Surge Energy: Shareholder Payday Possibly Postponed (TSX:SGY:CA)

Surge Energy (TSX:SGY:CA) (OTCPK:ZPTAF) is a higher-risk option if you are looking for some extra oil & gas exposure. The company has come under fire for some of its debt management over the years, but given where oil prices have been the last few years, the balance sheet looks much better now. That said, the company seems to currently be more focused on acquisitions than paying down that debt and rewarding shareholders. While the company is still set to hit its debt targets in 2024, recent moves have left shareholders a bit confused about what the actual number one priority is. I remain bullish on Surge given the industry it is in, but I will be waiting to see what the new plan is when Q4 results come out before adding Surge to my portfolio.

How’s The Dividend?

Growing!! For now… The new dividend, payable on February 15th is up to $0.04 per share. In Q3, we saw the company pay out $8.8 million to its shareholders in the form of cash dividends. As you may or may not know, future increases will all come on the back of debt reduction. Looking below, we can see exactly what the structure will look like.

What Does The Price Say?

As mentioned, the now looks great, and the future is a little shaky, which is why the stock is as undervalued as it’s coming across below. However, if we have learned nothing, it’s that “value” is a funny term. Let’s dive into what the technicals have to say.

Those who owned Surge in 2011 will recall the good days. After accounting for the split, the stock was worth just under $100 per share. Fast forward to today and the stock is down 90% sitting just under $10. But everything is relative because those who bought in 2020 are laughing as they are up anywhere from 200-600%.

Will we see $40 for Surge one day? Maybe. I would never make that call given the current state of the market/industry. But let’s look at just where we could go over the next couple of years. Starting with the positive, we can see two stepping stones on our way to $23.50. I always like to use horizontal price levels to see where stocks have found support or resistance in the past. Looking below, we can see $14.00, $18.75, and $23.50. The bad news here is even the $14.00 is almost a 50% increase from current levels. But if you want to set longer-term price targets, this is how I would go about it. Therefore, my current price target for Surge is $14.00.

Zooming in a bit closer, we can get a better investment plan. Looking below, we see two highlighted levels. $8.00 and $7.15. Now, this is where size comes into play. It’s very clear that one of these should be your stop if you are entering today with a medium-long-term view. The issue is how far they are from our current price. To get to $8.00 the stock would need to fall ~15%, which is a bit more risk than I like to expose myself to. The solution to this is sizing. If you take less of a position, you can still reap the rewards with the same amount of risk. I would want to take a two-tiered stop approach to this, given what we are seeing below. Selling 50% at $8.00 and the other 50% at $7.15. If the stock reacts properly, you could even look at buying back that 50% on any positive bounce off the $7.15 support.

The concern I have here is the very obvious descending triangle that I have drawn above. This is typically a bearish pattern and you wait for a break at the bottom of the triangle. However, we did just see the top of the triangle breach. The next few days will outline which way we could be going in the short term. I would want to see this pattern break before initiating a position. But, if you choose to do so, it’s very clear where your stops should be. I am bullish on Surge, but cautious at the moment. Protecting capital is my number one priority.

Wrap-Up

As you can see, Surge could really go either way. It’s too bad they made this acquisition when they did. I know opportunity doesn’t knock every day, but I do think it sent the wrong message to shareholders. I am excited to see what they have to say about it in the year-end results. Hopefully, there is a new debt target plan, and shareholders will still be rewarded on schedule. If not, we could see a very red day on March 8th. Until then, I will be on the sidelines watching this one closely.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.