Gear Energy Ltd. announces third quarter 2019 operating results

November 6, 2019 CNW

CALGARY, Nov. 6, 2019 /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 Consolidated Financial Statements and related Management’s Discussion and Analysis (“MD&A”) for the period ended September 30, 2019 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, except per share, share and per boe amounts)	Sep 30, 2019	Sep 30, 2018	Jun 30, 2019	Sep 30, 2019	Sep 30, 2018
FINANCIAL
Funds from operations ⁽¹⁾	15,968	11,578	17,104	48,104	33,329
Per boe	25.07	18.65	26.25	25.22	18.05
Per weighted average basic share	0.07	0.06	0.08	0.22	0.17
Cash flows from operating activities	13,613	16,831	18,881	38,475	40,214
Net income (loss)	3,493	706	5,684	2,365	(5,459)
Per weighted average basic share	0.02	–	0.03	0.01	(0.03)
Capital expenditures	11,800	18,749	3,334	24,386	34,377
Decommissioning liabilities settled	1,170	318	474	2,043	1,580
Net acquisitions (dispositions)⁽²⁾	115	65,470	(162)	(1,085)	65,870
Net debt^{(1) (3)}	69,837	83,733	72,127	69,837	83,733
Weighted average shares, basic (thousands)	219,084	198,826	219,093	219,063	196,294
Shares outstanding, end of period (thousands)	218,873	218,776	219,093	218,873	218,776

OPERATING
Production
Heavy oil (bbl/d)	3,929	4,484	4,104	4,060	4,497
Light and medium oil (bbl/d)	2,059	1,228	2,166	2,030	1,219
Natural gas liquids (bbl/d)	218	268	228	227	237
Natural gas (mcf/d)	4,295	4,609	3,977	4,021	4,879
Total (boe/d)	6,922	6,748	7,161	6,987	6,766
Average prices
Heavy oil ($/bbl)	52.93	56.79	60.45	55.45	51.89
Light and medium oil ($/bbl)	65.88	76.57	71.60	67.24	72.37
Natural gas liquids ($/bbl)	26.70	35.02	13.11	22.04	38.18
Natural gas ($/mcf)	0.79	0.93	0.92	1.33	1.24
Selected financial results ($/boe)
Commodity and other sales	50.97	53.70	57.23	53.26	49.76
Royalties	(6.06)	(7.33)	(6.87)	(5.78)	(5.79)
Operating costs	(17.20)	(17.69)	(18.08)	(18.00)	(16.91)
Operating netback ⁽¹⁾	27.71	28.68	32.28	29.48	27.06
Realized risk management gain (loss)	0.80	(6.55)	(1.65)	(0.35)	(5.44)
General and administrative	(2.03)	(1.81)	(2.47)	(2.18)	(2.39)
Interest	(1.52)	(1.05)	(1.90)	(1.76)	(0.97)
Transaction costs and realized gain (loss) on foreign exchange	0.11	(0.62)	(0.01)	0.03	(0.21)

TRADING STATISTICS ($ based on intra-day trading)
High	0.60	1.47	0.88	0.88	1.47
Low	0.41	1.00	0.53	0.41	0.66
Close	0.47	1.17	0.57	0.47	1.17
Average daily volume (thousands)	406	522	412	367	603

(1)	Funds from operations, net debt, and operating 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 (dispositions) 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. September 30, 2019 – $0.7 million, September 30, 2018 – $6.2 million, June 30, 2019 – $1.6 million.

MESSAGE TO SHAREHOLDERS

Gear is pleased to deliver another solid quarter for our shareholders. The strategy has continued to advance as planned, with a strong summer drilling program supporting ongoing production stability, strong funds from operations covering more than the quarter’s entire capital program and further meaningful reductions in net debt.

Since the beginning of the year Gear has reduced net debt by 24 per cent from $91.9 million to $69.8 million and recorded a strong net debt to annualized funds from operations ratio of 1.1 times for the third quarter of 2019. Meanwhile production has grown slightly from 6,847 boe per day in the fourth quarter of 2018 to 6,922 boe per day in the third quarter of 2019. In addition, annual guidance for 2019 is being increased slightly with a tighter production range of 6,900 to 7,100 boe per day (previously 6,800 to 7,100 boe per day) along with a five percent reduction in anticipated 2019 capital and abandonment expenditures to $40.5 million (previously $42.5 million). With current future strip prices, Gear is on track to invest approximately 65 per cent of estimated 2019 funds from operations while maintaining stable production through the year. Despite these solid results, Gear shares continue to trade at a discounted valuation, with today’s share price of $0.42 representing an enterprise value of approximately 2.4 times the annualized third quarter 2019 debt adjusted funds from operations.

QUARTERLY HIGHLIGHTS

Generated $16.0 million of funds from operations ($25.07 per boe) compared to $11.6 million in the third quarter of 2018 and $17.1 million in the second quarter of 2019. The seven per cent decrease from the second quarter of 2019 was realized despite an 11 per cent decrease in realized commodity prices. Stability in funds from operations was assisted by a decrease in operating costs of $0.88 per boe, an increase in realized risk management gains of $2.45 per boe, and a decrease in G&A and interest expenses of $0.82 per boe as compared to the second quarter of 2019. Gear reported third quarter net income of $3.5 million.
Reduced net debt by an additional $2.3 million through the third quarter for a total reduction of $22.1 million, or 24 per cent, from the beginning of 2019 to the end of the third quarter of 2019. Net debt was $69.8 million as at September 30, 2019 including $62.9 million of bank debt, $13.3 million of convertible debentures, and $6.4 million of positive working capital. Net debt to quarterly annualized funds from operations for the third quarter was 1.1 times.
During the third quarter, drilled seven heavy oil wells and one light oil well in Central Alberta with 100% success. Subsequent to quarter-end, seven of the eight wells have averaged approximately 100 boe per day per well over the first 30 days of production. The remaining heavy oil well has just recently started producing. The heavy oil wells were drilled, completed, and equipped at a total average cost of $0.9 million or approximately 12 per cent under budget, as a result of improved well design and shorter drill times. For the fourth quarter, Gear anticipates drilling three more heavy oil wells in Wildmere and Maidstone and two light oil wells in Tableland. Gear plans on releasing details for its 2020 capital program and guidance in December 2019.
Continued to maintain a relatively flat production profile, with volumes averaging 6,922 boe per day for the third quarter and 6,987 boe per day for the first nine months of 2019. Fourth quarter production is expected to incline slightly as a result of production from Gear’s third quarter drilling program.
Through the first nine months of 2019, Gear invested $2.0 million on decommissioning expenditures and is forecasting to invest a total of $3.0 million for the full year. During the nine months ended September 30, 2019 Gear abandoned 50 wells at an average cost of $24,000 per well or approximately half of what was estimated by the provincial regulators. As of today’s date, Gear has abandoned 71 wells in 2019, which is over four times the number of wells that are anticipated to be drilled during the year.
In late September 2019, Gear commenced its normal course issuer bid. During the third quarter, Gear purchased and cancelled 0.2 million common shares at a total cost of $0.1 million. Subsequent to the third quarter, Gear purchased and cancelled an additional 0.4 million common shares to date for an additional cost of $0.2 million. In order to best balance the future allocation of capital between drilling, debt repayment, and share buybacks, Gear will continue to closely monitor commodity prices, forecasted funds from operations, debt levels, expected returns on its capital program, and the share price.