Calgary, Alberta – Gear Energy Ltd. (TSX: GXE) (OTCQX: GENGF) (“Gear” or the “Company”) is pleased to provide the following fourth quarter operating results and reserves summary to shareholders. Gear’s Consolidated Financial Statements and related Management’s Discussion and Analysis (“MD&A”) for the year ended December 31, 2021 are available for review on Gear’s website at www.gearenergy.com and on www.sedar.com.
|Three months ended||Year ended|
|(Cdn$ thousands, except per share, share and per boe amounts)||Dec 31, 2021||Dec 31, 2020||Sep 30, 2021||Dec 31, 2021||Dec 31, 2020|
|Funds from operations (1)||17,938||8,253||15,955||54,368||33,429|
|Per weighted average basic share||0.07||0.04||0.06||0.22||0.15|
|Cash flows from operating activities||17,421||8,016||9,601||51,881||30,217|
|Net income (loss)||78,117||39,349||6,608||80,498||(77,324||)|
|Per weighted average basic share||0.30||0.18||0.03||0.32||(0.36||)|
|Decommissioning liabilities settled (2)||1,566||726||944||4,641||1,505|
|Net acquisitions (3)||–||–||–||–||3|
|Weighted average shares, basic (thousands)||259,360||216,490||258,274||248,665||216,545|
|Shares outstanding, end of period (thousands)||260,169||216,490||259,107||260,169||216,490|
|Heavy oil (bbl/d)||3,282||3,236||3,325||3,211||2,985|
|Light and medium oil (bbl/d)||1,773||1,657||1,656||1,604||1,507|
|Natural gas liquids (bbl/d)||231||182||176||169||169|
|Natural gas (mcf/d)||4,637||4,477||4,215||4,149||3,825|
|Heavy oil ($/bbl)||73.27||36.16||67.86||64.05||32.64|
|Light and medium oil ($/bbl)||88.99||48.10||80.49||77.51||45.41|
|Natural gas liquids ($/bbl)||59.50||26.02||47.48||47.90||19.56|
|Natural gas ($/mcf)||4.81||2.69||3.62||3.71||2.24|
|Petroleum and natural gas sales||71.69||36.68||65.29||62.28||33.55|
|Realized risk management (loss) gain||(8.20||)||4.67||(5.13||)||(5.92||)||8.85|
|General and administrative||(2.55||)||(2.41||)||(2.70||)||(2.57||)||(2.67||)|
|Realized (loss) gain on foreign exchange||–||(0.11||)||0.13||(0.05||)||0.02|
($ based on intra-day trading)
|Average daily volume (thousands)||2,887||320||2,145||2,349||510|
- Funds from operations, net debt and operating netback do not have any standardized meanings under Canadian generally accepted accounting principles (“GAAP”) and therefore may not be comparable to similar measures presented by other entities. For additional information related to these measures, including a reconciliation to the nearest GAAP measures, where applicable, see “Non-GAAP and Other Financial Measures” in this press release.
- Decommissioning liabilities settled includes expenditures made by both Gear and the federal government’s Site Rehabilitation Program.
- Net acquisitions exclude non-cash items for decommissioning liability and deferred taxes and is net of post-closing adjustments.
MESSAGE TO SHAREHOLDERS
Gear Energy delivered highly successful operational and financial results through 2021 that have compounded into growth in shareholders’ value. Some of the many achievements are highlighted below.
Gear was able to grow annual production by seven per cent from year-end 2020 while investing only 53 per cent of 2021 Funds from Operations (“FFO”). More importantly over the same time period, Gear grew production by 67 per cent per debt adjusted share. Additionally, as a result of prudent investments into high quality drilling and waterflood opportunities, Gear was able to increase reserves organically by 24 per cent, (88 per cent per debt adjusted share), and replace 183 per cent of 2021 production on a Proved Developed Producing (“PDP”) basis. All of this was accomplished with a record low PDP finding and development (“F&D”) cost of $8.54 per boe and a record high PDP recycle ratio of 4.2 times. Similar strong numbers were achieved for the Total Proved (“TP”) and Proved plus Probable (“P+P”) reserve categories. While delivering these strong operational results, Gear also reduced net debt by 70 per cent from year-end 2020 and delivered a record low net debt to annualized FFO ratio of 0.2 times for the quarter and 0.3 times for the year.
