Gear Energy Ltd. Announces Third Quarter 2018 Operating Results

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.

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: