Gear Energy Ltd. Announces First Quarter 2018 Operating Results

CALGARY, May 9, 2018 /CNW/ – Gear Energy Ltd. (“Gear” or the “Company”) (TSX:GXE) is pleased to provide the following first quarter operating update to shareholders. Gear’s Interim Financial Statements and related Management’s Discussion and Analysis (“MD&A”) for the period ended March 31, 2018 are available for review on Gear’s website at www.gearenergy.com and on www.sedar.com.

MESSAGE TO SHAREHOLDERS

The team at Gear have worked tirelessly through the last few years to manage external challenges and to set the Company up for future success even in an environment of business uncertainty. Two short years ago, Gear reported first quarter 2016 production of 4,435 boe/d and a net debt to funds from operations ratio of 3.7 times. Today, the team is forecasting to exit 2018 at more than double the production and with an exceptionally strong net debt to funds from operations ratio of approximately 0.5 times. In addition, management’s estimate of potential drilling locations has increased by 50 per cent over the same time period. Although temporary production restrictions were experienced in the first quarter of 2018, the resultant oil inventory build-up is now being sold at significantly higher prices and the outlook for the rest of 2018 and beyond is providing the team at Gear with significant reasons for enthusiasm.

QUARTERLY HIGHLIGHTS

During the first quarter of 2018, Gear experienced temporary limitations in its ability to ship oil to market. Heavy oil pipeline shipping capacity out of Canada decreased starting in November 2017 due to a leak on the Keystone pipeline which resulted in a backlog of oil inventory in Western Canada. In addition, crude-by-rail performance was challenged as a result of increased crude-by-rail demand, strong grain production, increased transportation of frac sand and extreme winter weather, all of which strained the rail network. As a result, Gear was subjected to approximately 30 per cent apportionment through the first quarter on its heavy oil sales.

To manage these restrictions prudently while maximizing realized pricing, Gear temporarily slowed its heavy oil production and built a record inventory of saleable oil in excess of 40,000 barrels. Total corporate productive capability for the first quarter was estimated to be 7,350 boe per day with total first quarter sales actually coming in at 6,522 boe per day. Starting in April 2018, oil egress has improved with reduced pipeline apportionments and greater crude-by-rail availability allowing Gear to start ramping base production back up and selling its excess oil inventory at substantially higher prices.

• Realized quarterly funds from operations of $8.1 million, a seven percent decrease from the prior year first quarter of $8.7 million and a 45 per cent decrease from the fourth quarter of 2017 of $14.6 million. The lower funds from operations are primarily due to the temporarily restricted sales volumes and decreases in realized prices. Current estimated field production is approximately 7,000 boe per day as Gear continues to ramp up production that was artificially slowed as a result of first quarter egress challenges. If the recent improvements in heavy oil shipping capacity continue, Gear expects to eliminate the majority of excess oil inventory throughout the second quarter, providing an incremental boost to sales volumes in the range of 400 barrels per day. Current expectations are that second quarter sales production should again be in excess of 7,000 boe per day, similar to the fourth quarter of 2017.
• Realized revenue for the first quarter of $42.42 per boe compared to $41.98 per boe in the first quarter of 2017 and $46.06 per boe in the fourth quarter of 2017. The decrease in realized prices was driven by lower heavy oil pricing as a result of widening WCS heavy oil differentials which increased to $24.27 per barrel in the first quarter of 2018 compared to a $14.58 per barrel discount in the first quarter of 2017 and a $12.27per barrel discount in the fourth quarter of 2017. WCS differentials have continued to be volatile, with May 2018 settled at a $16.62 per barrel discount.
• Realized a first quarter operating netback of $21.64 per boe, very similar to the prior year first quarter operating netback of $21.73 per boe and a decrease of $4.24 per boe or 16 per cent from the fourth quarter as a result of lower realized pricing. Corporate netback for the first quarter was $13.76 per boe, a 16 per cent reduction from the prior year first quarter and a decrease of $8.64 per boe or 39 per cent from the fourth quarter of 2017 primarily as a result of higher realized hedging losses.
• Despite the reduced production volumes during the quarter, Gear was able to improve its operating expenses to $15.83 per boe, a three per cent reduction from the prior year first quarter and a one per cent reduction from the fourth quarter of 2017. Although Gear experienced higher in-field trucking costs in order to manage inventory levels, these were offset by deferring non-essential maintenance expenditures.
• Drilled and completed two gross (1.9 net) wells with a 100 per cent success rate. The first well was a quad-lateral unlined horizontal Cummings well into a new area outside Gear’s existing Wildmere asset. The well has averaged approximately 140 barrels of oil per day over the last 30 days of production. The second well was Gear’s first extended reach Basal Belly River light oil well in the Wilson Creek area. This 1.5 mile long well looks encouraging with peak IP30 rates to date of approximately 250 boe per day (230 net). Both of these wells are likely to be followed up with further drilling in the second half of 2018. In addition, Gear was very active at crown land sales with the acquisition of approximately 14,000 acres in a new medium oil area and added land to its Wildmere core area.
• Successfully increased Gear’s credit facilities to $75 million from $55 million following the semi-annual borrowing base review completed subsequent to quarter end. Gear exited the first quarter 2018 with $45.3 million in net debt which includes $13.7 million in outstanding convertible debentures and $36.2 millionborrowed against its credit facilities. Based on current forward commodity pricing indications and internal production and cost forecasts, Gear anticipates exiting the year with an annualized fourth quarter 2018 net debt to funds from operations ratio of approximately 0.5 times.