Gear Energy Ltd. Announces Fourth Quarter 2018 Operating Results

February 27, 2019 CNW

CALGARY, Feb. 27, 2019 /CNW/ – Gear Energy Ltd. (“Gear” or the “Company”) (TSX:GXE) is pleased to provide the following fourth quarter operating update to shareholders. Gear’s Consolidated Financial Statements and related Management’s Discussion and Analysis (“MD&A”) for the period ended December 31, 2018 are available for review on Gear’s website at www.gearenergy.com and on www.sedar.com.

Financial Summary

	Three months ended			Twelve months ended
(Cdn$ thousands, except per share, share and per boe amounts)	Dec 31, 2018	Dec 31, 2017	Sep 30, 2018	Dec 31, 2018	Dec 31, 2017
FINANCIAL
Funds from operations ⁽¹⁾	2,089	14,613	11,578	35,418	43,550
Per weighted average basic share	0.01	0.07	0.06	0.18	0.23
Cash flows from operating activities	1,538	9,964	16,831	41,752	36,768
Net income	10,553	6,947	706	5,094	10,229
Per weighted average basic share	0.05	0.04	–	0.03	0.05
Capital expenditures	9,482	12,307	18,749	43,859	47,765
Decommissioning liabilities settled	1,401	1,260	318	2,981	2,577
Net acquisitions⁽²⁾	302	14	65,470	66,172	1,709
Net debt^{(1) (3)}	91,908	43,269	83,733	91,908	43,269
Weighted average basic shares (thousands)	219,013	194,968	198,826	202,020	193,477
Shares outstanding, end of period (thousands)	219,015	194,968	218,776	219,015	194,968

OPERATING
Production
Heavy oil (bbl/d)	4,064	4,760	4,484	4,388	4,112
Light and medium oil (bbl/d)	1,834	1,161	1,228	1,374	1,237
Natural gas liquids (bbl/d)	267	242	268	244	265
Natural gas (mcf/d)	4,091	5,566	4,609	4,680	5,379
Total (boe/d)	6,847	7,090	6,748	6,786	6,511
Average prices
Heavy oil ($/bbl)	22.45	49.18	56.79	45.01	45.49
Light and medium oil ($/bbl)	46.68	64.71	76.57	63.73	59.40
Natural gas liquids ($/bbl)	23.95	27.79	35.02	34.26	26.80
Natural gas ($/mcf)	1.45	1.90	0.93	1.29	2.32
Netback ($/boe)
Commodity and other sales	27.64	46.06	53.70	44.13	43.15
Royalties	(3.44)	(4.15)	(7.33)	(5.19)	(4.40)
Operating costs	(17.13)	(16.03)	(17.69)	(16.97)	(16.66)
Operating netback ⁽¹⁾	7.07	25.88	28.68	21.97	22.09
Realized risk management losses	(0.90)	(0.73)	(6.55)	(4.29)	(0.64)
General and administrative	(1.18)	(1.92)	(1.81)	(2.08)	(2.25)
Interest	(1.50)	(0.83)	(1.05)	(1.10)	(0.84)
Transaction costs	(0.19)	–	(0.64)	(0.21)	–
Other	0.02	–	0.02	(0.01)	(0.04)
Corporate netback⁽¹⁾	3.32	22.40	18.65	14.28	18.32

TRADING STATISTICS ($ based on intra-day trading)
High	1.23	1.00	1.47	1.47	1.26
Low	0.44	0.70	1.00	0.44	0.60
Close	0.57	0.85	1.17	0.57	0.85
Average daily volume (thousands)	558	468	522	592	400

(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)	Net debt includes the risk management liability acquired through the Steppe Resources Inc. corporate acquisition of $4.5 million (2017 – NIL).

MESSAGE TO SHAREHOLDERS

The Canadian oil and gas industry entered 2018 on a positive basis albeit with some concerns regarding market egress for its products. The first three quarters of 2018 were relatively strong if not robust for most of the energy sector including Gear. This positive business environment however, disappeared rapidly in the fourth quarter with oil prices collapsing in response to deteriorating egress and market conditions.

The Gear team responded quickly to the egress-based erosion of Canadian oil prices during the fourth quarter of 2018. Significant actions were undertaken in order to maximize realized corporate revenue by limiting production during the record low price period, with the intention to then maximize production once prices recovered. These efforts should now be rewarded as we enter 2019 with a dramatically stronger oil price environment.

Reported fourth quarter production of 6,847 boe per day was approximately 2,600 boe per day lower than previously guided, due to a combination of approximately 1,200 boe per day deferred into the future through postponed drilling and capital reductions and 1,400 boe per day deferred through wells being shut-in, slowed down, and produced to inventory.

Oil prices in December were trading at or near record lows with the Western Canada Select heavy (“WCS”) and Mixed Sweet Blend or Edmonton Par light (“MSW”) benchmark prices realizing only Cdn$8 per barrel and Cdn$19 per barrel, respectively. In contrast, the forward curves for these two benchmarks over the first half of 2019 are now trading at Cdn$55 per barrel and Cdn$66 per barrel, respectively. The incremental value that will be realized by delaying fourth quarter production into 2019, should ultimately be measured in the millions of dollars.

