CALGARY, AB – Gear Energy Ltd. (“Gear” or the “Company”) (TSX: GXE) is providing the following first 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 March 31, 2021 are available for review on Gear’s website at www.gearenergy.com and on www.sedar.com.
Three months ended |
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(Cdn$ thousands, except per share, share and per boe amounts) |
Mar 31, 2021 |
Mar 31, 2020 |
Dec 31, 2020 |
FINANCIAL |
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Funds from operations (1) |
8,253 |
6,258 |
8,253 |
Per boe |
17.19 |
10.20 |
15.41 |
Per weighted average basic share |
0.04 |
0.03 |
0.04 |
Cash flows from operating activities |
9,892 |
9,788 |
8,016 |
Per boe |
20.60 |
15.95 |
14.97 |
Net (loss) income |
(3,497) |
(110,215) |
39,349 |
Per weighted average basic share |
(0.02) |
(0.51) |
0.18 |
Capital expenditures |
7,883 |
11,099 |
386 |
Decommissioning liabilities settled (2) |
1,437 |
671 |
726 |
Net acquisitions (dispositions) (3) |
– |
3 |
– |
Net debt (1) (4) |
42,929 |
80,261 |
52,864 |
Weighted average shares, basic (thousands) |
221,090 |
216,715 |
216,490 |
Shares outstanding, end of period (thousands) |
247,415 |
216,468 |
216,490 |
OPERATING |
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Production |
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Heavy oil (bbl/d) |
3,026 |
3,989 |
3,236 |
Light and medium oil (bbl/d) |
1,513 |
1,775 |
1,657 |
Natural gas liquids (bbl/d) |
121 |
217 |
182 |
Natural gas (mcf/d) |
4,043 |
4,582 |
4,477 |
Total (boe/d) |
5,335 |
6,744 |
5,821 |
Average prices |
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Heavy oil ($/bbl) |
51.58 |
27.58 |
36.16 |
Light and medium oil ($/bbl) |
63.16 |
50.44 |
48.10 |
Natural gas liquids ($/bbl) |
42.61 |
10.54 |
26.02 |
Natural gas ($/mcf) |
3.05 |
1.93 |
2.69 |
Netback ($/boe) |
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Commodity and other sales |
50.46 |
31.24 |
36.68 |
Royalties |
(4.77) |
(3.66) |
(4.38) |
Operating costs |
(17.51) |
(15.93) |
(14.83) |
Transportation costs |
(2.01) |
(2.08) |
(1.96) |
Operating netback (1) |
26.17 |
9.57 |
15.51 |
Realized risk management (loss) gain |
(4.55) |
4.57 |
4.67 |
General and administrative |
(2.37) |
(2.77) |
(2.41) |
Interest |
(1.96) |
(1.33) |
(2.25) |
Realized gain on foreign exchange |
(0.10) |
0.16 |
(0.11) |
TRADING STATISTICS ($ based on intra-day trading) |
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High |
0.64 |
0.50 |
0.31 |
Low |
0.25 |
0.08 |
0.15 |
Close |
0.50 |
0.10 |
0.29 |
Average daily volume (thousands) |
1,307 |
874 |
320 |
(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) |
Decommissioning liabilities settled includes expenditures made by both Gear and the Federal Site Rehabilitation Program. |
(3) |
Net acquisitions (dispositions) exclude non-cash items for decommissioning liability and deferred taxes and is net of post-closing adjustments. |
(4) |
Net debt as of March 31, 2021, includes $3.3 million of Convertible Debentures that were subsequently converted into common shares. As of the date of this press release, no Convertible Debentures were outstanding. |
MESSAGE TO SHAREHOLDERS
Although we still find ourselves in the midst of a pandemic, the general market sentiment has changed dramatically from a year ago. WTI oil prices have recovered from negative levels last year to now trading above US$65 per barrel. Additionally, investors finally appear to be acknowledging the true value of the tangible resources that are required to fuel the economy now and into the foreseeable future. Despite the strong share price appreciations seen so far this year, most energy companies are still trading close to historical lows when balanced against future revenue generation ability.
With the release of this quarter, Gear has successfully accomplished the goal of providing an exceptionally strong balance sheet. With net debt being reduced by 47 per cent from a year ago, Gear now has material optionality to once again focus on providing shareholder returns in the most efficient and low risk ways possible. The outlook for the remainder of 2021 looks very strong. Gear is predicting material free funds from operations as a result of modest production growth, price stability and an improving cost profile. In aggregate the Company focus will continue to be on significant debt reduction with a slight increase to capital investment for the rest of the year. This modest increase is intended to take advantage of a few very strategic asset opportunities and to invest in decline-reducing water flood projects which will not only provide economic returns this year but will also enhance the ability to generate incremental free funds from operations into the future.
QUARTERLY HIGHLIGHTS
- Funds from operations for the first quarter of 2021 was $8.3 million, an increase of 32 per cent from the first quarter of 2020 as a result of significantly higher commodity prices. First quarter realized prices increased from $31.24 per barrel in 2020 to $50.46 per barrel in 2021. The improved commodity prices were driven by an increase in the West Texas Intermediate (“WTI”) benchmark oil price which averaged US$57.84 per barrel in the first quarter along with narrowing Canadian oil differentials on both the heavy and the light oil benchmarks.