Through 2021, Gear’s team and assets have continued to demonstrate the capability to be very competitive. The total 2021 development capital investment of $28.9 million is projected to deliver a record high 162 per cent internal rate of return, using P+P reserves estimates from the evaluation prepared by Sproule Associates Ltd. (“Sproule”) and the evaluator average price forecast. In addition, the realization of incremental reserves as a result of success in Gear’s waterflood projects have increased sustainability by extending PDP and TP reserves life indices and lowering future capital requirements to maintain production.
Gear is excited to report that it is currently projecting to reach zero net debt by the second quarter of this year. Gear will be one of the first in the Canadian energy sector to reach this milestone. Upon successfully reaching this goal, Gear will then be able to add potential share buybacks or dividends to the tool chest of opportunities designed to further enhance future shareholder returns.
FOURTH QUARTER HIGHLIGHTS
- Funds from operations for the fourth quarter of 2021 was $17.9 million, (net of a $4.6 million hedging cost), an increase of 12 per cent from the third quarter of 2021 as a result of higher commodity prices and increased production. Fourth quarter realized prices increased to $71.69 per boe from $65.29 per boe in the third quarter of 2021. The improved commodity prices were primarily driven by an increase in the WTI benchmark oil price which averaged US$77.19 per barrel in the fourth quarter.
- Operating netback for the fourth quarter of 2021 was $43.64 per boe, Gear’s highest operating netback since the second quarter of 2014 when WTI averaged US$103 per barrel. Operating costs inclusive of transportation were $0.46 per boe higher than the third quarter of 2021 due to a combination of gas conservation costs, seasonal weather and inflationary pressures.
- Production for the fourth quarter of 2021 was 6,059 boe per day, an increase of three per cent from the third quarter of 2021 as a result of new production from the 2021 drilling program. Gear had previously targeted fourth quarter production of approximately 6,250 boe per day but experienced extreme cold weather conditions during the month of December, leading to well freeze-ups. These conditions continued into January 2022 with production finally normalizing through February.
- Capital activity during the fourth quarter of 2021 was minimal, with Gear drilling one gross (0.3 net) light oil well in Wilson Creek, Alberta. This well was brought on production in 2022. In addition, Gear continued its investment in various waterflood opportunities. In total, Gear incurred $4.9 million of capital expenditures for the quarter.
- Deleveraging continued for the fourth quarter, with Gear exiting the quarter with $15.8 million in net debt, a reduction of $12.0 million from the third quarter. Net debt to quarterly annualized FFO for the quarter was 0.2 times.
- In the fourth quarter Gear realized a hedging loss of $8.20 per boe compared to the third quarter of 2021 of $5.13 per boe. Gear’s future hedges are as follows and have been structured to capture as much upside in a commodity price recovery as possible with the use of wide collars and put spreads.
|Q1 2022||Q2 2022||Q3 2022||Q4 2022||2023|
|Type||WTI 3-way collar||WTI put spread||WTI 3-way collar||WTI 3-way collar||N/A|
|Pricing (C$/bbl)||50 x 62.50 x 86||50 x 62.50 premium of $2.32||50 x 62.50 x 116.50||50 x 65 x 120||N/A|
2021 ANNUAL HIGHLIGHTS
- Delivered production of 5,676 boe per day for 2021, an increase of seven per cent over 2020 despite only investing 53 per cent of FFO into capital expenditures.
- Posted year-end net debt of $15.8 million with a net debt to FFO ratio of 0.3 times for the year. This represents a substantial $37.0 million or 70 per cent reduction from year end 2020.
- Generated $54.4 million of FFO or $26.24 per boe. FFO prior to hedging costs was $66.7 million or $32.16 per boe.
- Successfully invested $28.9 million to drill 20 gross (18.7 net) wells, install and optimize multiple waterflood projects, complete various recompletion opportunities and fund other corporate capital. This investment provided an estimated 1,750 boe per day of new production, more than offsetting annual base decline.
