Oil prices continue to be depressed as a result of demand destruction due to the impacts of COVID-19 on the global economy. With this weakness and uncertainty in the price of oil looking to extend through the second quarter of 2020, Gear has chosen to immediately pursue reductions to the variable costs of the business in an effort to maximize funds from operations. Protection of the corporate balance sheet remains the top priority.
In addition to previously announced cuts to capital investment, Gear has implemented a 20 per cent reduction in the salaries of all permanent employees and in the directors’ fees for our non-management directors, as well as an immediate and aggressive production storage and shut-in program. With approximately two-thirds of field operating costs being classified as variable, the prevailing low prices forecast for the second quarter of 2020 do not financially support production at current volume levels. By limiting field operations, Gear intends to eliminate the variable costs and maximize the resulting funds from operations. Annual funds from operations are expected to continue to be supported by substantial estimated gains on the 2020 risk management program with annual hedged volumes of approximately 3,200 barrels of oil per day.
Average and exit production for the first quarter of 2020 is estimated to be approximately 6,700 boe per day (57% Heavy Oil, 28% Light/Medium Oil, 12% Natural Gas and 3% NGLs). Through the second quarter, production is forecast to be shut-in and stored subject to various physical and financial restrictions. April sales production is estimated to be approximately 3,600 boe per day and May production is estimated to be approximately 800 boe per day. Production is expected to remain at this curtailed level until such time as Gear determines that operating and economic conditions warrant bringing shut-in production back online. The Gear team intends to remain flexible and opportunistic, keeping a close eye on the commodity market and being prepared to resume full production volume levels and expand capital investment if pricing improves materially.
As a result of the volatile production levels, no associated per unit cost guidance is being released at this time. Gear will consider developing guidance for the remainder of 2020 at a later date which will be highly contingent on oil prices and other macro factors over the next few months. All previous guidance issued by Gear regarding 2020 operations or financial results is withdrawn and investors are cautioned to no longer rely on any such previous guidance.