Quarterly / Earnings Reports | Third Quarter (3Q) Update

Gear Energy Talks Q3 2019 Results; Cuts Debt 24%

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Gear Energy Ltd. reported its Q3 2019 results.

Gear is pleased to deliver another solid quarter for our shareholders. The strategy has continued to advance as planned, with a strong summer drilling program supporting ongoing production stability, strong funds from operations covering more than the quarter’s entire capital program and further meaningful reductions in net debt.

Since the beginning of the year Gear has reduced net debt by 24% from $91.9 million to $69.8 million and recorded a strong net debt to annualized funds from operations ratio of 1.1 times for the third quarter of 2019. Meanwhile production has grown slightly from 6,847 boe per day in the fourth quarter of 2018 to 6,922 boe per day in the third quarter of 2019. In addition, annual guidance for 2019 is being increased slightly with a tighter production range of 6,900 to 7,100 boe per day (previously 6,800 to 7,100 boe per day) along with a five percent reduction in anticipated 2019 capital and abandonment expenditures to $40.5 million (previously $42.5 million). With current future strip prices, Gear is on track to invest approximately 65 per cent of estimated 2019 funds from operations while maintaining stable production through the year. Despite these solid results, Gear shares continue to trade at a discounted valuation, with today’s share price of $0.42 representing an enterprise value of approximately 2.4 times the annualized third quarter 2019 debt adjusted funds from operations.

Q3 2019 Highlights

• Generated $16.0 million of funds from operations ($25.07 per boe) compared to $11.6 million in the third quarter of 2018 and $17.1 million in the second quarter of 2019. The seven per cent decrease from the second quarter of 2019 was realized despite an 11 per cent decrease in realized commodity prices. Stability in funds from operations was assisted by a decrease in operating costs of $0.88 per boe, an increase in realized risk management gains of $2.45 per boe, and a decrease in G&A and interest expenses of $0.82 per boe as compared to the second quarter of 2019. Gear reported third quarter net income of $3.5 million.
• Reduced net debt by an additional $2.3 million through the third quarter for a total reduction of $22.1 million, or 24 per cent, from the beginning of 2019 to the end of the third quarter of 2019. Net debt was $69.8 million as at September 30, 2019 including $62.9 million of bank debt, $13.3 million of convertible debentures, and $6.4 million of positive working capital. Net debt to quarterly annualized funds from operations for the third quarter was 1.1 times.
• During the third quarter, drilled seven heavy oil wells and one light oil well in Central Alberta with 100% success. Subsequent to quarter-end, seven of the eight wells have averaged approximately 100 boe per day per well over the first 30 days of production. The remaining heavy oil well has just recently started producing. The heavy oil wells were drilled, completed, and equipped at a total average cost of $0.9 million or approximately 12 per cent under budget, as a result of improved well design and shorter drill times. For the fourth quarter, Gear anticipates drilling three more heavy oil wells in Wildmere and Maidstone and two light oil wells in Tableland. Gear plans on releasing details for its 2020 capital program and guidance in December 2019.
• Continued to maintain a relatively flat production profile, with volumes averaging 6,922 boe per day for the third quarter and 6,987 boe per day for the first nine months of 2019. Fourth quarter production is expected to incline slightly as a result of production from Gear’s third quarter drilling program.
• Through the first nine months of 2019, Gear invested $2.0 million on decommissioning expenditures and is forecasting to invest a total of $3.0 million for the full year. During the nine months ended September 30, 2019 Gear abandoned 50 wells at an average cost of $24,000 per well or approximately half of what was estimated by the provincial regulators.  As of today’s date, Gear has abandoned 71 wells in 2019, which is over four times the number of wells that are anticipated to be drilled during the year.
• In late September 2019, Gear commenced its normal course issuer bid. During the third quarter, Gear purchased and cancelled 0.2 million common shares at a total cost of $0.1 million. Subsequent to the third quarter, Gear purchased and cancelled an additional 0.4 million common shares to date for an additional cost of $0.2 million. In order to best balance the future allocation of capital between drilling, debt repayment, and share buybacks, Gear will continue to closely monitor commodity prices, forecasted funds from operations, debt levels, expected returns on its capital program, and the share price.