- Gear was able to reduce the year over year estimate of total decommissioning liabilities by 10 per cent from $87.5 million to $79.1 million, through the investment of $1.6 million from the Company, $3.0 million of Government sponsored funds and an improved estimate for remaining future asset retirement costs.
On November 3, 2021, Gear released its 2022 capital budget. Gear would like to reaffirm the following targets for the year:
- Three to four per cent annual growth in production 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, Social and Governance performance including reducing its environmental footprint through abandonment and reclamation activities; and
- The ability to return funds from operations to shareholders through potential share buybacks and/or dividends.
As a result of higher forecasted commodity prices, 2022 Guidance has been revised with respect to the royalty rate from 11 per cent to 13 per cent and the interest expense from $0.35 per boe to $0.25 per boe.
|Annual Production (boe/d)||5,900 – 6,000||5,900 – 6,000||5,676|
|Heavy oil weighting (%)||49||49||57|
|Light/Medium oil and NGLs weighting (%)||38||38||31|
|Royalty rate (%)||13||11||11|
|Operating and transportation costs ($/boe)||19.50||19.50||19.43|
|General and administrative expense ($/boe)||3.35||3.35||2.57|
|Interest expense ($/boe)||0.25||0.35||1.24|
|Capital and abandonment expenditures ($ millions)||40||40||31|
Using various WTI price forecasts for 2022 and assuming a WCS differential of US$13 per barrel, MSW and LSB differentials of US$3 per barrel, AECO gas price of C$3.50 per GJ, and a foreign exchange of US$0.79 per C$, Gear is forecasting 2022 funds from operations (“FFO”) as follows:
|FFO ($ millions)||82||100||117|
|Capital and abandonment expenditures ($ millions)||40||40||40|
|FFO less capital and abandonment expenditures ($ millions)||42||60||77|
2021 YEAR END RESERVES HIGHLIGHTS
- Gear achieved the following reserves highlights through 2021 activity, compared to 2020 results including full corporate abandonment and reclamation obligation (“ARO”) costs. No acquisitions were completed in 2021; as such, FD&A costs are equivalent to F&D costs.
Proved Developed Producing (“PDP”)
- 3.80 MMboe of additions
- Reserves increased 24 per cent, 88 per cent per Debt Adjusted (“DA”) share (1)
- Reserves value on a Before Tax 10 per cent discounted basis (“BT10”) increased 116 per cent, 227 per cent on a per DA share basis(1)
- Replaced 183 per cent of 2021 annual production
- F&D (and FD&A) cost(1) of $8.54/boe including change in Future Development Capital (“FDC”)
- Recycle ratio(1) of 4.2x based on 2021 operating netback(1) of $36.03/boe (before hedging)
Total Proved (“TP”)
- 5.73 MMboe of additions
- Reserves increased 28 per cent, 94 per cent per DA share(1)
- Reserves value BT10 increased 122 per cent, 237 per cent on a per DA share basis(1)
- Replaced 276 per cent of 2021 annual production
- F&D cost(1) of $12.28/boe including change in FDC
- Recycle ratio(1) of 2.9x
Total Proved plus Probable (“P+P”)
- 4.90 MMboe of additions
- Reserves increased 12 per cent, 70 per cent per DA share(1)
- Reserves value BT10 increased 80 per cent, 173 per cent on a per DA share basis(1)
- Replaced 236 per cent of 2021 annual production
- F&D cost(1) of $8.13/boe including change in FDC
- Recycle ratio(1) of 4.4x
- Corporate liquids weighting decreased to 87 per cent from 90 per cent for the P+P reserves case. Light/medium oil and Natural Gas Liquids (“NGLs”) decreased two per cent while heavy oil dropped by one per cent and gas increased by three per cent. Corporate P+P reserves are now balanced 42 per cent heavy oil, 39 per cent light and medium oil, 6 per cent NGLs and 13 per cent gas.
