Will Surge Energy’s Transformation Lead to Stock Upside

Shares of Surge Energy [stock_market_widget type="inline" template="generic" color="default" assets="SGY" markup="(TSE: {symbol} {currency_symbol}{price} ({change_pct}))" api="yf"] have declined substantially since October last year as the oil pricing scenario took a turn for the worse. In fact, the stock is down 43% in the past six months despite making all the right moves in recent quarters that are boosting its production.

Surge was successful in transforming its business last year, but it was a victim of the circumstances. But there’s a good chance the company could stage a comeback this year as oil prices are now moving up.

On the Right Path

Surge’s total revenue shot up 26% in 2018 to $304.5 million thanks to a nice bump in production. The company’s production stood at 18,058 barrels of oil equivalent per day last year, an increase of 21% from 2017 levels.

Surge witnessed a 7% increase in oil prices during the year to $55.88 per barrel, while the price of natural gas liquids increased 20% throughout the year. However, a 51% decline in the price of natural gas weighed on the company’s growth to some extent. Lower natural gas prices also impacted its operating netback, which fell 5% last year to $21.73 per barrel of oil equivalent. This also impacted Surge’s funds flow from operations.

However, investors should note that Surge’s acquisition of Mount Bastion Oil & Gas in the fourth quarter of 2018 positively impacted the company’s output. The good part is that this acquisition is going to drive Surge’s results once again this year as the company’s outlook suggests. Let’s take a look.

Surge is Adopting the Right Strategy

Surge has decided to be conservative with its capital outlay this year in light of the volatility it experienced in oil prices last year. As a result, the company has decided to reduce its outlay on exploration and development to $100 million in 2019 from $120.5 million last year.

But Surge’s reduced capex won’t be impacting its production profile, as the company expects to achieve average production of 22,000 barrels of oil equivalent per day in 2019. That would be a nice jump of nearly 22% over last year’s production levels.

Also, Surge’s production boost will be complemented by its disciplined cost profile. The company anticipates operating costs in the range of $15.45-$15.95 per BOE this year, which translates into a mid-single-digit increase over last year’s operating expenses of $14.76/BOE. Transportation expenses will remain consistent on a year over year basis, while general and administrative costs are forecasted to decline nearly 10%.

Now, oil prices have been rising thanks to a variety of factors such as supply cuts, sanctions on certain countries, and higher demand. So it won’t be surprising if Surge enjoys higher oil prices as the year progresses.

That’s probably why analysts expect the company to swing to a small profit this year after last year’s loss, driven by a solid jump in the top line. So it is quite likely that Surge Energy stock will move higher going forward, making it a good play for investors looking for a fast-growing oil company.

Harsh Singh Chauhan has a wealth of experience evaluating publicly-traded companies across several verticals, including technology, oil and gas, retail, and consumer goods. His financial writing has been published across platforms such as The Motley Fool, TheStreet, and Seeking Alpha. Harsh's philosophy is to find great businesses for the long run based on company fundamentals and industry prospects. Address: 682 Indian Road, Toronto, Ontario, M6P 2C9. Phone: 416-721-8257.


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