Gear Energy Details Q1 2019 Results, 2019 Budget

Gear Energy Ltd. reported its Q1 2019 results.

Highlights:

(1)Funds from operations, net debt, operating netback and corporate 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 (dispositions) acquisitions exclude non-cash items for decommissioning liability and deferred taxes and is net of post-closingadjustments.

(3)Net debt includes the risk management liability acquired through the Steppe Resources Inc. corporate acquisition. March 31, 2019 - $2.9 million, March 31, 2018 - nil, December 31, 2018 - $4.5 million.

Message to Shareholders

After a volatile fourth quarter of 2018, the Company was able to achieve a solid first quarter in 2019. As previously guided, Gear came in to 2019 with the intention of being prudent in light of ongoing uncertainty inside and outside of the industry. Our strategy was to maintain stable production through the first half of the year, balance production towards a lighter barrel and substantially reduce outstanding net debt. After a successful first quarter, the results are definitely moving in the anticipated direction. Net debt is down seven per cent, production has been reasonably stable amid ongoing apportionment challenges, pricing continues to be strong, and the market environment is lining up to provide a solid second quarter. Over the last few months, Gear’s Board of Directors (the “Board”) reviewed multiple capital scenarios for the remainder of 2019, and in the end reaffirmed a continuation of the current strategy. The goals will remain the same: keep production stable while spending within funds from operations, increase light oil weighting, and continue to reduce net debt while we monitor external factors looking for more stability with regards to egress, prices, and politics.

As noted in Gear’s 2019 Management Information Circular for the annual and special shareholder meeting, Mr. Raymond Cej will be retiring from the Board, effective today. Mr. Cej joined Gear’s Board in 2013 and has provided valuable counsel, experience and direction to Gear for many years. The Board and the rest of the team at Gear would like to sincerely thank Mr. Cej for all his contributions and wish him all the best in his retirement.

Highlights:

• Achieved an operating netback of $28.38 per boe, a substantial improvement over both the first quarter and fourth quarter of 2018. The improved netback was the result of increased light oil weighting and stronger pricing, with WCS heavy oil differentials falling to below US$10 per barrel and MSW and LSB light oil differentials falling to below US$4 per barrel for February and March 2019.

• Realized a corporate netback of $24.29 per boe and generated $15.0 million of funds from operations, an 86 per cent increase in funds from operations over the first quarter of 2018 and a 620 per cent increase over the fourth quarter of 2018.

• Drilled two successful multi-stage frac Torquay oil wells in Tableland, Southeast Saskatchewan. These wells were each two miles in length and came in on budget at $3.3 million each. Average production over the first 30 days was a combined total of 412 barrels per day of high quality high netback light oil in an area with no pipeline restrictions. The two wells came on late in the quarter, contributing approximately 55 barrels per day to the first quarter average. The wells continue to recover load fluid and will be optimized throughout the second quarter.

• In the fourth quarter of 2018, Gear successfully fracture stimulated and initiated production from a Cardium well in Ferrier. Unfortunately, during the majority of the first quarter, the well did not produce as a result of a third-party gas pipeline failure. Prior to shut-in, the well produced an average of 630 boe per day (80 per cent liquids) over the first 30 days of production. The well is expected to resume production in May 2019.

• Reduced corporate net debt by seven per cent to $85.7 million during the quarter as a result of underspending funds from operations by only investing $9.3 million of capital and divesting $1.1 million of non-core assets. Net debt is forecast to continue decreasing with minimal capital spending planned for the second quarter.

2019 Budget

Gear intends to reduce outstanding net debt by approximately 25 per cent through the first half of 2019. The plan after that will be to spend within funds from operations for the second half of the year. With current strip pricing, the result is a planned capital and abandonment program of $42.5 million for the year. Gear will target a relatively flat production profile through the rest of the year and a total annual forecasted reduction in net debt of approximately $30 million. The associated 2019 forecast for net debt to funds from operations is approximately 1.0 times.

Gear will closely monitor pricing, egress, and political indicators throughout the year and will consider adjusting capital as appropriate. Inclusive of activity to date, the budget expenditures are anticipated to be as follows:

• Tableland light oil: drill 5 wells utilizing approximately 38 per cent of the capital program

• Heavy oil multi-laterals: drill 11 wells, approximately 31 per cent of the capital program

• Central Alberta light oil: drill 2 wells, approximately 11 per cent of capital

• Abandonments: approximately 7 per cent of capital

• Recompletions, land, seismic, waterfloods and other: approximately 13 per cent of capital

Capital is forecast to be invested through the year in a more balanced manner than has been historically employed. Approximately 20 per cent of the capital was deployed in the first quarter, with an estimated 5 per cent in the second quarter, 45 per cent in the third quarter and 30 per cent in the fourth quarter. As a result of this allocation, production should remain relatively stable in the range of 7,000 boe per day over the year. However, as a result of the increased focus on light oil drilling in 2019, the forecasted 90 per cent annual liquids will shift from 27 per cent light and medium oil in 2018 to 38 per cent light and medium oil in 2019. In addition to the increased light oil weighting is a slightly higher per unit estimate for 2019 operating costs, primarily as a result of increased well servicing associated with shut-in wells and third-party related downtime on light oil wells.

In aggregate this plan is expected to deliver a combination of stable production per debt adjusted share relative to 2018, an estimated 30 per cent reduction in outstanding net debt, and an approximate doubling of forecasted funds from operations per debt adjusted share relative to 2018. (Assuming US$61.50WTI, 0.75 FX, and US$15 WCS differential).

Current guidance for 2019 is as follows: