Surge Energy Announces Fourth Quarter and Year-End 2015 Results

Surge Energy (TSX: SGY) Reports Year-End Results

2015 HIGHLIGHTS

• Completed $465 million in accretive asset sales (at $90,000/boed in 1H/15), setting the stage for a “lower for longer” scenario for crude oil prices, via top tier balance sheet strength.
• Further delineation of the Upper Shaunavon field solidified years of visible drilling inventory. Realized a 30 percent annual reduction for drilling and completion costs for this key asset.
• Delineated a large northern extension at Valhalla which resulted in the top three oil wells in Alberta for both cumulative production, and initial 90 day average rates, in 2015.
• Identified and implemented a facilities solution at Valhalla that has provided firm service processing capacity and de-bottlenecked the field. This strategic investment will provide for a more stable production profile going forward, and reduce the Valhalla processing fee by 50 percent for Surge’s sweet solution gas.
• Implemented a horizontal monobore well design at Eyehill Sparky, and realized a 17 percent reduction in drilling and completion costs.
• Further reduced the Company’s corporate decline rate from 22 percent to 19 percent in 2015, as a result of Surge’s low risk operating strategy and successful waterflood initiatives in the Company’s three core areas.
• Reduced operating expenses in the quarter ended December 31, 2015 to $12.57 per boe from $15.72 per boe for the same period in 2014.
• Gross G&A expense was reduced 36 percent since the fourth quarter of 2014, representing $7.3 million in annualized gross G&A savings.
• Reported “all-in” Proved plus Probable finding and development costs for 2015 of $6.08/boe.
• Utilizing Sproule’s much lower independent engineering price deck – Surge’s 2015 year-end net asset value (“NAV”) per share is $4.88.

Q4/15 HIGHLIGHTS

• Achieved a fourth quarter average production rate of 14,187 boe per day, a 5 percent increase from the previous quarter.
• Surge’s production mix for the quarter was 78 percent liquids, trending towards 2016 guidance of 76 percent.
• Capital expenditures excluding A&D totaled $18.3 million for the fourth quarter. This includes $8.7 million to drill 5 gross (5 net) wells. Total capital also includes $7.7 million in facilities expenditures, including completion of the pipeline to connect Valhalla associated gas production to a sweet gas processing plant located to the north of the field.
• Subsequent to the quarter, Surge signed a definitive agreement to divest its non-core Sunset property inNorthern Alberta for proceeds of $28 million.
• Subsequent to the quarter, Surge also agreed on terms for a facilities sale on select Valhalla facilities. Proceeds of this transaction are expected to be $15 million.
• Pro-forma the $43 million in gross proceeds from the two asset divestures mentioned above, Surge’s net debt as at December 31, 2015 was $117.4 million, which provides for a pro-forma Q4 debt-to-cash flow of 1.9 times.

OPERATIONS OVERVIEW

Shaunavon Results Continue to Outperform; Early Waterflood Response Detected

Highlights from the fourth quarter drilling program include two wells in the southern portion of Surge’s 54 section land block, both of which encountered high quality reservoir.  These wells have averaged 235 bopd over a 90 day period, and ranked in the top five oil wells drilled in Saskatchewan for 2015. As a follow up to the two fourth quarter Upper Shaunavon wells in the south, Surge subsequently drilled two more wells in the same area in the first quarter of 2016.  Both of these wells also encountered high quality reservoir, with excellent porosity levels reaching 18 percent.  Early results indicate that these wells are similar in productive capacity to the two fourth quarter wells.

Surge is also pleased to report that a waterflood response has been detected in a 200m offset oil producer in the Upper Shaunavon waterflood pilot area.  Recent production data from offsetting wells indicates a positive type curve result in the field compared to Surge’s budget.

Surge is currently conducting an internal resource update of the Upper Shaunavon field.  Once definitive waterflood results have been observed, the Company will provide an update to the market.

Processing Options Expanded at Valhalla

During the fourth quarter, the pipeline connecting production of the solution gas from the Valhalla field to sweet gas processing options in the north was finalized and operational in mid-December. More recently, Surge commissioned additional compression capacity in order to maximize delivery to the Company’s firm service and draw down field line pressures.  The Company is currently sending more than 12 mmcf/d of sweet gas to the northern sweet processing facilities.  Surge holds strategic firm transportation at Valhalla, with both area service providers.  Current transportation commitments are aligned with the Company’s outlook for sustained production at Valhalla.

In early 2016 Surge also completed the acquisition of an increased working interest (and operatorship) in the Company’s nearby owned Doe Gas Plant at 8-30-075-09W6.  Surge could ultimately take a significant portion of its associated gas production to the 8-30 plant.

In addition to facilities expansions, Surge recently completed a new well in the north at Valhalla.  The 400m downspaced well encountered virgin reservoir pressure, and the well is currently tracking Surge’s Valhalla type curve.  Recent well tests are encouraging, with performance continuing to improve as the well responds to lower operating line pressures in the field.

