Calgary, Alberta–(Newsfile Corp. – November 2, 2022) – Gear Energy Ltd. (TSX: GXE) (OTCQX: GENGF) (“Gear” or the “Company”) is pleased to provide the following third quarter operating update to shareholders and 2023 budget guidance. Gear’s Interim Condensed Consolidated Financial Statements and related Management’s Discussion and Analysis (“MD&A”) for the period ended September 30, 2022 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,
|Sep 30, 2021||Jun 30, 2022||Sep 30,
|Sep 30, 2021|
|Funds from operations (1)||22,544||15,955||33,770||75,096||36,430|
|Per weighted average basic share||0.09||0.06||0.13||0.29||0.15|
|Cash flows from operating activities||26,196||9,601||29,668||71,204||34,460|
|Per weighted average basic share||0.07||0.03||0.09||0.18||0.01|
|Decommissioning liabilities settled – Gear||2,859||40||1,100||4,871||619|
|Decommissioning liabilities settled – Government(2)(2)||433||904||250||683||2,456|
|Free funds from operations (1)||4,813||5,659||24,579||38,575||11,863|
|Net surplus (debt)(1)||6,959||(27,860)||9,775||6,959||(27,860)|
|Dividends declared and paid||7,751||–||2,610||10,361||–|
|Dividends declared and paid per share||0.03||–||0.01||0.04||–|
|Weighted average shares, basic (thousands)||258,385||258,274||260,561||259,752||245,061|
|Shares outstanding, end of period (thousands)||259,367||259,107||258,173||259,367||259,107|
|Heavy oil (bbl/d)||2,546||3,325||2,686||2,756||3,187|
|Light and medium oil (bbl/d)||1,971||1,656||1,980||1,845||1,546|
|Natural gas liquids (bbl/d)||320||176||243||278||149|
|Natural gas (mcf/d)||5,339||4,215||5,205||5,135||3,985|
|Heavy oil ($/bbl)||89.32||67.86||116.74||100.62||60.85|
|Light and medium oil ($/bbl)||109.95||80.49||133.18||118.37||73.07|
|Natural gas liquids ($/bbl)||60.62||47.48||72.59||65.15||41.82|
|Natural gas ($/mcf)||4.47||3.62||7.38||5.51||3.28|
|Petroleum and natural gas sales||85.10||65.29||109.63||94.53||58.82|
|Realized risk management loss||(1.94)||(5.13)||(0.96)||(5.60)||(5.08)|
|General and administrative||(3.20)||(2.70)||(2.94)||(3.65)||(2.58)|
|Interest and other||(0.20)||(0.88)||(0.51)||(0.43)||(1.50)|
(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 by the Federal Site Rehabilitation Program.
MESSAGE TO SHAREHOLDERS
The third quarter of 2022 saw Gear deliver the second highest funds from operations per boe ever, despite commodity prices taking a pause from the rapid rise experienced through the first six months of the year. Prices still remain at healthy and historical highs.
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Western Canadian Select (“WCS”), the primary benchmark index for Canadian heavy oil, experienced a C$28 per barrel or 23 per cent drop from the second quarter of 2022 to the third quarter of 2022. As a result, Gear’s funds from operations (“FFO”) per boe fell by $21.45 per boe. Despite the decrease in commodity prices, the business remains very healthy, with the third quarter generating exceptional funds from operations while maintaining a net surplus on the balance sheet.
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With the release of these quarterly results, Gear is also pleased to provide 2023 budget guidance. The new budget is designed to target continued shareholder returns focused on a combination of material dividends and further organic growth of five to six per cent, annualized. Additionally, using an assumed US$80 per barrel WTI price, the 2023 budget estimates delivering these shareholder returns while maintaining a strong balance sheet.
- Funds from operations for the third quarter of 2022 of $22.5 million, a decrease of 33 per cent from the second quarter of 2022 primarily as a result of lower commodity prices. Third quarter realized prices fell from $109.63 per boe in the second quarter of 2022 to $85.10 per boe. The decrease in commodity prices was driven by a decline in the WTI benchmark oil price and a widening WCS heavy oil differential. Combined, the benchmark WCS heavy oil price averaged US$71.66 per barrel in the third quarter compared to US$95.61 per barrel in the second quarter.
- Despite the decrease in commodity prices, Gear generated $4.8 million in free funds from operations in a quarter where Gear spent a significant amount of capital expenditures on an active drilling program. In the third quarter, Gear drilled seven gross (seven net) wells including three exploratory heavy oil wells, two heavy oil wells in Lindbergh, and two heavy oil wells in Wildmere and was in the midst of drilling an eighth well in Wildmere which was rig-released in early October. A total of $14.9 million of capital expenditures were incurred for the quarter.
