CALGARY, Nov. 7, 2018 /CNW/ - Gear Energy Ltd.
("Gear" or the "Company") (TSX:GXE) is pleased to provide the
following third quarter operating update to shareholders. Gear's
Interim Financial Statements and related Management's Discussion
and Analysis ("MD&A") for the period ended September 30, 2018 are available for review on
Gear's website at www.gearenergy.com and on www.sedar.com.
Financial
Summary
|
|
|
|
Three months
ended
|
Nine months
ended
|
(Cdn$ thousands, per
boe amounts)
|
Sep 30,
2018
|
Sep 30,
2017
|
Jun 30,
2018
|
Sep 30,
2018
|
Sep 30,
2017
|
FINANCIAL
|
|
|
|
|
|
Funds from operations
(1)
|
11,578
|
9,960
|
13,674
|
33,329
|
28,937
|
Per
weighted average basic share
|
0.06
|
0.05
|
0.07
|
0.17
|
0.15
|
Per
weighted average diluted share
|
0.05
|
0.05
|
0.07
|
0.17
|
0.14
|
Cash flow from
operating activities
|
16,831
|
9,197
|
8,596
|
40,214
|
26,804
|
Net income
(loss)
|
706
|
(2,705)
|
(1,869)
|
(5,459)
|
3,282
|
Per
weighted average basic and diluted share
|
-
|
(0.01)
|
(0.01)
|
(0.03)
|
0.02
|
Capital
expenditures
|
18,749
|
10,513
|
6,385
|
34,377
|
35,458
|
Net acquisitions
(2)
|
65,470
|
1,635
|
10
|
65,870
|
1,695
|
Net debt (1)
(3)
|
83,733
|
44,568
|
38,960
|
83,733
|
44,568
|
Weighted average
shares, basic (thousands)
|
198,826
|
193,158
|
195,045
|
196,294
|
192,975
|
Weighted average
shares, diluted (thousands)
|
217,426
|
193,158
|
195,045
|
196,294
|
209,430
|
Shares outstanding,
end of period (thousands)
|
218,776
|
194,968
|
195,213
|
218,776
|
194,968
|
|
|
|
|
|
|
OPERATING
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|
|
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Production
|
|
|
|
|
|
Heavy oil (bbl/d)
|
4,484
|
4,054
|
4,774
|
4,497
|
3,894
|
Light and medium oil
(bbl/d)
|
1,228
|
1,290
|
1,232
|
1,219
|
1,263
|
Natural gas liquids
(bbl/d)
|
268
|
279
|
219
|
237
|
273
|
Natural gas
(mcf/d)
|
4,609
|
5,415
|
4,806
|
4,879
|
5,316
|
Total (boe/d)
|
6,748
|
6,525
|
7,025
|
6,766
|
6,316
|
Average
prices
|
|
|
|
|
|
Heavy oil ($/bbl)
|
56.79
|
44.00
|
55.04
|
51.89
|
43.96
|
Light and medium oil
($/bbl)
|
76.57
|
53.12
|
75.67
|
72.37
|
57.76
|
Natural gas liquids
($/bbl)
|
35.02
|
27.28
|
40.51
|
38.18
|
26.51
|
Natural gas
($/mcf)
|
0.93
|
1.52
|
1.08
|
1.24
|
2.46
|
Netback
($/boe)
|
|
|
|
|
|
Commodity and other
sales
|
53.70
|
40.41
|
52.67
|
49.76
|
42.05
|
Royalties
|
(7.33)
|
(4.50)
|
(5.06)
|
(5.79)
|
(4.49)
|
Operating costs
|
(17.69)
|
(16.57)
|
(17.16)
|
(16.91)
|
(16.89)
|
Operating netback
(1)
|
28.68
|
19.34
|
30.45
|
27.06
|
20.67
|
Realized risk management
(losses) gains
|
(6.55)
|
0.11
|
(5.55)
|
(5.44)
|
(0.61)
|
General and
administrative
|
(1.81)
|
(2.06)
|
(2.55)
|
(2.39)
|
(2.37)
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Interest
|
(1.05)
|
(0.81)
|
(0.93)
|
(0.97)
|
(0.84)
|
Transaction costs
|
(0.64)
|
-
|
-
|
(0.21)
|
-
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Other
|
0.02
|
-
|
(0.02)
|
-
|
(0.07)
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Corporate netback
(1)
|
18.65
|
16.58
|
21.40
|
18.05
|
16.78
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|
|
|
|
|
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TRADING
STATISTICS
($ based on intra-day
trading)
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|
|
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High
|
1.47
|
0.86
|
1.37
|
1.47
|
1.26
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Low
|
1.00
|
0.65
|
0.68
|
0.66
|
0.60
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Close
|
1.17
|
0.82
|
1.35
|
1.17
|
0.82
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Average daily volume
(thousands)
|
522
|
326
|
820
|
603
|
377
|
(1)
|
Funds 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.