- In aggregate, the reserves associated with the 2021 capital development program came in on target. Reserves additions across all categories were achieved primarily through a combination of the following:
- Successful new drilling in Paradise Hill, Wildmere, Provost, Tableland and Wilson Creek
- Base performance revisions in Paradise Hill, Tableland and Wildmere
- Recognition of waterflood implementation and response in Wilson Creek, Maidstone and Wildmere
- Economic factors as a percentage of annual reserves additions were 20 per cent, 40 per cent and 54 per cent for PDP, TP and P+P values, respectively
- Management’s annual estimate of future potential drilling locations decreased to 440 un-risked net locations as a result of high grading the future inventory through increased use of multi-laterals, increased inter-well spacing, and the impacts of land expiries. The Sproule evaluation currently recognizes 97 net locations in the TP category and 160 in the P+P category. These booked locations represent 22 and 36 per cent of management’s estimates, respectively. The 160 net booked P+P locations include 41 multi-lateral horizontals, 103 single lateral horizontals and 16 vertical wells.
- Corporate Net Asset Values (“NAV”) BT10(2) are $0.57 per share for PDP, $0.90 per share for TP and $1.49 per share for P+P utilizing the price forecast at January 1, 2022 used in the Sproule evaluation. These values represent a respective 475 per cent, 310 per cent and 186 per cent increase from the prior year. Additional NAV values at various flat price scenarios and discount rates are highlighted within.
- The Reserves Life Index (“RLI”) (3) for each category are 4.6 years for PDP, 7.4 years for TP, and 10.1 years for P+P. These values represent seven per cent improvement for PDP and TP and a six per cent reduction for P+P when compared to the prior year.
- FD&A cost, F&D cost, reserves per DA share, reserves per DA share, reserves value BT10 per DA share, recycle ratio and operating netback do not have any standardized meanings under GAAP and therefore are considered non-GAAP ratios and may not be comparable to similar measures presented by other entities. For additional information related to these measures see “Efficiency Ratios” and “Non-GAAP and Other Financial Measures” in this press release.
- Net Asset Value is a supplementary financial measure. See “Efficiency Ratios” and “Non-GAAP and Other Financial Measures” in this press release for an explanation of the composition of this supplementary financial measure
- Reserves Life Index is an oil and gas metric that does not have a standardized meaning and therefore may not be comparable to similar measures presented by other entities. For additional information related to this measure see “Oil and Gas Metrics” in this press release.
Year-end 2021 reserves were evaluated by independent reserves evaluator Sproule Associates Ltd. (“Sproule”) in accordance with the definitions, standards and procedures contained in the Canadian Oil and Gas Evaluation Handbook (“COGE Handbook”) and National Instrument 51-101 Standards of Disclosure for Oil and Gas Activities (“NI 51-101”). A reserves committee, comprised of independent board members, reviews the qualifications and appointment of the independent reserves evaluator and reviews the procedures for providing information to the evaluators. The reserves evaluation was based on an average of price forecasts prepared by Sproule, GLJ Petroleum Consultants Ltd. and McDaniel & Associates Consulting Ltd. effective at January 1, 2022. Reserves included herein are stated on a company gross basis (working interest before deduction of royalties without inclusion of any royalty interests) unless noted otherwise. Additional reserves information required under NI 51-101 will be included in Gear’s Annual Information Form to be filed on SEDAR on or before March 31, 2022.
The following tables outline Gear’s reserves as at December 31, 2021. No provision for interest, risk management contracts, debt service charges and general and administrative expenses have been made and it should not be assumed that the net present values of the reserves estimated by Sproule represents the fair market value of the reserves.
Reserves Summary at Dec 31, 2021 Using Forecast Costs and January 1, 2022 Evaluator Average Forecast Prices
|Company Gross||Light & Medium Oil
| Heavy Oil
|Proved Developed Producing||3,747||3,180||519||8,910||8,931||83|
|Proved Non-Producing & Undeveloped||3,172||3,082||533||5,596||7,720||88|
|Probable Developed Producing||1,245||866||160||2,775||2,734||83|
|Probable Non-Producing & Undeveloped||2,139||3,842||285||4,043||6,940||90|
|Total Proved plus Probable||10,303||10,970||1,498||21,324||26,325||86|
Net Present Value of Future Revenues Including Full ARO Before Income Taxes Under Forecast Prices and Costs
|($ thousands)||@ 5%||@ 10%||@ 15%||@ 20%|
|Proved Developed Producing||146,729||166,915||159,119||147,696||137,105|
|Proved Non-Producing & Undeveloped||156,215||112,700||83,696||63,753||49,494|
|Probable Developed Producing||86,452||59,271||44,106||34,941||28,905|
|Probable Non-Producing & Undeveloped||190,958||141,036||109,408||87,863||72,339|
|Total Proved plus Probable||580,354||479,921||396,328||334,254||287,844|
Net Future Development Capital (“FDC”) Under Forecast Prices and Costs
The following table highlights annual capital efficiency through F&D and FD&A costs per boe metrics.
