guidance price for crude oil in 2022, Surge is pleased to announce its intention to resume its base cash dividend distribution, payable on a monthly basis.

At current strip commodity prices for crude oil and natural gas, Management projects that Surge’s net debt target range will be achieved during Q3/22. On this basis, the Company anticipates reinstating its base annual cash dividend expected to be $0.42 per share (3.5 cents per month), payable on July 15, 2022 to holders of the Company’s common shares (“Common Shares”) of record at the close of business on June 30, 2022. Any anticipated dividend payment will be subject to the approval of Surge’s Board of Directors at the time of declaration.

On an annualized basis, this base cash dividend is equal to approximately 20 percent of Surge’s previously guided annual 2022 free cash flow1 utilizing a US$85 WTI per bbl crude oil pricing assumption2.

With the majority of the Company’s mandated fixed price crude oil hedges for 2022 expiring in less than two months, Surge has resumed its regular, ongoing risk management program. This orderly program is designed to set price floors that protect Surge’s dividend and capital programs, while also providing participation in a rising commodity price environment.

The monthly cash dividend is expected to be designated as an “eligible dividend” for Canadian federal and provincial income tax purposes. Dividends paid to shareholders who are non-residents of Canada will be subject to Canadian non-resident withholding taxes.

NEW LIGHT OIL POOL EXTENSION AND LAND ACQUISITION AT STEELMAN IN SE SASKATCHEWAN

Surge is pleased to announce that drilling on its operated, light oil, core area assets at Steelman in SE Saskatchewan has delivered better than anticipated results. The Company has been actively drilling in SE Saskatchewan since its acquisition of Astra Oil Corp. and Fire Sky Energy Inc. in 2H, 2021.

The Company’s most recent 4.0 gross (2.5 net) wells drilled at Steelman in Q1/22 have continued to deliver strong results, producing at an average IP30 rate of more than 2503 boepd. These four wells have been independently evaluated as some of the best wells drilled in Saskatchewan to date this year4, and at current oil prices these wells are anticipated to pay out in less than 50 days5.

In addition to these excellent drilling results, Surge was also successful at a recent, highly competitive, Saskatchewan Crown land sale at Steelman. As a result, the Company is pleased to announce that it has acquired the majority of the targeted prospective acreage on this exciting new light oil Frobisher pool extension. With Surge’s success at the Crown land sale, the Company now estimates it has added up to 40 gross (40.0 net) incremental, highly economic, light oil Frobisher drilling locations on the newly acquired Crown lands – directly offsetting the recent successful drilling results noted above.

Furthermore, Surge’s integrated geotechnical modeling on the new pool extension has added internally estimated original oil in place (“OOIP6“) of over 20 million barrels (15 million barrels net) on the new lands. The Company now internally estimates combined OOIP of over 72 million barrels (53 million net) at its Steelman Frobisher pool.

TERM DEBT UPDATE, INTENTION TO REDEEM 5.75% CONVERTIBLE DEBENTURES FOR CASH, AND CREDIT FACILITY UPDATE

The Company’s Term Debt Facility provider has exercised their previously announced right to deliver an additional $30 million of term debt financing (under the same terms and conditions as its existing five-year Term Debt Facility) to Surge, providing the Company with significant incremental liquidity. Management anticipates that, at current commodity prices, the $30 million in gross proceeds, combined with a portion of Surge’s forecasted free cash flow, will be used to settle the Company’s $44.5 million of 5.75% convertible debentures for cash prior to their maturity on December 31, 2022.

Concurrently, Surge has reconfirmed and extended its existing $150 million First Lien Credit Facility, which was drawn only $96.8 million at March 31, 2022. The maturity of the newly reconfirmed First Lien Credit Facility is now extended through to May 31, 2024.

The addition of the incremental Term Debt Facility proceeds, combined with the intention to redeem the 5.75% convertible debentures for cash, will provide Surge with a simplified debt capital structure, significant liquidity, and no debt capital maturities through to mid-2024.

OPERATIONS UPDATE: SUCCESSFUL Q1/22 DRILLING PROGRAM AT SPARKY AND SE SASKATCHEWAN

Surge completed its Q1/22 capital program drilling 23 (21.5 net) wells, with three rigs active in the quarter. This program was comprised of 14.0 net wells in the Company’s Sparky core area, and 7.5 net wells in Surge’s SE Saskatchewan core area for total expenditures on property, plant, and equipment of $43.0 million. Furthermore, the Company completed an additional 6.0 net wells in Q1/22 that were drilled in Q4/21.

In recent months, Management has been successful in adding significant organic growth opportunities across its core areas. On this basis, the Company has added more than 10 net sections of highly prospective land. These strategic core area land acquisitions have added an incremental 79 gross (70.0 net) drilling locations7 to Surge’s deep 13 year drilling inventory at a total cost of $9.9 million, including the exciting SE Saskatchewan land sale at Steelman discussed above.

The Company is currently monitoring the impact of cost inflation, labour shortages, and global supply chain challenges on its 2022 capital and operating expense guidance. Surge’s Q1/22 capital program tracked the Company’s 2022 budget, and the Company will continue to monitor the impact of these inflationary pressures over the second half of 2022 and into 2023.

