Gear Energy Ltd. announces first quarter 2022 operating results, zero net debt, the implementation of a variable dividend plan, the filing of a normal course issuer bid, and an expanded 2022 capital program


Calgary, Alberta – Gear Energy Ltd. (“Gear” or the “Company”) (TSX: GXE) 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 (“MD&A”) for the period ended March 31, 2022 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, 2022 Mar 31, 2021 Dec 31, 2021
FINANCIAL
Funds from operations (1) 18,782 8,253 17,938
Per boe 36.61 17.19 32.18
Per weighted average basic share 0.07 0.04 0.07
Cash flows from operating activities 15,340 9,892 17,421
Per boe 29.90 20.60 31.25
Net income (loss) 6,227 (3,497) 78,117
Per weighted average basic share 0.02 (0.02) 0.30
Capital expenditures 8,687 7,883 4,936
Decommissioning liabilities settled (2) 912 1,437 1,566
Free funds from (used in) operations (1) 9,183 (26) 12,002
Net debt (1) 6,706 42,929 15,830
Weighted average shares, basic (thousands) 260,331 221,090 259,360
Shares outstanding, end of period (thousands) 260,759 247,415 260,169
OPERATING
Production
Heavy oil (bbl/d) 3,043 3,026 3,282
Light and medium oil (bbl/d) 1,580 1,513 1,773
Natural gas liquids (bbl/d) 269 121 231
Natural gas (mcf/d) 4,855 4,043 4,637
Total (boe/d) 5,701 5,335 6,059
Average prices
Heavy oil ($/bbl) 95.91 51.58 73.27
Light and medium oil ($/bbl) 110.32 63.16 88.99
Natural gas liquids ($/bbl) 63.88 42.61 59.50
Natural gas ($/mcf) 4.64 3.05 4.81
Netback ($/boe)
Petroleum and natural gas sales 88.73 50.46 71.69
Royalties (9.38) (4.77) (8.11)
Operating costs (19.80) (17.51) (16.94)
Transportation costs (3.43) (2.01) (3.00)
Operating netback (1) 56.12 26.17 43.64
Realized risk management loss (14.11) (4.55) (8.20)
General and administrative (4.83) (2.37) (2.55)
Interest and other (0.57) (2.06) (0.71)
TRADING STATISTICS ($ based on intra-day trading)
High 1.94 0.64 1.09
Low 0.90 0.25 0.76
Close 1.60 0.50 0.92
Average daily volume (thousands) 4,859 1,307 2,887

(1) Funds from operations, free 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 this press release.
(2) Decommissioning liabilities settled includes expenditures made by both Gear and the federal government’s Site Rehabilitation Program.

MESSAGE TO SHAREHOLDERS

Gear successfully achieved its target of zero net debt at the end of April 2022, the first strategic step towards enhanced shareholder returns. Within approximately two years, Gear has eliminated over $80 million of net debt through a combination of 84 per cent free funds from operations and 16 per cent equity issuances. Now that this milestone has been accomplished, maintaining an exceptional balance sheet will continue to be a priority for the foreseeable future. Coincident with this achievement and as promised, Gear is pleased to provide clarity on the next steps in the plan for enhanced returns to shareholders.

Effective immediately, Gear will be implementing a variable quarterly dividend with target distributions of approximately 30 per cent of the free funds from operations generated from the previous quarter. For May, the inaugural quarterly dividend payment in relation to the free funds from operations generated through the first quarter of 2022 will be $0.01 per share. Gear believes this to be a unique and superior dividend strategy that will expose shareholders to the strength of the underlying business and commodity price upside, while minimizing any potential future risk of volatility to the balance sheet.

The remaining approximately 70 per cent of free funds from operations for the previous quarter is expected to be dedicated to a combination of share buybacks, growth capital, cash funded acquisitions, and special dividends. Share buybacks will be subject to certain strategic net asset value and debt adjusted trading multiple thresholds and are expected to commence in May with the formalization of an approved Normal Course Issuer Bid (“NCIB”).

In parallel with these plans for immediate returns, Gear is also increasing the planned capital and abandonment expenditures for 2022 from $40 million to $55 million, targeting production and reserves growth from Gear’s deep inventory of undeveloped opportunities into 2023 through a combination of incremental drilling in the fourth quarter of 2022 and expanded strategic waterflood investments.

