CALGARY, May 6, 2020 /CNW/ - Gear Energy Ltd. ("Gear" or
the "Company") (TSX:GXE) is providing the following first 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
March 31, 2020 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,
2020
|
Mar 31,
2019
|
Dec 31,
2019
|
FINANCIAL
|
|
|
|
Funds from operations
(1)
|
6,258
|
15,032
|
13,738
|
Per boe
|
10.20
|
24.29
|
21.68
|
Per weighted average
basic share
|
0.03
|
0.07
|
0.06
|
Cash flows from
operating activities
|
9,788
|
5,981
|
11,401
|
Net loss
|
(110,215)
|
(6,812)
|
(8,045)
|
Per weighted average
basic share
|
(0.51)
|
(0.03)
|
(0.04)
|
Capital
expenditures
|
11,099
|
9,252
|
12,603
|
Decommissioning
liabilities settled
|
671
|
399
|
889
|
Net
acquisitions (dispositions) (2)
|
3
|
(1,038)
|
109
|
Net debt (1)
(3)
|
80,261
|
85,740
|
69,752
|
Weighted average
shares, basic (thousands)
|
216,715
|
219,016
|
218,365
|
Shares outstanding,
end of period (thousands)
|
216,468
|
219,044
|
217,610
|
|
|
|
|
OPERATING
|
|
|
|
Production
|
|
|
|
Heavy oil
(bbl/d)
|
3,989
|
4,148
|
4,034
|
Light and medium oil
(bbl/d)
|
1,775
|
1,863
|
1,763
|
Natural gas liquids
(bbl/d)
|
217
|
235
|
269
|
Natural gas
(mcf/d)
|
4,582
|
3,787
|
4,935
|
Total
(boe/d)
|
6,744
|
6,877
|
6,888
|
Average
prices
|
|
|
|
Heavy oil
($/bbl)
|
27.58
|
52.89
|
49.17
|
Light and medium oil
($/bbl)
|
50.44
|
63.64
|
64.82
|
Natural gas liquids
($/bbl)
|
10.54
|
26.40
|
22.79
|
Natural gas
($/mcf)
|
1.93
|
2.40
|
2.36
|
Netback
($/boe)
|
|
|
|
Commodity and other
sales
|
31.24
|
51.44
|
47.97
|
Royalties
|
(3.66)
|
(4.33)
|
(5.52)
|
Operating
costs
|
(18.01)
|
(18.73)
|
(17.93)
|
Operating netback
(1)
|
9.57
|
28.38
|
24.52
|
Realized risk
management gain (loss)
|
4.57
|
(0.16)
|
0.58
|
General and
administrative
|
(2.77)
|
(2.04)
|
(2.13)
|
Interest
|
(1.33)
|
(1.88)
|
(1.30)
|
Transaction
costs
|
-
|
(0.01)
|
-
|
Realized gain on
foreign exchange
|
0.16
|
-
|
0.01
|
|
|
|
|
TRADING
STATISTICS
($ based on intra-day
trading)
|
|
|
|
High
|
0.50
|
0.73
|
0.48
|
Low
|
0.08
|
0.54
|
0.26
|
Close
|
0.10
|
0.61
|
0.46
|
Average daily volume
(thousands)
|
874
|
283
|
529
|
|
|
(1)
|
Funds from
operations, net debt and operating netback are non-GAAP measures
and are reconciled to the nearest GAAP measures under the heading
"Non-GAAP Measures" in Gear's MD&A.
|
(2)
|
Net acquisitions
(dispositions) exclude non-cash items for decommissioning liability
and deferred taxes and is net of post-closing
adjustments.
|
(3)
|
Net debt includes the
risk management liability acquired through the Steppe Resources
Inc. corporate acquisition. March 31, 2020 – nil, March 31, 2019 –
$2.9 million, December 31, 2019 – nil.
|
MESSAGE TO SHAREHOLDERS
In January 2020, the West Texas
Intermediate ("WTI") benchmark index peaked at US$65 per barrel. Not long after, the COVID-19
pandemic began which impacted the global economy and significantly
reduced world oil consumption. In addition, an oil price war
erupted between Russia and
Saudi Arabia who both began to
flood the market with additional oil supply. As a result, oil
prices plummeted by over US$100 with
WTI hitting a low of negative US$37 per barrel in April. Since then, WTI prices
have recovered somewhat to current levels around US$23 per barrel. With this modest recovery, the
industry and investors appear to be cautiously optimistic that
perhaps the worst is behind us. The response from the oil industry
has been significant; Canadian and US drilling rig counts are now
down by approximately 80 and 60 per cent from 2018 levels
respectively and OPEC+ have concluded their price war with a
commitment to cut approximately 8 million barrels per day of
production through the second half of 2020. In addition to the
supply responses, there have been some early encouraging signs on
the demand front as well. For the first time since March, total US
product supply (a key indicator of demand) has posted a positive
change, global inventories appear to be peaking, and the media is
full of headlines regarding a proposed global shift out of the
current economic lock-downs. The recent data is certainly more
encouraging than it has been for the last seven weeks.
The scale of recent volatility is certainly unprecedented.
