CALGARY, March 21, 2018 /CNW/ - Gear Energy Ltd.
("Gear" or the "Company") (TSX:GXE) is pleased to present the
following operational update and revised outlook for 2018.
The first quarter of 2018 has been quite dynamic to date. The
Company would like to update investors on the following key
accomplishments and revised outlook:
2018 Capital Activity To Date
Wilson Creek
Gear successfully drilled
and frac'd a new extended reach Basal Belly River light oil well at
11-34-42-4W5. The well was drilled offset to the Gear 16-33-42-4W5
well; the best Belly River well drilled in the area to date with an
IP30 peak rate of approximately 290 boe per day (85% liquids). The
11-34 well encountered approximately 1.5 times as much reservoir as
the 16-33 well at an estimated all-in cost of $2.9 million gross ($2.6
million net at 92% working interest). This well should be on
production in April.
Wildmere GP
Two
dual-lateral unlined General Petroleum wells successfully drilled
in 2017 were brought on production in January with some of the best
rates seen from this play to date. The two wells, 100/8-17-48-5W4
and 102/8-17-48-5W4, averaged peak IP30 rates over 150 bbl of oil
per day per well. The wells were drilled and brought on production
at a cost of $0.9 million per well.
In addition, Gear was successful in acquiring an additional 2,500
acres of land currently mapped within the same pool.
New Cummings Play
Gear
successfully drilled a quad-lateral unlined horizontal Cummings
well into a new area outside of the existing de-risked Wildmere
asset. The well is currently on production with the last 10 days
averaging approximately 150 bbl per day of oil. The well was
drilled and brought on production at a cost of $1.3 million. These early results are encouraging
and could lead to an expansion of future drilling inventory in the
area.
New Potential Medium Oil
Prospect
Gear acquired a large land position of
approximately 14,000 acres in a new area that appears prospective
for multi-stage fractured horizontal development of medium oil,
similar to Gear's successful Killam asset. The team is currently
acquiring seismic and planning to drill its first well into this
play during the third quarter of 2018.
Heavy Oil Takeaway
Although the Western Canada Select ("WCS") heavy oil pricing
outlook has improved over the last couple of months, the physical
ability to ship oil to market has degraded through the first
quarter. Heavy oil pipeline shipping capacity out of Canada decreased in the fourth quarter of 2017
due to a leak on the Keystone pipeline, the resulting inventory
builds from the associated shutdown and the reduced operating
capacity upon resumption of service. This created a backlog of
inventory that historically would have been managed using
crude-by-rail. However, as the end of the first quarter approaches,
railing has yet to alleviate this issue. As a result of increased
demand for rail, due to strong grain production and increased
transportation of frac sand, coupled with current limited capacity,
crude-by-rail has not performed as it had historically. The
majority of these issues are considered to be seasonal and
short-term in nature, with improvements forecasted into the spring.
With the announced increase to both investment and hiring by rail
providers, it is forecasted that there will be an increase in rail
capacity. As well, improved reliability is anticipated with
the end of the extreme winter weather. In addition to the
expectation for improvements in crude-by-rail, pipeline throughputs
normally increase with the warmer weather due to reduced diluent
requirements. In parallel with the potential takeaway improvements,
the current forward market forecasts the WCS price differential to
improve into the summer by approximately 20 per cent relative to
the first quarter.
As a result of the issues highlighted, Gear has been subjected
to approximately 30 per cent apportionments through February and
March on its heavy oil sales. The restrictions have been managed as
prudently as possible through the quarter by building a record
inventory of saleable oil in excess of 41,000 barrels and by
temporarily slowing down multiple heavy oil wells. Total corporate
productive capability through the quarter is estimated at 7,350 boe
per day. However, as a result of the apportionments, the quarterly
sales volumes are currently forecast to average 6,450 boe per day.
Fortunately, with egress expected to improve, and with a reduced
and optimized capital forecast for the remainder of the year, it is
anticipated that these short term challenges will not have a
significant impact on the annual results. Details are discussed
below.
