Surge Energy is looking strong

Adverse hedges rolling off, good hedges coming into play

Like many leveraged Canadian E&P companies, Surge Energy (SGY.TO) suffered some debilitating hedge book losses as commodity prices rose over the past two years. But the company’s assets are good and management has started to “hedge smart” with fewer hedges and at more favorable prices. I expect the company to end 2022 with negligible debt and be debt free in 2023. The company recently initiated a dividend of $0.035 cents per month (Canadian funds) and is trading about CAD$9.00 a share so yield is over 4%.

I model the company producing about 24,000 Boe/day this year with a high percentage of that oil and liquids, and free cash flow for the year somewhere around CAD$330 million. The major improvement in the second half is the absence of major hedging losses.

Surge’s hedge book had been a liability for several quarters but the June 30, 2022 hedge book is shaping up as an asset. Oil prices are now capped at about CAD$107 a barrel for the rest of 2022 and the 2023 cap ranges from CAD$138 to $187 a barrel and should not result in material losses. Natural gas hedges are mixed with the benefit of “basis” hedges offsetting the limitation of AECO and Nymex hedges and the effect being immaterial given the low natural gas portion of Surge’s output. Here is the risk management note from Surge’s June 30, 2022 statements.

At this point in the cycle, Surge’s outlook seems promising and if the pundits are right that oil prices are heading higher, SGY.TO stock may well be a double over the next year or two. I hold 5,000 shares.