Q1 2023 FINANCIAL & OPERATING HIGHLIGHTS
Q1/23 is the Company’s first quarter that includes the full impact of the strategic acquisition of high quality, core area assets from Enerplus (the “Acquisition”), which closed in late Q4/22. In Q1/23 Surge delivered an increase in production of more than 22 percent compared to Q1/22, with production increasing from 20,550 boepd (85 percent liquids) to a record 25,138 boepd (87 percent liquids) in the current quarter. Surge’s December 31, 2023 production exit rate guidance is 25,000 boepd.
West Texas Intermediate (“WTI”) crude oil prices in Q1/23 decreased by more than 19 percent (i.e. a drop of over US$18 per barrel) compared to Q1/22. Additionally, Western Canadian Select (“WCS”) differentials to WTI also widened substantially in Q1/23, resulting in a benchmark WCS crude oil price of C$69.46 per barrel, a decrease of 31 percent compared to a Q1/22 WCS price of C$101.01 per barrel. The WCS differential to WTI in Q1/23 was US$24.79 per barrel. Approximately fifty percent of Surge’s crude oil production is correlated to WCS pricing.
Encouragingly, WCS differentials have quickly returned to long term historical levels, with both April, 2023 and May, 2023 WCS differentials settling below US$16 per barrel. Surge Management is optimistic that WCS differentials could even improve beyond these levels as the Trans Mountain pipeline expansion project comes online (currently forecast for early 2024).
Despite the much lower crude oil price environment experienced during the quarter, Surge’s cash flow from operating activities increased by four percent to $54.5 million in Q1/23, up from $52.2 million in Q1/22. Furthermore, after adjusting for changes in non-cash working capital, the Company delivered adjusted funds flow1 (“AFF”) of $63.3 million in Q1/23, which represents an increase of one percent compared to Q1/22 AFF of $62.9 million.
These positive financial results are primarily due to the accretive Acquisition, Surge’s exciting Frobisher light oil drilling results in SE Saskatchewan, and the expiry of the Company’s previously mandated 2022 fixed price crude oil hedges.
During the quarter, Surge returned $11.7 million to its shareholders in the form of cash dividends pursuant to the Company’s base cash dividend of $0.48 per share per annum (paid monthly). The cash dividends paid during the quarter represent less than 19 percent of Surge’s Q1/23 AFF.
Additional highlights from the Company’s Q1/23 financial and operating results include:
- Reported Surge’s first complete quarter including the Acquisition, with production from the acquired assets contributing approximately 3,800 boepd (99 percent liquids) to Q1/23 production;
- Achieved record average daily production of 25,138 boepd (87 percent liquids) during Q1/23, an increase of over 22 percent compared to Q1/22 production of 20,550 boepd (85 percent liquids);
- Successfully drilled 18 gross (17.9 net) wells, with activity focused in the Company’s Sparky and SE Saskatchewan conventional light and medium gravity crude oil core areas; and
- Announced that the Company’s independently engineered December 31, 2022 (Sproule) Proven Developed Producing (“PDP”) Net Asset Value (“NAV”) increased by 107 percent year over year, from $3.51 per share to $7.27 per share.
FINANCIAL AND OPERATING HIGHLIGHTS
|
FINANCIAL AND OPERATING HIGHLIGHTS |
Three Months Ended March 31, |
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|
($000s except per share amounts) |
2023 |
2022 |
% Change |
|
Financial highlights |
|||
|
Oil sales |
152,664 |
157,440 |
(3) % |
|
NGL sales |
3,618 |
4,053 |
(11) % |
|
Natural gas sales |
5,688 |
7,631 |
(25) % |
|
Total oil, natural gas, and NGL revenue |
161,970 |
169,124 |
(4) % |
|
Cash flow from operating activities |
54,506 |
52,182 |
4 % |
|
Per share – basic ($) |
0.56 |
0.63 |
(11) % |
|
Per share diluted ($) |
0.55 |
0.63 |
(13) % |
|
Adjusted funds flowa |
63,331 |
62,893 |
1 % |
|
Per share – basic ($)a |
0.65 |
0.75 |
(13) % |
|
Per share diluted ($) |
0.64 |
0.75 |
(15) % |
|
Net income (loss) |
14,789 |
(21,868) |
nmb |
|
Per share basic ($) |
0.15 |
(0.26) |
nm |
|
Per share diluted ($) |
0.15 |
(0.26) |
nm |
|
Expenditures on property, plant and equipment |
45,733 |
42,968 |
6 % |
|
Net acquisitions and dispositions |
(678) |
— |
nm |
|
Net capital expenditures |
45,055 |
42,968 |
5 % |
|
Net debta, end of period |
331,917 |
315,770 |
5 % |
|
Operating highlights |
|||
|
Production: |
|||
|
Oil (bbls per day) |
21,055 |
16,760 |
26 % |
|
NGLs (bbls per day) |
721 |
691 |
4 % |
|
Natural gas (mcf per day) |
20,172 |
18,592 |
8 % |
|
Total (boe per day) (6:1) |
25,138 |
20,550 |
22 % |
|
Average realized price (excluding hedges): |
|||
|
Oil ($ per bbl) |
80.57 |
104.38 |
(23) % |
|
NGL ($ per bbl) |
55.78 |
65.17 |
(14) % |
|
Natural gas ($ per mcf) |
3.13 |
4.56 |
(31) % |
|
Netback ($ per boe) |
|||
|
Petroleum and natural gas revenue |
71.59 |
91.45 |
(22) % |
|
Realized gain (loss) on commodity and FX contracts |
(0.88) |
(15.58) |
(94) % |
|
Royalties |
(12.84) |
(15.36) |
(16) % |
|