Q1 2022 FINANCIAL & OPERATING HIGHLIGHTS

During the first quarter of 2022, Surge delivered cash flow from operating activities of $52.2 million, an increase of 236% as compared to Q1/21 cash flow from operating activities of $15.6 million. Additionally, the Company delivered adjusted funds flow8 of $62.9 million in Q1/22, an increase of 299% compared to Q1/21 adjusted funds flow of $15.8 million.

Surge reported a realized loss on financial contracts of $28.8 million in Q1/22, primarily due to fixed price oil hedging relating to the corporate acquisitions that closed in late 2021. The Company generated adjusted funds flow before realized gains or losses on financial contracts of $91.7 million in Q1/22 (with a Q1/22 average oil price of US$94.29 WTI per barrel), an increase of 181% over $32.6 million in Q1/22.

As previously announced, the Company’s production in Q1/22 was impacted by a contained fire at one of its SE Saskatchewan oil batteries. Thanks to the efforts of Surge’s Emergency Response Committee and local service providers, the Company is pleased to reaffirm that no injuries or significant environmental problems occurred in relation to the fire. Production from the affected areas resumed in late February 2022. The impact on average production from this incident, along with unusually cold weather in January 2022, was approximately 700 boepd for Q1/22.

Highlights from the Company’s Q1 2022 financial and operating results include:

FINANCIAL AND OPERATING HIGHLIGHTS

OUTLOOK: SGY – POSITIONED FOR OUTPERFORMANCE IN 2022 AND BEYOND

  • Delivered Q1/22 cash flow from operating activities of $52.2 million, an increase of 236% over Q1/21 cash flow from operating activities of $15.6 million;
  • Delivered adjusted funds flow of $62.9 million in Q1/22, an increase of 299% over Q1/21 adjusted funds flow of $15.8 million;
  • Achieved average daily production of 20,550 boepd (85% liquids) during Q1/22, an increase of 24% over Q1/21 production of 16,582 boepd (84% liquids);
  • Successfully drilled 23.0 (21.5 net) wells in Q1/22, with drilling activity strategically focused in the Company’s Sparky and SE Saskatchewan, conventional, light and medium gravity crude oil core areas; and
  • Reduced net debt8 by $15.7 million as compared to December 31, 2021 while concurrently completing the Q1/22 capital program for $43.0 million.

FINANCIAL AND OPERATING HIGHLIGHTS

Three Months Ended March 31,

($000s except per share amounts)

2022

2021

% Change

Financial highlights

Oil sales

157,440

69,956

125 %

NGL sales

4,053

1,948

108 %

Natural gas sales

7,631

8,790

(13)%

Total oil, natural gas, and NGL revenue

169,124

80,694

110 %

Cash flow from operating activities

52,182

15,550

236 %

Per share – basic ($)

0.63

0.39

61 %

Per share diluted ($)

0.63

0.39

61 %

Adjusted funds flow1

62,893

15,757

299 %

Per share – basic ($)1

0.75

0.39

91 %

Per share diluted ($)

0.75

0.39

91 %

Net income (loss)

(21,868)

(9,985)

119 %

Per share basic ($)

(0.26)

(0.25)

4 %

Per share diluted ($)

(0.26)

(0.25)

4 %

Expenditures on property, plant and equipment

42,968

31,898

35 %

Net acquisitions and dispositions

(102,591)

nm

Net capital expenditures

42,968

(70,693)

nm

Net debt1, end of period

315,770

303,334

4 %

Operating highlights

Production:

Oil (bbls per day)

16,760

13,422

25 %

NGLs (bbls per day)

691

583

19 %

Natural gas (mcf per day)

18,592

15,462

20 %

Total (boe per day) (6:1)

20,550

16,582

24 %

Average realized price (excluding hedges):

Oil ($ per bbl)

104.38

57.91

80 %

NGL ($ per bbl)

65.17

37.12

76 %

Natural gas ($ per mcf)

4.56

6.32

(28)%

Netback ($ per boe)

Petroleum and natural gas revenue

91.45

54.07

69 %

Realized gain (loss) on commodity and FX contracts

(15.58)

(11.27)

38 %

Royalties

(15.36)

(5.68)

170 %

Net operating expenses1

(19.28)

(18.09)

7 %

Transportation expenses

(1.50)

(1.03)

46 %

Operating netback1

39.73

18.00

121 %

G&A expense

(2.18)

(1.98)

10 %

Interest expense

(3.55)

(5.46)

(35)%

Adjusted funds flow1

34.00

10.56

222 %

Common shares outstanding, end of period

83,357

39,975

109 %

Weighted average basic shares outstanding

83,357

39,975

109 %

Weighted average diluted shares outstanding

83,357

39,975

109 %

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 The Company views this change calculation as not meaningful, or “nm”.

Surge is an intermediate light and medium gravity crude oil producer, with an estimated 13 year development drilling inventory comprising more than 1,000 internally estimated net development drilling locations. The Company confirms its 2022 production exit rate guidance of 21,500 boepd (86% liquids).

With 2.6 billion of net (internally estimated) OOIP9, an approximate 6.5% recovery factor to date, and dominant positions in two top tier medium and light gravity crude oil growth plays at Sparky and SE Saskatchewan, Surge is poised to deliver strong operational results in 2022 and beyond. Further, with over $1.3 billion in tax pools and an attractive balance sheet, the Company will deliver to its stakeholders a combination of:

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