SGY - Surge Energy

[influx]

Colleagues,

 

Can you please share your opinion?

 

From their website:

Surge Energy Inc. is an oil focused E&P company that has a high quality crude oil reserve, production and cash flow base. Surge has elite, operated properties characterized by large OOIP crude oil reservoirs with low recovery factors, an extensive 14 year inventory of more than 700 net low risk development drilling locations, several high quality waterflood projects, and an excellent balance sheet. Surge's management team has initiated an orderly, on-going risk management/hedging program designed to protect cash flows, fund capital expenditures, and to pay dividends.

 

 

The latest news: http://surgeenergy.mediaroom.com/index.php?s=10448&item=135269

 

Surge is pleased to welcome Mr. Paul Ferguson, who will be joining the Company in the position of Chief Financial Officer ("CFO").

 

Surge management and Board have determined to start acquiring Surge common shares pursuant to a normal course issuer bid providing for the repurchase of Surge common shares through the facilities, rules and regulations of the TSX (the "Issuer Bid"). The Issuer Bid has been approved by the TSX.

 

Surge's new net asset value ("NAV") is $4.64 per share, utilizing Sproule's recent third quarter of 2015 engineering price deck. In addition, the Company only books approximately two years of trailing cash flow as future development capital in its external engineering report.  Further, 73 percent of Surge's reserve value is in the proved developed producing and probable producing categories.

 

Surge's NAV per share includes a booking of only 37 development drilling locations for its Upper Shaunavon play – where Surge now estimates the Company has over 200 low risk development locations on 300m spacing. No waterflood upside is included in Surge's NAV per share for the Company's Upper Shaunavon play.

 

Surge has approximately $295 million of credit availability on its bank lines, and a very low debt to cash flow of 0.9 times at the end of Q2 2015. Surge pays an interest rate of approximately 2.5 percent (after tax) on indebtedness owing under its bank lines.

 

Surge does not have to pay a dividend on the common shares that it acquires pursuant to the Issuer Bid - thereby increasing the Company's sustainability.

 

The Issuer Bid provides an excellent, low risk return on investment to Surge shareholders of greater than 125 percent, including: NAV accretion (using the third quarter of 2015 Sproule price deck $4.64 per share NAV), dividend savings, less interest  on applicable debt (if any). Essentially, the Issuer Bid provides an additional method for Surge management to return capital to its shareholders, along with the payment of the Company's dividend.

 

Based on the current trading price of Surge common shares, management believes that, pursuant to the Issuer Bid, the Company is acquiring its reserves at a purchase price of less than $6.90 per boe for independently engineered proven plus probable reserves. This provides a low risk recycle ratio of more than 3.5 times, based on Surge's second quarter of 2015 operating netback of $26.53 per boe.

 

As a result of the very attractive rates of return at Shaunavon, and the attractive, low risk metrics relating to the buy back of Surge's common shares, management confirms the initiation of the acquisition of Surge common shares on August 24th, 2015 pursuant to the Issuer Bid.

 

Accordingly, Surge will: 1) deliver annual growth of three to four percent per share; 2) return capital to its shareholders pursuant to the Company's attractive dividend; and 3) return capital to its shareholders pursuant to the accretive buyback of its common shares in accordance with the Issuer Bid.

 

Macquarie Capital Markets Canada Ltd. will conduct the bid on behalf of Surge pursuant to an automatic purchase plan. All purchases under the bid will be purchased on the open market through the facilities of the TSX and alternative Canadian trading platforms at the prevailing market price at the time of such transaction.

[Cardboard]

Very solid balance sheet. Will likely continue to pay its current dividend and to buyback shares. The price is cheap but, not the cheapest at $44,000 boe/day. However, they are 84% liquids and their Upper Shauvanon play is first class with great IRR's and netbacks and a lot of room to grow.

 

The key thing and unlike many other Canadian E&P's is that they acted decisively by selling their Saskatchewan/Manitoba asset at a very good price to solidify their balance sheet. Then luck played out a bit relative to the Upper Shauvanon play. I think that they will be able to grow quite a bit at attractive metrics by drilling and acquiring in their core plays which will make today's price per boe/day even lower.

 

I think that the guy in charge or Paul Colborne is pretty good. Based on what I have seen, he thinks like a shareholder and you can see it by his insider trades. The language around the buyback is also indicative of that: why grow at any cost when you can drill for oil cheaper on the floor of the TSX?

 

While I am not a big fan of large dividends being paid by O&G producers or said differently, not covered by net earnings, they are at least focused on sustainability or that cash flows cover capex and dividends.