Surge anticipates that Valhalla Doig drills will benefit greatly from the revised Alberta royalty legislation that is expected to be in place for 2017.  This is largely due to the change from volume based to cost based calculations during the capital recovery phase of the well life.  A lower overall royalty rate is expected at Valhallamoving forward.

Updated Type Curve at Eyehill Sparky

As previously reported, Surge drilled two new wells at Eyehill in the Sparky formation during the fourth quarter.  These wells were successfully completed with a new horizontal monobore well design.  The Company’s development plan now calls for 1200-1400m lateral length wells at Eyehill.  The two new wells at Eyehill have averaged 112 boe/d (75% oil) over a 90 day period.

Based on a data set of seven longer lateral wells, Surge now expects to recover reserves of 140 mboe on primary recovery, compared to 120 mboe previously.  Coupled with the expectation of lower well costs at Eyehill, Surge now expects this core area to compete for more capital within the Company.

BUSINESS DEVELOPMENT UPDATE

Subsequent to the fourth quarter, Surge signed a definitive agreement divesting the Company’s non-core Sunset property in Northern Alberta.  Recent production rates at Sunset were approximately 700 boe/d, and gross proceeds are $28 million.

The second transaction involves the sale of certain Valhalla area production facilities to a third party. Surge will maintain control of the facilities as operator and will pay the purchaser an annual tariff for the life of the agreement, but will also retain all third party processing revenues generated.  Gross proceeds from this transaction are expected to be $15 million.  The modest increase in operating costs associated with this deal are expected to be completely offset by the decrease in Valhalla processing costs associated with moving Surge’s gas to lower cost sweet processing plants.  In this regard, Surge has monetized the operating cost savings associated with the recent facilities re-configuration at Valhalla.

Surge anticipates the closing of these two transactions to occur prior to the end of the first quarter 2016, contingent upon final bank approval.  The $43 million in gross proceeds will be used to pay down the Company’s existing debt facility.

FINANCIAL UPDATE

2016 Guidance

Surge intends to provide updated 2016 financial guidance post the closing of the two transactions discussed above.  In addition to the closing of these deals, the Company is monitoring an increased production environment at Valhalla due to reduced field pressure as the recently added compression is optimized. The Company expects to have a clearer picture of a stable production profile at Valhalla over the next several weeks.

Liquidity; Bankline

Pro-forma the $43 million in gross proceeds from the two asset divestures mentioned above, Surge’s net debt as at December 31, 2015 was $117.4 million, which provides for a pro-forma Q4 debt-to-cash flow of 1.9 times.

Hedging Update

Subsequent to the fourth quarter, Surge completed several hedge transactions.  In January, the Company elected to monetize a 1,000 bbl/d WTI collar for 2016.  Proceeds from this transaction were $4.7 million, and will be recognized in the financial statements for the first quarter 2016.

Surge has recently entered into new WTI collar contracts, which are summarized below:

2015 RECAP AND OUTLOOK

Despite the volatile commodity price environment, Surge was able to execute on a number of significant accomplishments in 2015.  As stated in the highlights above, the Company’s timely disposition of a significant asset in SE Saskatchewan/Manitoba in the first half of 2015 laid the foundation for successfully operating in a lower commodity price environment.  Surge management also made the proactive decision of reducing the Company’s dividend by a total of 75 percent in 2015.  These strategic decisions proved to be correct and necessary to preserve capital as lower commodity prices persisted throughout 2015, and well into 2016.

In addition to significantly bolstering its balance sheet, the Company advanced development of its three key assets throughout the year.  The significant cost reductions at the Upper Shaunavon have led to improved economics for the play.  Recently, high porosity reservoir in the southern portion of the play has been encountered, resulting in delivery of consistent results above type curve.  Surge anticipates encountering more of this high quality sandstone reservoir as it further delineates the Company’s large, contiguous land base.

Valhalla experienced a transformational year in 2015, in regards to both well results and facilities developments.  Discovery of a high porosity Coquina section in the northern extension of the field resulted in three of the top wells in Alberta for the year.  As the final leg of a facilities expansion is implemented, the Company looks forward to a more reliable and stable production profile at Valhalla.

At Eyehill, implementation of a monobore well design and longer laterals has increased expectations for the Sparky play, and enhanced economics in this area.

Despite the significant decline in oil prices in 2015, the Company’s business model remains intact.  The current corporate decline rate of 19 percent underpins this business model.  Surge management remains committed to being a moderate growth, dividend paying company.  The Company is encouraged by the current business development environment, and the prospects for strengthening its asset base over the balance of the year.  Surge management looks forward to delivering further corporate updates as the year progresses.

FINANCIAL STATEMENTS AND ACCOMPANYING MDA AND ANNUAL INFORMATION FORM:

Surge has filed with Canadian securities regulatory authorities its annual audited consolidated financial statements and accompanying MD&A for the year and three months ended December 31^st, 2015, as well as its Annual Information Form. These filings are available for review at www.sedar.com or www.surgeenergy.ca.