Calgary, Alberta–(Newsfile Corp. – July 27, 2022) – Gear Energy Ltd. (TSX: GXE) (OTCQX: GENGF) (“Gear” or the “Company”) is pleased to provide the following second 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 June 30, 2022 are available for review on Gear’s website at www.gearenergy.com and on www.sedar.com.
|Three months ended||Six months ended|
|(Cdn$ thousands, except per share, share and per boe amounts)||Jun 30,
|Funds from operations (1)||33,770||12,222||18,782||52,552||20,475|
|Per weighted average basic share||0.13||0.05||0.07||0.20||0.09|
|Cash flows from operating activities||29,668||14,967||15,340||45,008||24,859|
|Net income (loss)||23,309||(730)||6,227||29,536||(4,227)|
|Per weighted average basic share||0.09||0.00||0.02||0.11||(0.02)|
|Decommissioning liabilities settled (2)||1,350||694||912||2,262||2,131|
|Free funds from operations (1)||24,579||6,230||9,183||33,762||6,204|
|Net surplus (debt)(1)||9,775||(33,418)||(6,706)||9,775||(33,418)|
|Dividends declared per share||0.01||–||–||0.01||–|
|Weighted average shares, basic (thousands)||260,561||247,415||260,331||260,447||234,325|
|Shares outstanding, end of period (thousands)||258,173||258,103||260,759||258,173||258,103|
|Heavy oil (bbl/d)||2,686||3,207||3,043||2,863||3,117|
|Light and medium oil (bbl/d)||1,980||1,469||1,580||1,781||1,491|
|Natural gas liquids (bbl/d)||243||148||269||256||135|
|Natural gas (mcf/d)||5,205||3,694||4,855||5,031||3,868|
|Heavy oil ($/bbl)||116.74||62.14||95.91||105.73||57.05|
|Light and medium oil ($/bbl)||133.18||74.72||110.32||123.10||68.89|
|Natural gas liquids ($/bbl)||72.59||34.40||63.88||68.03||38.08|
|Natural gas ($/mcf)||7.38||3.15||4.64||6.06||3.10|
|Petroleum and natural gas sales||109.63||59.90||88.73||99.31||55.25|
|Realized risk management loss||(0.96)||(5.55)||(14.11)||(7.46)||(5.06)|
|General and administrative||(2.94)||(2.66)||(4.83)||(3.87)||(2.52)|
|Interest and other||(0.51)||(1.64)||(0.57)||(0.54)||(1.84)|
($ based on intra-day trading)
|Average daily volume (thousands)||5,269||3,019||4,859||5,066||2,181|
(1) Funds from operations, free funds from operations, net surplus (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.
(2) Decommissioning liabilities settled includes expenditures made by both Gear and the Federal Site Rehabilitation Program.
MESSAGE TO SHAREHOLDERS
Gear’s second quarter results include a number of significant new records including record high funds from operations, record high field netback, and a first ever net surplus on the balance sheet (as defined below). The business remains very sound during this time of heightened macroeconomic uncertainty and commodity price volatility with record high free funds from operations of $24.6 million or $0.095 per share generated in the second quarter. In light of the continued strength of the business, Gear is pleased to announce the revision of the previously declared variable quarterly dividend program to the implementation of a new monthly dividend of $0.01 per common share. To account for no dividend being distributed in July, the initial dividend for the month of August will be $0.02 per common share. Further details are included below.
- Record funds from operations for the second quarter of 2022 of $33.8 million, an increase of 80 per cent from the first quarter of 2022 primarily as a result of higher commodity prices and lower risk management losses. The record funds from operations exceeds the previous quarterly record funds from operations by 50 per cent, with the previous record set back in the third quarter of 2014.
- Second quarter realized prices increased from $88.73 per boe in the first quarter of 2022 to $109.63 per boe. The improved commodity prices were driven by an increase in the WTI benchmark oil price which averaged US$108 per barrel (C$139 per barrel) in the second quarter.
- Operating netback for the second quarter of 2022 was a record $68.65 per boe, Gear’s highest operating netback since inception.
- In the second quarter of 2022, Gear successfully drilled one light oil well in Tableland, Saskatchewan, one multi-lateral unlined heavy oil well in Wildmere, Alberta, and one water-source well for expanded waterflooding in Killam, Alberta. Gear also rig-released one additional multi-lateral unlined heavy oil well in Swimming, Alberta subsequent to the second quarter. The Tableland light oil well was completed in July and is expected to be on production in August. A total of $8.1 million of capital was incurred for the quarter including $1.6 million for facilities and $0.4 million for undeveloped land purchases. Gear anticipates its drilling rig to remain active to the end of the year with up to two additional rigs active for portions of the second half of 2022.
