Quarterly / Earnings Reports | Second Quarter (2Q) Update

Gear Energy Reports Q2 2019 Results, Board Changes

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Gear Energy Ltd. has reported its Q2 2019 results.

Highlights:

• Reduced net debt by $19.8 million, or 22 per cent, from the beginning of 2019 to the end of the second quarter of 2019. Net debt was $72.1 million as at June 30, 2019 including $66.3 million of bank debt, $13.3 million of convertible debentures, and $7.5 million of positive working capital. Net debt to quarterly annualized funds from operations for the second quarter was 1.1 times. As announced on May 24, 2019, Gear’s syndicated credit facilities were reduced to $90.0 million dollars as a result of a variety of factors including the recent Supreme Court ruling on Redwater.

• Record high sales production for the second quarter averaging 7,161 boe per day, 91 per cent weighted to liquids. This was a four per cent increase compared to the prior quarter. The increase in quarterly production was assisted by 460 bbl per day from two wells drilled in Tableland in the first quarter, 200 boe per day from the 2018 Cardium Ferrier well, optimization of wells drilled in 2018, and sales from inventory as a result of stronger pricing and an easing of egress constraints.

• Quarterly funds from operations of $17.1 million, a 14 per cent increase from the first quarter funds from operations of $15.0 million. The quarterly increase is primarily due to the increase in sales volumes and stronger light and heavy oil pricing.

• Lowered operating costs from $18.73 per boe in the first quarter of 2019 to $18.08 per boe in the second quarter of 2019 as a result of higher volumes and lower workover activity. This was accomplished despite a rainy spring yielding temporary road bans and wet lease conditions.

• Increased operating netback from $28.38 per boe in the first quarter of 2019 to $32.28 per boe in the second quarter of 2019 as a result of the aforementioned higher commodity prices and the increase in corporate production weighting to higher netback barrels in Tableland. The second quarter operating netback is the highest quarterly netback for Gear since the third quarter of 2014.

• At the end of the second quarter, commenced summer drilling program with Gear’s third Tableland well in Southeast Saskatchewan. Subsequent to quarter end, two gross (two net) heavy oil wells in Wildmere and one gross (one net) light oil well in Wilson Creek have also been drilled. For the full year 2019, Gear is forecasting to drill a total of 17 wells including 11 heavy oil wells and 6 light oil wells.

• The two Tableland wells drilled in the first quarter were the first wells drilled by Gear on the assets acquired in September of 2018. As the two best wells that have ever been drilled on the acquired acreage, the results of thesetwo-mile Torquay wells are exceeding expectations. Total combined costs for the two wells came in at just over $6.9 million and the estimated net operating income to date over the first four and half months of production is just over $3.7 million, or 53 per cent of the invested capital. The wells averaged approximately 220 bbl per day per well over the same period, produced a combined total of 60,000 barrels of light oil and are currently producing an average of approximately 185 bbl per day per well.

Message to Shareholders

Execution of Gear’s value focused strategy continues to progress as expected. Total net debt was reduced by 22 per cent since the beginning of the year and record quarterly production was delivered during the second quarter of 2019 with an increased weighting to higher netback light oil. Now that Gear has essentially achieved its target for debt reduction, the summer drilling program has been initiated with the intention of balancing capital spending against estimated funds from operations throughout the remainder of the year.

As a result of the strong performance to date in 2019 and current perceived value misalignment, Gear believes it is now appropriate to pursue the implementation of a normal course issuer bid (“NCIB”) through the facilities of the Toronto Stock Exchange. Pursuant to the NCIB and subject to regulatory approval, Gear would be able to purchase for cancellation up to 5% of its issued and outstanding common shares for a one year period at prevailing market prices at the time of purchase. In order to affect the NCIB Gear must reduce its stated capital pursuant to the provisions of the Business Corporations Act (Alberta). As such the Board of Directors of Gear has determined to hold a special meeting of shareholders on September 20, 2019 for shareholders to consider and, if determined advisable, approve a reduction in the stated capital of Gear's common shares. The record date for the special meeting will be August 19, 2019. Assuming shareholder approval for the reduction of stated capital is received and subject to approval of the NCIB by the Toronto Stock Exchange, Gear intends to commence the NCIB as soon as practicable following the special meeting.

Changes to Board