Net operating expensesa |
(22.26) |
(19.28) |
15 % |
|
Transportation expenses |
(1.79) |
(1.50) |
19 % |
|
Operating netbacka |
33.82 |
39.73 |
(15) % |
|
G&A expense |
(2.04) |
(2.18) |
(6) % |
|
Interest expense |
(3.80) |
(3.55) |
7 % |
|
Adjusted funds flowa |
27.98 |
34.00 |
(18) % |
|
Common shares outstanding, end of period |
98,334 |
83,357 |
18 % |
|
Weighted average basic shares outstanding |
97,087 |
83,357 |
16 % |
|
Stock based compensation dilution |
2,296 |
— |
100 % |
|
Weighted average diluted shares outstanding |
99,383 |
83,357 |
19 % |
|
a This is a non-GAAP and other financial measure which is defined in the Non-GAAP and Other Financial Measures section of this document. |
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b The Company views this change calculation as not meaningful, or “nm”. |
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OPERATIONS UPDATE: STRONG DRILLING SUCCESS IN SE SASKATCHEWAN AND SPARKY CORE AREAS
Surge continued its strong operational momentum in Q1/23, with a drilling rig active in each of its Sparky and SE Saskatchewan core areas. The Company budgets drilling 67.0 net wells in 2023, with this program comprised of 37.0 net Sparky wells and 30.0 net SE Saskatchewan wells. The Company plans to commence its post-breakup drilling program in both the Sparky and SE Saskatchewan core areas on or about June 1, 2023.
During Q1/23, Surge successfully drilled a total of 18 gross (17.9 net) wells, spending a total of $45.7 million including expenditures on property, facilities, and equipment. Q1/23 capital expenditures were in line with the Company’s budget estimates. Drilling operations during the first quarter focused on Surge’s medium and light gravity crude oil assets in its Sparky and SE Saskatchewan core areas.
In the Company’s Sparky core area, Surge drilled 10 gross (10.0 net) wells in the first quarter of 2023 with a 100 percent success rate (the average IP30 of the 10 well program being greater than 125 bbl/d2). Two gross (2.0 net) of these 10 wells were drilled on lands located in the recently acquired Cadogan property, which was obtained through the Enerplus Acquisition. These two Sparky wells are still cleaning up and are currently producing at a combined rate of 300 bopd. Surge has identified an internally estimated 32.0 net follow up Sparky drilling locations2 on the acquired Cadogan property alone.
Surge’s current Sparky core area production now exceeds 11,000 boepd (>85 percent liquids; 25° API average oil quality) for the first time in the Company’s history, up over 800 percent from 1,200 boepd eight years ago. Surge has a 12 year Sparky drilling inventory of more than 480 internally estimated drilling locations2, as well as attractive waterflood upside.
In Q1/23, Surge drilled 8 gross (7.9 net) wells in the Company’s SE Saskatchewan core area. Drilling operations primarily targeted light oil in the prolific Frobisher formation. The average Surge SE Saskatchewan well drilled in Q1/23 came on production with an IP30 of more than 250 boepd (90 percent light oil). Surge’s average internal Frobisher type curve has an IP30 of 240 boepd and a payout of approximately 11 weeks at US$80 WTI flat pricing2.
Surge continues to add significant organic drilling inventory in SE Saskatchewan, and now has an inventory of more than 275.0 net drilling locations, with more than 160.0 net locations targeting the prolific Frobisher horizon.
Since the start of 2023, Surge has continued to execute on the Company’s organic land acquisition strategy, adding 4.0 net sections and 28 gross (28.0 net) drilling locations3 through Crown land sales and freehold leasing. Included in this are 14.0 net drilling locations on the Frobisher trend in SE Saskatchewan. Surge intends to drill 4 gross (4.0 net) wells on these newly acquired lands in 2023.
OUTLOOK: POSITIONED FOR SUCCESS IN 2023 AND BEYOND
Surge is a 25,000 boepd (87 percent liquids) intermediate, publicly traded oil company that is focused on enhancing shareholder returns through free cash flow generation. The Company’s defined operating strategy is based on acquiring and developing high quality, conventional, light and medium gravity crude oil reservoirs, using proven technology to enhance ultimate oil recoveries.
With more than 3.0 billion barrels of net (internally estimated) original oil in place (“OOIP”)4, a low 7.7 percent recovery factor at year end 2022, and a dominant operational position in two of the most economic5 light and medium gravity crude oil plays in Canada, Surge believes that the Company is poised to deliver strong results both operationally and financially in 2023 and beyond.
In addition, with over $1.4 billion in estimated tax pools at December 31, 2022, Surge is committed to delivering its shareholders a combination of:
- continued net debt repayment (increasing Surge’s NAV per share);
- a $0.48 per share annual base cash dividend, paid monthly;
- share buybacks;
- a modest production per share growth wedge; and
- potential for variable or special dividends.
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