- Looking forward to the fourth quarter of 2022, capital expenditures are estimated to increase significantly over the third quarter. Eight new wells are planned for last quarter of the year including two multi lateral heavy oil wells in Wildmere, Alberta, four horizontal multi stage fractured wells into the medium oil waterflood in Killam, Alberta, and two light oil multistage fractured wells in Tableland, Saskatchewan. In addition, funds are forecast to be invested in a waterflood expansion in Maidstone, Saskatchewan and in the initiation of waterfloods in Provost, Alberta and Tableland, Saskatchewan. Pending timing and availability of services as we approach year end, some of these planned capital activities may carry over into the first quarter of 2023.
- Production in the third quarter of 5,727 boe per day remained relatively unchanged from the second quarter. Of the seven wells drilled during the quarter, one came on production in late August, contributing approximately 40 boe per day to the quarterly average, one exploratory well did not realize economic production, and the remaining five wells came on late in the quarter, or subsequent to quarter end, and will contribute incremental production through the fourth quarter. During the quarter, Gear encountered egress issues with two different third party gas infrastructures. As a result, approximately 120 boe per day of production was restricted during the third quarter. These issues have been partially resolved subsequent to quarter end.
- During the nine months ended September 30, 2022, as a result of combined efforts of both Gear and the Federal Government’s Site Rehabilitation Program, the combined $5.6 million of decommissioning expenditures allowed Gear to cut and cap 127 gross wells and downhole abandon 145 gross wells.
- Realized a net surplus of $7.0 million as of September 30, 2022 while returning $7.8 million in dividends ($14.71 per boe) to Gear’s shareholders through a total of $0.03 per share dividend for the quarter. No shares were repurchased under Gear’s Normal Course Issuer’s Bid for the third quarter as funds from operations were preferentially allocated to dividends and Gear’s capital program.
2023 BUDGET GUIDANCE
The Board of Directors has approved a 2023 capital budget of $61 million dollars designed to target the following four key strategic goals:
- Five to six per cent annual production growth through investment into core area drilling and waterflood opportunities;
- Continuation of the one cent per share monthly dividend;
- Maintenance of the strong balance sheet; and
- Continued commitment to improving Gear’s environmental footprint through abandonment and reclamation activities
The details of the 2023 capital budget are as follows:
- $39 million (64%) focused on drilling 22 gross (22 net) wells including 15 Lloydminster area heavy oil wells, five Provost and Killam, Alberta medium oil wells, one light oil well in Wilson Creek, Alberta, and one Southeast Saskatchewan Tableland light oil well.
- $9 million (15%) invested in water flood expansions and optimizations including continued expansion of various heavy oil water floods, continued expansion of the Killam medium oil water flood, expansion of the Tableland light oil water flood and further expansions of the light oil water floods in Wilson Creek. Gear continues to increase capital investment into water flood expansions in various areas targeting increases in oil recovery factors and lower production decline rates.
- $7 million (11%) directed to continued reduction in liabilities associated with abandonment and reclamations.
- $6 million (10%) invested in land, seismic, field capital projects, recompletions and other corporate costs.
- For the last two years, Gear has observed an increase in capital costs. For 2023, Gear has budgeted capital inflation to be approximately 12 per cent.
|2023 Guidance||2022 Guidance||Q3 2022 YTD
|Annual production (boe/d)||6,100||5,700 – 5,900||5,735|
|Heavy oil weighting (%)||48||50||48|
|Light oil, medium oil and NGLs weighting (%)||37||36||37|
|Royalty rate (%)||13||13||13|
|Operating and transportation costs ($/boe)||23.00||23.50||24.50|
|General and administrative expense ($/boe)||3.50||3.15||3.65|
|Interest and other expense ($/boe)||0.30||0.40||0.43|
|Capital and abandonment expenditures ($ millions)(1)||61||62(2)||37|
(1) Capital and abandonment expenditures includes decommissioning liability expenditures made by Gear and excludes any expenditures made by the federal government’s Site Rehabilitation Program.
(2) Guidance for 2022 capital and abandonment expenditures was reduced from $64 million to $62 million due to the deferral of two wells into 2023.
Using various WTI price forecasts for 2023 and assuming a WCS differential of US$18 per barrel, MSW and LSB differentials of US$3.50 per barrel, AECO gas price of C$4.50 per GJ, and a foreign exchange of US$0.73 per C$, Gear is forecasting 2023 funds from operations (“FFO”) as follows:
|FFO ($ millions)||69||92||115||138|
|Capital and abandonment expenditures ($ millions)||(61)||(61)||(61)||(61)|
|Free funds from operations ($ millions)||8||31||54||77|
On an annualized basis, Gear forecasts its $0.01 per share per month dividend to total approximately $31 million. Assuming an annual production of 6,100 boe per day, that equates to approximately $14 per boe. As such, if WTI is at or above US$80 per barrel, the dividend is forecast to be funded with free FFO. Any future increase in commodity prices beyond these base assumptions will provide incremental free FFO which would be dedicated to potential future capital expansions, cash funded acquisitions, share buybacks and/or future dividend increases.