- In the first quarter of 2021, Gear recommenced investment in the field through the drilling of eleven successful (10.3 net) wells including ten heavy oil single lateral wells in Paradise Hill and one (0.3 net) light oil multi-stage fractured well in Wilson Creek. A total of $7.9 million was invested during the first quarter. The ten heavy oil wells continue to be optimized, producing a total of over 400 barrels per day over the last 30 days. The light oil well has been on production for 33 days producing an average of 200 barrels per day on an inclining profile with the last few days at approximately 300 barrels per day (on a gross basis).
- Reduced abandonment liabilities by $1.4 million in the first quarter through $0.4 million of expenditures made by Gear and $1.0 million of expenditures through the Federal Site Rehabilitation Program. A total of 61 wells were abandoned and 52 wells were cut and capped. As a result of significant and ongoing cost savings being realized in the field, Gear reduced some estimates for future costs to abandon wells. This assisted Gear in reducing the first quarter corporate decommissioning liability to $80.3 million from the $87.5 million reported in the fourth quarter of 2020.
- Finalized plans to eliminate the flaring of approximately 550 mcf per day of natural gas in Tableland, Saskatchewan. Field work is commencing immediately with the project expected to be operational sometime in the second half of 2021.
- Reduced net debt by 47 per cent from $80.3 million in the first quarter of 2020 to $42.9 million at the end of the first quarter of 2021. Since the first quarter of 2020, debt has been lowered as a result of funds from operations significantly exceeding capital investment. Additionally, $9.9 million of convertible debentures were retired through the issuance of 30.9 million common shares during the first quarter of 2021. The currently outstanding $42.9 million of net debt includes $3.3 million of convertible debentures which were subsequently retired in April 2021. As of this date, Gear does not have any convertible debentures outstanding.
- As a result of the retirement of convertible debentures, Gear increased its outstanding common shares from 216.5 million at year-end 2020 to 247.4 million at March 31, 2021. Subsequent to the end of the first quarter, Gear issued an additional 10.3 million common shares to retire the remaining convertible debentures and currently has approximately 257.7 million common shares outstanding. The annualized interest savings on the debenture retirement is $0.9 million.
INCREASED 2021 GUIDANCE
- As a result of significantly improved commodity prices, Gear intends to modestly increase its 2021 capital and abandonment expenditure investment from $20 million to $27 million. The incremental expenditures are scheduled for the second half of the year and as such, Gear will remain nimble with respect to any future changes in prices. The additional $7 million in capital will be strategically dedicated to the drilling of one (0.8 net) light oil well, one medium oil exploratory well, and the expansion and acceleration of multiple medium and light oil waterflood projects. Corporate waterflood investment for 2021 now totals approximately $4 million and is anticipated to provide solid economic returns as well as helping to extend the reserves life of the Company. These investments will help reduce the forecasted corporate decline rate into 2022 by two to three per cent, putting Gear on track for the lowest corporate decline in its history thus minimizing future sustaining capital requirements. Guidance for 2021 is now as follows:
2021 Revised |
2021 Original Guidance |
|
Annual production (boe/d) |
5,500 – 5,600 |
5,400 – 5,500 |
Heavy oil weighting (%) |
56 |
55 |
Light/Medium oil and NGLs weighting (%) |
32 |
33 |
Royalty rate (%) |
10 |
11 |
Operating and transportation costs ($/boe) |
18.00 |
18.00 |
General and administrative expense ($/boe) |
2.40 |
2.15 |
Interest expense ($/boe) |
1.30 |
1.50 |
Capital and abandonment expenditures ($ millions) |
27 |
20 |
- Gear forecasts production growth through 2021 of approximately eight percent from the first quarter despite a recent production disruption of approximately 200 boe per day in Killam, Alberta as the result of the Government shut-in of a third party gas processing facility. Gear expects to resolve the Killam issue in the coming months.
- Gear is forecasting material future reductions in its bank debt through 2021 as forecasted FFO exceeds planned capital expenditures. Using forward market pricing as of May 4th, 2021 (full year 2021 WTI of US$63 per barrel, WCS diff of US$12.50 per barrel, MSW and LSB diff of US$4.50 per barrel, FX of US$0.81 per C$, and AECO of $2.80 per GJ) and inclusive of 2021 existing hedges, Gear is forecasting the following:
Q2 2021 |
Q3 2021 |
Q4 2021 |
FY 2021 |
|
Forecasted FFO ($ million) |
13 |
16 |
15 |
52 |
Forecasted Net debt ($ million) |
32 |
28 |
15 |
15 |
Forecasted Net debt to FFO |
0.6 |
0.4 |
0.3 |
0.3 |
- In the event that markets continue to strengthen through 2021, Gear anticipates further potential expansions in strategic value creation opportunities throughout its diversified portfolio.