Calgary, Alberta – Gear Energy Ltd. (TSX: GXE) (OTCQX: GENGF) (“Gear” or the “Company”) is pleased to provide the following third quarter operating results and 2022 budget guidance to shareholders. Gear’s Interim Condensed Consolidated Financial Statements and related Management’s Discussion and Analysis (“MD&A”) for the period ended September 30, 2021 are available for review on Gear’s website at www.gearenergy.com and on www.sedar.com.
|Three months ended||Nine months ended|
|(Cdn$ thousands, except per share, share and per boe amounts)||Sep 30, 2021||Sep 30, 2020||Jun 30, 2021||Sep 30, 2021||Sep 30, 2020|
|Funds from operations (1)||15,955||10,848||12,222||36,430||25,176|
|Per weighted average basic share||0.06||0.05||0.05||0.15||0.12|
|Cash flows from operating activities||9,601||8,864||14,967||34,460||22,201|
|Net income (loss)||6,608||(1,157||)||(730||)||2,381||(116,673||)|
|Per weighted average basic share||0.03||(0.01||)||–||0.01||(0.54||)|
|Decommissioning liabilities settled (2)||944||87||694||3,075||779|
|Net (dispositions) acquisitions (3)||–||–||–||–||3|
|Weighted average shares, basic (thousands)||258,274||216,490||247,415||245,061||216,563|
|Shares outstanding, end of period (thousands)||259,107||216,490||258,103||259,107||216,490|
|Heavy oil (bbl/d)||3,325||3,321||3,207||3,187||2,900|
|Light and medium oil (bbl/d)||1,656||1,746||1,469||1,546||1,456|
|Natural gas liquids (bbl/d)||176||174||148||149||165|
|Natural gas (mcf/d)||4,215||3,761||3,694||3,985||3,606|
|Heavy oil ($/bbl)||67.86||40.27||62.14||60.85||31.32|
|Light and medium oil ($/bbl)||80.49||47.61||74.72||73.07||44.38|
|Natural gas liquids ($/bbl)||47.48||20.30||34.40||41.82||17.17|
|Natural gas ($/mcf)||3.62||2.25||3.15||3.28||2.06|
|Commodity and other sales||65.29||39.00||59.90||58.82||32.36|
|Realized risk management (loss) gain||(5.13||)||5.35||(5.55||)||(5.08||)||10.45|
|General and administrative||(2.70||)||(2.28||)||(2.66||)||(2.58||)||(2.80||)|
|Realized (loss) gain on foreign exchange||0.13||–||(0.24||)||(0.06||)||0.07|
($ based on intra-day trading)
|Average daily volume (thousands)||2,145||275||3,019||2,169||573|
|(1)||Funds from operations, net debt and operating netback are non-GAAP measures (as defined below) 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 government’s Site Rehabilitation Program.|
|(3)||Net acquisitions (dispositions) exclude non-cash items for decommissioning liability and deferred taxes and is net of post-closing adjustments.|
MESSAGE TO SHAREHOLDERS
On December 17, 2020, Gear announced its 2021 budget with the following stated objective: to stabilize production and continue to improve its strong balance sheet. As 2021 unfolded, Gear expanded on this objective by reaffirming its desire to strengthen its balance sheet so that it could position for a potential return of capital to shareholders in the form of share buybacks and/or dividends, implement modest production growth, and look to continued consolidation in the sector. In the last twelve months, Gear is pleased that it has accomplished the following:
- Reduced net debt by 54 per cent from $60.5 million to $27.9 million on September 30, 2021
- Lowered net debt to annualized funds from operations (“FFO”) to 0.4 times for the third quarter of 2021, a level not seen since the first quarter of 2014
- Delivered stable production of 5,859 boe per day during the third quarter of 2021 compared to 5,868 boe per day in the third quarter of 2020
- Exited the third quarter with production comfortably above 6,000 boe per day with a new expanded forecast to average approximately 6,250 boe per day through the fourth quarter of 2021
Based on the current price forecast outlook as of November 2, 2021, Gear projects its net debt to be zero in the second quarter of 2022 with potential returns to shareholders to commence shortly thereafter. See below for more details.
