Surge Energy (SGY.TO and ZPTAF) Q2 Results - Aug 4

[dan_s]

Q2/23 Highlights:

Achieved average production of 23,463 boe per day (87 percent liquids), a 12 percent increase over Q2/22 production of 21,003 boe per day (85 percent liquids) < Volumes below my forecast of 25,050 Boepd, but higher than forecast realized oil price thanks to narrowing differentials, caused operating cash flow to come in slightly above my forecast.

Increased cash flow from operating activities by 11 percent in Q2/23 as compared to Q1/23, up from $54.5 million to $60.6 million, despite lower WTI pricing during the period;

Increased adjusted funds flow by 2 percent as compared to Q1/23, from $63.3 million in Q1/23 to $64.6 million in Q2/23; < Beat my forecast of $60.2 million operating cash flow.

Reduced net debt during the second quarter of 2023 by approximately $20.1 million, while spending $30.6 million on property, plant and equipment, and distributing $11.8 million in cash dividends to shareholders in Q2/23;

The Company spud 11.8 net (13 gross) wells, and rig released 8.8 net (10 gross) wells during the quarter, with all wells expected to be completed and brought on stream in mid-Q3/23; and

Safely completed 8 operated gas plant and oil battery turnarounds, positioning Surge to maximize operational runtime during the second half of 2023.

MESSAGE TO SHAREHOLDERS

Crude oil prices softened over the course of the second quarter, with Western Texas Intermediate ("WTI") averaging nearly US$80 per bbl in April 2023, and approximately US$70 per bbl in June 2023. Despite this drop in WTI pricing, Surge realized significant benefits from a dramatic tightening of Western Canadian Select ("WCS") differentials, which averaged US$15.07 per bbl in Q2/23 – down 39 percent from US$24.79 WTI per bbl during Q1/23. Approximately half of Surge's oil production is medium gravity crude oil, which is correlated to WCS pricing and significantly mitigated the impact of softer WTI pricing in the quarter. On this basis, Surge increased cash flow from operating activities by 11 percent in Q2/23, as compared to Q1/23, up from the $54.5 million realized during the first quarter to $60.6 million in the second quarter of 2023. Furthermore, the Company increased its adjusted funds flow1 by 2 percent, from $63.3 million in Q1/23 to $64.6 million in Q2/23.

The second quarter is traditionally a slow drilling activity quarter for Canadian oil and gas companies, as counties impose annual spring road bans for moving heavy trucks and drilling equipment. Accordingly, after a successful and active Q1/23 drilling program, Surge focused a significant portion of its Q2/23 capital expenditures on facility, pipeline and well maintenance work, as well as further land consolidation in SE Saskatchewan. Subsequent to road bans being lifted in early June, Surge resumed drilling activity in both the SE Saskatchewan and Sparky core areas.

During Q2/23, Surge safely executed 8 operated gas plant and oil battery turnarounds at Valhalla, Provost, Betty Lake, Lakeview and Steelman. In addition, the Company experienced 4 additional turnarounds at facilities operated by third parties (including the Sexsmith, Keyera, Steelreef and TCPL gas plant turnarounds). Although several of these turnarounds were budgeted for by the Company, the impact of the unscheduled turnarounds reduced production in the quarter by approximately 700 boepd. Surge remains on track to meet the Company's 2023 production exit rate target of 25,000 boe per day.

The Company spud 11.8 net (13 gross) wells, and rig released 8.8 net (10 gross) wells during Q2/23, with all of these wells expected to be completed and brought on stream in mid-Q3/23. Drilling activity during the second quarter, along with the end of spring turnaround season, has positioned Surge to maximize operational runtime during the second half of 2023.

During Q2/23, Surge brought on production two new exciting Sparky wells that were drilled at Cadogan, on lands recently acquired in Q4/22. These two wells are currently producing at a combined rate of over 390 boepd (95 percent oil). Surge has an internally estimated 32 net follow up Sparky drilling locations2 on the acquired Cadogan lands.

Surge has also acquired more than 20 sections of land on the Company's new open hole, multi-lateral, oil play in the Sparky core area. These acquired lands are offsetting the Company's exciting 6 leg, open hole, Sparky discovery well that was drilled in late 2022. Subsequent to Q2/23, Surge recently completed drilling the Company's first 12 leg, open hole, Sparky step-out well on this play trend. The Company expects production results from this step-out well in the latter part of Q3/23.

Stable quarterly cash flow, combined with a seasonally light capital expenditure program during the quarter, contributed to Surge delivering a substantial net debt1 reduction in the amount of $20.1 million in Q2/23. This net debt reduction was achieved while also distributing $11.8 million to shareholders in Q2/23 by way of Surge's cash dividend – which is paid monthly.

Today, more than 75 percent of Surge's crude oil production is strategically located in the Company's Sparky and SE Saskatchewan core areas – which have been recently independently evaluated as two of the top four crude oil plays in North America3. Surge has a deep, 13 year, drilling inventory of more than 1,000 net locations.

[Fraser921]

>a dramatic tightening of Western Canadian Select ("WCS") differentials

This is why i review month GearEnergy monthly update. You could see the improvement in differentials before they are announced.

With crude in the 80's some of these canadian names will be printings cash

[Fraser921]

SLIDE DECK

https://www.surgeenergy.ca/wp-content/uploads/2023/04/Corporate-Presentation-Summer-2023-1.pdf

Driving FCF > Thats what it's all about!