Surge Energy Inc. Announces Accretive USD 320 Million Core Area Light Oil Acquisition
CALGARY: Surge Energy Inc. ("Surge" or the "Company") (TSX: SGY) and Mount Bastion Oil and Gas Corp. ("Mount Bastion" or "MBOG") have announced that they have entered into an arrangement agreement (the "Arrangement Agreement"), pursuant to which Surge has agreed to acquire all of the issued and outstanding common shares of MBOG ("MBOG Shares") by way of a statutory arrangement (the "Transaction").
Surge anticipates increasing its dividend by 25 percent, from $0.10 per share annually ($0.00833 per month) to $0.125 per share annually ($0.0104 per month), while improving Surge's all-in payout ratio from 89 percent to 87 percent. Any dividend increase will be subject to the approval of Surge's Board of Directors with consideration given to the business environment upon closing of the Transaction.
The MBOG Assets include 5,500 boepd (98 percent liquids) of operated, light oil production from the structural reef complexes within the geological Beaverhill Lake Group - with a corporate decline of 23 percent. The Transaction results in a 22,500 boepd (85 percent oil-weighted), light and medium gravity, intermediate, growth and dividend paying company. The MBOG Assets are located near Surge's core, waterflooded, light oil pools at Nipisi and Nipisi South in Western Alberta.
The Transaction has the following key benefits to Surge shareholders:
11 percent accretive to Surge's forecast 2019 adjusted funds flow per share;
Increases oil and liquids weighting from 81 percent to 85 percent;
Increases Surge's light oil weighting to 55 percent;
Increases Surge's operating netback by 12 percent to over $31 per boe3;
Lowers Surge's corporate decline to below 24 percent;
Surge's all-in payout ratio1 improves to 87 percent from 89 percent, after accounting for the anticipated 25 percent increase to the annual dividend;
Adds over 600 million barrels of net combined internally estimated OOIP under management; and
Increases Surge's December 31, 2017 independently engineered net asset value (Sproule) from $6.06 per share to an estimated $6.52 per share4.
1 Adjusted funds flow, adjusted funds flow per share, net operating income, and all-in payout ratio are non-IFRS measures. See the Non-IFRS Measures section in this press release.
2 Original Oil in Place (OOIP) is the equivalent to Discovered Petroleum Initially In Place (DPIIP) for the purposes of this press release. "Internally estimated" means an estimate that is derived by Surge's internal APEGA certified Engineers and Geologists (who are also Qualified Reserve Evaluators) and prepared in accordance with National Instrument 51-101.
3 Based on pricing averaging as follows: US$65.00WTI/bbl; CAD$86.67WTI/bbl; EDM CAD$77.33/bbl; WCS CAD $60.00/bbl; AECO $1.95/mcf
Paul Colborne, President and CEO of Surge stated: "We believe that this Transaction is an exciting opportunity for both Surge and MBOG shareholders. Shareholders in the combined Company will participate in the newest, intermediate crude oil, growth and dividend paying company in Canada, while benefitting from Surge's exciting growth opportunities, our top tier all-in payout ratio, and Surge's excellent balance sheet; together with Mount Bastion's light oil netbacks, and its long life asset base".
The Transaction will be funded through a combination of cash, common shares of Surge, and the assumption of positive working capital from MBOG, structured to minimize dilution to Surge shareholders while improving Surge's balance sheet. The cash portion of the Transaction will be funded from the projected, revised credit facility and does not require any external financing.
The Company estimates that Q4 2019 net debt to annualized adjusted funds flow ratio will be 1.62 times. Surge estimates bank debt for the combined entity of $390 million at closing on a projected bank line of $525 million. The Company estimates that it will have approximately $135 million of undrawn credit avaibility at closing. All of the directors and officers of MBOG and its largest shareholder, collectively representing approximately 70 percent of the outstanding MBOG Shares, have entered into support and lock-up agreements to vote in favor of the Transaction and have agreed to certain escrow agreements with respect to any Surge Shares received from the Transaction for a period of nine months following the completion of the Transaction, subject to certain exceptions.
Operational platform to continue to execute on sustainable growth plus income model:
Over 2.4 billion barrels of net combined, internally estimated, conventional OOIP - with a 6.9 percent recovery factor to date;
Combined proven plus probable year end 2017 reserves of over 120 million boe (90 percent oil);
22,500 boepd light and medium gravity oil producer (85 percent oil and liquids weighted);
Combined forecasted 2019 adjusted funds flow of $230 million;
Corporate base decline of less than 24 percent;
Development drilling upside: >800 locations5 (internally estimated); provides drilling inventory of more than 10 years; and
>14 year reserve life index (proved plus probable).