Surge Energy, err, surges
Also: the increasingly difficult landscape for junior oil and gas producers (at least, ones not named Surge Energy)
When he was younger, Max Fawcett wanted to make a mint in the markets. Now as the managing editor of Alberta Venture he gets to write about them. Close enough, right? He can be reached at email@example.com
by Max Fawcett
The market sure seems to like Paul Colborne. In the month since he was announced as the president and CEO of Surge Energy (TSE:SGY), a junior oil and gas producer whose board he’d been chairing, its shares have risen 50 per cent. It’s not entirely surprising, given Colborne’s track record as one of the founders of Crescent Point Energy back in 2001. Crescent Point quickly emerged as one of the best operators in Alberta’s energy sector, and it seems that investors are betting that he can repeat the feat at Surge.
For now, he’s said he’s focused on cleaning up the company’s balance sheet through asset sales, hedging programs and restricting capital expenditures in the near term. But in the longer-term, he intends to transform the company into a kind of Crescent Point-lite, one that pays out a steady and sustainable dividend while growing its production at a healthy clip. “With oil at $96 WTI, I don’t think people realize what kind of excellent cash flow a good light oil company can throw off to return capital to shareholders every month,” Colborne told the Calgary Herald’s Dan Healing.
Indeed, just yesterday the company announced a $225 million bought deal financing that was used in part to acquire assets in Saskatchewan from Cenovus that have original oil in place of over 250 million barrels. In conjunction with that acquisition and the financing that helped pay for it, the company officially announced that it would pay out a $0.40 annual dividend beginning this August. “Based upon the company’s detailed modeling, which was completed pursuant to the transition to a sustainable growth + dividend model, together with the very positive effects of the cash flow accretion from the Acquisition, Surge is now announcing a significant increase to the company’s projected 2013 production exit rate, and a substantially higher dividend than management had been modeling for Surge on a ‘stand alone’ basis,” the company said in a press release. And while the company’s shares have rallied from under $3.50 to over $5, Colborne thinks there’s still upside to come. After all, the company’s shares traded over $11 as recently as March of 2012.
But while the news surrounding Surge Energy has been positive of late, that’s something of an exception for the junior sector as a whole. As the Calgary Herald’s Dan Healing reported, the mood was decidedly downbeat at the recent Explorers and Producers Association of Canada event, where keynote speaker Joseph Schachter captured the challenges that companies in the sector face. “It’s a question for the industry of surviving for the next few years, which will be tough,” he said. “Access to capital is going to be tough. Flow-through business is dead. So, if you’re not one of the premium stories that can do flow through, most of the junior companies … will have to be living within their cash flow and debt lines and make sure their debt lines don’t have problems in case of reserve writedowns.” Schachter thinks a sustainable recovery – one in which fundamentals support oil prices at $120 per barrel and gas prices at $7 per thousand cubic feet – may not arrive until 2016 at the earliest. It’s safe to say, given the tone of his remarks, that he thinks there will be more than a few casualties between now and then.