 

I have found that Kevin4u has a very good understanding of most of these Canadian producers and would value his opinion on this one at this price.

 

Cardboard

[bizaro86]

I bought a small amount of this in a retirement/dividend account I manage for a relative after they bought the Shaunavon assets. My opinion at the time was that they got a good price for an underappreciated/developed asset, which I still think. However, market conditions in the meantime have not been kind to them, as with all other O&G companies. They have gotten their debt down, and should be able to keep going for quite some time, although I don't think their dividend is sustainable at current oil prices. Given the >10% yield, the market doesn't think so either.

 

On a completely unrelated-to-investment note, the son of their CEO plays for our local NHL team (the one whose logo is my avatar).

[bigbluffzinc]

I initiated a position in the last few weeks.  I think  it's a really good spot  :)

 

Great capital allocation & discipline.    A CEO whose been buying stock (IIRC) at higher prices whose motivated to get the price back up..  Canadian assets and it's hard to imagine oil going to 25 without the canadian dollar coming down further so you have that buffer.  If that thesis is correct I think they breakeven at $30 oil with their recent discoveries and are currently being valued as though they're distressed when they have some production hedged into next year, a clean balance sheet, and as far as I can tell no signs of distress at all...  I don't think there will be a lot of damage done to their balance sheet given their low cost of production and expenses being paid in CAD...

 

To me it was a no brainer @ $2.50 and moreso @ $2.

 

They sold their asset with the lowest netbacks @ $400M recently, they have 3 plays left.  They have basically no debt and a market cap of about 450M...  They did the work for you with a third party evaluation of NAV which management clearly puts stock in given the personal investment + buybacks.. 

[influx]

although I don't think their dividend is sustainable at current oil prices. Given the >10% yield, the market doesn't think so either.

 

Indeed and this could be another catalyst on the way down, if they suspend dividend. Then the share price may get dumped abit more. So I am thinking whether to wait abit. I will never know as outsider, so averaging down is perhaps the best option if going in

 

One more thing which kept me off for 2-3 months was that I contacted them with specific question. They responded after 12 days from the first email, and 3 days after my reminder. Abit red flag for waiting so long. I got relatively good answers, and one of THE MOST critical questions after reading this (

http://www.sedar.com/GetFile.do?lang=EN&docClass=8&issuerNo=00010447&fileName=/csfsprod/data151/filings/02363860/00000001/k%3A%5Cfilings%5CBranded%5C2015%5C0615%5CSurgeEnergy%5CAsset_Sale%5CSurge_0615_asset.pdf) was:

 

"13. NAV: $6.28 per share (year-end external engineering report)"

My question: What do you think regarding buyback of shares in relation to the NAV value compared to the dividend? If we have almost 100% discount of the market price of the shares vs the NAV per share, it makes sense to me that you buy back shares because shareholders get better ROIC compared to 8.45% dividend yield which also may be taxed?

 

Their response was: "In the ordinary course, Surge's management regularly reviews transactions of various natures with a view to maximizing shareholder value.  At this time Surge is not considering instituting a share repurchase program, but it may in the future."

 

This was June 29th. So I kept monitoring it but never really got interested because this answer was really a a definition of capital dis-allocation. So, now that they have NCIB and more info in place I am more interested, even though the dividend is in place and I dont like that. But I like it more compared to two months ago.

 

That is 0.025*221147248 (number of outstanding shares) = 5,528,681.2 CAD monthly

Annualized: 66,344,174.4 CAD

A good amount of money in this environment. It is better that they buy other resources in this downturn. This implies that they (and the CEO) wants the dividend to get money back and they have no better target for capital allocation. Which is also a fair if that is their stand. I'll try to ask them.

 

The share is some 20% up in the few days. Of course it is volatile environment and it is expected.

 

@bigbluffzinc, I havent done the math, he was frequent buyer. Can you please share more info regarding the $20M - what period and how many shares, average price? I see has has little over 3 million of shares which is a SMALL holding, say roughly 1.5%-2%.

 

Thank you for your feedback.

 

Looking forward for more folks to join to bring more ideas

[bigbluffzinc]

Wow I was quoting off memory and that didn't work out well.  I was wrong apologies.

 

Looking at it now he has 3.3M shares.

 

I don't think management has any intention to cut the dividend for what it's worth, but shares would trade down on that news.  They seem very commited to the strategy of remaining a reliable divco.  I don't think it's best for the company and agree they should suspend and allocate towards buying assets opportunistically.  But I think it's unlikely management cuts based on the way they present the company unless oil continues it's descent. 