2018 Optimized Budget
Gear is dedicated to ensuring that invested capital is focused
on low-risk, high rate of return projects in order to yield
competitive growth while ensuring the maintenance of a strong
balance sheet. In light of the temporary challenges related to the
shipment of heavy oil production, the team is refocusing a
significant portion of the 2018 capital budget to the Company's
light and medium oil opportunities that do not experience the same
egress challenges. Gear will also continue to be aggressive in
implementing light and medium oil recompletion and waterflood
optimization projects. The net result of the new budget is an
estimated deferral of approximately 700 bbls per day of heavy oil
production from the first half of 2018, with the majority of that
production made up in the second half, through a combination of
increased light and medium oil production, heavy oil well speed-ups
and heavy oil inventory sales. As always, Gear will remain nimble
and continue to monitor pricing and logistics with the intention of
investing capital approximate to actual realized cash flow
targeting an annual net debt to cash flow ratio from operations of
one or less.
The revised 2018 budget outlook includes an increased focus on
light and medium drilling opportunities, with over 40 per cent of
forecasted capital now dedicated to drilling nine light and medium
oil wells, including; Wilson Creek Basal Belly River, Ferrier
Cardium, Killam Lloyd and the new
potential medium oil prospect. The original 35 well heavy oil
drilling program has been temporarily reduced to 16 wells,
including; Paradise Hill McLaren and a variety of multi-lateral
unlined horizontal wells in the Cummings, General Petroleum and
Sparky. The deferral of a large portion of the drill-ready heavy
oil program leaves Gear with significant optionality to add
multiple low-risk, high rate of return wells to the program later
in the year, if desired. The new forecast also includes
approximately $4 million dedicated to
land and seismic, $6 million to
waterfloods, recompletions and corporate costs, and approximately
$4 million for abandonment
expenditures. Detailed guidance is as follows.
|
Revised 2018
Outlook
|
Original
Guidance
|
Annual Production
(boe/d)
|
7,350
|
7,500
|
Per cent heavy oil
(%)
|
61
|
68
|
Per cent light/medium
oil & NGLs (%)
|
25
|
20
|
Royalties
(%)
|
11
|
10
|
Operating and
Transportation Costs ($/boe)
|
15.85
|
15.50
|
G&A Costs
($/boe)
|
2.25
|
2.15
|
Interest Costs
($/boe)
|
0.80
|
0.65
|
Capital and
Abandonment Expenditures ($ million)
|
50
|
58
|
Forward-looking Information and Statements
This press release contains certain forward-looking information
and statements within the meaning of applicable securities laws.
The use of any of the words "expect", "anticipate", "continue",
"estimate", "objective", "ongoing", "may", "will", "project",
"should", "believe", "plans", "intends", "strategy" and similar
expressions are intended to identify forward-looking information or
statements. In particular, but without limiting the foregoing, this
press release contains forward-looking information and statements
pertaining to the following: the expected timing for
bringing certain wells on production; the expectation that certain
encouraging early results could lead to an expansion of future
drilling inventory in a certain area; the expectation that a new
prospect may be prospective for multi-stage fractured horizontal
development of medium oil, similar to Gear's successful Killam
asset; the expected timing for drilling a well into a new play;
that increased transportation capacity and reliability is forecast;
forecast sales volumes and productive capacity in the first quarter
of 2018; the expectation that egress will improve and with a
reduced and optimized capital forecast for the remainder of the
year, that these short term challenges will not have a significant
impact on the annual results; the expectation that first quarter
sales will average 6,450 boe per day; the intent to focus invested
capital on low-risk, high rate of return projects in order to yield
competitive growth while ensuring the maintenance of a strong
balance sheet; the intent to refocus a significant portion of the
2018 capital budget to the Company's light and medium oil
opportunities that do not experience the same egress challenges;
the intent to continue to be aggressive in implementing light and
medium oil recompletion and waterflood optimization projects; the
expectation that approximately 700 bbls per day of heavy oil
production from the first half of 2018 will be deferred with the
majority of that production made up in the second half through a
combination of increased light and medium oil production, heavy oil
well speed-ups and heavy oil inventory sales; the intent of
investing capital approximate to actual realized cash flow in order
to maintain an annual net debt to cash flow ratio or one or
less; Gear's expected capital budget for 2018 and the
expected timing of expenditures; details on the wells to be drilled
including the number of wells, the type of wells, where such wells
will be drilled and the targets of such wells; the 2018
expected annual net debt to cash flow ratio; expectations of the
amount of the budget focused on land, seismic, waterflood projects,
infrastructure projects, recompletions, corporate capital and
strategic abandonment and reclamation projects; expectations with
respect to 2018 average production, 2018 commodity weighting,
royalties, operating and transportation costs, G&A costs and
interest costs; expectations of future commodity prices and
differentials; and the intent that Gear will closely monitor
pricing throughout the year and adjust capital as required to
ensure a balance between growth, debt and estimated returns on
capital.