|Reserves (mboes), Capital ($ thousands)||PDP||TP||P+P||PDP||TP||P+P|
|Development Reserves Additions||3,797||5,725||4,899||280||(1,186||)||(1,732||)|
|Net Acquisition Reserves Additions||–||–||–||(3||)||(127||)||(346||)|
|Total Reserves Additions||3,797||5,725||4,899||283||(1,313||)||(2,078||)|
|Development change in FDC||3,538||41,436||10,956||–||(41,825||)||(41,082||)|
|Total development capital including FDC||32,422||70,320||39,840||11,775||(30,050||)||(29,307||)|
|Net acquisition capital||–||–||–||3||3||3|
|Net acquisition change in FDC||–||–||–||–||–||–|
|Total net acquisition capital including FDC||–||–||–||3||3||3|
|Total change in FDC||3,538||41,436||10,956||–||(41,825||)||(41,082||)|
|Total capital including FDC||32,422||70,320||39,840||11,778||(30,047||)||(29,304||)|
|F&D costs with FDC per boe||8.54||12.28||8.13|
|FD&A costs with FDC per boe||8.54||12.28||8.13|
|3 Year average FD&A including FDC per boe||21.78||18.47||17.57|
|Recycle ratio (FD&A with FDC)||4.2||2.9||4.4|
Reserves Life Index (“RLI”)
|Proved Developed Producing||4.6||4.3||4.2|
|Total Proved plus Probable||10.1||10.7||9.4|
Net Asset Value (“NAV”) at December 31, 2021
|($ millions, except per share amounts)||2021||2020|
|Value of Company Interest Proved plus Probable Reserves Discounted at 10%
|Shares Outstanding (millions)||260.2||216.5|
|NAV per Share||1.49||0.80|
Using various constant WTI price forecasts and assuming a WCS differential of US$13 per barrel, MSW and LSB differentials of US$3 per barrel, AECO gas price of C$3.50 per GJ, and a foreign exchange of US$0.79 per C$, NAV’s at December 31, 2021 at various discount rates before tax are as follows:
|NAV per Share||Discount Rate (%)||Evaluator Average Forecast Prices, Jan 1, 2022||WTI US$75/bbl||WTI US$85/bbl||WTI US$95/bbl|
|Proved Developed Producing||10||0.57||0.78||0.98||1.19|
|Total Proved plus Probable||10||1.49||2.04||2.62||3.20|
|Proved Developed Producing||5||0.60||0.87||1.11||1.35|
|Total Proved plus Probable||5||1.81||2.50||3.22||3.92|
|Heavy Oil (Mbbl)||Light & Medium Oil
|Natural Gas (MMcf)||Natural Gas Liquids (Mbbl)||Oil Equivalent (Mboe)|
|Opening Balance, January 1, 2021||2,483||3,406||6,084||302||7,205|
|Closing Balance, December 31, 2021||3,180||3,747||8,910||519||8,931|
|Opening Balance, January 1, 2021||5,433||5,716||8,427||444||12,998|
|Closing Balance, December 31, 2021||6,262||6,919||14,505||1,053||16,651|
|Proved plus Probable|
|Opening Balance, January 1, 2021||10,114||10,371||13,901||696||23,498|
|Closing Balance, December 31, 2021||10,970||10,303||21,324||1,498||26,325|
FORECAST PRICES AND COSTS
Evaluator average crude oil and natural gas benchmark reference pricing, inflation, and exchange rates utilized by Sproule as at January 1, 2022 were as follows:
GEAR ENERGY LTD.
