CALGARY, Aug. 8, 2018 /CNW/ - Gear Energy Ltd. ("Gear" or
the "Company") (TSX:GXE) is pleased to provide the following second
quarter operating update to shareholders. Gear's Interim Financial
Statements and related Management's Discussion and Analysis
("MD&A") for the period ended June 30,
2018 are available for review on Gear's website at
www.gearenergy.com and on www.sedar.com.
Financial Summary
|
|
|
|
Three months
ended
|
Six months
ended
|
(Cdn$ thousands, per
boe amounts)
|
Jun
30,
2018
|
Jun 30,
2017
|
Mar 31,
2018
|
Jun
30,
2018
|
Jun 30,
2017
|
FINANCIAL
|
|
|
|
|
|
Funds from operations
(1)
|
13,674
|
10,248
|
8,078
|
21,753
|
18,977
|
|
Per weighted average
basic share
|
0.07
|
0.05
|
0.04
|
0.11
|
0.10
|
|
Per weighted average
diluted share
|
0.07
|
0.05
|
0.04
|
0.11
|
0.09
|
Cash flow from
operating activities
|
8,596
|
5,362
|
14,787
|
23,383
|
17,607
|
Net income
(loss)
|
(1,869)
|
3,001
|
(4,294)
|
(6,163)
|
5,987
|
|
Per weighted average
basic share
|
(0.01)
|
0.02
|
(0.02)
|
(0.03)
|
0.03
|
|
Per weighted average
diluted share
|
(0.01)
|
0.01
|
(0.02)
|
(0.03)
|
0.03
|
Capital
expenditures
|
6,385
|
6,161
|
9,243
|
15,628
|
24,945
|
Net acquisitions
(2)
|
10
|
127
|
390
|
400
|
59
|
Net debt
(1)
|
38,960
|
43,409
|
45,330
|
38,960
|
43,409
|
Weighted average
shares, basic (thousands)
|
195,045
|
192,922
|
194,968
|
195,007
|
192,881
|
Weighted average
shares, diluted (thousands)
|
195,045
|
208,971
|
194,968
|
195,007
|
209,074
|
Shares outstanding,
end of period (thousands)
|
195,213
|
192,935
|
194,968
|
195,213
|
192,935
|
|
|
|
|
|
|
OPERATING
|
|
|
|
|
|
Production
|
|
|
|
|
|
|
Heavy oil
(bbl/d)
|
4,774
|
3,887
|
4,231
|
4,504
|
3,813
|
|
Light and medium oil
(bbl/d)
|
1,232
|
1,412
|
1,197
|
1,215
|
1,249
|
|
Natural gas liquids
(bbl/d)
|
219
|
322
|
223
|
221
|
270
|
|
Natural gas
(mcf/d)
|
4,806
|
5,334
|
5,229
|
5,016
|
5,266
|
|
Total
(boe/d)
|
7,025
|
6,510
|
6,522
|
6,775
|
6,210
|
Average
prices
|
|
|
|
|
|
|
Heavy oil
($/bbl)
|
55.04
|
44.72
|
42.97
|
49.40
|
43.94
|
|
Light oil
($/bbl)
|
75.67
|
59.64
|
64.53
|
70.21
|
60.19
|
|
Natural gas liquids
($/bbl)
|
40.51
|
28.11
|
39.74
|
40.12
|
26.10
|
|
Natural gas
($/mcf)
|
1.08
|
2.91
|
1.66
|
1.38
|
2.96
|
Netback
($/boe)
|
|
|
|
|
|
|
Commodity and other
sales
|
52.67
|
43.77
|
42.42
|
47.76
|
42.92
|
|
Royalties
|
(5.06)
|
(4.96)
|
(4.95)
|
(5.01)
|
(4.49)
|
|
Operating
costs
|
(17.16)
|
(17.78)
|
(15.83)
|
(16.52)
|
(17.07)
|
|
Operating netback
(1)
|
30.45
|
21.03
|
21.64
|
26.23
|
21.36
|
|
Realized risk
management gains (losses)
|
(5.55)
|
(0.77)
|
(4.15)
|
(4.88)
|
(0.99)
|
|
General and
administrative
|
(2.55)
|
(2.13)
|
(2.83)
|
(2.69)
|
(2.54)
|
|
Interest
|
(0.93)
|
(0.83)
|
(0.92)
|
(0.92)
|
(0.85)
|
|
Other
|
(0.02)
|
-
|
0.02
|
-
|
(0.09)
|
|
Corporate netback
(1)
|
21.40
|
17.30
|
13.76
|
17.74
|
16.89
|
|
|
|
|
|
|
TRADING
STATISTICS
($ based on intra-day
trading)
|
|
|
|
|
|
High
|
1.37
|
0.94
|
1.01
|
1.37
|
1.26
|
Low
|
0.68
|
0.60
|
0.66
|
0.66
|
0.60
|
Close
|
1.35
|
0.74
|
0.70
|
1.35
|
0.74
|
Average daily volume
(thousands)
|
820
|
253
|
458
|
642
|
403