The aggregate results for the fourth quarter of 2018 were quite muted in comparison to both previous and expected future quarters as a result of these revenue maximizing actions. However, with continued pricing stability, and the eventual resumption of full production capacity, the Gear team remain very optimistic for the outlook through 2019 and beyond.

QUARTERLY HIGHLIGHTS

Drilled two successful dual-lateral un-lined GP heavy oil wells in Wildmere, with initial production coming on as expected despite being delayed until early February when pricing improved.
Successfully fracture stimulated and initiated production from Gear’s 103/04-02-040-08W5 Cardium well in Ferrier. Despite intermittent production due to pipeline apportionments, the well flowed at approximately 640 boe per day (515 barrels per day of oil and NGL’s) for the 28 days that it was on production during the fourth quarter. The 04-02 well has subsequently had a pump installed and is ready to be brought on steady production as soon as a third-party gas pipeline is repaired, currently estimated to be early in the second quarter of 2019.
Initiated new production or continued existing production from five (2.9 net) 2018 Wilson Creek horizontal Basal Belly River wells ranging in length from one to 1.75 miles. Net of pipeline apportionment restrictions and deferred optimization efforts, the five wells averaged gross rates of approximately 150 boe per day per well through December of 2018, with further optimization efforts ongoing in early 2019.
Successfully initiated production from a new zone in Wildmere with the six-legged 105/12-28-048-05W4 multi-lateral un-lined horizontal Sparky well. Initial 30 day oil rates of approximately 160 barrels per day were realized, prior to the well being temporarily shut-in for improved prices. This successful well, in addition to the successfully step-out Cummings multi-lateral wells drilled in Lindbergh and Maidstone, materially enhances Gear’s inventory of future drilling locations in the area.
Limited production during the fourth quarter to 6,847 boe per day as a result of both egress and pricing challenges.
Realized quarterly funds from operations of $2.1 million and maintained a positive operating and corporate netback of $7.07 per boe and $3.32 per boe, respectively, despite the record low-price environment experienced during November and December.

ANNUAL HIGHLIGHTS

Drilled 26 gross (23.9 net) wells with a 96 per cent success rate. The 2018 drilling program consisted of 19 heavy oil wells (19 net), 10 in Paradise Hill, 7 in Wildmere, and 2 in Hoosier. In addition, seven light oil wells (4.9 net) were drilled in Wilson Creek and Ferrier.
Completed the acquisition of Steppe Resources on September 18, 2018 and acquired a material land position and high netback light oil in Tableland, Southeast Saskatchewan where pipeline egress constraints do not presently exist. The acquisition was completed with the issuance of 21.9 million Gear shares and the assumption of approximately $38.9 million of net debt. As a result of this successful acquisition and the relative stability of the associated pricing, Gear has focused early 2019 capital towards the Tableland area. Two two-mile Torquay wells are planned to be drilled and on production by late in the first quarter or early in the second quarter of 2019. To date, both wells have been successfully drilled and one has been fracture stimulated.
Increased Gear’s borrowing base of its Credit Facilities from $55 million at the end of 2017 to $115 millionat the end of 2018. As at December 31, 2018, Gear was drawn 68 per cent of its Credit Facilities.

2019 OUTLOOK

Production through January and February 2019 to date has been restricted by ongoing pipeline apportionments, temporarily reduced crude by rail takeaway, bouts of extreme cold weather and third party shut-ins. However, Gear is currently targeting no change to production guidance with plans to offset those early months with a strong finish to the first half of the year. In addition, continued improvements in forecast pricing have enhanced expectations for balance sheet strength. With current strip pricing, Gear anticipates reporting a first half annualized net debt to funds from operations ratio of 1.0 to 1.5 times.
Remaining guidance is being maintained as follows:

	2019 First Half Guidance
Average Production (boe/d)	7,300 – 7,500
Heavy Oil Weighting (%)	59
Light/Medium Oil & NGL Weighting (%)	31
Royalties (%)	10 – 12
Operating and Transportation Costs ($/boe)	16.00 – 17.00
G&A Costs ($/boe)	2.10
Interest Costs ($/boe)	1.70
Capital and Abandonment Expenditures ($ million)	10

GEAR ENERGY LTD.
CONSOLIDATED BALANCE SHEETS (unaudited)
As at December 31

(Cdn$ thousands)		2018		2017
ASSETS
Current assets
	Accounts receivable	$	5,716	$	13,240
	Prepaid expenses	3,914		2,862
	Inventory	7,185		7,297
	Risk management contracts	3,230		–
		20,045		23,399

Deferred income tax asset		26,531		26,531
Risk management contracts		1,644		–
Property, plant and equipment		331,622		256,961
Total assets		$	379,842	$	306,891

LIABILITIES
Current liabilities
	Accounts payable and accrued liabilities	$	12,475	$	11,625
	Decommissioning liability	1,843		–
	Risk management contracts	–		5,295
		14,318		16,920

