Financial Summary
Three months ended |
Nine months ended |
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(Cdn$ thousands, except per share, share and per |
Sep 30, |
Sep 30, |
Jun 30, |
Sep 30, |
Sep 30, |
FINANCIAL |
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Funds from operations (1) |
10,848 |
15,968 |
8,068 |
25,176 |
48,104 |
Per boe |
20.09 |
25.07 |
32.26 |
17.94 |
25.22 |
Per weighted average basic share |
0.05 |
0.07 |
0.04 |
0.12 |
0.22 |
Cash flows from operating activities |
8,864 |
13,613 |
3,547 |
22,201 |
38,475 |
Net (loss) income |
(1,157) |
3,493 |
(5,300) |
(116,673) |
2,365 |
Per weighted average basic share |
(0.01) |
0.02 |
(0.02) |
(0.54) |
0.01 |
Capital expenditures |
715 |
11,800 |
239 |
12,055 |
24,386 |
Decommissioning liabilities settled |
87 |
1,170 |
22 |
779 |
2,043 |
Net acquisitions (dispositions) (2) |
– |
115 |
– |
3 |
(1,085) |
Net debt (1)(3) |
60,544 |
69,837 |
70,177 |
60,544 |
69,837 |
Weighted average shares, basic (thousands) |
216,490 |
219,084 |
216,486 |
216,563 |
219,063 |
Shares outstanding, end of period (thousands) |
216,490 |
218,873 |
216,490 |
216,490 |
218,873 |
OPERATING |
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Production |
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Heavy oil (bbl/d) |
3,321 |
3,929 |
1,388 |
2,900 |
4,060 |
Light and medium oil (bbl/d) |
1,746 |
2,059 |
845 |
1,456 |
2,030 |
Natural gas liquids (bbl/d) |
174 |
218 |
103 |
165 |
227 |
Natural gas (mcf/d) |
3,761 |
4,295 |
2,474 |
3,606 |
4,021 |
Total (boe/d) |
5,868 |
6,922 |
2,749 |
5,122 |
6,987 |
Average prices |
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Heavy oil ($/bbl) |
40.27 |
52.93 |
20.46 |
31.32 |
55.45 |
Light and medium oil ($/bbl) |
47.61 |
65.88 |
24.91 |
44.38 |
67.24 |
Natural gas liquids ($/bbl) |
20.30 |
26.70 |
25.73 |
17.17 |
22.04 |
Natural gas ($/mcf) |
2.25 |
0.79 |
1.98 |
2.06 |
1.33 |
Netback ($/boe) |
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Commodity and other sales |
39.00 |
50.97 |
20.74 |
32.36 |
53.26 |
Royalties |
(3.48) |
(6.06) |
(1.38) |
(3.18) |
(5.78) |
Operating costs |
(13.60) |
(15.10) |
(14.51) |
(14.78) |
(15.78) |
Transportation costs |
(2.71) |
(2.10) |
(1.92) |
(2.29) |
(2.22) |
Operating netback (1) |
19.21 |
27.71 |
2.93 |
12.11 |
29.48 |
Realized risk management gain (loss) |
5.35 |
0.80 |
35.85 |
10.45 |
(0.35) |
General and administrative |
(2.28) |
(2.03) |
(3.84) |
(2.80) |
(2.18) |
Interest |
(2.19) |
(1.52) |
(2.71) |
(1.91) |
(1.76) |
Transaction costs |
– |
– |
– |
– |
– |
Realized gain on foreign exchange |
– |
0.11 |
0.03 |
0.07 |
0.03 |
TRADING STATISTICS ($ based on intra-day trading) |
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High |
0.25 |
0.60 |
0.28 |
0.50 |
0.88 |
Low |
0.14 |
0.41 |
0.09 |
0.08 |
0.41 |
Close |
0.16 |
0.47 |
0.21 |
0.16 |
0.47 |
Average daily volume (thousands) |
275 |
406 |
571 |
573 |
367 |
(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. September 30, 2020 – nil, September 30, 2019 – $0.7 million, June 30, 2020 – nil. |
MESSAGE TO SHAREHOLDERS
Through the third quarter of 2020, Gear successfully restarted the majority of production that was shut in during the second quarter. With improving prices, and no challenges in restarting production, Gear was able to deliver its highest quarterly funds from operations so far this year. A total of $10.8 million of funds from operations was predominantly derived from organic operations with a much smaller impact from risk management gains as compared to the second quarter. These strong funds from operations in the third quarter enabled a 14 per cent reduction in outstanding net debt through the quarter, yielding a strong net debt to funds from operations ratio of 1.4 times.