CONSOLIDATED BALANCE SHEETS (unaudited)
As at December 31
|Deferred income tax asset||32,888||–|
|Property, plant and equipment||263,649||244,940|
|Accounts payable and accrued liabilities||$||11,701||$||6,266|
|Risk management contracts||2,595||19|
|Total shareholders’ equity||199,048||104,929|
|Total liabilities and shareholders’ equity||$||318,763||$||262,276|
GEAR ENERGY LTD.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (unaudited)
For the years ended December 31
|Share Capital||Convertible Debentures||Contributed Surplus||Deficit||Total Equity|
|Balance at December 31, 2019||$||335,455||$||2,498||$||18,097||$||(173,795||)||$||182,255|
|Common shares repurchased||(1,764||)||–||1,274||–||(490||)|
|Conversion of convertible debentures||20||(4||)||–||–||16|
|Net loss for the year||–||–||–||(77,324||)||(77,324||)|
|Balance at December 31, 2020||$||333,711||$||2,494||$||19,843||$||(251,119||)||$||104,929|
|Conversion of convertible debentures||15,679||(2,494||)||–||–||13,185|
|Stock option exercise||942||–||(1,004||)||–||(62||)|
|Net income for the year||–||–||–||80,498||80,498|
|Balance at December 31, 2021||$||350,332||$||–||$||19,337||$||(170,621||)||$||199,048|
GEAR ENERGY LTD.
CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS) (unaudited)
|Three Months Ended
|(Cdn$ thousands, except per share amounts)||2021||2020||2021||2020|
|Petroleum and natural gas sales||$||39,961||$||19,644||$||129,027||$||65,057|
|Realized (loss) gain on risk management contracts||(4,572||)||2,500||(12,271||)||17,163|
|Unrealized (loss) gain on risk management contracts||3,952||(2,597||)||(2,576||)||3,075|
|General and administrative||1,422||1,253||5,332||5,181|
|Interest and financing charges||395||1,204||2,572||3,881|
|Depletion, depreciation and amortization||9,745||8,845||35,423||32,448|
|Loss on foreign exchange||–||60||98||683|
|Convertible debenture modification||–||(351||)||–||(351||)|
|Deferred income tax recovery (expense)||32,888||–||32,888||(23,281||)|
|Net income (loss) and comprehensive income (loss)||$||78,117||$||39,349||$||80,498||$||(77,324||)|
|Net income (loss) per share, basic||$||0.30||$||0.18||$||0.32||$||(0.36||)|
|Net income (loss) per share, diluted||$||0.29||$||0.15||$||0.31||$||(0.36||)|
GEAR ENERGY LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
|Three Months Ended
|CASH FLOWS FROM OPERATING ACTIVITIES|
|Net income (loss)||$||78,117||$||39,349||$||80,498||$||(77,324||)|
|Add items not involving cash:|
|Unrealized loss (gain) on risk management contracts||(3,952||)||2,597||2,576||(3,075||)|
|Depletion, depreciation and amortization||9,745||8,845||35,423||32,448|
|Convertible debenture modification||–||(351||)||–||(351||)|
|Unrealized loss on foreign exchange||–||–||–||725|
|Deferred income tax (recovery) expense||(32,888||)||–||(32,888||)||23,281|
|Decommissioning liabilities settled||(1,000||)||(141||)||(1,619||)||(920||)|
|Change in non-cash working capital||483||(96||)||(868||)||(2,292||)|
|CASH FLOWS USED IN FINANCING ACTIVITIES|
|Repayments of debt under credit facilities||(11,450||)||(7,216||)||(24,394||)||(14,230||)|
|Settlement of stock options||–||–||(29||)||–|
|Exercise of stock options||(22||)||–||(33||)||–|
|Common shares repurchased||–||–||–||(490||)|
|CASH FLOWS USED IN INVESTING ACTIVITIES|
|Property, plant and equipment expenditures||(4,936||)||(386||)||(28,884||)||(12,441||)|
|Net acquisition of petroleum and natural gas properties||–||–||–||(3||)|
|Change in non-cash working capital||(1,013||)||(414||)||1,459||(3,053||)|
|INCREASE IN CASH AND CASH EQUIVALENTS||–||–||–||–|
|CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD||–||–||–||–|
|CASH AND CASH EQUIVALENTS, END OF PERIOD||$||–||$||–||$||–||$||–|