However, volatility in general is not something that is new to the
industry. Just over a year ago the Canadian energy industry
experienced a material shock to pricing with differentials being
devastated by a localized supply-demand imbalance. During the
fourth quarter of 2018, WCS heavy oil prices dropped to
$19 per barrel and MSW light oil
prices hit a low of $32.50 per
barrel. Fortunately, through a combination of supply responses and
increased demand, prices had essentially fully recovered by the
second quarter of 2019 with those two benchmark prices increasing
by 154 and 70 per cent, respectively. Over the same time period,
Gear's reported funds from operations increased by over 700 per
cent from $2.1 million in the fourth
quarter of 2018 to $17.1 million in
the second quarter of 2019. History tells us that it is very
difficult to predict the scale and timing of any potential price
recovery. However, it is encouraging that eventually it has always
recovered in the past.
As a result of the current weakness and uncertainty in the price
of oil, starting in April Gear chose
to shut-in the majority of its production and immediately pursue
reductions to the variable costs of the business in an effort to
maximize funds from operations. Protection of the corporate balance
sheet remains the top priority. All capital investments were halted
in early March 2020. In addition,
Gear implemented a 20 per cent reduction in the salaries of all
permanent employees and in the directors' fees for its
non-management directors, as well as an immediate and aggressive
production storage and shut-in program. With approximately
two-thirds of field operating costs being classified as variable,
the current low commodity prices do not financially support
production. By limiting field operations, Gear intends to eliminate
the variable costs in order to maximize the impact of the
forecasted gains on risk management contracts and the resulting
funds from operations. Once certain price thresholds are met,
production is expected to be restarted with minimal cost. Gear has
regulated production levels before in times of low commodity price
environments with negligible impact to its oil reservoirs.
QUARTERLY HIGHLIGHTS
- Funds from operations for the first quarter of 2020 was
$6.3 million, a decrease of 54 per
cent from the fourth quarter of 2019 as a result of significantly
lower commodity prices. Realized prices fell from $47.97 per barrel in the fourth quarter to
$31.24 per barrel in the first
quarter.
- Realized hedging gains of $2.8
million or 45 per cent of the funds from operations. For the
remainder of 2020, Gear has hedged 3,200 barrels per day using
various swaps, collars, and three-way collar structures.
- Drilled nine successful gross (9 net) wells including; seven
heavy oil wells consisting of four single lateral wells in
Paradise Hill, two multi-lateral
wells in Lindbergh, and one single leg lined well in Frenchman's
Butte, all in the Lloydminster
area of Alberta; and two medium
oil wells consisting of one multi-stage fractured well in
Killam and one multi-lateral well
in Provost, all in the east central area of Alberta. Two of the Paradise Hill wells remain uncompleted until
oil prices recover.
- The new Sparky oil well in Provost is Gear's first well into
this medium oil area. The Provost well has produced at an average
rate of approximately 150 barrels per day for the first 30 days of
production, well above expectations. Wells in this area are
typically drilled as multi-stage fractured wells whereas Gear's
well was successfully drilled as an unlined multi-lateral
horizontal well at a much lower capital cost. Gear has accumulated
a total of 8 sections of land in this area and intends to pursue
follow-up drilling as soon as prices recover.
- Net loss of $110.2 million
primarily as a result of non-cash impairment of $93.9 million on property, plant and equipment
due to a material drop in commodity prices and the de-recognition
of Gear's $23.3 million deferred tax
asset.
- Actual bank debt increased by $2.4
million from December 31, 2019
with Gear drawn $66.6 million on its
$90.0 million credit facilities. Net
debt increased by $10.5 million
primarily as a result of capital and abandonment expenditures
exceeding funds from operations for the quarter by $5.5 million and a non-cash impairment of oil
inventory of $4.3 million as a result
of the drop in oil price. First quarter net debt to quarterly
annualized funds from operations was 3.2 times.
- The next semi-annual borrowing base review of Gear's credit
facilities is slated to be complete on or about May 31, 2020 with the current maturity date of
the credit facilities on May 28,
2021. These credit facilities carry a single financial
covenant. As at March 31, 2020, Gear
was in compliance with this covenant.
- On April 17, 2020 the Government
of Canada, through Export
Development Canada and Business Development Bank of Canada, announced that it will make available
financial liquidity support to Canada's oil and gas sector in order to help
companies ensure a degree of continuity of operations during this
period of uncertainty. Eligible companies must have been
financially viable prior to COVID-19. The programs also include
other stipulations and restrictions. Gear is continuing to explore
whether it will be eligible for the programs through active
discussions with its lenders.
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: expectation of limiting variable costs
to maximize funds from operations; expectation of restarting
production with minimal cost once certain price thresholds are met;
and the scheduled completion of Gear's semi-annual borrowing base
on or about May 31, 2020.
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; 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; any action taken by Gear's lenders to
reduce borrowing capacity or demand repayment under its Credit
Facilities; 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 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 Measures
This press release contains the terms funds from operations, net
debt and operating netback, which do not have standardized meanings
under Canadian generally accepted accounting principles ("GAAP")
and therefore may not be comparable with the calculation of similar
measures by other companies. Management believes that these key
performance indicators and benchmarks are key measures of financial
performance for Gear and provide investors with information that is
commonly used by other oil and gas companies. Funds from operations
is calculated as cash flow from operating activities before changes
in noncash operating working capital and decommissioning
liabilities settled. Net debt is calculated as debt less current
working capital items, excluding risk management contracts.
Operating netbacks are presented both before and after taking into
account the effects of hedging and are calculated based on the
amount of revenues received on a per unit of production basis after
royalties and operating costs. Additional information relating to
certain of these non-GAAP measures, including the reconciliation
between funds from operations and cash flow from operating
activities, can be found in the MD&A.
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.
SOURCE Gear Energy Ltd.