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Gear Energy Ltd. Announces Fourth Quarter 2018 Operating Results


CALGARYFeb. 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

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

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

$

$

$

$



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