Surge Energy - April 2017

Suite 2100, 635 – 8th Ave. SW Calgary, AB T2P 3M3
Phone 403.930.1010  •  Website: www.surgeenergy.ca
Content updated periodically  • Dated April 24, 2017

Ticker Symbol: SGY-T

View All Posts Tagged SGY-T

FINANCIAL HIGHLIGHTS

Shares Outstanding

225.8M

Market Capitalization

$598M

Q1/17 Production Estimate

13,800 boe/d

Enterprise Value

$796M

Intermediate Cap Company

Current Price (04/21/17)

$2.65

Attractive Purchase

Under $2.00

Table-Pounding BUY

Under $1.80

12 Month Target

$3.70/share

Bull Market Peak

$8.50/share

BACKGROUND

Surge is a Calgary-based, oil focused, E&P Company that has high quality crude oil reserve production and low operating costs. Surge’s three 100% operated core properties (Shaunavon, Valhalla, and Sparky) have large Original Oil In-Place (OOIP) crude reservoirs with low recovery factors and capability for large increases in production as new technologies are applied. SGY has a long life RLI with an extensive 14 year inventory. In addition several quality water flood projects provide long term growth opportunities with low decline rates. SGY estimates their current base decline rate, at less than 25%, necessitates drilling only 13 wells and spending $50M to keep production flat.

INVESTMENT PARAMETERS: PEOPLE

TitleManagementShares Owned
President & CEOPaul Colborne4.0M
CFOPaul Ferguson82K
COODan Brown617K
TitleManagementShares Owned
VP LandMargret Elekes402K
VP ProductionMurray Bye389K
VP GeosciencesGerry deLeeuw224K

SOURCE: www.sedi.ca April 2017

INVESTMENT PARAMETERS: PROJECTS

SGY has three core areas with the ability to show moderate volume growth that will allow them to replace declines, grow moderately at 3-5% per year and pay a monthly dividend, which was raised on April 19th to $0.095 per year, paid monthly, providing nearly a 3.5% yield. We expect SGY to add a fourth core area over the next year which should add additional growth opportunity.

Upper and Lower Shaunavon (Sask)

This core area has over 465 Mb OOIP and in 2016, SGY drilled 24 wells which averaged in at greater than 200 boe/d at a cost of $1.1M per well. Drill time has been cut from 12.4 days to a recent six days per well with the application of horizontal monobore technology. Over time, with water floods, they estimate that the recovery factor could rise to 13% of the reserves in place from the 1% recovery rate so far. The oil has an API of 21-23 degrees and 4-10 metres of pay. SGY has over 200 wells in inventory for the Upper Shaunavon and 100 in the Lower Shaunavon formation. As crude prices recover SGY could drill 20-30 wells per year and raise production to 6,000 boe/d. At US$60/b, the upside could be 7,000 boe/d.

Valhalla (NW AB)

This core area has 150Mb OOIP of 40 degree API crude oil with a 4% recovery so far. SGY’s recent wells have been spectacular with IP rates of 2,000 boe/d and over 1,000 boe/d for 30 day IP’s. Production is from the Doig formation, and costs have been reduced to $3.2M per well. Their “type curve” estimates for 30 day IP’s are at 860 boe/d, so well performance is much better than expected.  To handle the associated natural gas, they built a compressor in the north end of the pool so that the gas can be moved at all times and is not subject to shut-ins. A strategic purchase in the Sexsmith sour gas plant was made in Q4/16 adding to sour gas handling capabilities. Over time with water floods, they estimate that the recovery factor could rise to 23% of the reserves in place. SGY has an inventory of 40 net locations at 200 metre spacing in inventory. To keep production flat they need to drill 5-6 wells per year and therefore have a 10-year inventory.

Sparky (SE AB)

This oil pool has over 130 Mb OOIP of 28 degree oil. The current recovery factor is less than 15%. SGY has over 200 drilling locations. Over time with water floods they estimate that the recovery factor could rise to more than 20% of the reserves. Well costs are $1.0M, down from $2.0M per well versus a few years ago, and the recent wells have produced greater than 110 boe/d. Drill time has fallen from 8.5 days to five days in Q4/16 using the advanced technology monobore drilling. The new Alberta water flood royalty regime helps this play’s economics, with a 5% royalty for the first 9 years. Production has been raised from 470 boe/d in Q2/16, to 2,000 boe/d as of April 18, 2017 upon completing new wells. SGY has a 10-year inventory.

Surge’s Current Three Core Areas

Surge Energy - April 2017

Source: www.surgeenergy.ca

INVESTMENT PARAMETERS: FINANCIAL CAPACITY

  • SGY will be very active in 2017 drilling over 50 wells. Production should grow by 11% this year to 14,325 boe/d on a capex budget of $119M after completing a deal for $37M in their core Sparky area on April 19th. In 2016, SGY had production of 12,888 boe/d, spent $47.7M net and had Cash Flow Per Share (CFPS) of $0.32. In 2017 we see cash flow rising to $82M versus $70.2M in 2016 and for CFPS to rise to $0.36 per share.
  • Surge has a healthy balance sheet and a recently raised line of credit from $250M to $285M. At year-end 2016 they had drawn down only $160.7M on the line. The stock trades at a discount to its Book Value of $3.45 per share at year-end 2016.
  • Our 12 Month Target of $3.70 per share is based upon a 8.4x (below their 1P RLI of 10.2 years) our Q4/17 annualized cash flow estimate of $0.44 per share. SGY would be an Attractive Purchase at under $2.00/share, and a Table Pounding BUY below $1.80/share. Our 12-month target of $3.70 per share and our 3-5 year next Bull Market Peak target value is $8.50 per share providing lots of exciting upside as they execute their program and pay a rising dividend over time.
  • In our 3-5 year Bull Market scenario, we expect SGY to be producing >24,000 boe/d, and have CFPS estimate of greater than $1.50/share which should justify the stock trading at more than $8.50/share.

Balance of Evidence

POSITIVES

  • SGY has been focused on lowering its cost structure and in Q4/16 had operating costs at $12.69/boe. SGY is targeting to lower operating costs by a further $1 per barrel in 2017.
  • SGY has an excellent balance sheet with nearly $90M available on its credit line that can be used for asset purchases or an expanded drill program.
  • We expect SGY to add a 4th core oil area sometime within the next 12-18 months. With the new Alberta regulations on water floods and royalty regime which started in January 2017, it is quite likely that an attractive acquisition could be made. The focus would be on buying 2,000-3,000 boe/d of production with upside from drilling and consolidation opportunities. If they went for a larger sized deal, they would need to raise some equity to complete the transaction.

ISSUES OF CONCERN

  • SGY had 1,056 net wells that were non-producing at the end of 2016. In normal years they spend $4M per year and abandon 80 wells. In 2016, they only spent only $2.2M. With the Government of Alberta pushing for an orderly resolution of the abandoned wells issue, we expect SGY to spend at a faster rate to remove this significant liability.
  • The volatility in commodity prices has created a more defensive posture among energy companies. SGY currently plans on spending less than their forecasted cash flow in 2017. We are more cautious in our commodity price forecast for 2017 than SGY.
  • We expect SGY to take advantage of the upcoming, weaker commodity price to make a fourth core acquisition at favourable terms. SGY’s focus is on oil and a new core area with this commodity. We hope that they do not purchase heavy oil assets which have problematic netbacks at low oil prices.

SURGE ENERGY INC. (SGY-T)

Surge Energy - April 2017

Source: stockcharts.com

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