|
(3)
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Net debt includes the
risk management liability acquired through the Steppe Resources
Inc. corporate acquisition of $6.2 million (2017 – NIL).
|
MESSAGE TO SHAREHOLDERS
The third quarter realized very encouraging field results from
an active drilling program across the light and heavy oil
portfolio. On the heavy oil assets, two step-out multi-lateral
wells have successfully de-risked approximately 45 follow-up
locations in a new formation in Wildmere and in a new core area in
Maidstone. On the light oil
assets, the application of extended reach horizontal drilling is
continuing to improve the economics in Wilson Creek, and Gear's first ever Cardium
horizontal well in Ferrier shows significant future potential. In
addition, the close of the acquisition of Steppe Resources Inc.
("Steppe") (the "Steppe Acquisition") further enhances the
diversity of Gear's portfolio by providing a new core area with
significant future potential and increased the corporate weighting
of light oil and natural gas liquids in October to approximately 30
per cent. However, recent challenges in both pricing and egress are
expected to temper this operational success through the rest of the
year and into early 2019. As of today, the short-term challenges
include heavy oil differentials for November and December that have
expanded above US$40 per barrel, and
light oil differentials and apportionments (primarily in
Alberta) that have also expanded
materially. There is a line of sight to these issues improving in
the next few months as industry continues to announce production
shut-ins, (approximately 100,000 barrels per day announced to
date), US refinery maintenance ends, domestic inventory levels
diminish and crude by rail shipping from Canada continues to increase. In the
longer-term, these issues are expected to be resolved by the
completion of one, or multiple, new pipeline projects. In the
meantime, the team has, and will continue to, proactively react to
changes in the macro energy environment to maximize the value of
the discovered barrels and maintain a strong balance sheet. Having
a strong balance sheet has always been a core strategy at Gear,
providing significant ability to be flexible and opportunistic in
managing the business. In the current environment, the strong
balance sheet supports Gear's ability to defer production and
target future increased value and returns on capital.
STEPPE ACQUISITION
- On September 18, 2018, Gear
closed the Steppe Acquisition for approximately $66.0 million through a combination of 21.9
million Gear shares and the assumption of approximately
$38.6 million of net debt. Steppe's
assets consist primarily of a material land position and high
netback light oil production of approximately 1,000 boe per day in
Southeast Saskatchewan. In
conjunction with the close of the Steppe Acquisition, Gear
increased its credit facilities from $75
million to $115 million with
the next borrowing base review scheduled for the Spring of
2019.
QUARTERLY HIGHLIGHTS
- Completed an active oil drilling program with two to three rigs
running through the third quarter of 2018 with 17 (16 net) wells
drilled to the end of September, bringing the year to date total to
23 wells at a 96 per cent success rate. During the third quarter,
10 of the new wells were brought on production contributing over
600 barrels per day to the September exit. The remaining seven (six
net) wells in Wilson Creek,
Ferrier and Wildmere will be brought on production at reduced rates
into the fourth quarter. The total productive capacity of the 16
net wells drilled in the third quarter is estimated to be over
1,400 boe per day which would be sold in the fourth quarter if not
for the current pricing and egress challenges. Highlights of the
successful program include one six leg multi-lateral well into a
new formation and two multi-lateral re-entries in Wildmere, one
step-out quad-lateral Cummings well in Maidstone, two new multi-stage fractured wells
in Hoosier, six McLaren wells in
Paradise Hill, three (two net)
Basal Belly River wells in Wilson
Creek, and one bioturbated Cardium well in Ferrier. In
aggregate, the third quarter drilling program has successfully
yielded production capability as expected and has also de-risked
approximately 45 future drilling locations and a yet to be
determined number of future horizontal re-entry opportunities.
- Production of 6,748 boe per day for the third quarter
represented a decrease of approximately four per cent from the
second quarter as a result of natural declines and shut-ins while
drilling and completing adjacent wells, partially offset by the
addition of new production later in the quarter and the close of
the Steppe Acquisition.
- Realized quarterly funds from operations of $11.6 million, bringing year-to-date funds from
operations to $33.3 million which
funded almost 100 per cent of the development capital spending to
the end of the third quarter. The corporate netback for the quarter
came in at $18.65 per boe, a decrease
of $2.75 per boe from the prior
quarter. The decrease is primarily due to temporarily increased
royalties and an escalation of losses on the 2018 risk management
positions, with most other costs relatively stable in comparison to
the prior quarter.
