Gear Energy Ltd.
TSX : GXE

Gear Energy Ltd.

March 04, 2014 20:53 ET

Gear Energy Ltd. Announces Fourth Quarter and Year End 2013 Results; Record Production and Strong Operational Performance

CALGARY, ALBERTA--(Marketwired - March 4, 2014) - Gear Energy Ltd. (TSX:GXE) ("Gear" or the "Company") is pleased to provide the following fourth quarter operating update to shareholders. In conjunction with this fourth quarter release, please refer to Gear's Reserves Press Release for its 2013 year-end reserves update for more information. Gear's Annual Audited Financial Statements and related Management's Discussion and Analysis (MD&A) for the year's ended December 31, 2013 and 2012 are available for review on Gear's website at www.gearenergy.com and on www.sedar.com.

Financial Summary

Three months ended Twelve months ended

(Cdn$ thousands, except per boe amounts)
December 31, 2013 December 31, 2012 September 30, 2013 December 31, 2013 December 31, 2012
FINANCIAL
Cash flow from operations (1) 8,309 11,099 12,080 35,103 33,693
Per weighted average basic and diluted share 0.15 0.21 0.22 0.65 0.62
Cash flow from operating activities 7,765 7,411 12,991 39,511 36,226
Per weighted average basic and diluted share 0.14 0.14 0.24 0.73 0.67
Net (loss) income (539) 1,080 2,449 (1,059) 547
Per weighted average basic and diluted share (0.01) 0.02 0.05 (0.02) 0.01
Capital expenditures 17,440 5,492 17,342 53,559 45,504
Net acquisitions (2) (29) 1,683 (200) (92) 1,750
Net debt outstanding (1) 67,148 47,926 57,615 67,148 47,926
Shares outstanding, weighted average, basic 53,956 53,858 53,956 53,932 53,748
Shares outstanding, weighted average, diluted 54,392 53,858 53,956 54,158 53,748
OPERATING
Production
Oil and liquids (bbl/d) 4,369 3,753 3,652 3,786 3,152
Natural gas (mcf/d) 1,641 1,927 1,723 1,757 1,946
Total (boe/d) 4,642 4,073 3,940 4,079 3,476
Average prices
Oil and liquids ($/bbl) 62.91 64.50 88.01 69.18 66.13
Natural gas ($/mcf) 3.12 3.13 2.53 3.11 2.36
Oil equivalent ($/boe) 60.31 60.89 82.70 65.47 61.28
Netback ($/boe)
Commodity and other sales 60.37 60.93 82.77 65.55 61.34
Royalties 15.15 14.66 18.59 15.27 14.16
Operating costs 16.72 15.34 17.21 17.90 17.32
Operating netback (before hedging) 28.50 30.93 46.97 32.38 29.86
Realized risk management (losses) gains (3.53) 3.19 (8.20) (3.41) 1.38
Operating netback (after hedging) 24.97 34.12 38.77 28.80 31.24
General and administrative 4.31 3.40 3.68 3.94 3.47
Interest 1.24 1.30 1.77 1.46 1.33
Corporate netback 19.42 29.42 33.32 23.57 26.44
TRADING STATISTICS ($ based on intra-day trading)
High 3.55 n/a n/a 3.55 n/a
Low 2.55 n/a n/a 2.55 n/a
Close 3.23 n/a n/a 3.23 n/a
Average daily volume (thousands) 374 n/a n/a 374 n/a
  1. Cash flow from operations and net debt 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 exclude non-cash items for decommissioning liability and deferred taxes and is net of post-closing adjustments.

