CARLYLE - Surge Energy Inc. and Fire Sky Energy Inc. have announced that they have entered into an amalgamation agreement, in which Surge has agreed to acquire all of the issued and outstanding common shares of Fire Sky in a $58 million deal.
The transaction is to be funded by the issuance of approximately 11.2 million Surge common shares, and the assumption of approximately $3 million of net debt, inclusive of transaction costs.
With Surge’s recent acquisition of Astra Oil Corp., Surge says its management has targeted southeast Saskatchewan as a new area of growth based on its high value light oil netbacks, low-cost production efficiencies and quick drilling payouts. Surge's operational track record of execution in the southeast, combined with its in-house technical abilities, make this a new core area for the company.
The Fire Sky assets are currently producing more than 1,500 barrels of oil equivalent per day (boepd), greater than 95 per cent liquids, of operated, light oil, focused in Surge's southeast Saskatchewan core area, with an operating netback of more than $52 per barrel of oil equivalent (boe) at US$70 West Texas Intermediate (WTI) pricing – which is now less than 2022 average strip pricing.
Following the transaction, Surge now forecasts average production in 2022 of 21,500 boepd (86 per cent liquids) of primarily light and medium gravity crude oil.
Surge cited the following reasons for the transaction:
- The transaction is accretive to Surge's 2022 free cash flow per share, and debt adjusted cash flow per share;
- The Fire Sky assets are forecast to increase the company's cash flow from operating activities by $26 million over the next 12 months at US $70 WTI;
- The company now estimates that its exit 2022 net debt to annualized fourth quarter 2022 adjusted funds flow ratio will be approximately 0.7 times at US$70 WTI;
- The transaction adds highly concentrated light oil reserves, production, land, and infrastructure in Surge's southeast Saskatchewan core area;
- The Fire Sky assets include a large internally estimated development drilling inventory of more than 100 locations;
- The Fire Sky assets are an excellent operational fit providing numerous synergies with the attractive light oil assets recently acquired through the Astra transaction; and
- Fire Sky has an attractive corporate licensee liability rating in Saskatchewan of 3.5, with a total undiscounted decommissioning liability of only $9.8 million.
The transaction is consistent with Surge's defined business model of acquiring high quality, operated, light and medium gravity crude oil reservoirs with large original oil in place and low recovery factors. The combined company possesses high netbacks, an operated light and medium gravity crude oil asset base, with extensive infrastructure in place to facilitate years of future development drilling and waterflood.