QUARTERLY HIGHLIGHTS

  • Funds from operations (“FFO”) for the first quarter of 2022 was $18.8 million, an increase of 128 per cent from the first quarter of 2021 as a result of significantly higher commodity prices. First quarter 2022 FFO was negatively impacted by $7.2 million in realized hedging losses. Prior to these hedging costs, 2022 FFO would have been $26.0 million. For the second quarter of 2022, Gear is anticipating minimal hedging losses as no WTI oil calls have been sold.
  • Record high field netback of $56.12 per boe for the first quarter of 2022. The previous highest field netback was in the third quarter of 2013 with a field netback of $46.97 per boe.
  • Production for the first quarter of 2022 was 5,701 boe per day, a seven per cent increase over the 5,335 boe per day reported in the first quarter of 2021 and a six per cent decrease from the fourth quarter of 2021 of 6,059 boe per day. Production decreased from the fourth quarter of 2021 as a result of extreme cold weather challenges in January, shut-in production in Provost to accommodate the first quarter drilling program, and normal declines as a result of minimal fourth quarter 2021 drilling activity. Production is set to incline throughout 2022 as production from new wells come online, with peak production from the new expanded 2022 capital program expected in the first quarter of 2023.
  • Drilled six successful gross (6 net) unlined multi-lateral medium oil wells in Provost, Alberta. The six wells commenced production in April and continue to be optimized, producing a total of 435 boe per day in April and currently producing 545 boe per day.
  • Reduced net debt by $36.2 million from the first quarter of 2021 to $6.7 million at the end of the first quarter of 2022. In April 2022, Gear finalized its spring redetermination with its lenders and extended the maturity date to May 2024 for its credit facilities with minimal restrictions. Gear’s banking syndicate is now comprised of ATB and Business Development Bank of Canada, with the Export Development Bank of Canada (“EDC”) graciously exiting its lending syndicate in order to facilitate Gear’s return of capital plan to shareholders. Gear would like to thank EDC for its support over the last two years.

INAUGURAL QUARTERLY CASH DIVIDEND

  • Gear’s board of directors has approved the initiation of a quarterly variable cash dividend program with an initial dividend of $0.01 per common share. The dividend will be paid on May 30, 2022 to shareholders of record as of the close of business on May 16, 2022. The dividend is designated as an “eligible dividend” for income tax purposes. This dividend represents approximately 30 per cent of the free funds from operations generated in the first quarter of 2022. Gear intends to pay approximately 30 per cent of its free funds from operations each quarter to its shareholders, with the actual dividend amount being dependent on a combination of commodity prices, capital and abandonment expenditures inclusive of cash funded acquisitions, and Gear’s operational and financial performance. Gear anticipates announcing future quarterly variable cash dividends in conjunction with its quarterly financial releases.
  • Going forward, Gear expects to dedicate the remaining approximately 70 per cent of its free funds from operations to share buybacks, capital investments, cash funded acquisitions, and special dividends.
  • Using forward market pricing as of May 3, 2022 (remaining 2022 WTI of US$98 per barrel, WCS differential of US$13 per barrel, MSW and LSB differentials of US$2.75 per barrel, FX of US$0.78 per C$, AECO of $6.75 per GJ, and current share count), Gear is forecasting the following:
($ millions except % and per share) Q1 2022 Actual Q2 2022 Q3 2022 Q4 2022
Forecasted FFO 18.8 33 31 31
Forecasted capital and abandonment expenditures 9.6 12 18 15
Forecasted free FFO 9.2 21 13 16
Forecasted dividend amounts 2.6 6 4 5
Committed % of free FFO paid out as a dividend (%) 28 30 30 30
Forecasted variable dividend ($/share) 0.01 0.026 0.015 0.019

NCIB

  • Gear believes that, from time to time, the market price of its common shares may not fully reflect the underlying value of the common shares, using certain strategic net asset value and debt adjusted trading multiple thresholds, and at such times the purchase of common shares would be in the best interests of Gear. As a result of such purchases, the number of issued common shares will be decreased and, consequently, the proportionate share interest of all remaining Gear shareholders will be increased on a pro rata basis.
  • In furtherance of its objective to complete share buybacks, Gear is pleased to announce that the Toronto Stock Exchange (“TSX”) has granted approval for Gear to commence an NCIB. Under the NCIB, Gear may purchase for cancellation up to 24,029,161 common shares of Gear, representing approximately 10% of the “public float”, which is equal to the issued and outstanding common shares as at May 4, 2022 (260,950,535 Shares) less the common shares held by directors and officers of Gear. The total number of common shares that Gear is permitted to purchase is subject to a daily purchase limit of 551,916 Shares, representing 25% of the average daily trading volume of 2,207,667 common shares on the TSX calculated for the six-month period ended April 30, 2022; however, Gear may make one block purchase per calendar week which exceeds the daily repurchase restrictions.
  • The NCIB is expected to commence on May 9, 2022 and will terminate on the earlier of: (i) the date on which Gear has acquired all common shares sought pursuant to the NCIB; or (ii) May 8, 2023 unless terminated earlier at the option of Gear, upon prior notice being given to the TSX. The common shares will be purchased on behalf of Gear by a registered broker through the facilities of the TSX and through other alternative Canadian trading platforms at the prevailing market price at the time of such transaction.
  • Gear will ensure, under both the quarterly variable cash dividend program and the NCIB, that it maintains its pristine balance sheet and will continue to target zero net debt. As such, restrictions placed by Gear’s current credit facilities are not expected to be a factor. The actual ultimate number of common shares purchased under the NCIB, the timing of the purchases, and the price at which the common shares are acquired will depend upon future market conditions.