HIGHLIGHTS

  • Record sales production for the fourth quarter averaging 4,642 barrels of oil equivalent per day ("boe/d"), a five per cent increase per debt adjusted share from 4,073 boe/d in the fourth quarter of 2012. Annual production for 2013 was 4,079 boe/d, a ten per cent increase per debt adjusted share over 2012.
  • Realized cash flow from operations of $8.3 million, a 30 per cent decrease per debt adjusted share from $11.1 million in the fourth quarter of 2012 as a result of wider heavy oil differentials. Heavy oil differentials continue to be volatile, with the outlook for 2014 at the time of this release to be materially narrower compared to the fourth quarter of 2013.
  • Fourth quarter operating costs, including transportation, were $16.72 per boe, bringing 2013 total year costs to $17.90 per boe, well within company guidance. These strong numbers reflect continued focus on disciplined field operations combined with the operating advantages associated with managing corporate assets that produce approximately 80 per cent from low cost horizontal wells. Guidance for 2014 includes further improvement in costs with annual expectations of $17.00 to $18.00 per boe.
  • Execution of an active drilling program in 2013 with a total of 47 gross (42 net) wells drilled at a 98 per cent success rate, including drilling into three new formations, Maidstone Cummings, Wildmere Cummings and Vermilion Sparky. All of these new plays have been proven successful and have added material undeveloped inventory to the Company. Gear will focus on testing several new low risk plays in 2014 to further build future inventory.
  • Four horizontal wells were drilled in Gear's new core area in Maidstone Cummings during the fourth quarter completed a nine well program executed throughout 2013. All nine wells were on production at year-end and were contributing approximately 700 boe per day, compared to no production from this area the prior year. The results from these wells strongly support further development in the area and as such approximately 12 horizontal and up to four vertical drills are currently planned in 2014.
  • Two horizontal wells were drilled in Gear's second new core area in Wildmere Cummings with initial average 30 day rates of 90 barrels per day. As a result of improved completion techniques these rates are 30 per cent higher than the two Wildmere Cummings drills completed earlier in the year. This new core area makes up 65 potential wells out of total company drilling inventory of 230 locations. Gear's current 2014 capital plan includes drilling approximately seven horizontal wells into this area.
  • Gear increased heavy oil amenable land holdings by investing $1.2 million during the fourth quarter bringing the 2013 total to $2.3 million spent on over 2,600 hectares of new prospective lands in Alberta and Saskatchewan. Management is committed to further expanding organic production growth opportunities and as such has dedicated 20 per cent of Gear's 2014 budget to land, seismic and exploration activity.
  • Gear is currently undergoing a review of its credit facility and has been given early indications by its two lenders that its $75 million facility can be materially increased. Subject to final review, Gear hopes to finalize a credit facility increase to $100 million in March 2014.
  • Gear is anticipating material advances on its enhanced oil recovery programs in 2014. The two pilot projects in the Wildmere Lloydminster pool continue successfully, with no early breakthrough and back-pressure increasing on the injectors for both the waterflood and polymer pilot project. The simulation model and field results to date indicate a definitive response is to be expected very early in 2014. Within the Maidstone Cummings pool an offset operator has recently seen significant early response from water injection into section 23-47-23W3. These results are encouraging and add confidence to Gear's plans for potential waterflood implementation in both the Maidstone and Wildmere Cummings plays. Gear hopes to announce its plans later in 2014, with $5 million currently budgeted for initial commercialization.