Despite the volatile market that currently exists, the Gear team has continued to act quickly and to successfully focus on the business fundamentals, including the target of further strengthening the balance sheet.
QUARTERLY HIGHLIGHTS
- In April, Gear began to shut-in production as a result of a sharp decrease in commodity prices. In addition, oil was inventoried with the expectation that pricing would recover. In June, Gear commenced a partial restart of production and reached full productive capacity in August. As such, production for the third quarter was 5,868 boepd or a 113 per cent increase from the second quarter. For the third quarter, Gear sold 284 barrels per day of oil production that had been previously stored in inventory. Two new heavy oil wells were also brought on production in August that had been drilled in the first quarter in Paradise Hill.
- Funds from operations for the third quarter of $10.8 million was an increase of 34 per cent from the second quarter of 2020 as a result of higher volumes and higher pricing. Gear also recognized hedging gains of $2.9 million in the third quarter.
- Despite Gear not producing at full productive capacity for the entire third quarter and WTI averaging only US$40.93 per barrel, net debt decreased by $9.6 million or 14 per cent from the second quarter to the third quarter of 2020. This balance sheet improvement was accomplished primarily as a result of funds from operations being applied against debt while incurring minimal capital and abandonment expenditures for the third quarter. Third quarter net debt to quarterly annualized funds from operations was 1.4 times. On September 30, 2020, Gear had drawn $58.0 million of bank debt on its $70 million Credit Facilities. Gear is anticipating additional debt reduction for the fourth quarter.
- Operating costs before transportation decreased from $14.51 per boe in the second quarter to $13.60 per boe in the third quarter primarily as a result of the reactivation of production. Transportation per boe increased from $1.92 per boe in the second quarter to $2.71 per boe in the third quarter as a result of Gear having to truck further distances to market. This additional transportation cost was offset by a greater increase in received price.
- Gear has proposed an amendment and extension to its $13.2 million outstanding convertible debentures. These proposed amendments include the following:
- Extension of the maturity date from November 30, 2020 to November 30, 2023
- Increase in the coupon rate from 4.0 per cent to 7.0 per cent
- A change to the conversion price of $0.87 to $0.32 per Gear common share
- The option to pay interest in-kind for the period from December 1, 2020 to November 30, 2021 by issuing additional Convertible Debentures
- Redeemable by Gear at any time by full repayment of the principal and all accrued interest
The proposal will be subject to approval of the Toronto Stock Exchange (“TSX”), and Gear’s lenders and shareholders. A special meeting of Gear’s shareholders is expected to be held prior to December 31, 2020. In the event that approvals are not received, Gear will be required to repay the outstanding amounts on December 31, 2020 and intends to do so by issuing common shares at an issue price equal to 95 per cent of the volume weighted average trading price of the common shares on the TSX for the 20 trading days ending five trading days prior to December 31, 2020.
- During the second quarter of 2020 Gear had announced the engagement of a financial advisor to consider a number of possible strategic alternative transactions to improve liquidity, provide additional flexibility and enhance shareholder value. To date, there is nothing material to report as a result of this process.
PROVOST DISCOVERY
- In the first quarter of 2020, Gear drilled a successful multi-leg Sparky horizontal unlined discovery well in a new area in Provost, Alberta on an eight section block of land. The well has recovered approximately 35 mboe to date (91% liquids, consisting of 26.5 API medium oil) at a surface equipment restricted rate. Gear anticipates significant future development potential with this discovery on both primary and secondary recovery schemes. With future wells expected to cost between $0.9 million to $1.2 million depending on the well design, Gear estimates drilling locations to have a break-even price between US$28 and US$32 WTI. Although a 2021 budget forecast has not yet been compiled in detail, Gear anticipates that Provost development will feature significantly in any future plans.