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Gear Energy Ltd. Announces Fourth Quarter 2019 Operating Results


CALGARY – 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, 2019 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,
2019

Dec 31,
2018

Sep 30,
2019

Dec 31,
2019

Dec 31,
2018

FINANCIAL

Funds from operations (1)

13,738

2,089

15,968

61,842

35,418

 Per boe

21.68

3.32

25.07

24.34

14.28

   Per weighted average basic share

0.06

0.01

0.07

0.28

0.18

Cash flows from operating activities

11,401

1,538

13,613

49,876

41,752

Net (loss) income

(8,045)

10,553

3,493

(5,680)

5,094

   Per weighted average basic share

(0.04)

0.05

0.02

(0.03)

0.03

Capital expenditures

12,603

9,482

11,800

36,989

43,859

Decommissioning liabilities settled

889

1,401

1,170

2,932

2,981

Net acquisitions (dispositions) (2)

109

302

115

(976)

66,172

Net debt (1)(3)

69,752

91,908

69,837

69,752

91,908

Weighted average shares, basic (thousands)

218,365

219,013

219,084

218,887

202,020

Shares outstanding, end of period (thousands)

217,610

219,015

218,873

217,610

219,015

OPERATING

Production

     Heavy oil (bbl/d)

4,034

4,064

3,929

4,053

4,388

     Light and medium oil (bbl/d)

1,763

1,834

2,059

1,963

1,374

     Natural gas liquids (bbl/d)

269

267

218

238

244

     Natural gas (mcf/d)

4,935

4,091

4,295

4,252

4,680

     Total (boe/d)

6,888

6,847

6,922

6,962

6,786

Average prices

     Heavy oil ($/bbl)

49.17

22.45

52.93

53.87

45.01

     Light and medium oil ($/bbl)

64.82

46.68

65.88

66.69

63.73

     Natural gas liquids ($/bbl)

22.79

23.95

26.70

22.26

34.26

     Natural gas ($/mcf)

2.36

1.45

0.79

1.63

1.29

Netback ($/boe)

     Commodity and other sales

47.97

27.64

50.97

51.94

44.13

     Royalties

(5.52)

(3.44)

(6.06)

(5.71)

(5.19)

     Operating costs

(17.93)

(17.13)

(17.20)

(17.98)

(16.97)

     Operating netback (1)

24.52

7.07

27.71

28.25

21.97

     Realized risk management gain (loss)

0.58

(0.90)

0.80

(0.12)

(4.29)

     General and administrative

(2.13)

(1.18)

(2.03)

(2.17)

(2.08)

     Interest

(1.30)

(1.50)

(1.52)

(1.65)

(1.10)

   Transaction costs

(0.19)

(0.21)

 Realized gain (loss) on foreign exchange

0.01

0.02

0.11

0.03

(0.01)

TRADING STATISTICS

($ based on intra-day trading)

High

0.48

1.23

0.60

0.88

1.47

Low

0.26

0.44

0.41

0.26

0.44

Close

0.46

0.57

0.47

0.46

0.57

Average daily volume (thousands)

529

558

406

418

592

(1)

Funds from operations, net debt and operating netback are non-GAAP measures and are reconciled to the nearest GAAP measures 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. December 31, 2019 – nil, December 31, 2018 – $4.5 million, September 30, 2019 – $0.7 million.

MESSAGE TO SHAREHOLDERS

Despite ongoing macro volatility in the Canadian energy business, the Gear team delivered exceptional performance through 2019. With annual funds from operations exceeding capital investment by a healthy margin, Gear was able to reduce outstanding net debt by over 24 per cent, exiting 2019 with a strong balance sheet and a very competitive net debt to funds from operations ratio of 1.1 times. In the meantime, production was held essentially flat year over year, with a small increase in both the total liquids weighting and the portion of those liquids that are classified as light and medium oil. In addition, during 2019 Gear acquired 1.6 million of its common shares for the aggregate purchase price of $0.7 million pursuant to its Normal Course Issuer Bid (“NCIB”) that commenced in September 2019.

The strong 2019 financial and operational results were assisted by an improved Canadian oil price environment compared to the challenges of 2018 and by continued executional success across three core assets. Although WTI oil prices declined year over year, from US $64.77 to $57.03 per barrel, the Canadian differentials compressed materially. In combination with the improvement in commodity mix, Gear’s realized pricing increased 18 per cent from $44.13 to $51.94 per boe. This factor combined with reduced losses on risk management contracts and a stable cost profile helped to drive an impressive 70 per cent year over year increase in annual funds from operations to a five-year record high figure of $24.34 per boe.