2022 EXPANDED CAPITAL PROGRAM AND REVISED GUIDANCE

  • As a result of significantly improved commodity prices, Gear intends to increase the planned 2022 capital and abandonment expenditure investment from $40 million to $55 million. The incremental expenditures are scheduled for late into 2022 and, as a result, will have no impact to 2022 annual production but will have positive impacts to first quarter 2023 production and the base for a 2023 capital program. Forecasted annual production growth remains at approximately three to four per cent however, production growth from the first quarter of 2022 to the first quarter of 2023 is expected to be closer to seven or eight per cent.
  • The breakdown of the $15 million increase in capital and abandonment expenditures is as follows:
($ millions)
Five additional wells drilled 7
Inflationary cost pressures 4
Waterflood expansions 2
Field projects, land, seismic and other 2
Total 15
  • The capital budget now includes plans to drill a total of 24 gross (24 net) oil wells with four additional heavy oil wells and one medium oil well to now be drilled in the fourth quarter of 2022. These wells are expected to provide competitive returns as well as ensuring that Gear’s primary drilling rig remains active through to the end of the year. Due to recent inflationary pressures, per well cost estimates for the 2022 program have increased by seven to 10 per cent.
  • Gear expects to spend a total of $5 million in waterflood investments for 2022, an increase of $2 million from previous plans. In addition to the current plans for flood expansions and implementations in Provost, Killam and Wilson Creek, these new investments will target additional opportunities in Wilson Creek as well as a new pilot in Tableland. Waterflood investments are forecast to provide competitive economic long-term returns, extend the corporate reserves life and reduce the future corporate decline rate.
  • As a result of actual costs experienced since the original 2022 budget was released in November 2021, Gear adjusted its guidance. Operating and transportation costs estimates have been increased to $23.50 per boe as a result several factors. Over $1 per boe of increased revenue associated with recent high gas prices for the third-party gas contract in Tableland needs to be offset by an equivalent increase in transportation costs. The remaining operating and transportation cost increases are a result of carbon taxes, fuel surcharges, greenhouse gas emissions reduction costs, and general inflationary pressures largely related to the recent increase in oil and gas prices. Minor adjustments to royalty, interest and general and administrative (“G&A”) costs are expected to be slightly lower than previous estimates. In aggregate, the total 2022 costs (operating, transportation, royalties, G&A and interest) are estimated to be a record low 40 per cent of forecasted revenue at current strip prices resulting in a record high estimated operating margin of 60 per cent.
  • Updated Guidance for 2022 is as follows:
2022 Revised Guidance 2022 Previous
Guidance
Q1 2022 YTD Actuals
Annual production (boe/d) 5,900 – 6,000 5,900 – 6,000 5,701
Heavy oil weighting (%) 51 49 53
Light oil, medium oil and NGLs weighting (%) 36 38 32
Royalty rate (%) 12 13 11
Operating and transportation costs ($/boe) 23.50 19.50 23.23
General and administrative expense ($/boe) 3.15 3.35 4.83
Interest expense ($/boe) 0.40 0.25 0.60
Capital and abandonment expenditures ($ millions) 55 40 10
  • Under various WTI price scenarios from May to December 2022 and assuming 2022 Revised Guidance above, WCS differential of US$13 per barrel, MSW and LSB differentials of US$2.75 per barrel, FX of US$0.78 per C$, and AECO of $6.75 per GJ, Gear is forecasting the following FFO:
($ millions) Q2 2022 Q3 2022 Q4 2022 FY 2022
WTI US$80/bbl 26 23 24 91
WTI US$90/bbl 29 28 29 105
WTI US$100/bbl 32 31 34 116
WTI US$110/bbl 36 33 38 125

 

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