OPERATIONS UPDATE

  • With the bullish outlook on heavy oil pricing, Gear has decided to accelerate its 2014 capital program by adding a third drilling rig in the first quarter. This more aggressive drilling schedule has resulted in a shift in Gear's production profile for 2014. As with prior years, production volumes in the first quarter are forecasted to be lower than the previous quarter as a result of the drilling operations. Current production is approximately 4,500 boe/d, 500 boe/d lower than our December exit rate. The temporary decline in production is a direct result of drilling multi-well pad sites that take longer to initially produce (but provide both increased capital and operating efficiency), shut-in of several high producing wells to accommodate adjacent drilling, railing interruptions and extreme winter weather.
  • Gear is benefiting approximately $4 per barrel by selling its production via rail. At times, Gear has to inventory some of its oil production based on available sales transportation. During the first quarter, rail transportation has been constrained due to both weather and rail network disruptions. As a result, Gear has been building oil inventory levels during the first quarter. As the weather begins to improve, we expect the constraints on shipping oil by rail to diminish, facilitating increased sales production and reducing inventories to normal levels.
  • We expect second quarter 2014 production to increase from the current 4,500 boe/d as volumes from new drills are added and shut-in wells are re-activated. Gear expects to average between 5,000 and 5,200 boe/d for 2014.
GEAR ENERGY LTD.
BALANCE SHEETS (unaudited)
As at December 31
(Cdn$ thousands) 2013 2012
ASSETS
Current assets
Cash and cash equivalents $ 841 $ -
Accounts receivable 9,550 6,137
Prepaid expenses 1,210 1,132
Inventory (Note 5) 4,465 4,507
16,066 11,776
Deferred income tax asset (Note 12) 12,611 11,755
Exploration and evaluation assets (Note 6) 3,284 3,284
Property, plant and equipment (Note 7) 214,641 182,390
Total assets $ 246,602 $ 209,205
LIABILITIES
Current liabilities
Accounts payable, accrued liabilities and deferred credits $ 18,297 $ 7,019
Risk management contracts (Note 10) 2,113 143
Debt (Note 8) 64,917 52,683
85,327 59,845
Decommissioning liability (Note 9) 35,113 24,704
Total liabilities 120,440 84,549
SHAREHOLDERS' EQUITY
Shareholders' capital (Note 11) 166,869 166,624
Contributed surplus (Note 11) 9,446 7,126
Deficit (50,153) (49,094)
Total shareholders' equity 126,162 124,656
Total liabilities and shareholders' equity $ 246,602 $ 209,205
See accompanying notes to the Financial Statements.
GEAR ENERGY LTD.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (unaudited)
For the years ended December 31
(Cdn$ thousands)
Shares to be issued Share capital Contributed surplus Deficit Total Shareholders'equity
Balance at December 31, 2011 3,296 162,542 4,509 (49,641) 120,706
Share-based compensation - - 2,617 - 2,617
Issued for share awards - 589 - - 589
Issued under share rights agreement (3,296) 3,493 - - 197
Income for the year - - - 547 547
Balance at December 31, 2012 - 166,624 7,126 (49,094) 124,656
Share-based compensation - - 2,320 - 2,320
Issued for share awards - 245 - - 245
Net loss for the year - - - (1,059) (1,059)
Balance at December 31, 2013 - 166,869 9,446 (50,153) 126,162
See accompanying notes to the Financial Statements.
GEAR ENERGY LTD.
STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS) (unaudited)
Three Months Ended December 31 Twelve Months Ended December 31
(Cdn$ thousands, except per share amounts) 2013 2012 2013 2012
Sales of crude oil, natural gas and natural gas liquids $ 25,758 $ 22,820 $ 97,462 $ 77,968
Royalties (6,470) (5,493) (22,726) (18,020)
Other income 26 13 115 70
REVENUE 19,314 17,340 74,851 60,018
(Loss) gain on risk management contracts (Note 10) (979) (38) (7,043) 3,115
18,335 17,302 67,808 63,133
EXPENSES
Operating 7,140 5,747 26,641 22,031
General and administrative 1,840 1,274 5,869 4,412
Share-based compensation 404 866 2,565 3,206
Interest and financing charges 528 486 2,179 1,707
Accretion of decommissioning liability (Note 9) 196 189 681 746
Depletion, depreciation and amortization (Note 7) 8,813 8,556 32,027 29,653
Exploration and evaluation expense (Note 6) - 336 - 336
Gain on asset disposition (Note 6 and 7) - (2,222) (238) (2,210)
Dilution penalty - - - 197
18,921 15,232 69,724 60,078
Deferred tax (recovery) expense (Note 12) (47) 990 (857) 2,508
Net (loss) income and comprehensive (loss) income $ (539) $ 1,080 $ (1,059) $ 547
Net (loss) income per share, basic and diluted (Note 11) $ (0.01) 0.02 $ (0.02) 0.01
See accompanying notes to the Financial Statements.
GEAR ENERGY LTD.
STATEMENTS OF CASH FLOWS (unaudited)
Three Months Ended
December 31
Twelve Months Ended
December 31
(Cdn$ thousands) 2013 2012 2013 2012
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income $ (539) $ 1,080 $ (1,059) $ 547
Add items not involving cash:
Unrealized (gain) loss on risk management contracts (Note 10) (530) 1,232 1,972 (1,362)
Share-based compensation (Note 11) 404 866 2,565 3,206
Bad debt expense 12 72 12 72
Accretion of decommissioning liability 196 189 681 746
Depletion, depreciation and amortization 8,813 8,556 32,027 29,653
Exploration and evaluation expense - 336 - 336
Gain on asset disposition - (2,222) (238) (2,210)
Deferred tax (recovery) expense (47) 990 (857) 2,508
Dilution penalty - - - 197
Decommissioning liabilities settled (Note 9) (98) (15) (602) (778)
Change in non-cash working capital (Note 15) (446) (3,673) 5,010 3,311
7,765 7,411 39,511 36,226
CASH FLOW FROM FINANCING ACTIVITIES
Borrowings of debt under demand credit facility 12,246 (438) 12,234 10,873
12,246 (438) 12,234 10,873
CASH FLOW USED IN INVESTING ACTIVITIES
Property, plant and equipment expenditures (17,411) (10,119) (53,664) (50,365)
Proceeds on disposition of petroleum and natural gas properties (Note 7 and 8) - 2,682 200 2,802
Change in non-cash working capital (Note 15) (1,759) 464 2,560 464
(19,170) (6,973) (50,904) (47,099)
INCREASE IN CASH AND CASH EQUIVALENTS 841 - 841 -
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD - - - -
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 841 $ - $841 $ -
The following are included in cash flow from operating activities:
Interest paid in cash $528 $ 486 $2,179 $ 1,707
See accompanying notes to the Financial Statements.

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: the 2014 Guidance estimates; the number of future drilling locations in Maidstone Cummings and Wildmere Cummings; the proposed increase in Gear's credit facility; 2014 pricing outlook; the planned number of wells to be drilled in 2014; anticipated advances in Gear's enhanced oil recovery programs in 2014, including plans in the Maidstone and Wildmere Cummings plays; and a number of other matters, including future results from operations and operating metrics; future costs, expenses and royalty rates; future interest costs; and future development, exploration, acquisition and development activities (including drilling plans) and related capital expenditures.

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 cash flow 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.

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: 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; 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.

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.

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 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. While encouraging, readers are cautioned not to place reliance on such rates in calculating the aggregate production for the Gear.

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