Moving into 2020, the market has delivered some early volatility with WTI oil prices already fluctuating by over 24 per cent. However, Canadian differentials currently appear to be improving from the prices seen at the outset of the year to prices more in line with the expectations outlined in the Gear 2020 budget (See “Gear Energy Ltd. Provides 2020 Budget Guidance” dated December 18, 2019). The Gear team remain cautiously optimistic that 2020 will again support further value creation through a combination of production stability, continued improvement of the balance sheet and additional purchases of Gear’s common shares under the NCIB.

QUARTERLY HIGHLIGHTS

  • Production for the fourth quarter of 6,888 boe per day was essentially unchanged from production in the third quarter of 6,922 boe per day.
  • Generated $13.7 million of funds from operations ($21.68 per boe) compared to $2.1 million in the fourth quarter of 2018 and $16.0 million in the third quarter of 2019. The 558 per cent increase in the fourth quarter of 2019 was due to a significant narrowing of Canadian oil differentials which had suffered record low benchmark pricing in the fourth quarter of 2018 as a result of egress and inventory issues.
  • Exited the quarter with net debt of $69.8 million and a net debt to quarterly annualized funds from operations of 1.3 times. Net debt included $64.3 million of bank debt, $13.2 million of convertible debentures, and positive working capital of $7.7 million.
  • Successfully drilled two multi-lateral horizontal heavy oil wells in Wildmere, one multi-lateral horizontal heavy oil well in Maidstone, and two light oil wells in Tableland.

ANNUAL HIGHLIGHTS

  • Reduced net debt by $22.2 million or 24 per cent from $91.9 million to $69.8 million as a result of strong funds from operations generation while essentially maintaining stable production and Proved Developed Producing reserves (See “Gear Energy Ltd. Announces 2019 Year-end Reserves” dated February 20, 2020). The net debt to annual funds from operations ratio came in at a very competitive 1.1 times.
  • Delivered the highest funds from operation, both absolute and per boe, since 2014. Generated $61.8 million of funds from operations ($24.34 per boe) compared to $35.4 million ($14.28 per boe) in 2018. The 70 per cent increase in funds from operations per boe was due to a combination of stronger commodity prices, increased light oil production, reduced realized losses on risk management contracts, stable costs and a 3 per cent increase in annual production.
  • Reported record high annual production of 6,962 boe per day with a 90 per cent liquids weighting (2018 – 89 per cent). Additionally, the light, medium, and NGL weighting improved to 32 per cent (2018 – 24 per cent) while the heavy oil weighting declined to 58 per cent (2018 – 65 per cent). These improvements were the result of a successful 2019 drilling program combined with the full annual impacts of the acquisition of Steppe Resources Inc. in late 2018.
  • Drilled 16 gross (16 net) wells with a 100 per cent success rate including 10 heavy oil wells (10 net): eight in Wildmere and two in Maidstone; and six light oil wells (six net): five in Tableland and one in Wilson Creek.  The 10 well heavy oil program met expectations by delivering an average peak IP30 rate per well of approximately 110 barrels per day. The first three wells in Tableland included two core area wells that delivered peak IP30 rates of approximately 200 and 300 barrels per day and a step out well with a peak IP30 rate closer to 150 barrels per day. The final two wells in Tableland continue to be optimized with peak IP30 rates to date of approximately 190 and 130 barrels per day.
  • During 2019, Gear invested $2.9 million to abandon 77 wells at an average cost that was approximately half of what was estimated by the provincial regulators. Gear abandoned 4.8 times the number of wells that were drilled during the year. A similar amount is forecast to be invested in 2020.

2020 OUTLOOK

  • Commodity price volatility has been significant for the first two months of 2020. Early in January, WTI briefly touched US$65 per barrel as a result of plateauing US oil production, OPEC production cuts, and continued strong world demand. Since then, WTI has fallen to approximately US$54 as a result of concerns of an economic slowdown in China impacted by the coronavirus outbreak. As always, balance sheet strength is paramount, and Gear will be nimble in its capital deployment to ensure that annual capital expenditures approximate funds from operations.
  • 2020 Guidance remains unchanged and as follows:

2020 Guidance

Annual Production (boe/d)

7,000

Heavy Oil Weighting (%)

57

Light/Medium Oil & NGL Weighting (%)

33

Fourth Quarter Production (boe/d)

>7,400

Fourth Quarter Light/Medium Oil & NGL weighting (%)

37

Royalties (%)

11

Operating and Transportation Costs ($/boe)

18.00

G&A Costs ($/boe)

2.35

Interest Costs ($/boe)

1.35

Capital Expenditures ($ million)

46.5

Abandonment Expenditures ($ million)

3.5

GEAR ENERGY LTD.

