2015 Operational update
- Sales production averaged 5,015 boe/d for the fourth quarter; yielding annual production of 5,670 boe/d. Production declined 400 boe/d from the previous quarter, which includes approximately 200 boe/d of oil shut-in due to weakened prices.
- Drilled four successful oil wells during the fourth quarter; two single lateral horizontal wells in Morgan and two single lateral horizontal wells in Paradise Hill. All four wells are producing above expectations at an average IP60 of 80 bbl/d per well. The drilling rig was released on October 25 after a 100 per cent success rate for the 12 horizontal wells drilled through the year.
- Record annual capital efficiency of approximately $13,500/boe/d after spending an estimate of $15 million to realize December average production of 1,100 boe/d from the new 2015 wells. Capital efficiency has improved by almost 60 per cent compared to the previous four year average as a result of lower costs and improved productivity.
- Continued reduction in per unit costs for the fourth quarter with operating costs decreased approximately five per cent per boe and G&A costs declined over 20 per cent per boe from the previous quarter, despite a reduction in volumes for the same period.
- Detailed fourth quarter and year-end 2015 results planned for release on February 17, 2016.
Revised Outlook for 2016
Given the recent and continued weakness in the price of oil, Gear will again adopt a conservative approach to its capital program. This strategy is similar to the actions taken during 2015 whereupon Gear successfully reduced net debt by over 30 per cent and reduced outstanding debt on its demand credit facility by over 40 per cent. It is expected that Gear will enter this year with approximately $51 million, net of working capital, drawn on the recently renewed credit facility of $60 million, with an additional $14.8 million of convertible debentures due in 2020, for a total year end 2015 net debt of approximately $66 million.
The original 2016 capital budget of $31 million to drill 36 low risk horizontal oil wells will not be initiated in the current price environment as the returns on Gear’s extensive inventory of drilling locations can be materially improved by delaying investment until the price of oil improves or a further reduction in service costs occurs. Capital investment will be minimized through the first half of the year with the majority of cash flow and hedging gains again dedicated to reducing outstanding debt. An estimate of $1 million of non-discretionary capital will be invested through the first half of the year, with all budgeted development activity being deferred to the second half of the year, subject to improved oil prices. Under the current forward strip oil forecast, excess cash flow will be used to reduce debt during the first half of 2016. The net result is expected to be approximately $42 to $45 million drawn, net of working capital, on the current $60 million facility at June 30th, 2016. Gear’s next scheduled bank facility review is planned for June 1, 2016.
In order to maximize cash flow through this period of low oil prices, Gear has shut-in approximately 250 bbl/d of production since the fall of 2015. This is in addition to the 250 bbl/d of recoverable production that was shut-in near the beginning of 2015. The variable cost savings associated with deferring all of this production will more than offset the estimated revenue losses at current low prices, thus yielding a net positive gain in cash flow. The realized heavy oil price for Gear will need to be in excess of $40/bbl before consideration will be given to restarting this 500 bbl/d of shut-ins. Total corporate production is anticipated to decline through the first half of 2016 as a result of these shut-ins and the limited development activity. The production estimate has been revised to 4,150 boe/d for the first half of 2016. Fortunately, Gear also expects to realize further costs savings from lower royalties, lower operating costs and lower absolute G&A costs.
|H1 – 2016 Guidance|
|Average Production (boe/d)||4,150|
|Operating Costs including Transportation ($/boe)||14.00 – 16.00|
|G&A Costs ($/boe)||3.50|
|Interest Costs ($/boe)||1.75|
|Capital Expenditures ($ million)||1|
During January, West Texas Intermediate oil prices intermittently dipped below US$30/bbl and Western Canadian Select heavy oil differentials widened to almost a 50 per cent discount, relative to the four year historical average of only 22.5 per cent. The net result is that WCS heavy barrels have traded at the lowest they ever have since the inception of the WCS benchmark. For perspective, the current first quarter 2016 price estimate for Gear’s oil is just over CAD$20/bbl. Ultimately, these low prices are not sustainable, even for a low cost producer like Gear. This recent weakness has started to encourage material capital and production cuts from many North American producers and that should finally catalyze a re-balancing of global supply and demand and eventually bring the price of oil back to a more sustainable level.
Gear believes that during uncertain times like these, the most prudent course of action is to accept temporary production declines by limiting spending and directing all cash flows to reducing outstanding debt. By focusing on the sustainability of the Company, Gear will retain significant optionality in planning future capital spending and be better able to maximize the returns on capital for the large inventory of low risk horizontal heavy oil drilling and select strategic acquisition opportunities. The team at Gear continues to focus on maximizing value to shareholders for the long term.
In view of the reduced expenditures, shareholders and readers should no longer rely on the previously published 2016 guidance.
About Gear Energy Ltd.
Gear is a Canadian exploration and production company with predominantly horizontal heavy oil production in east central Alberta and west central Saskatchewan. The current and ongoing business plan is to continue focusing on being a low cost heavy oil operator, drilling economic wells and acquiring assets on an accretive basis.