Calgary, Alberta – Gear Energy Ltd. (TSX: GXE) (“Gear” or the “Company”) is pleased to provide the following first quarter operating update to shareholders. Gear’s Interim Condensed Consolidated Financial Statements and related Management’s Discussion and Analysis for the period ended March 31, 2023 are available for review on Gear’s website at www.gearenergy.com and on www.sedar.com.
|Three months ended|
|(Cdn$ thousands, except per share, share and per boe amounts)||Mar 31, 2023||Mar 31, 2022||Dec 31, 2022|
|Funds from operations (1)||13,012||18,782||18,676|
|Per weighted average basic share||0.05||0.07||0.07|
|Cash flows from operating activities||14,933||15,340||18,565|
|Per weighted average basic share||0.06||0.06||0.07|
|Per weighted average basic share||0.01||0.02||0.11|
|Decommissioning liabilities settled – Gear||441||912||1,417|
|Decommissioning liabilities settled – Government (2)||37||–||532|
|Net debt (1)||(15,276)||(6,706)||(2,220)|
|Dividends declared and paid||7,826||–||7,795|
|Dividends declared and paid per share||0.03||–||0.03|
|Weighted average shares, basic (thousands)||260,693||260,331||259,908|
|Shares outstanding, end of period (thousands)||261,212||260,759||260,693|
|Heavy oil (bbl/d)||2,734||3,043||2,772|
|Light and medium oil (bbl/d)||2,045||1,580||1,835|
|Natural gas liquids (bbl/d)||292||269||299|
|Natural gas (mcf/d)||5,287||4,855||5,091|
|Heavy oil ($/bbl)||56.80||95.91||69.72|
|Light and medium oil ($/bbl)||91.68||110.32||103.62|
|Natural gas liquids ($/bbl)||50.69||63.88||58.48|
|Natural gas ($/mcf)||3.13||4.64||5.11|
|Petroleum and natural gas sales||62.86||88.73||74.19|
|Operating netback (1)||28.52||56.12||38.21|
|Realized risk management gain (loss)||0.87||(14.11)||–|
|General and administrative||(4.36)||(4.83)||(2.62)|
|Interest and other||(0.74)||(0.57)||(0.32)|
(1) 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 Gear’s management’s discussion and analysis.
(2) Decommissioning liabilities settled by the federal government’s Site Rehabilitation Program, which ended during the first quarter of 2023.
MESSAGE TO SHAREHOLDERS
The first quarter of 2023 was a busy one for Gear with significant activity occurring across the majority of the asset base. However, operational execution was partially offset by macro commodity price weakness and ongoing inflationary pressure. The quarter experienced weaker commodity prices including lower West Texas Intermediate (“WTI”) prices, wider Western Canada Select (“WCS”) heavy oil differentials, and higher diluent blending costs. In response to these macro pressures, Gear has reevaluated its capital plans for the remainder of the year. The goals for 2023 remain the same: to strike a balance between strong returns on capital, production and reserves stability, continued dividends, and balance sheet strength. Although the first quarter of 2023 saw an increase in net debt due to the aggressive capital program, the second quarter is expected to reverse that course as capital investment is reduced through spring break-up. Additionally, funds from operations in the second quarter is estimated to improve over the first quarter due to improved oil prices and the new production associated with the recently invested capital. Despite these anticipated improvements, the Gear team has re-evaluated and optimized the 2023 budget to better reflect the current commodity price forecast. This will include a scale back of planned capital as well as a small reduction in associated production. Together these adjustments will provide Gear with a more sustainable future and a strong foundation for incremental activity should prices improve further as the year progresses.
- Production for the first quarter of 2023 was 5,952 boe per day, a four per cent increase over the 5,701 boe per day reported in the first quarter of 2022 and a three per cent increase from the fourth quarter of 2022 of 5,755 boe per day. First quarter production was slightly lower than guided as a result of the four new wells drilled in Killam, Alberta in 2022 not being able to produce at full capacity due to a facility restriction through the quarter. This restriction resulted in lower initial rates but should assist the area production to remain stable for a longer period of time. Additionally, as noted below, Gear only drilled four of the originally planned six wells in the first quarter of 2023.
