Gear successfully achieved its target of zero net debt at the end of April 2022, the first strategic step towards enhanced shareholder returns. Within approximately two years, Gear has eliminated over $80 million of net debt through a combination of 84 per cent free funds from operations and 16 per cent equity issuances. Now that this milestone has been accomplished, maintaining an exceptional balance sheet will continue to be a priority for the foreseeable future. Coincident with this achievement and as promised, Gear is pleased to provide clarity on the next steps in the plan for enhanced returns to shareholders.
Effective immediately, Gear will be implementing a variable quarterly dividend with target distributions of approximately 30 per cent of the free funds from operations generated from the previous quarter. For May, the inaugural quarterly dividend payment in relation to the free funds from operations generated through the first quarter of 2022 will be $0.01 per share. Gear believes this to be a unique and superior dividend strategy that will expose shareholders to the strength of the underlying business and commodity price upside, while minimizing any potential future risk of volatility to the balance sheet.
The remaining approximately 70 per cent of free funds from operations for the previous quarter is expected to be dedicated to a combination of share buybacks, growth capital, cash funded acquisitions, and special dividends. Share buybacks will be subject to certain strategic net asset value and debt adjusted trading multiple thresholds and are expected to commence in May with the formalization of an approved Normal Course Issuer Bid (“NCIB”).
In parallel with these plans for immediate returns, Gear is also increasing the planned capital and abandonment expenditures for 2022 from $40 million to $55 million, targeting production and reserves growth from Gear’s deep inventory of undeveloped opportunities into 2023 through a combination of incremental drilling in the fourth quarter of 2022 and expanded strategic waterflood investments.
[expand title=”Read More”]Forward-looking Information and Statements
This press release contains certain forward-looking information and statements within the meaning of applicable securities laws. The use of any of the words “expect”, “anticipate”, “continue”, “estimate”, “objective”, “ongoing”, “may”, “will”, “project”, “should”, “believe”, “plans”, “intends”, “strategy” and similar expressions are intended to identify forward-looking information or statements. In particular, but without limiting the foregoing, this press release contains forward-looking information and statements pertaining to the following: the maintenance of an exceptional balance sheet will be a priority for the foreseeable future; the implementation of a variable quarterly dividend that will distribute approximately 30 per cent of free funds from operations; the usage of 70 per cent of free funds from operations to be dedicated to share buybacks, growth capital, and potential acquisitions; share buybacks to commence in May 2022; minimal hedging losses for the second quarter of 2022; production set to incline throughout 2022 as production from new wells comes online with peak production to be realized in the first quarter of 2023; future dividends to be dependent on commodity prices, capital and abandonment expenditures inclusive of cash funded acquisitions and Gear’s operational and financial performance; future quarterly variable cash dividends announced in conjunction with Gear’s quarterly financial releases; the forecast of quarterly 2022 funds from operations, quarterly 2022 capital and abandonment expenditures, quarterly 2022 free funds from operations, quarterly 2022 dividend amounts, and quarterly 2022 dividends per share; planned increased 2022 capital and abandonment expenditures positively impacting first quarter 2023 production and the base for 2023; the forecasted annual production growth of three to four per cent and the estimate of production growth from the first quarter of 2022 to the first quarter of 2023 at seven or eight per cent; the plans to drill 24 gross (24 net) oil wells in 2022 with 5 additional wells to be drilled in the fourth quarter of 2022; added wells to provide superior economic returns and that Gear’s primary drilling rig remains active through to the end of 2022; per well cost estimates; and the expectation that Gear will spend a total of $5 million in waterflood investments for 2022 in the Provost, Killam, Wilson Creek and Tableland areas; that waterflood investments will provide competitive economic long-term returns, extend corporate reserves life and reduce Gear’s decline rate into 2023; and Gear’s revised 2022 guidance including expected annual average production (including commodity weightings), expected royalty rate, expected operating and transportation costs, expected general and administrative costs, expected interest expense and expected capital and abandonment expenditures.