Debt		78,461		41,345
Convertible debentures		12,297		12,155
Decommissioning liability		86,839		80,541
Total liabilities		191,915		150,961

SHAREHOLDERS’ EQUITY
	Share capital	337,740		311,240
	Warrants	129		129
	Equity component of convertible debentures	2,519		2,592
	Contributed surplus	15,654		15,178
	Deficit	(168,115)		(173,209)
Total shareholders’ equity		187,927		155,930
Total liabilities and shareholders’ equity		$	379,842	$	306,891

GEAR ENERGY LTD.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (unaudited)

For the years ended December 31

(Cdn$ thousands)

Share
Capital

Warrants

Equity
Component of
Convertible
Debentures

Contributed
Surplus

Deficit

Total
Equity

Balance at December 31, 2016

308,900

335

2,649

13,786

(183,438)

142,232

Exercise of stock options

2,022

–

(573)

–

1,449

Cancellation of warrants

–

(206)

–

206

–

Share issue costs, net of deferred tax of $2

(5)

–

(5)

Issued on conversion of convertible

debentures

323

–

(57)

–

266

Share-based compensation

–

1,759

–

1,759

Net income for the year

–

10,229

Balance at December 31, 2017

311,240

129

2,592

15,178

(173,209)

155,930

Exercise of stock options

1,355

–

(600)

–

755

Issued as consideration on corporate

acquisition

24,743

–

24,743

Share issue costs

(7)

–

(7)

Issued on conversion of convertible

debentures

409

–

(73)

–

336

Share-based compensation

–

1,076

–

1,076

Net income for the year

–

5,094

Balance at December 31, 2018

337,740

129

2,519

15,654

(168,115)

187,927

GEAR ENERGY LTD.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (unaudited)

			Three Months Ended December 31				Twelve Months Ended December 31
(Cdn$ thousands, except per share amounts)				2018		2017		2018		2017
REVENUE
	Sales of crude oil, natural gas and natural gas liquids		$	17,408	$	30,047	$	109,316	$	102,551
	Royalties			(2,164)		(2,705)		(12,858)		(10,454)
				15,244		27,342		96,458		92,097

		Realized cash loss on risk management contracts		(567)		(476)		(10,619)		(1,524)
		Unrealized gain (loss) on risk management contracts		21,283		(5,261)		14,641		2,010
				35,960		21,605		100,480		92,583

EXPENSES
	Operating			10,790		10,456		42,033		39,586
	General and administrative			745		1,253		5,163		5,347
	Interest and financing charges			944		540		2,728		1,986
	Depletion, depreciation and amortization			11,959		10,450		42,142		37,896
	Accretion			630		578		2,303		2,199
	Share-based compensation			230		420		1,076		1,759
	Transaction costs			119		–		514		–
	Gain on asset disposition			–		–		(556)		(445)
	Other			(10)		1		(17)		101
				25,407		23,698		95,386		88,429

Deferred tax recovery				–		9,040		–		6,075
Net income and comprehensive income			$	10,553	$	6,947	$	5,094	$	10,229

Net income per share, basic			$	0.05	$	0.04	$	0.03	$	0.05
Net income per share, diluted			$	0.05	$	0.03	$	0.03	$	0.05

GEAR ENERGY LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

		Three Months Ended December 31				Twelve Months Ended December 31
(Cdn$ thousands)		2018		2017		2018		2017

CASH FLOWS FROM OPERATING ACTIVITIES
Net income		$	10,553	$	6,947	$	5,094	$	10,229
Add items not involving cash:
	Unrealized loss (gain) on risk management contracts	(21,283)		5,261		(14,641)		(2,010)
	Bad debt recovery	–		(3)		–		(3)
	Depletion, depreciation and amortization	11,959		10,450		42,142		37,896
	Accretion	630		578		2,303		2,199
	Share-based compensation	230		420		1,076		1,759
	Gain on asset disposition	–		–		(556)		(445)
	Deferred tax recovery	–		(9,040)		–		(6,075)
Decommissioning liabilities settled		(1,401)		(1,260)		(2,981)		(2,577)
Change in non-cash working capital		850		(3,389)		9,315		(4,205)
		1,538		9,964		41,752		36,768

CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings of debt under credit facility		12,302		1,937		37,116		10,182
Repayment of debt assumed on corporate acquisition		–		–		(36,251)		–
Issuance of share capital, net of share issue costs		44		–		748		1,442
		12,346		1,937		1,613		11,624

CASH FLOWS USED IN INVESTING ACTIVITIES
Property, plant and equipment expenditures		(9,482)		(12,307)		(43,859)		(47,765)
Cash received on corporate acquisition		–		–		693		–
Acquisition of petroleum and natural gas properties		(2)		(46)		(452)		(2,261)
Disposition of petroleum and natural gas properties		–		(11)		556		511
Change in non-cash working capital		(5,093)		463		(303)		1,123
		(14,577)		(11,901)		(43,365)		(48,392)

DECREASE IN CASH		(693)		–		–		–
CASH, BEGINNING OF PERIOD		693		–		–		–
CASH, END OF PERIOD		$	–	$	–	$	–	$	–