- Gear invested $18.4 million of capital through the first quarter of 2023. This included the drilling of four (four net) successful wells including one unlined multi-lateral medium oil well in Provost, Alberta, two multi-stage fractured heavy oil wells in Hoosier, Saskatchewan, and one unlined multi-lateral heavy oil well in Wildmere, Alberta. In addition, Gear initiated or expanded waterfloods in Maidstone, Saskatchewan, Provost, Alberta, Wilson Creek, Alberta and Tableland, Saskatchewan. Gear also fractured and completed two Tableland, Saskatchewan light oil wells in the first quarter. Over the last 30 days, the six new wells cumulatively averaged approximately 650 boe per day of production. Gear’s original plan was to drill six wells for the first quarter of 2023 but due to inflationary cost pressures and lower commodity prices, two wells were deferred to later in 2023.
- Funds from operations for the first quarter of 2023 was $13.0 million, a decrease of 31 per cent from the first quarter of 2022 as a result of lower commodity prices. WTI pricing fell from US$94.29 per barrel in the first quarter of 2022 to US$76.13 per barrel in the first quarter of 2023. In addition, WCS heavy oil differentials widened from US$14.53 per barrel to $24.76 per barrel. Finally, heavy oil pricing was further negatively impacted due to higher diluent blending costs through the colder months, all of which resulted in a 41 per cent lower realized heavy oil price for Gear.
- Gear distributed $7.8 million of dividends or $0.03 per share through the first quarter of 2023, bringing the inception to date total cumulative distributions to $26.0 million, or $0.10 per share.
- Net debt to quarterly annualized funds from operations was 0.3 times, with net debt increasing from $2.2 million on December 31, 2022 to $15.3 million on March 31, 2023. This increase was a result of capital expenditures and dividends exceeding funds from operations through the quarter. For the second quarter of 2023, with the reduction in capital spending and using the current outlook on commodity prices, net debt is forecasted to fall considerably.
REVISED 2023 GUIDANCE
In light of ongoing commodity price volatility, Gear has strategically reduced its planned 2023 capital expenditures by 12 per cent to $58 million. The optimized budget now includes 15 (14.5 net) wells across all three core areas. The reduced well count reflects a higher weighting to light oil opportunities than was planned with the original budget released in November of 2022. The new budget includes one medium oil well in Provost, Alberta (successfully drilled in Q1), four heavy oil wells in Hoosier, Saskatchewan (two successfully drilled in Q1, with two follow-ups planned in the second half of 2023), six multi-lateral heavy oil wells in the general Lloydminster area (one successfully drilled in Q1), two light oil wells in Wilson Creek, Alberta and two light oil wells in Tableland, Saskatchewan. This compares to the original budget of 22 net wells with six of those originally planned in the first quarter of 2023. Annual production guidance has now been reduced by approximately three per cent to range from 5,800 to 6,000 boe per day due to the reduced drill count to date (and go forward) as well as ongoing capacity limitations at Gear’s Killam oil facility and an unplanned third-party infrastructure turnaround now expected in Central Alberta in the second quarter of 2023.
Total drill capital is now forecast to be $40 million, with an additional $7 million invested in waterfloods in Wilson Creek, Tableland and Wildmere, $6 million invested in abandonment and reclamation activities and the remaining capital dedicated to land, seismic, and other corporate costs. Within the revised guidance there are some associated increases in per unit costs related to the lower annual volumes, continued inflationary pressures and the weaker forecasted commodity prices under the current forward strip.
|2023 Previous Guidance||Q1 2023
|Annual production (boe/d)||5,800 – 6,000||6,100||5,952|
|Q1 2023 production (boe/d)||6,100||5,952|
|Heavy oil weighting (%)||48||48||46|
|Light oil, medium oil and NGLs weighting (%)||38||37||39|
|Royalty rate (%)||13||13||12|
|Operating and transportation costs ($/boe)||25.00||23.00||26.70|
|General and administrative expense ($/boe)||3.50||3.50||4.36|
|Interest and other expense ($/boe)||0.80||0.30||0.74|
|Capital and abandonment expenditures ($ millions)(1)||58||66||18|
(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.