The forward-looking information and statements contained in this press release reflect several material factors and expectations and assumptions of Gear including, without limitation: that Gear will continue to conduct its operations in a manner consistent with past operations; the general continuance of current industry conditions; the continuance of existing (and in certain circumstances, the implementation of proposed) tax, royalty and regulatory regimes; the accuracy of the estimates of Gear’s reserves and resource volumes; certain commodity price and other cost assumptions; and the continued availability of adequate debt and equity financing and funds from operations to fund its planned expenditures. Gear believes the material factors, expectations and assumptions reflected in the forward-looking information and statements are reasonable but no assurance can be given that these factors, expectations and assumptions will prove to be correct.
To the extent that any forward-looking information contained herein may be considered a financial outlook, such information has been included to provide readers with an understanding of management’s assumptions used for budgeting and developing future plans and readers are cautioned that the information may not be appropriate for other purposes. The forward-looking information and statements included in this press release are not guarantees of future performance and should not be unduly relied upon. Such information and statements involve known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in such forward-looking information or statements including, without limitation: the continuing impact of the COVID-19 pandemic; changes in commodity prices; changes in the demand for or supply of Gear’s products; the impacts of the Russian-Ukraine war on the global economy and commodity prices; unanticipated operating results or production declines; changes in tax or environmental laws, royalty rates or other regulatory matters; changes in development plans of Gear or by third party operators of Gear’s properties, increased debt levels or debt service requirements; the impacts of inflation and supply chain issues; inaccurate estimation of Gear’s oil and gas reserve and resource volumes; limited, unfavorable or a lack of access to capital markets; increased costs; a lack of adequate insurance coverage; the impact of competitors; and certain other risks detailed from time to time in Gear’s public documents including in Gear’s most current annual information form which is available on SEDAR at www.sedar.com.
The amount of future cash dividends paid by Gear, if any, will be subject to the discretion of the Board of Directors of Gear and may vary depending on a variety of factors and conditions existing from time to time, including, among other things, funds from operations, fluctuations in commodity prices, production levels, capital expenditure requirements, debt service requirements and debt levels, operating costs, royalty burdens, foreign exchange rates and the satisfaction of the liquidity and solvency tests imposed by applicable corporate law for the declaration and payment of dividends. Depending on these and various other factors, many of which will be beyond the control of the Company, the dividend policy of the Company from time to time and, as a result, future cash dividends may not be paid or if paid could at a later date be reduced or suspended entirely.
The forward-looking information and statements contained in this press release speak only as of the date of this press release, and Gear does not assume any obligation to publicly update or revise them to reflect new events or circumstances, except as may be required pursuant to applicable laws.
Non-GAAP and Other Financial Measures
This press release includes references to non-GAAP and other financial measures that Gear uses to analyze financial performance. These specified financial measures include non-GAAP financial measures, non-GAAP ratios, capital management measures and supplementary financial measures, and are not defined by IFRS and are therefore referred to as non-GAAP and other financial measures. Management believes that the non-GAAP and other financial measures used by the Company are key performance measures for Gear and provide investors with information that is commonly used by other oil and gas companies. These key performance indicators and benchmarks as presented do not have any standardized meaning prescribed by Canadian GAAP and therefore may not be comparable with the calculation of similar measures for other entities. These non-GAAP and other financial measures should not be considered an alternative to or more meaningful than their most directly comparable financial measure presented in the financial statements, as an indication of the Company’s performance. Descriptions of the non-GAAP and other financial measures used by the Company as well as reconciliations to the most directly comparable GAAP measure for the quarter ended March 31, 2022 and year ended December 31, 2021, where applicable, is provided below.
Funds from Operations
Funds from operations is a non-GAAP financial measure defined as cash flows from operating activities before changes in non-cash operating working capital and decommissioning liabilities settled. Gear evaluates its financial performance primarily on funds from operations and considers it a key measure for management and investors as it demonstrates the Company’s ability to generate the funds from operations necessary to fund its capital program and decommissioning liabilities and repay debt. The following is a reconciliation of funds from operations from cash flows from operating activities.
