CALGARY, March 21, 2018 /CNW/ – Gear Energy Ltd. (“Gear” or the “Company”) (TSX:GXE) is pleased to present the following operational update and revised outlook for 2018.
The first quarter of 2018 has been quite dynamic to date. The Company would like to update investors on the following key accomplishments and revised outlook:
2018 Capital Activity To Date
Wilson Creek
Gear successfully drilled and frac’d a new extended reach Basal Belly River light oil well at 11-34-42-4W5. The well was drilled offset to the Gear 16-33-42-4W5 well; the best Belly River well drilled in the area to date with an IP30 peak rate of approximately 290 boe per day (85% liquids). The 11-34 well encountered approximately 1.5 times as much reservoir as the 16-33 well at an estimated all-in cost of $2.9 million gross ($2.6 million net at 92% working interest). This well should be on production in April.
Wildmere GP
Two dual-lateral unlined General Petroleum wells successfully drilled in 2017 were brought on production in January with some of the best rates seen from this play to date. The two wells, 100/8-17-48-5W4 and 102/8-17-48-5W4, averaged peak IP30 rates over 150 bbl of oil per day per well. The wells were drilled and brought on production at a cost of $0.9 million per well. In addition, Gear was successful in acquiring an additional 2,500 acres of land currently mapped within the same pool.
New Cummings Play
Gear successfully drilled a quad-lateral unlined horizontal Cummings well into a new area outside of the existing de-risked Wildmere asset. The well is currently on production with the last 10 days averaging approximately 150 bbl per day of oil. The well was drilled and brought on production at a cost of $1.3 million. These early results are encouraging and could lead to an expansion of future drilling inventory in the area.
New Potential Medium Oil Prospect
Gear acquired a large land position of approximately 14,000 acres in a new area that appears prospective for multi-stage fractured horizontal development of medium oil, similar to Gear’s successful Killam asset. The team is currently acquiring seismic and planning to drill its first well into this play during the third quarter of 2018.
Heavy Oil Takeaway
Although the Western Canada Select (“WCS”) heavy oil pricing outlook has improved over the last couple of months, the physical ability to ship oil to market has degraded through the first quarter. Heavy oil pipeline shipping capacity out of Canada decreased in the fourth quarter of 2017 due to a leak on the Keystone pipeline, the resulting inventory builds from the associated shutdown and the reduced operating capacity upon resumption of service. This created a backlog of inventory that historically would have been managed using crude-by-rail. However, as the end of the first quarter approaches, railing has yet to alleviate this issue. As a result of increased demand for rail, due to strong grain production and increased transportation of frac sand, coupled with current limited capacity, crude-by-rail has not performed as it had historically. The majority of these issues are considered to be seasonal and short-term in nature, with improvements forecasted into the spring. With the announced increase to both investment and hiring by rail providers, it is forecasted that there will be an increase in rail capacity. As well, improved reliability is anticipated with the end of the extreme winter weather. In addition to the expectation for improvements in crude-by-rail, pipeline throughputs normally increase with the warmer weather due to reduced diluent requirements. In parallel with the potential takeaway improvements, the current forward market forecasts the WCS price differential to improve into the summer by approximately 20 per cent relative to the first quarter.
As a result of the issues highlighted, Gear has been subjected to approximately 30 per cent apportionments through February and March on its heavy oil sales. The restrictions have been managed as prudently as possible through the quarter by building a record inventory of saleable oil in excess of 41,000 barrels and by temporarily slowing down multiple heavy oil wells. Total corporate productive capability through the quarter is estimated at 7,350 boe per day. However, as a result of the apportionments, the quarterly sales volumes are currently forecast to average 6,450 boe per day. Fortunately, with egress expected to improve, and with a reduced and optimized capital forecast for the remainder of the year, it is anticipated that these short term challenges will not have a significant impact on the annual results. Details are discussed below.
2018 Optimized Budget
Gear is dedicated to ensuring that invested capital is focused on low-risk, high rate of return projects in order to yield competitive growth while ensuring the maintenance of a strong balance sheet. In light of the temporary challenges related to the shipment of heavy oil production, the team is refocusing a significant portion of the 2018 capital budget to the Company’s light and medium oil opportunities that do not experience the same egress challenges. Gear will also continue to be aggressive in implementing light and medium oil recompletion and waterflood optimization projects. The net result of the new budget is an estimated deferral of approximately 700 bbls per day of heavy oil production from the first half of 2018, with the majority of that production made up in the second half, through a combination of increased light and medium oil production, heavy oil well speed-ups and heavy oil inventory sales. As always, Gear will remain nimble and continue to monitor pricing and logistics with the intention of investing capital approximate to actual realized cash flow targeting an annual net debt to cash flow ratio from operations of one or less.
The revised 2018 budget outlook includes an increased focus on light and medium drilling opportunities, with over 40 per cent of forecasted capital now dedicated to drilling nine light and medium oil wells, including; Wilson Creek Basal Belly River, Ferrier Cardium, Killam Lloyd and the new potential medium oil prospect. The original 35 well heavy oil drilling program has been temporarily reduced to 16 wells, including; Paradise Hill McLaren and a variety of multi-lateral unlined horizontal wells in the Cummings, General Petroleum and Sparky. The deferral of a large portion of the drill-ready heavy oil program leaves Gear with significant optionality to add multiple low-risk, high rate of return wells to the program later in the year, if desired. The new forecast also includes approximately $4 million dedicated to land and seismic, $6 million to waterfloods, recompletions and corporate costs, and approximately $4 million for abandonment expenditures. Detailed guidance is as follows.
Revised 2018 Outlook |
Original Guidance |
|
Annual Production (boe/d) |
7,350 |
7,500 |
Per cent heavy oil (%) |
61 |
68 |
Per cent light/medium oil & NGLs (%) |
25 |
20 |
Royalties (%) |
11 |
10 |
Operating and Transportation Costs ($/boe) |
15.85 |
15.50 |
G&A Costs ($/boe) |
2.25 |
2.15 |
Interest Costs ($/boe) |
0.80 |
0.65 |
Capital and Abandonment Expenditures ($ million) |
50 |
58 |