|
(1)
|
Cash flow from
operations, net debt, operating netback and corporate netback are
non-GAAP measures and additional information with respect to these
measures can be found under the heading "Non-GAAP Measures"
in Gear's MD&A.
|
(2)
|
Net acquisitions
exclude non-cash items for decommissioning liability and deferred
taxes and is net of post-closing adjustments.
|
MESSAGE TO SHAREHOLDERS
With this quarterly release, the team at Gear is pleased to
report production above 7,000 boe per day with a liquids weighting
of 89 per cent delivering a field netback of greater than
$30 per boe. This is a netback number
per boe that Gear shareholders have not seen since the fourth
quarter of 2014. During that quarter in 2014 revenue was 14 per
cent higher than it is this quarter however at the time royalties
and operating costs per boe were 50 per cent and 14 per cent,
respectively, higher as well. The combination of more stable oil
prices and lower costs has provided an environment where the Gear
team is excited to resume significant organic growth activity.
Although only four wells were drilled during the second quarter,
Gear will have two active rigs drilling for light and heavy oil
throughout the third quarter, and into the fourth. In addition the
Gear team is pleased to have further deleveraged during the second
quarter with a reported net debt of $38.2
million, a 60 percent reduction from the previously
mentioned fourth quarter of 2014, and a 14 percent reduction from
the prior quarter in 2018. The Gear team remains cautiously
optimistic regarding future commodity prices with recent positive
news on two major oil pipeline developments and the continued
crude-by-rail expansion.
QUARTERLY HIGHLIGHTS
- Realized quarterly funds from operations of $13.7 million, a 69 per cent increase from the
first quarter funds from operations of $8.1
million. The quarterly increase is primarily due to an eight
per cent increase in sales volumes to 7,025 boe per day and
stronger liquids pricing.
- In the first quarter, as a result of limitations in shipping
oil to market, Gear decided to temporarily slow its heavy oil
production and built a record inventory of saleable oil in excess
of 40,000 barrels. Egress problems were alleviated in the second
quarter as a result of the seasonal increase in pipeline capacity,
the improvement in rail services, and the temporary shut-down of a
major oil sands project. As a result, Gear was able to sell those
inventoried oil volumes throughout the second quarter of 2018 at
improved prices. Gear estimates that approximately 500 barrels per
day sold in the second quarter related to inventoried volumes.
- Heavy and light oil prices improved in the second quarter
relative to the first quarter by $12.07 and $11.14
per barrel, respectively. The improvement in pricing was
attributable to the increase in WTI benchmark pricing by
approximately US$5 per barrel and the
narrowing of the WCS differential by approximately US$5 per barrel. The stronger pricing resulted in
a realized a field netback of $30.45
per boe, a 41 per cent improvement over the first quarter.
