Gear Energy Diversifies Into Lighter Oil Production So Cash Flow Becomes Less Volatile

Summary

• Fourth quarter cash flow slowed to less than C$2 million.
• Net debt topped C $90 million at the end of the fiscal year.
• The diversification into lighter oil production appears urgent.
• First quarter pricing appears far stronger.  But continued pricing strength remains a concern.
• A lot of competitors in the oil industry have lower costs than a heavy oil producer.
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Gear Energy (OTCPK:GENGF) is a heavy oil producer in Canada that has recently branched into lighter oil production. The latest acquisition of Steppe Resources sent debt spiraling above C$90 million right when the Alberta government (and company management) decided to limit production due to low pricing. The result was an unprecedented fast drop of cash flow.

(Canadian Dollars Unless Otherwise Stated)

Source: Gear Energy 2018 Fourth Quarter Earnings Press Release

Cash flow in the fourth quarter fell to less than C$2 million due to some extreme volatility in Canadian oil pricing as well as mandated production declines. Heavy oil production led the way down. Management responded by stockpiling some heavy oil and deferring some capital activity until industry conditions were a little more favorable. The first quarter of fiscal year 2019 should recover some of that deferred cash flow.

Cost Comparison

Thankfully more normal pricing conditions have returned during the first quarter of fiscal 2019. Now the question remains how long will these higher prices last? This company needs decent pricing because heavy oil generally has a higher operating cost than the lighter oil produced. The roughly C$17 per barrel cost reported above is as much as C$8 higher than some of the competitors in the industry.

Heavy oil competitor Baytex Energy (BTE) reported similar costs including transportation for the fiscal year 2018. Baytex though took the step of acquiring Raging River to increase its higher netback production. Plus the company benefits from sizable Eagle Ford production while the Canadian dollar remains relatively weak. The Eagle Ford production in Texas generates income in the stronger United States dollar.

Yangarra Resources (OTCPK:YGRAF) is a light oil producer with a total operating cost of $6.88 BOE. Management has calculated the "all-in" costs in the middle $20 range. That may decrease as industry improvements continue. Companies with costs this

Analyst’s Disclosure: I am/we are long BTE CVE YGRAF TGA PEYUF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.