Gear Energy Ltd. has completed the acquisition of Steppe Resources Inc., a private oil and gas company with production of approximately 1,175 barrels of oil equivalent per day.
Pursuant to the arrangement, shareholders of Steppe received 0.1445 of a Gear common share for each Steppe common share. As a result, Gear issued approximately 21.9 million Gear shares. The acquisition cost is pegged at $70.4 million, which includes $40.9 million in net debts.
The Steppe assets were characterized as “high margin, high netback, light oil providing netbacks of $52 per barrel for the first quarter of 2018, which would have increased Gear's pro-forma Q1 2018 netbacks by 23 per cent to $26.50 per boe.”
The Steppe land would also add a “meaningful, delineated drilling inventory of an estimated 100 future light oil locations in the Torquay (essentially 100 per cent working interest in more than 50 net contiguous sections) with additional multi-zone potential in the Ratcliffe and Bakken.”
Steppe had been an active driller in the Torquay area, along the U.S. border, in the Tableland area.
In its initial announcement of the deal, Gear pointed out the ability for the Steppe assets to deliver more than 15 per cent production growth in 2019 while spending less than cash flow generated by the assets, complementing the performance of Gear's existing Saskatchewan and Alberta oil operations.
The Steppe deal would add 100 per cent ownership of two oil batteries with significant remaining capacity, enabling growth of production volumes with limited infrastructure spending.
The deal would also benefit Gear in improving its existing 2.2 liability ratio, as the Steppe assets came in with a liability ratio of approximately 5.3 times.
That initial July 23 announcement noted the Steppe assets, in 2019, were expected to have an annual production of 1,400 to 1,500 boepd, 99 per cent of which is light oil. The royalty rate would be eight per cent, and the operating costs would be $13 per boe. The estimated net operating income was pegged at $27 million and capital expenditures were set at $18 million. Six wells were planned.
Concurrent with the closing of the arrangement, Gear entered into an amending agreement in respect of its existing syndicated credit agreement, providing for an increase of the senior secured credit facilities by $40 million to an aggregate principal amount of up to $115 million, of which approximately $69 million has been drawn, net of cash on hand, as at Sept. 18, which includes Steppe's net debt that was assumed pursuant to the arrangement after taking into account expected Steppe transaction costs. Steppe's senior secured credit facility has been re-paid in full and terminated in connection with the closing of the arrangement.
Gear’s August corporate presentation showed it had 7,025 boepd second quarter production, of which 89 per cent was liquids.
The company’s two other core areas are in central Alberta and the heavy oil region straddling the Saskatchewan/Alberta border around Lloydminster. At Paradise Hill, it has grown production from zero to approximately 1,800 bpd since 2014.
At Hoosier the company has drilled fracked horizontal and unfracked, open hole quad lateral wells. The first had a peak initial production over 30 days (IP30) of 71 bpd, while the second had an IP30 of 25 bpd, and has since been shut in. Two multistage fracked wells have been drilled in the area by Gear in the third quarter.
Year-to-date in 2018, the company had shipped approximately 45 per cent of its heavy oil volumes by rail, with the remained shipped by pipeline and a small amount sold locally to pavers. That rail number is up from their historical 34 per cent level.