Reconciliation of cash flows from operating activities to funds from operations:
|
Three months ended |
($ thousands) |
Mar 31, 2022 |
Mar 31, 2021 |
Dec 31, 2021 |
Cash flows from operating activities |
15,340 |
9,892 |
17,421 |
Decommissioning liabilities settled (1) |
912 |
396 |
1,000 |
Change in non-cash operating working capital |
2,530 |
(2,035) |
(483) |
Funds from operations |
18,782 |
8,253 |
17,938 |
(1) Decommissioning liabilities settled includes only expenditures made by Gear.
Funds from Operations per BOE
Funds from operations per boe is a non-GAAP ratio calculated as funds from operations, as defined and reconciled to cash flows from operating activities above, divided by sales production for the period. Gear considers this a useful non-GAAP ratio for management and investors as it evaluates financial performance on a per boe level, which enables better comparison to other oil and gas companies in demonstrating its ability to generate the funds from operations necessary to fund its capital program and settle decommissioning liabilities and repay debt.
Funds from operations per weighted average basic share
Funds from operations per weighted average basic share is a non-GAAP ratio calculated as funds from operations, as defined and reconciled to cash flows from operating activities above, divided by the weighted average basic share amount. Gear considers this non-GAAP ratio a useful measure for management and investors as it demonstrates its ability to generate the funds from operations, on a per weighted average basic share basis, necessary to fund its capital program and settle decommissioning liabilities and repay debt.
Free Funds from Operations
Free funds from operations is a non-GAAP financial measure defined as cash flows from operating activities, adjusted for the net change in non-cash operating working capital, less capital expenditures and net acquisitions funded by funds from operations. Gear evaluates its financial performance on free funds from operations and considers it a key measure for management and investors as it demonstrates the Company’s ability to generate the cash flow necessary to fund its capital program and decommissioning liabilities and repay debt.
Reconciliation of cash flows from operating activities to free funds from operations:
|
Three months ended |
($ thousands) |
Mar 31, 2022 |
Mar 31, 2021 |
Dec 31, 2021 |
Cash flows from operating activities |
15,340 |
9,892 |
17,421 |
Change in non-cash operating working capital |
2,530 |
(2,035) |
(483) |
Capital expenditures |
(8,687) |
(7,883) |
(4,936) |
Free funds from (used in) operations |
9,183 |
(26) |
12,002 |
Net Debt
Net debt is a capital management measure defined as debt plus amounts outstanding under subordinated convertible debentures (“Convertible Debentures”) less current working capital items (excluding debt, Convertible Debentures, risk management contracts and decommissioning liabilities). Gear believes net debt provides management and investors with a measure that is a key indicator of its leverage and strength of its balance sheet. Changes in net debt are primarily a result of funds from operations, capital and abandonment expenditures and equity issuances.
Reconciliation of debt to net debt:
Capital Structure and Liquidity
($ thousands) |
Mar 31, 2022 |
Dec 31, 2021 |
Debt |
20,029 |
26,355 |
Working capital (surplus) (1) |
(13,323) |
(10,525) |
Net debt |
6,706 |
15,830 |
(1) Excludes risk management contracts, debt, Convertible Debentures and decommissioning liabilities.
Net Debt to Trailing Twelve-Month Funds from Operations
Net debt to trailing twelve-month funds from operations is a non-GAAP ratio and is defined as net debt, as defined and reconciled to debt above, divided by the funds from operations, as defined and reconciled to cash flows from operating activities above, for the most recent trailing twelve-month period. Gear uses net debt to funds from operations to analyze financial and operating performance. Gear considers this a key measure for management and investors as it demonstrates the Company’s ability to pay off its debt and take on new debt, if necessary, using the most recent trailing twelve-month results.