- Production for the second quarter of 2022 was 5,777 boe per day, a slight increase of one per cent from the first quarter of 2022 as a result of new production from the first quarter drilling program in Provost, Alberta of 6 gross (6 net) wells. For the second quarter, these wells contributed an average of 460 boe per day of sales. Production continues to incline for these wells with the last 30 days of production averaging approximately 520 boe per day. Into the third quarter, production is expected to be approximately 5,500 boe per day in July as a result of weather related delays in bringing on new wells and equipment issues delaying the fracture stimulation of the new well in Tableland until the end of the month. Production is expected to grow through the remainder of the quarter and into year end.
- Achieved Gear’s goal of zero net debt in the month of April 2022 and exited the second quarter with a net surplus of $9.8 million, a $16.5 million movement from the first quarter of 2022 net debt of $6.7 million. As of June 30, 2022, the net surplus consists of $14.4 million of working capital offset by $4.6 million of bank debt.
- Gear had minimal hedging losses of $0.5 million or $0.96 per boe realized during the second quarter. The losses were related to the premium cost of the purchased put spread with no sold calls impeding upper oil price potential.
- In the second quarter of 2022, Gear paid a $0.01 per share dividend in relation to first quarter free funds from operations and acquired and cancelled 3.6 million shares under its Normal Course Issuer Bid share buyback program at an average price of $1.45 per share.
2022 EXPANDED CAPITAL PROGRAM AND REVISED GUIDANCE
- As a result of continued strong commodity prices and expanded strategic investment opportunities, Gear intends to increase the planned 2022 capital and abandonment expenditure investment from $55 million to $64 million with the majority of the increase relating to two additional light oil wells to be drilled in Tableland, SK. These two wells are currently planned to be drilled and completed at the end of 2022 and are expected to be on production in the first quarter of 2023.
- Production to date for 2022 has been marginally hindered by difficult weather as well as intermittent challenges accessing equipment and manpower. Gear anticipates the majority of these issues to be less relevant through the second half of the year with strong capital activity levels anticipated right through to year-end. Annual production guidance for 2022 is being stepped back slightly at this point. However, for the first quarter of 2023, production is expected to be approximately 6,400 boe per day reflecting the impacts of the strong capital investments currently planned.
- Updated Guidance for 2022 is as follows:
|2022 Revised Guidance||2022 Previous
|Q2 2022 YTD
|2022 annual production (boe/d)||5,700 – 5,900||5,900 – 6,000||5,739|
|Q1 2023 production (boe/d)||6,400||n/a||n/a|
|Heavy oil weighting (%)||50||51||50|
|Light oil, medium oil and NGLs weighting (%)||36||36||35|
|Royalty rate (%)||13||12||13|
|Operating and transportation costs ($/boe)||23.50||23.50||24.34|
|General and administrative expense ($/boe)||3.15||3.15||3.87|
|Interest and other expense ($/boe)||0.40||0.40||0.54|
|Capital and abandonment expenditures ($ millions)||64||55||19|
IMPLEMENTATION OF A MONTHLY DIVIDEND
- With the generation of $24.6 million in free funds from operations during the second quarter and a continued strong outlook, Gear’s Board of Directors has approved the implementation of a new monthly dividend of $0.01 per common share. To account for no dividend being distributed in July, the initial dividend for the month of August will be $0.02 per common share and thereafter will revert to $0.01 per common share for the following months. The $0.02 dividend will be paid on August 31, 2022 to shareholders of record as of close of business on August 15, 2022. The dividend is designated as an “eligible dividend” for income tax purposes.
- After reviewing the impacts and results of the initial variable dividend payment completed in the second quarter, Gear will be revising its dividend program going forward by converting to a monthly dividend program to provide investors with more predictable returns. With the initiation of the new monthly $0.01 per share dividend, Gear still anticipates maintaining a strong balance sheet with the current forecast (using forward market pricing as of July 26, 2022) showing a continual net surplus in the future. In the first four months of 2022, Gear dedicated all of its free funds from operations to debt repayments. Under the current forecast from May 2022 to December 2022, Gear anticipates approximately 75 per cent of free funds from operations (approximately 25 per cent of funds from operations) will be returned to shareholders as dividends with the remaining free funds from operations dedicated to potential future capital expansions, cash funded acquisitions, share buybacks and/or future dividend increases. Management and the Board of Directors will continue to monitor the future commodity markets and the strength of the business to ensure that the distribution of future dividends remains aligned with all other strategic goals.
- Over the course of the second quarter of 2022, Gear purchased and cancelled a total of 3,638,600 shares at an average cost of $1.45 per share. Going forward, potential future purchases will be made subject to available free funds from operations and subject to certain strategic net asset value and debt adjusted trading multiple thresholds. Given the increased allocation of free funds from operations to Gear’s monthly dividend, the number of shares repurchased through the rest of the year will likely be lower than amounts repurchased to date.