- Funds from operations for the third quarter of 2021 was $16.0 million, an increase of 31 per cent from the second quarter of 2021 as a result of higher commodity prices and increased production. Third quarter realized prices increased from $59.90 per boe in the second quarter of 2021 to $65.29 per boe. The improved commodity prices were primarily driven by an increase in the WTI benchmark oil price which averaged US$70.56 per barrel in the third quarter. The strong funds from operations were net of $2.8 million of hedging costs realized during the quarter.
- Operating netback for the third quarter of 2021 was $38.31 per boe, Gear’s highest operating netback since the third quarter of 2014 when WTI averaged US$97 per barrel. Operating costs inclusive of transportation was $0.76 per boe higher than the second quarter of 2021 due to a combination of reactivating higher cost wells, carbon taxes, and inflationary pressures.
- Production for the third quarter of 2021 was 5,859 boe per day, an increase of eight per cent from the second quarter of 2021 as a result of new production from the 2021 drilling program. During the third quarter, three new heavy oil wells and one light oil well came on production with the remaining four medium oil wells coming on production in October. Fourth quarter production is projected to increase to approximately 6,250 boe per day with all of the wells drilled in 2021 on production.
- During the third quarter of 2021, Gear successfully drilled four multi-lateral unlined medium oil wells in Provost, Alberta and two multi-lateral unlined heavy oil wells in Wildmere, Alberta. In addition, Gear completed a Tableland light oil well and continued its heavy oil waterflooding activities. A total of $10.3 million of capital was incurred for the quarter. Subsequent to quarter end, Gear wrapped up its 2021 drilling program with the drilling of one gross (0.3 net) light oil well in Wilson Creek, Alberta.
- The balance sheet continues to strengthen with an annualized net debt to funds from operations of 0.4 times for the third quarter of 2021 and net debt of $27.9 million as at September 30, 2021. Gear has substantially completed the fall semi-annual borrowing base redetermination of its credit facilities with the successful removal of its one unsupportive lender from its banking syndicate and an expected adjustment to its total borrowing base to $42 million. The maturity date remains unchanged at May 27, 2023.
- In the third quarter Gear realized a hedging loss of $5.13 per boe compared to the second quarter of 2021 of $5.55 per boe. For 2022, Gear has entered into a variety of 3-way collars and put spreads including a 2,400 barrels per day hedge for the third quarter of 2022 capped at a WTI price of C$116.50 per barrel.
2021 GUIDANCE UPDATE
Gear’s Board of Directors has approved a revision to 2021 guidance including slight increases to capital and production estimates with no material change to 2021 exit net debt estimates.
|2021 Revised Guidance|| 2021
|Q3 2021 YTD
|Annual production (boe/d)||5,700 – 5,800||5,500 – 5,600||5,546|
|Heavy oil weighting (%)||56||56||57|
|Light/Medium oil and NGLs weighting (%)||32||32||31|
|Royalty rate (%)||11||10||11|
|Operating and transportation costs ($/boe)||19.00||18.00||19.25|
|General and administrative expense ($/boe)||2.50||2.40||2.58|
|Interest expense ($/boe)||1.25||1.30||1.44|
|Capital and abandonment expenditures ($ millions)||31||27||27|
The 2021 revised capital program includes one additional gross well (0.33 net) to be drilled adjacent to the Wilson Creek light oil well drilled in the first quarter of 2021 which reached payout after six months of production and continues to produce over 250 boe per day (gross) at 85 percent liquids (83 boe per day net). In addition, Gear increased recompletion expenditures targeting low-risk oil and gas production as well as accelerating a portion of its abandonment and reclamation program from Q1 2022 to Q4 2021. In aggregate, these changes result in an increase to Gear’s capital and abandonment expenditure guidance from $27 million to $31 million. However, the associated incremental production from these investments coupled with strong pricing will more than offset the increased capital with no material change to exit net debt of approximately $13 million for 2021. In addition to reactivating some higher cost production, Gear is also observing some inflationary pressures in the field, which have impacted operating and transportation costs, resulting in a $1 per boe increase in 2021 guidance. Coincident with these changes, Gear is increasing its 2021 annual production guidance by 200 boe per day to a range of 5,700 to 5,800 boe per day and increasing fourth quarter of 2021 expectations by 350 boe per day to 6,250 boe per day.