- Drilled and completed four gross (four net) wells during the
second quarter with a 100 per cent success rate in Paradise Hill. Subsequent to June 30, 2018, Gear has drilled an additional six
wells in Paradise Hill and two
multi-stage fractured wells in Hoosier. In addition, Gear has recently
initiated its light oil well drilling program in Wilson Creek. Second quarter production was
somewhat reduced as several wells adjacent to active drilling
operations were temporarily shut-in. As a result of the active
summer drilling program, Gear is forecasting production to grow
through the second half of the year.
- Improved the already strong balance sheet with net debt falling
from $45.3 million in the first
quarter to $39.0 million in the
second quarter. The $39.0 million of
net debt is inclusive of $13.6
million of convertible debentures ("debentures"). Starting
in 2019, the remaining debentures can be redeemed by Gear provided
that the 20 day volume weighted share price for Gear is greater
than or equal to $1.09 per share. At
any time up to the maturity or redemption date, debenture holders
have the right to convert at a price of $0.87 per common share, which if all debentures
were converted would result in the issuance of approximately 15.6
million Gear common shares. Net debt to annualized second quarter
funds from operations was 0.7 times.
STEPPE RESOURCES INC. ("Steppe")
- On July 23, 2018, Gear announced
it had entered into an agreement for the acquisition of Steppe for
approximately $70.4 million through a
combination of 21.9 million Gear shares and the assumption of
approximately $40.9 million of net
debt. Steppe's assets consist primarily of a material land position
and high netback light oil production of approximately 1,175 boe/d
in Southeast Saskatchewan. The
acquisition, which has been structured as a plan of arrangement
under the Business Corporations Act (Alberta), is subject to certain conditions
including the approval of Steppe shareholders, approval of the
Court of Queen's Bench and certain regulatory and third party
approvals. The Steppe acquisition is expected to close by the end
of the third quarter of 2018. In conjunction with the close of the
acquisition, Gear expects to increase its credit facilities from
$75 million to $115 million. Assuming the transaction closes at
the end of the third quarter of 2018, Gear forecasts a fourth
quarter 2018 annualized net debt to funds from operations ratio of
0.9 times (estimates are based on the following price assumptions:
WTI – US$67/bbl, WCS differential –
US$25/bbl, Edmonton Par differential
– US$7/bbl, AECO – Cdn$1.50/GJ and FX - $0.77
USD/CAD).
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: drilling, completion and optimization
plans for Gear's assets; second half 2018 production growth; the
expected closing of the Steppe acquisition and the timing thereof;
the expected increase to credit facilities; and the estimated
fourth quarter 2018 annualized net debt to funds from operations
ratio.
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; the
timing of receipt of regulatory, third party, court and Steppe
shareholder approvals for the Steppe acquisition; that the
increased credit facilities will be entered into in the amounts and
terms anticipated which shall be satisfactory to Gear or at all;
and the continued availability of adequate debt and equity
financing and funds 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: completion of the Steppe acquisition could be delayed
if parties are unable to obtain the necessary regulatory, stock
exchange, shareholder and court approvals on the timeline planned;
the Steppe acquisition will not be completed if all of these
approvals are not obtained or some other condition of closing is
not satisfied; the increase to Gear's credit facilities may be
subject to a number of conditions, including the closing of the
Steppe acquisition; if an increase to Gear's credit facilities is
not provided by Gear's lenders it may prevent the closing of the
Steppe acquisition; 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; 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 funds from operations, net debt, operating netback and
corporate netback, 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. Funds from operations
is calculated as funds 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. Operating
netbacks are presented both before and after taking into account
the effects of hedging and are calculated based on the amount of
revenues received on a per unit of production basis after royalties
and operating costs. Corporate netbacks are presented after taking
into account the effects of hedging and are calculated based on the
amount of revenues received on a per unit of production basis after
royalties, operating costs, general and administrative expenses,
interest and foreign exchange gain or loss. Additional information
relating to certain of these non-GAAP measures, including the
reconciliation between funds 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 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. In addition, Gear has
disclosed the cumulative production of wells on certain Gear
properties; 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.