- Exited the quarter with bank debt borrowings of $66.2 million on Gear's $115 million credit facilities. With an active
development drilling program and the assumption of debt associated
with the Steppe Acquisition at the end of the third quarter, net
debt to trailing 12 month funds from operations was 1.7 times.
2018 GUIDANCE
The Gear team has worked hard through 2018 to unlock significant
new reserves that were anticipated to boost fourth quarter
production to approximately 9,500 boe per day. However, in light of
the current weak pricing environment, that production growth will
now be deferred into 2019. In order to maximize the value received
for its production and to ensure positive returns on capital
invested, an estimated 20 to 30 per cent of forecasted fourth
quarter production will be deferred until pricing improves. This
will be accomplished by reducing the $50
million development capital guidance by 12 to 14 per cent
and delaying approximately five drilling locations until 2019. In
addition, approximately 40,000 barrels of heavy oil will be
produced and then stored in surface tanks to be sold at a later
date, similar to the successful actions taken in the first quarter
of 2018. The remaining heavy and light oil volume reductions will
be accomplished by slowing down and shutting in wells as required.
To take advantage of the relatively stable pricing in southeast
Saskatchewan, volumes from the
Steppe Acquisition will not be affected by these actions. In
aggregate the annual production guidance for 2018 will be reduced
by 10 to 12 per cent with some associated minor adjustments in per
unit costs. These efforts are focused primarily on maximizing
realized revenue, however, they will also assist Gear in
maintaining a strong balance sheet. A continued rapid and
consolidated effort by Canadian producers to reducing domestic
storage levels would go a long way in alleviating the current
record pricing discounts and accelerating the forecasted recovery
of prices prior to any actual improvements in rail or pipe
egress.
A summary of revised 2018 guidance is as follows:
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|
|
|
|
New 2018
Guidance
|
Previous 2018
Guidance
|
2018 YTD
Actuals
|
Production – Annual
(boe/d)
|
6,650 -
6,750
|
7,500
|
6,766
|
Per cent heavy oil
(%)
|
65
|
64
|
66
|
Per cent light/medium
oil and NGLs (%)
|
25
|
25
|
18
|
Royalty rate
(%)
|
12
|
11
|
11.6
|
Operating costs
($/boe)
|
17.25
|
15.85
|
16.91
|
General and
administrative expense ($/boe)
|
2.45
|
2.25
|
2.39
|
Interest expense
($/boe)
|
1.20
|
0.80
|
0.97
|
Capital and
abandonment expenditures ($ millions)
|
42 -
44
|
50
|
36
|
|
|
|
|
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: Gear's expectations of commodity
prices and differentials and trends affecting such commodity prices
and differentials; expected future drilling locations associated
with a new formation in Wildmere and Maidstone; expected future potential
associated with Gear's Cardium drilling; expected productive
capacity associated with certain deferred drilling and production;
Gear's intent to maximize realized revenue and maintain a strong
balance sheet; 2018 updated guidance estimates including expected
average 2018 production, expected commodity weightings, royalty
rate expectations, operating cost expectations, interest expense
expectations and expected capital and abandonment expenditures; the
intent to defer development capital spending and production growth
into 2019; expectations as to light and heavy oil production
to be slowed down, shut-in and/or stored; expectations with respect
to availability of transportation, egress and apportionments of
light and heavy oil production and trends affecting transportation,
egress and apportionments; the expectation to be able to
proactively react to changes in the macro environment to maximize
the value of the discovered barrels and maintain a strong balance
sheet; expected future drilling locations; expected timing for
bringing certain wells on production; and Gear's intent to slow
down wells or shut them in to defer sale to a time when pricing
improves.
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 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: 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.
Drilling Locations
This press release discloses
drilling locations associated with a new formation in Wildmere and
a new core area in Maidstone.
These drilling locations are considered unbooked locations as they
currently do not have any associated booked proved or probable
reserves. Unbooked locations are internal estimates based on Gear's
prospective acreage and an assumption as to the number of wells
that can be drilled per section based on industry practice and
internal review. Unbooked locations have been identified by
management as an estimation of our multi-year drilling activities
based on evaluation of applicable geologic, seismic, engineering,
production, pricing assumptions and reserves information. The
drilling locations on which Gear actually drill wells will
ultimately depend upon the availability of capital, regulatory
approvals, seasonal restrictions, oil and natural gas prices,
costs, actual drilling results, additional reservoir information
that is obtained and other factors. There is more uncertainty
whether wells will be drilled in unbooked locations than in booked
locations and if drilled there is more uncertainty that such
unbooked locations will result in additional oil and gas reserves,
resources or production.
SOURCE Gear Energy Ltd.