CONSOLIDATED BALANCE SHEETS (unaudited)

As at December 31

(Cdn$ thousands)

2019

2018

ASSETS

Current assets

Accounts receivable

$

11,343

$

5,716

Prepaid expenses

3,196

3,914

Inventory

6,515

7,185

Risk management contracts

3,230

21,054

20,045

Deferred income tax asset

23,281

26,531

Risk management contracts

1,644

Property, plant and equipment

317,035

331,622

Total assets

$

361,370

$

379,842

LIABILITIES

Current liabilities

Accounts payable and accrued liabilities

$

13,348

$

12,475

Convertible debentures

12,705

Decommissioning liability

2,840

1,843

Risk management contracts

3,094

31,987

14,318

Debt

64,254

78,461

Convertible debentures

12,297

Decommissioning liability

82,874

86,839

Total liabilities

179,115

191,915

SHAREHOLDERS’ EQUITY

Share capital

335,455

337,740

Warrants

129

Equity component of convertible debentures

2,498

2,519

Contributed surplus

18,097

15,654

Deficit

(173,795)

(168,115)

Total shareholders’ equity

182,255

187,927

Total liabilities and shareholders’ equity

$

361,370

$

379,842

 

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, 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

Exercise of stock options

51

(51)

Common shares repurchased

(2,455)

1,713

(742)

Warrant expiry

(129)

129

Issued on conversion of convertible          

debentures

119

(21)

98

Share-based compensation

652

652

Net loss for the year

(5,680)

(5,680)

Balance at December 31, 2019

$

335,455

$

$

2,498

$

18,097

$

(173,795)

$

182,255

GEAR ENERGY LTD.

CONSOLIDATED STATEMENTS OF (LOSS) INCOME AND COMPREHENSIVE (LOSS) INCOME (unaudited)

Three Months Ended

December 31

Twelve Months Ended

December 31

(Cdn$ thousands, except per share amounts)

2019

2018

2019

2018

REVENUE

Sales of crude oil, natural gas and natural gas liquids

$

30,396

$

17,408

$

131,989

$

109,316

Royalties

(3,497)

(2,164)

(14,513)

(12,858)

26,899

15,244

117,476

96,458

Realized gain (loss) on risk management contracts

366

(567)

(300)

(10,619)

Unrealized (loss) gain on risk management contracts

(6,426)

21,283

(12,440)

14,641

20,839

35,960

104,736

100,480

EXPENSES

Operating

11,363

10,790

45,691

42,033

General and administrative

1,350

745

5,517

5,163

Interest and financing charges

821

944

4,186

2,728

Depletion, depreciation and amortization

12,591

11,959

50,339

42,142

Accretion

497

630

2,190

2,303

Share-based compensation

145

230

652

1,076

Gain on foreign exchange

(596)

(10)

(753)

(17)

Gain on asset disposition

(776)

(556)

Bad debt expense

113

113

Transaction costs 

119

7

514

26,284

25,407

107,166

95,386

Deferred tax expense

(2,600)

(3,250)

Net (loss) income and comprehensive (loss) income

$

(8,045)

$

10,553

$

(5,680)

$

5,094

Net (loss) income per share, basic and diluted

$

(0.04)

$

0.05

$

(0.03)

$

0.03

GEAR ENERGY LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

Three Months Ended

December 31

Twelve Months Ended

December 31

(Cdn$ thousands)

2019

2018

2019

2018

CASH FLOWS FROM OPERATING ACTIVITIES

Net (loss) income

$

(8,045)

$

10,553

$

(5,680)

$

5,094

Add items not involving cash:

Unrealized loss (gain) on risk management contracts     

6,426

(21,283)

12,440

(14,641)

Depletion, depreciation and amortization

12,591

11,959

50,339

42,142

Accretion

497

630

2,190

2,303

Share-based compensation

145

230

652

1,076

Gain on asset disposition

(776)

(556)

Unrealized gain on foreign exchange

(589)

(686)

Bad debt expense

113

113

Deferred tax expense

2,600

3,250

Decommissioning liabilities settled

(889)

(1,401)

(2,932)

(2,981)

Change in non-cash working capital

(1,448)

850

(9,034)

9,315

11,401

1,538

49,876

41,752

CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES

Borrowings (repayments) of debt under credit facility

1,937

12,302

(13,521)

37,116

Common shares repurchased

(623)

(742)

Repayment of debt assumed on corporate acquisition

(36,251)

Issuance of share capital, net of share issue costs

44

748

1,314

12,346

(14,263)

1,613

CASH FLOWS USED IN INVESTING ACTIVITIES

Property, plant and equipment expenditures

(12,603)

(9,482)

(36,989)

(43,859)

Acquisition of petroleum and natural gas properties

(127)

(2)

(133)

(452)

Disposition of petroleum and natural gas properties

18

1,109

556

Cash received on corporate acquisition

693

Change in non-cash working capital

(3)

(5,093)

400

(303)

(12,715)

(14,577)

(35,613)

(43,365)

DECREASE IN CASH AND CASH EQUIVALENTS

(693)

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR

693

CASH AND CASH EQUIVALENTS, END OF YEAR

$

$

$

$



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