The forward-looking information and statements contained in
this press release reflect several material factors and
expectations and assumptions of Gear including, without limitation:
that Gear will continue to conduct its operations in a manner
consistent with past operations; the general continuance of current
industry conditions; the continuance of existing (and in certain
circumstances, the implementation of proposed) tax, royalty and
regulatory regimes; the accuracy of the estimates of Gear's
reserves and resource volumes; certain commodity price and other
cost assumptions; and the continued availability of adequate debt
and equity financing and cash flow from operations to fund its
planned expenditures. Gear believes the material factors,
expectations and assumptions reflected in the forward-looking
information and statements are reasonable but no assurance can be
given that these factors, expectations and assumptions will prove
to be correct.
To the extent that any forward-looking information contained
herein may be considered a financial outlook, such information has
been included to provide readers with an understanding of
management's assumptions used for budgeting and developing future
plans and readers are cautioned that the information may not be
appropriate for other purposes. The forward-looking information and
statements included in this press release are not guarantees of
future performance and should not be unduly relied upon. Such
information and statements involve known and unknown risks,
uncertainties and other factors that may cause actual results or
events to differ materially from those anticipated in such
forward-looking information or statements including, without
limitation: changes in commodity prices; changes in the demand for
or supply of Gear's products; unanticipated operating results or
production declines; changes in tax or environmental laws, royalty
rates or other regulatory matters; changes in development plans of
Gear or by third party operators of Gear's properties, increased
debt levels or debt service requirements; inaccurate estimation of
Gear's oil and gas reserve and resource volumes; limited,
unfavorable or a lack of access to capital markets; lack of
transporation capacity; increased costs; a lack of adequate
insurance coverage; the impact of competitors; and certain other
risks detailed from time to time in Gear's public documents
including in Gear's most current annual information form which is
available on SEDAR at www.sedar.com.
The forward-looking information and statements contained in
this press release speak only as of the date of this press release,
and Gear does not assume any obligation to publicly update or
revise them to reflect new events or circumstances, except as may
be required pursuant to applicable laws.
NON-GAAP Measures
This press release
contains the terms cash flow from operations and net debt, which do
not have standardized meanings under Canadian generally accepted
accounting principles ("GAAP") and therefore may not be comparable
with the calculation of similar measures by other companies.
Management believes that these key performance indicators and
benchmarks are key measures of financial performance for Gear and
provide investors with information that is commonly used by other
oil and gas companies. Cash flow from operations is calculated as
cash flow from operating activities before changes in noncash
operating working capital and decommissioning liabilities settled.
Net debt is calculated as debt less current working capital items,
excluding risk management contracts. Additional information
relating to certain of these non-GAAP measures, including the
reconciliation between cash flow from operations and cash flow from
operating activities, can be found in the MD&A.
Barrels of Oil Equivalent
Disclosure
provided herein in respect of BOEs may be misleading, particularly
if used in isolation. A BOE conversion ratio of six Mcf to one Bbl
is based on an energy equivalency conversion method primarily
applicable at the burner tip and do not represent a value
equivalency at the wellhead. Additionally, given that the value
ratio based on the current price of crude oil, as compared to
natural gas, is significantly different from the energy equivalency
of 6:1; utilizing a conversion ratio of 6:1 may be misleading as an
indication of value.
Initial and Other Production Rates
Any
references in this document to initial production rates, production
rates of new wells over a period of time or any other initial
drilling results are useful in confirming the presence of
hydrocarbons, however, such rates are not determinative of the
rates at which such wells or other future wells will continue
production and decline thereafter. Additionally, such rates may
also include recovered "load oil" fluids used in well completion
stimulation. There is no certainty that other wells on such
properties will achieve such production levels. Readers are
cautioned not to place reliance on such rates in calculating the
aggregate production for Gear.
SOURCE Gear Energy Ltd.