Surge Energy has announced a $37 million acquisition of assets in the Sparky area of central Alberta, which is a complement to its existing operations, according to GMP FirstEnergy.
“I would look at it as a strategic tuck in,” said Stacey McDonald, the firm’s managing director of institutional research.
“Some of the lands that were included in the acquisition are offsetting their Eyehill Sparky pool, so they have very high value to them. It’s a perfect layover with their existing asset base.”
The acquisition adds 745 boe/d of oil-weighted production and more than 56 million barrels of original oil in place at a 17 percent recovery factor to Surge’s existing original oil in place of 500 million barrels at in the Sparky/Lloyd play.
Most of the production is under waterflood, with up to 29 low-risk developmental drilling locations. The acquired assets have potentially strong netbacks of $30-plus per boe at US$55 WTI.
Surge’s Sparky area assets acquisition is expected to deliver production per share growth of more than 24 percent from Q2/16 to the end of Q4/17.
The company has revised its 2017 average daily production estimate to14,000 boe/d from 13,500 boe/d, while its year-end exit production has been bumped to 14,450 boe/d from 14,150 boe/d.
Surge Energy also said its board of directors will look to increase the company's dividend by 11.8 percent from $0.085 per year to $0.095 per year.
Over the last 30 months of the oil price downturn, Surge says its management strategically created financial liquidity of over $750 million to reduce debt, improve the company's balance sheet and make a strategic acquisition a viable option.
McDonald points to dispositions Surge made earlier in the downturn: $43 million in assets at Valhalla and Sunset in northern Alberta in 2016 and $465.6 million of properties in Saskatchewan and Manitoba in 2015.
“I think they got good value for those assets when they sold them. They also have a very good balance sheet relative to their peers. A lot of that was due to getting their operating costs down during the downturn and them making some strategic decisions as well,” she said.
One of those strategic decisions was for Surge to remain focused on conventional oil and gas assets. These reservoirs have relatively low corporate declines of about 20 per cent, which means less drilling is required to maintain production. The reservoirs also respond well to secondary recovery techniques such as waterflood, which provide good returns on investment.
But despite these positive attributes, Surge’s stock has not performed well through the downturn—or even into the gradual recovery currently underway. An encouraging vote of confidence is Surge’s insider buying. CEO Paul Colborne has increased his ownership stake in the company through open market purchases of well over three million shares over the years.
“Paul Coburn has been historically active as a buyer,” said McDonald. “So he’ll buy his stock when he thinks it’s undervalued and he’s buying it now. He believes in the company and he’s willing to buy equity along the way.”