Net Debt to Quarterly Annualized Funds from Operations
Net debt to quarterly annualized funds from operations is a non-GAAP ratio and is defined as net debt, as defined and reconciled to debt above, divided by the annualized funds from operations, as defined and reconciled to cash flows from operating activities above, for the most recently completed quarter. Gear uses net debt to quarterly annualized funds from operations to analyze financial and operating performance. Gear considers this a key measure for management and investors as it demonstrates the Company’s ability to pay off its debt and take on new debt, if necessary, using the most recent quarter’s results.
Debt Adjusted Shares
Debt adjusted shares is a non-GAAP financial measure calculated as the weighted average shares plus the share equivalent on Gear’s average net debt, as defined and reconciled to debt above, over the period, assuming that net debt were to be extinguished with a share issuance based on a certain share price; however, it should be noted that Gear’s bank debt is not convertible into shares and, although Gear’s Convertible Debentures were convertible into shares, the calculation of debt adjusted shares was not based on the conversion of the Convertible Debentures in accordance with the terms of such Convertible Debentures. The calculation of debt adjusted shares assumes that Gear issues shares for cash proceeds and such proceeds are used to repay the amounts outstanding under both the Company’s bank debt and the Convertible Debentures. The Convertible Debentures are assumed to be extinguished in the per debt adjusted share calculations. Gear has used the ten-day volume weighted average share price ending at the end of the period as this share price better captures the actual price that could be theoretically used in the event that shares are hypothetically issued to extinguish outstanding debt. Gear considers debt adjusted shares a useful measure for management and investors as it enables oil and gas companies to be put on an equal, enterprise value-based footing when calculating per share numbers.
Reconciliation of weighted average basic shares to debt adjusted shares:
|
Three months ended |
(thousands, except per share amounts) |
Mar 31, 2022 |
Mar 31, 2021 |
Dec 31, 2021 |
Weighted average basic shares |
260,331 |
221,090 |
259,360 |
Average share price (1) |
1.61 |
0.51 |
0.89 |
Average net debt (2) |
11,268 |
47,897 |
21,845 |
Share equivalent on average net debt (3) |
6,999 |
93,916 |
24,545 |
Debt adjusted shares |
267,330 |
315,006 |
283,905 |
(1) Average share price obtained by a ten-day volume weighted average price ending at the end of the period.
(2) Average net debt obtained by a simple average between opening and ending net debt for the three months ended.
(3) Share equivalent on average net debt obtained by average net debt divided by average share price.
Operating Netback
Operating netbacks are non-GAAP ratios calculated based on the amount of revenues received on a per unit of production basis after royalties and operating costs. Management considers operating netback to be a key measure of operating performance and profitability on a per unit basis of production. Management believes that netback provides investors with information that is commonly used by other oil and gas companies. The measurement on a per boe basis assists management and investors with evaluating operating performance on a comparable basis.
Barrels of Oil Equivalent
Disclosure provided herein in respect of BOEs may be misleading, particularly if used in isolation. A BOE conversion ratio of six Mcf to one Bbl is based on an energy equivalency conversion method primarily applicable at the burner tip and do not represent a value equivalency at the wellhead. Additionally, given that the value ratio based on the current price of crude oil, as compared to natural gas, is significantly different from the energy equivalency of 6:1; utilizing a conversion ratio of 6:1 may be misleading as an indication of value.
Initial Production Rates
Any references in this document to initial production (or IP) rates are useful in confirming the presence of hydrocarbons, however, such rates are not determinative of the rates at which such wells will continue production and decline thereafter. Additionally, such rates may also include recovered “load oil” fluids used in well completion stimulation. Readers are cautioned not to place reliance on such rates in calculating the aggregate production for Gear.
FOR FURTHER INFORMATION PLEASE CONTACT:
Ingram Gillmore
President & CEO
403-538-8463
David Hwang
Vice President Finance & CFO
403-538-8437
Email: info@gearenergy.com
Website: www.gearenergy.com[/expand]