On September 27, Gear Energy announced that it was initiating a strategic repositioning. Through this process, the company’s board announced its intention “to undertake a comprehensive review to identify and consider a broad range of alternatives to enhance shareholder value including, but not limited to, a merger, corporate sale, corporate restructuring, the sale of select assets, the purchase of assets, a potential spin-out of select assets, optimization of future capital allocation and return of capital strategies, or any combination of these alternatives”. With these options now publicly on the table, we wanted to examine Gear Energy’s current assets in order to give our readers a better idea of what’s on offer. The analysis in this article is based on data from BOE Intel and Petro Ninja, along with the company’s publicly available presentations and financial reporting.
Gear Energy is best known for its heavy oil production, and it has three primary asset groups: Lloydminster, SE Saskatachewan, and Central Alberta. In recent years, Gear has devoted substantial resources to both debt reduction and capital spending. The company has paid down significant quantities of debt in the past few years; from net debt of over $80 million on an estimated $101 million enterprise value in Q1 2020, the company reached $14.3 million in net debt on an estimated $272 million enterprise value in Q2 2023.
The company’s noteworthy debt reduction has been driven in part by increased operating cash flows. From $3.55 million in Q2 2020, Gear’s operating cash flow peaked at $29.67 million in Q2 2022 before settling at $13.31 million in Q2 2023. Interestingly, this has not been driven by increased production; in fact, Gear’s quarterly corporate production averaged at around 5,700 BOE/d between Q3 2020 and Q2 2023 compared to just under 6,900 BOE/d between Q1 2018 and Q1 2020. Instead, the company’s operating cash flow boom appears to have been a result of both favourable oil price developments and improved hedging outcomes.
After drastically cutting capital spending 2020 (a common move by many small cap E&Ps in this challenging period), Gear has significantly ramped up its spend since 2021. From $239,000 in Q2 2020, the company’s capital spend reached a peak of $18.90 million in Q4 2022 before moderating slightly to $17.99 million in Q1 2023. Capital spending in Q2 2023 was the lowest for any quarter since Q2 2021, however, which may suggest this is when the company began to seriously contemplate a shift in its strategy (although Q2 capital spending is usually lower on account of spring breakup). The company’s 2023 drilling program involved 39% fewer spuds compared to 2022. The company’s 2022 drilling program involved 23 spuds across Lloydminster, Provost, Killam, and Tableland while its 2023 drilling program is projected to involve 14 spuds in Lloydminster, Wilson Creek, Tableland, and Provost.
With respect to licensing, Lloydminster has been the clear focus for Gear. In the past 5 years, the company has obtained 107 licences in Lloydminster, 8 licences in Central Alberta (with none since 2019) and 21 licences in SE Saskatchewan along with a handful of licences outside of Gear’s main asset groups.
The company has expanded its reserves from 5-year lows in 2020 and is once again approaching pre-pandemic levels. In particular, the company’s proven developed producing (PDP) reserves have actually increased compared to 2018 levels. This suggests the company has been doing a solid job of replenishing its reserves, although it does not appear to be acquiring enough land and mineral rights to actually grow its inventory.
The company’s Lloydminster assets are responsible for the bulk of its gross licensed production, accounting for roughly 2,600 BOE/d of Gear’s overall 6,000 BOE/d total production. According to the company’s September 2023 presentation, the Lloydminster assets are a mix of heavy and medium oil that are around 92% liquids in aggregate. The company’s heavy oil production is generally from the Mannville, while the medium oil production is mostly from the Sparky and the Lloydminster. As of October 3, the company was the licensee for 341 licences tagged as “active” or “location”. Of these wells, the majority target the McLaren (70 licences), the Cummings (55 licences), or the Lloydminster (26 licences) producing formations.
The company has drilled 84 Lloydminster asset group wells in the past 5 years, with a high of 19 spuds in 2022 and a low of 9 in pandemic-impacted 2020. The company’s drilling programs, which have been weighted heavily towards the Lloydminster assets, have helped the company maintain consistent production, although short-term fluctuations can be observed in the gross licensed production chart below.
Top 5 Lloydminster Wells by Recent Production
|UWI||Field||Producing Formation||Spud Date||Recent Daily Oil (BBL/d)||Recent Daily Gas (mcf/d)||Recent Daily Equivalent (BOE/d)|
|100070204804W400||Wildmere||Unknown (Our educated guess is the Cummings)||2023-06-14||157||39||163|
Gear’s SE Saskatchewan assets generate light oil production, with a particular focus on the Torquay producing formation (although the company also operates a handful of Bakken and the Ratcliffe wells). The company’s operations in the region are compact and Gear makes efficient use of its mineral rights. According to the company’s most recent corporate presentation, the SE Saskatchewan assets account for around 900 BOE/d in corporate production. Characteristic of the company’s overall asset make-up, these light oil assets are 89% liquids.
The company has drilled 12 SE Saskatchewan wells in the past 5 years, with a high of 5 spuds in 2019 and a low of 0 spuds in 2020. The company’s production from SE Saskatchewan has generally trended downward since 2018, although there have been a number of positive jumps since July 2022.
Top 5 SE Saskatchewan Wells by Recent Production
|UWI||Field||Producing Formation||Spud Date||Daily Oil (BBL/d)||Daily Gas (mcf/d)||Daily Equivalent (BOE/d)|
Gear Energy’s Central Alberta assets are generally gassier than its other holdings, with the company indicating only 63% liquids production as of September 2023. The assets mostly host Belly River wells. With approximately 1,300 BOE/d in average production as of September, the company has budgeted for a single spud in Central Alberta in 2023; a Wilson Creek well that has not yet been drilled as of October 2. The company is the licensee for 68 licences in this asset group that are tagged as “active” or “location” in our dataset.
The majority of the company’s wells in Central Alberta are located at Pembina with clusters in Willesden Green, Wilson River and other fields. The company’s most productive wells in this asset group are at Willesden Green and Pembina. Gear’s August 2023 daily average production in Central Alberta was 876 BOE/d across 105 producing wells, representing an average daily production of around 8 BOE/d. Interestingly, the company owns a number of crown mineral rights that it doesn’t appear to be exploiting; this could present a fresh development opportunity. The company has also not drilled in the Central Alberta asset group since 2019, which could mean there are eligible drilling locations yet to be exploited.
With its liquids-weighted asset base and strong cash flow generation capabilities, our team will be keeping an eye on Gear Energy for the foreseeable future. To monitor the company, or any other company in the Canadian oil patch, for yourself, check out BOE Intel. And for existing BOE Intel users, navigate directly to our page for Gear Energy here.