CALGARY – Surge Energy Inc. has been a busy of late, closing acquisitions of two of the more active junior oil producers in southeast Saskatchewan – Astra Oil Corp. and Fire Sky Energy Inc.
On Nov. 3, Surge announced its third quarter earnings via press release. The company’s financial and operating results for the third quarter of 2021 include only a partial quarter of operational and financial contribution from the previously announced acquisition of Astra which closed on Aug. 18, 2021. Additionally, Surge’s financial and operating results for the third quarter of 2021 include no impact from the previously announced acquisition of Fire Sky, which closed on Nov. 1, 2021.
During the third quarter of 2021, Surge completed the strategic acquisition of Astra Oil Corp. adding highly concentrated light oil reserves, production, land, and operations in southeast Saskatchewan. Astra’s land base was largely in the Pinto, Lampman, and Viewfield areas. Astra had been one of the most active junior producers in the area, with a regular drilling program operating for several years. The Astra assets included more than 4,100 boepd (90 per cent liquids) of operated, light oil production, focused primarily in southeast Saskatchewan with an operating netback1 of more than $42 per boe at US $65 WTI pricing, which was the case when the announcement was made in June.
The deal involved the issuance of approximately 229 million common shares of Surge and approximately $13.5 million in assumed debt. The total value of the purchase came in at $160 million. The deal also saw Surge consolidate its shares on a 8.5:1 basis.
Fire Sky
Subsequent to the quarter, on Nov. 1, Surge announced the closing of the acquisition of Fire Sky, a private Estevan-based company with light oil assets focused in southeast Saskatchewan for total consideration of $58 million/ That was done through 11.2 million Surge shares and the assumption of $3.0 million of Fire Sky debt. The deal was announced on Oct. 4.
Headed by Warren Waldegger, Fire Sky was originally spun out from another privately company based in Estevan, T. Bird Oil. The Fire Sky acquisition expands Surge’s position in its new southeast Saskatchewan core area, adding an additional 1,500 boepd of light oil production.
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The Fire Sky assets include a large internally estimated development drilling inventory of more than 100 locations, according to Surge. Additionally, they are “an excellent operational fit providing numerous synergies with the attractive light oil assets recently acquired through the Astra transaction.”
In the initial announcement, Surge said Fire Sky has an attractive corporate Licensee Liability Rating (LLR) in Saskatchewan of 3.5, with a total undiscounted decommissioning liability of only $9.8 million. Fire Sky also had an operating netback of more than $52 per boe at US$70 WTI pricing.
Surge said these two strategic acquisitions are consistent with the company’s defined business model of acquiring high quality, operated, light and medium gravity, conventional crude oil reservoirs with large original oil in place (OOIP1) and low recovery factors. Following these acquisitions, Surge is now a 21,500 boepd (86 per cent liquids) intermediate light and medium gravity oil producer, with over 975 internally estimated net development drilling locations, providing an estimated 13-year development drilling inventory.
Sparky
In addition to the acquisitions the company has now completed its 2H/21 23 gross (23.0 net) well Sparky drilling program, with a 100 per cent success rate. All of the wells from the 2H/21 Sparky drilling program are scheduled to be on stream and optimized prior to the end of November 2021.
During the third quarter of 2021, Surge’s cash flow from operating activities increased by 218 per cent, from $8.3 million in Q2/21 to $26.3 million in Q3/21. Additionally, the company’s adjusted funds flow also increased by 105 per cent, from $13.6 million in Q2/21 to $27.8 million in Q3/21.
This is Astra’s Lampman battery, now part of Surge. Photo by Brian Zinchuk
Surge’s cash flow from operating activities and adjusted funds flow in Q3/21 were negatively impacted by realized losses on fixed price commodity contracts, totaling $23.2 million. These required fixed priced oil hedge positions were primarily entered into during the volatile price environment in 2020. Surge projects that, at current strip oil prices, the cash flow impact from these hedge positions will moderate significantly in the coming months as the hedges expire.
Production in Q3/21 averaged 17,642 boepd, up 17 percent from Q2/21 production levels of 15,132 boepd. The company’s Q3/21 production levels included only a partial quarter of production from the Astra acquisition and no impact from the Fire Sky acquisition.
This is Surge’s updated guiudance for 2022:
|
Guidance |
@ US $75 WTI* |
@ US $80 WTI* |
@ US $85 WTI* |
|
Exit 2021 production |
21,500 boepd (86% liquids) |
||
|
Average 2022 production |
21,500 boepd (86% liquids) |
||
|
2022 Exploration and Development Capital Expenditures |
$120 million |
||
|
2022 Adjusted funds flow1 ($MM) |
$270 |
$295 |
$315 |
|
2022 Adjusted funds flow per share1 |
$3.23 |
$3.53 |
$3.77 |
|
2022 Cash flow from operating activities ($MM) |
$255 |
$280 |
$300 |
|
2022 Free cash flow ($MM) |
$135 |
$160 |
$180 |
|
2022 Free cash flow per share |
$1.62 |
$1.92 |
$2.16 |
|
2022 All-in payout ratio1 |
47% |
43% |
40% |
|
2022 Exit Net debt to annualized Q4/22 adjusted funds flow1 |
0.6x |
0.5x |
0.4x |
Abandonments
Surge continues to reduce the impact of its operations on the environment and reported that it has abandoned over 190 wells in the first nine months of 2021. The company spent $3.0 million on abandonment activities during the third quarter of 2021 and has now spent $6.6 million to date during 2021. These activities included the abandonment of inactive well bores and the decommissioning of inactive pipelines throughout its operating areas.
Additionally, Surge has now completed the previously announced 45-kilometre gas gathering infrastructure system in southeast Saskatchewan. This pipeline allows the company to conserve gas at critical facilities and is anticipated to reduce emissions by over 95 percent from its main operating fields in the area.
Surge said it, “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.”
In a release, Surge said its management remains excited regarding the company’s exposure to rising crude oil prices in 2022, following its strategic positioning activities throughout 2021. The company anticipates generating significantly higher operating netbacks and cash flow from operating activities in 2022 at current commodity prices.
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