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Gear Energy Ltd. announces second quarter 2020 operating results


CALGARY, AB – Gear Energy Ltd. (“Gear” or the “Company”) (TSX: GXE) is pleased to provide the following second quarter operating update to shareholders. Gear’s Interim Condensed Consolidated Financial Statements and related Management’s Discussion and Analysis (“MD&A”) for the period ended June 30, 2020 are available for review on Gear’s website at www.gearenergy.com and on www.sedar.com.

Financial Summary

Three months ended

Six months ended

(Cdn$ thousands, except per share, share and per boe amounts)

Jun 30, 2020

Jun 30, 2019

Mar 31, 2020

Jun 30, 2020

Jun 30, 2019

FINANCIAL

Funds from operations (1)

8,068

17,104

6,258

14,328

32,136

   Per boe

32.26

26.25

10.20

16.59

25.29

   Per weighted average basic share

0.04

0.08

0.03

0.07

0.15

Cash flows from operating activities

3,547

18,881

9,788

13,337

24,862

Net (loss) income

(5,300)

5,684

(110,215)

(115,516)

(1,128)

   Per weighted average basic share

(0.02)

0.03

(0.51)

(0.53)

(0.01)

Capital expenditures

239

3,334

11,099

11,340

12,586

Decommissioning liabilities settled

22

474

671

692

873

Net (dispositions) acquisitions (2)

(162)

3

3

(1,200)

Net debt (1)(3)

70,177

72,127

80,261

70,177

72,127

Weighted average shares, basic (thousands)

216,486

219,093

216,715

216,600

219,089

Shares outstanding, end of period (thousands)

216,490

219,093

216,468

216,490

219,093

OPERATING

Production

     Heavy oil (bbl/d)

1,388

4,104

3,989

2,688

4,126

     Light and medium oil (bbl/d)

845

2,166

1,775

1,310

2,015

     Natural gas liquids (bbl/d)

103

228

217

160

232

     Natural gas (mcf/d)

2,474

3,977

4,582

3,528

3,882

     Total (boe/d)

2,749

7,161

6,744

4,746

7,020

Average prices

     Heavy oil ($/bbl)

20.46

60.45

27.58

25.74

56.67

     Light and medium oil ($/bbl)

24.91

71.60

50.44

42.20

67.94

     Natural gas liquids ($/bbl)

25.73

13.11

10.54

15.45

19.82

     Natural gas ($/mcf)

1.98

0.92

1.93

1.95

1.64

Netback ($/boe)

     Commodity and other sales

20.74

57.23

31.24

28.20

54.41

     Royalties

(1.38)

(6.87)

(3.66)

(3.00)

(5.63)

     Operating costs

(16.43)

(18.08)

(18.01)

(17.55)

(18.39)

     Operating netback (1)

2.93

32.28

9.57

7.65

30.39

     Realized risk management gain (loss)

35.85

(1.65)

4.57

13.63

(0.93)

     General and administrative

(3.84)

(2.47)

(2.77)

(3.08)

(2.26)

     Interest

(2.71)

(1.90)

(1.33)

(1.73)

(1.89)

     Transaction costs

(0.01)

(0.02)

     Realized gain (loss) on foreign exchange

0.03

0.16

0.12

TRADING STATISTICS

($ based on intra-day trading)

High

0.28

0.88

0.50

0.50

0.88

Low

0.09

0.53

0.08

0.08

0.53

Close

0.21

0.57

0.10

0.21

0.57

Average daily volume (thousands)

571

412

874

723

348

(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 (dispositions) 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. June 30, 2020 – nil, June 30, 2019 – $1.6 million, March 31, 2020 – nil.

MESSAGE TO SHAREHOLDERS

The dominant headline for 2020 to date has been the COVID-19 pandemic which has adversely impacted the global economy as a result of governments mandating the shut-down of several facets of society. This, in turn, led to significantly reduced world oil consumption. As a result, oil prices initially plummeted with WTI hitting a historical low of negative US$37 per barrel in April 2020.  Since then, WTI has recovered and currently sits at US$42 per barrel. During the second quarter, Gear chose to shut-in the majority of its production and immediately pursued reductions to the variable costs of the business in an effort to curb the impact of low oil prices. In June, Gear initiated a gradual production re-start across the majority of its asset base as minimum economic pricing thresholds started to be met. The Company estimates current field production to be approximately 6,000 boe/d and expects the majority of its wells to be producing by the third quarter. To date, no issues have been encountered with the start-up of production. In addition, capital expenditures are expected to be minimal for the remainder of 2020. Protection and continued improvement of the corporate balance sheet remains the top priority.

In conjunction with the volatility in commodity prices and the corresponding operational impacts, Gear has been working closely with its lenders on its syndicated credit facilities. In July, Gear completed its annual borrowing base redetermination with amended terms that provides Gear with ample liquidity under the new credit structure for the remainder of 2020. Lenders continue to be constructive with Gear and acknowledge that persistent uncertainty around commodity prices have warranted a more frequent examination of the borrowing base. As such, the next borrowing base redetermination has been scheduled for August 31, 2020. In addition, Gear has engaged a financial advisor to consider a number of possible strategic alternative transactions to improve liquidity, provide additional flexibility, and enhance shareholder value.

Per unit results in the second quarter will appear slightly unusual as a result of production volatility resulting from Gear’s decision to shut-in production due to low commodity prices. Although Gear sold 2,749 boe per day of production in the second quarter at an average price of $20.74 per boe, it also had WTI oil hedges in place for 3,200 barrels per day at an average price of C$69.22 per barrel. As a result, hedging gains for the second quarter were $9.0 million compared to funds from operations of $8.1 million.

QUARTERLY HIGHLIGHTS

  • Net debt decreased by $10.1 million or 13 per cent from the first quarter to the second quarter of 2020. This was accomplished primarily as a result of funds from operations being applied against debt while capital and abandonment expenditures were minimized for the second quarter. Despite production shut-ins and weak pricing, second quarter net debt to quarterly annualized funds from operations was 2.2 times.
  • Production for the second quarter was intentionally reduced to 2,749 boe per day from 6,744 boe per day in the first quarter. Currently, field production is estimated to be approximately 6,000 boe per day as the majority of production has been reactivated. Two additional new wells drilled in the first quarter are expected to be on production later in August and 2020 annual production is expected to be in the range of 5,200 to 5,300 boepd.
  • Funds from operations for the second quarter of $8.1 million was an increase of 29 per cent from the first quarter of 2020 as a result of significantly higher hedging gains offsetting the impacts of historically low oil prices experienced during the quarter. For the remainder of 2020, Gear has hedged 3,200 barrels per day using collars (700 barrels per day at $C65.00 x C$94.00) and three-way collar structures (2,500 barrels per day at a blended average of C$55.00 x C$65.00 x C$78.32).
  • Operating costs for the second quarter were $16.43 per boe compared to $18.01 per boe in the first quarter primarily as a result of the shut-in of higher cost wells. With the majority of Gear’s production being restored, annual operating costs are expected to range from $17.00 to $18.00 per boe.
  • Gear has applied for numerous government grants under provincial and federal Site Rehabilitation Programs. To date, Gear has received $2.2 million in committed grants to assist Gear with its abandonment and reclamation activities. For 2020, Gear has planned an Area Based Closure program which should allow it to retire these liabilities with greater efficiencies.


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