2022 BUDGET GUIDANCE
The Board of Directors has approved a 2022 capital budget of $40 million dollars designed to target the following four key strategic outcomes:
- Three to four per cent annual growth through low-risk investment into core area drilling and waterflood opportunities;
- Achievement of zero net debt in the first half of the year;
- Continued commitment to improving Gear’s environmental footprint through abandonment and reclamation activities; and
- The ability to return free funds from operations to shareholders through a combination of share buybacks and/or dividends.
The strategic decision has been made to achieve a zero net debt balance prior to considering a return of capital to shareholders for two key reasons.
First and most immediate is an externally mandated restriction imposed by one of Gear’s syndicated lenders. During 2020 when Gear encountered a withdrawal of support by one of its lenders, Gear was required to solicit external support from other lending institutions. At the time, Gear was successful in including Export Development Bank of Canada (“EDC”) into the lending syndicate. However, EDC’s support was contingent on the inclusion of several restrictions including an inability to return capital to shareholders regardless of the position of the balance sheet. EDC has affirmed that this restriction will remain in place. Gear is now pleased to announce that the fall borrowing base redetermination has substantially been completed and the previous unsupportive lender will no longer be a participant. With the forecast to be at or near zero net debt commensurate with the timing of the Spring 2022 borrowing base redetermination, Gear anticipates moving to a lending structure with no restrictions.
The second key reason is to reduce or eliminate risks associated with the growing trend of lenders looking to reduce their associated emissions by phasing out lending to Greenhouse Gas intensive sectors. On April 21, 2021, 43 banks from around the world announced a commitment to participate in the “Net-Zero Banking Alliance” which commits to the financial transition to a low-carbon economy and a focus by the year 2030 (or sooner) to reduce lending to the most Greenhouse Gas intensive sectors. The implications are that this program is designed primarily to target oil and gas producers, seemingly ignoring the material achievements made to date and future emission reduction commitments. The group has now been expanded to 69 banks and includes participation by all six of Canada’s large banks. By moving to a zero net debt position, Gear will be in the enviable position of maximum flexibility in running its business in a continued ethical and responsible manner.
Using current forecasted commodity prices, Gear anticipates net debt being zero in the second quarter of 2022. Once zero net debt has been achieved, Gear anticipates directing some or all of the substantial forecasted free funds from operations towards a potential return of capital to shareholders in the form of share buybacks and/or dividends. Gear will also continue to evaluate consolidation investment opportunities as they arise. On a regular basis, Gear will assess whether it believes the share price is undervalued on an intrinsic basis, using various factors including reserve values per share and enterprise value to debt adjusted funds from operations multiples. If Gear believes its share price is appropriately valued, Gear will preferentially return capital to its shareholders in the form of dividends on a trailing quarterly basis.
The details of the 2022 capital budget are as follows:
- $29 million (72.5%) focused on drilling 19 gross (19 net) wells including 10 Provost and Killam, Alberta medium oil wells, eight Lloydminster area heavy oil wells, and one Southeast Saskatchewan Tableland light oil well
- $3 million (7.5%) invested in water flood expansions and optimizations including initiation of water injection into the new Provost medium oil asset, expansion of the successful Killam medium oil water flood and further expansions of the light oil water floods in Wilson Creek
- $3 million (7.5%) invested in field capital projects, recompletions, land, seismic and other corporate costs
- $5 million (12.5%) directed to continued reduction in liabilities associated with abandonment and reclamations to be combined with a minimum of an additional $2 million of federal government funding under the Site Rehabilitation Program
The budget is forecast to deliver the following results:
|Annual production (boe/d)||5,900 – 6,000|
|Heavy oil weighting (%)||49|
|Light/Medium oil and NGLs weighting (%)||38|
|Royalty rate (%)||11|
|Operating and transportation costs ($/boe)||19.50|
|General and administrative expense ($/boe)||3.35|
|Interest expense ($/boe)||0.35|
|Capital expenditures ($ millions)||35|
|Abandonment expenditures ($ millions)||5|
Using various WTI price forecasts for 2022 and assuming a WCS differential of US$14 per barrel, MSW and LSB differentials of US$4 per barrel, AECO gas price of C$4 per GJ, and a foreign exchange of US$0.80 per C$, Gear is forecasting 2022 funds from operations (“FFO”) as follows:
|FFO ($ millions)||61||81||99||117|
|Capital and abandonment expenditures ($ millions)||(40)||(40)||(40)||(40)|
|FFO less capital and abandonment expenditures