[influx]

In their words

 

"In the current low commodity price environment, Surge is well positioned to be one of the best light/medium crude oil growth and dividend paying companies in Canada, with a proven management team and a strong balance sheet with approximately $295 million unused on the Company’s bank line at the end of the second quarter of 2015.

 

Surge has a low, 23 percent decline production base, upper Shaunavon and Valhalla (Doig) plays with excellent capital efficiencies and rates of return, low operating costs at <$14.45/boe and low general & administrative costs at $1.64/boe as reported in the second quarter of 2015. All very important attributes for any successful growth and dividend paying company.

 

At this time there are no plans to revisit the dividend, however the Company will continue to monitor commodity prices and take the necessary steps to preserve shareholder capital as required.

 

Surge is focusing second half 2015 capital to three core conventional plays; all of which have excellent reservoir characteristics which in turn lead to top tier PE’s, ROR’s and higher recovery factors."

[Cardboard]

An excellent opportunity to get back into this company at the moment. It had gotten a little expensive with the rebound in oil but now, the recent decline in the oil price to the $36 range is fully priced in IMO.

 

One of the best balance sheet in the industry, solid netbacks, disciplined on capex, good properties, pays a dividend and a CEO that has a $1 salary (all share based awards) and owns 3.1 million shares. It is also a liquid stock and reacts with a very high correlation to the oil price.

 

Pretty cheap at $42,000 per boe/d, 42% of NAV and at $6.47 per boe of 2P reserves considering all of its positive attributes.

 

Cardboard

[influx]

Does any have problem with the dividend as a form of capital allocation? I wonder why do they insist on this

I mean I asked them few times and they just say it is as it is and we constantly review it

 

I think they can by debentures, equities or even assets that long-term can be a really great value for all shareholders

 

Is it just so they have institutional support with those that depend on the dividend? Like PWT - they tried to retain it for some time until they finally couldn't. I am not saying SGY cant, but I am saying that they can have better capital allocation and more tax efficiency. Look BRK and others

 

What do you think?

[winjitsu]

Does any have problem with the dividend as a form of capital allocation? I wonder why do they insist on this

I mean I asked them few times and they just say it is as it is and we constantly review it

 

I think they can by debentures, equities or even assets that long-term can be a really great value for all shareholders

 

Is it just so they have institutional support with those that depend on the dividend? Like PWT - they tried to retain it for some time until they finally couldn't. I am not saying SGY cant, but I am saying that they can have better capital allocation and more tax efficiency. Look BRK and others

 

What do you think?

 

Well the textbook corporate finance answer on why LBOs are successful is higher leverage forces the company to spend and invest with more discipline/scrutiny. Maybe you can draw a corollary from that when they have less cash on hand. But I certainly think its dumb.

 

Institutional ownership could certainly be a factor -- this is the case for CVX, XOM who are borrowing billions to fund their dividend -- but I think you should look at the board/officer incentives as well.

 

I forgot where I read this (but I can certainty look it up later if you are interested), but an academic was presenting a case on the textbook reasons for issuing a dividend. One of his students went above and beyond and called up one of the old board members and basically was told -- "oh the CEO needed money." He stopped presenting the case after that.

 

If "CEO has a $1 salary (all share based awards) and owns 3.1 million shares, " the dividend is nice paycheck.

 

[influx]

Does any have problem with the dividend as a form of capital allocation? I wonder why do they insist on this

I mean I asked them few times and they just say it is as it is and we constantly review it

 

I think they can by debentures, equities or even assets that long-term can be a really great value for all shareholders

 

Is it just so they have institutional support with those that depend on the dividend? Like PWT - they tried to retain it for some time until they finally couldn't. I am not saying SGY cant, but I am saying that they can have better capital allocation and more tax efficiency. Look BRK and others

 

What do you think?

 

Well the textbook corporate finance answer on why LBOs are successful is higher leverage forces the company to spend and invest with more discipline/scrutiny. Maybe you can draw a corollary from that when they have less cash on hand. But I certainly think its dumb.

 

Institutional ownership could certainly be a factor -- this is the case for CVX, XOM who are borrowing billions to fund their dividend -- but I think you should look at the board/officer incentives as well.

 

I forgot where I read this (but I can certainty look it up later if you are interested), but an academic was presenting a case on the textbook reasons for issuing a dividend. One of his students went above and beyond and called up one of the old board members and basically was told -- "oh the CEO needed money." He stopped presenting the case after that.

 

If "CEO has a $1 salary (all share based awards) and owns 3.1 million shares, " the dividend is nice paycheck.

 

true but dumb

unless he does drip or he re-allocated that dividend to something else SGY is supposed to do

[influx]

Hey Folks.

 

Anyone following and invested in this nowadays? What are your thoughts?