As previously announced by Gear Energy Ltd. (TSX: GXE) (OTCQX: GENGF) ("Gear" or the "Company"), the Company has entered into an arrangement agreement pursuant to which a large publicly traded company will acquire Gear including its heavy oil assets for $110 million in cash (subject to adjustments) and Gear will transfer its Central Alberta assets, Southeast Saskatchewan assets and, Tucker Lake property to a newly formed entity ("Newco"), which will be owned by the former shareholders of Gear following the closing of the transaction (the "Transaction"). Gear is pleased to announce that Newco has been named Lotus Creek Exploration Inc. ("Lotus Creek") and will trade on the TSX Venture Exchange. Gear is also pleased to provide details of 2025 budget guidance and a new November 30, 2024 independent reserves evaluation for Lotus Creek. In addition, details of a special meeting of Gear shareholders to be held to consider the Transaction are provided below.
PRESIDENT'S MESSAGE TO SHAREHOLDERS
I wanted to take this opportunity to provide you with a more comprehensive background and perspective of the strategic rationale relating to the Transaction announced on December 2, 2024. As many of you are aware, I joined Gear in April of this year, following the conclusion of a strategic process initiated in September 2023. Over the last 8 months at Gear, we have been carefully and systematically reviewing each asset with a particular focus on understanding the quality of the remaining drilling inventory, base production declines and asset retirement obligations. In parallel with framing the future, we have looked back at Gear's historical performance of capital investments and the corresponding impact on shareholder value.
Gear's Lloydminster heavy oil assets have been the cornerstone of the Company since inception. In fact, prior to 2016, it was the only asset. In 2014, the heavy oil business unit was producing approximately 7,000 boe/d. Today it sits at 3,700 boe/d despite receiving a significant majority of invested capital over that period. During this time, Gear has developed these assets utilizing innovative drilling and production techniques, however, this has become increasingly difficult with inflationary capital and operating cost pressures, a depleted inventory of locations and tightly held offset land bases. Today, the Lloydminster assets are mature, characterized by declining base production, limited drilling inventory and nearly 1,400 legacy wells, of which more than 80% are inactive. At this stage of the assets life cycle, the assets are more appropriately owned by a major oil and gas company with a large area land position and operational synergies.
During the review of Gear's remaining assets, the team has identified the Central Alberta and SE Saskatchewan light oil assets to be transferred to Lotus Creek as low base decline and high netback with a promising inventory of quality drilling projects. Additionally, the Tucker Lake undeveloped lands offer exposure to the Mannville, heavy oil fairway. The proposed Transaction crystallizes shareholder value from the mature Lloydminster asset, at accretive metrics, while pivoting the company's focus to unlocking the potential from these remaining assets with the newly formed growth company, Lotus Creek Exploration. We are excited to share the details of Lotus Creek's 2025 budget and reserve report, which demonstrate the high-quality nature of the Lotus Creek asset base and the plan to create significant value for shareholders.
Sincerely,
Kevin Johnson
President and Chief Executive Officer
LOTUS CREEK HIGHLIGHTS
Business Model
Lotus Creek is an oil weighted organic growth company. The objective is to be the fastest growing, fully funded, public junior oil and gas company in Canada. We will measure shareholder value creation by profitable growth in cashflow, production and producing reserves per debt adjusted share.
Origin of the Name
Lotus Creek draws inspiration from the lotus flower as a symbol of renewal, growth, strength and resilience. Just as the lotus thrives in murky waters, overcoming adversity to emerge strong and unscathed, we believe in navigating the challenges of the oil and energy industry with perseverance and determination. The creek represents the beginning of our journey, a steady flow towards growth, while the lotus' deep roots signify the strong foundation upon which we build our success. With Lotus Creek, we will be committed to profitability, growing sustainably, and emerging as a leader in the energy sector.
Key Attributes
- High-quality, light sweet oil production base with long life reserves
- Proved Developed Producing ("PDP") reserves PV-10 value $76 million after-tax
- Current production of 1,700 boe/d, 14% base decline and 6.5 year Reserve Life Index (PDP)
- Annualized October 2024 Net Operating Income of $22 million
- Material upside in Wilson Creek and Tucker Lake assets with strong economics and capital efficiencies
- 6 prospective Belly River zones in Wilson Creek with multi-stage horizontal development potential
- 6 prospective Mannville zones in Tucker Lake with open hole, multi-lateral development potential
- Well capitalized business model positioned to substantially grow production through 2025 and beyond
- Estimated initial cash of $20 million (subject to adjustment) and a $35 million available credit facility
LOTUS CREEK 2025 BUDGET
The Gear Board of Directors has approved a 2025 capital budget for Lotus Creek of $43 million, which is forecasted to achieve average production of 2,000 to 2,400 boe/d (77% light oil and NGLs, 10% heavy oil, 13% natural gas), with Q1 2025 production forecasted at 1,600 to 1,700 boe/d and Q4 2025 production forecasted at 3,000 to 3,400 boe/d. The program is expected to generate an 88 per cent increase in production from Q4 2024 to Q4 2025.
The capital program is aimed to achieve significant production and cashflow growth, with $23 million dedicated to drilling, $15 million allocated to longer term, strategic projects such as seismic, major infrastructure and acquisition of new undeveloped lands, $2 million applied to field projects and other, and $3 million dedicated to abandonment and reclamation activities.
Wilson Creek - Central Alberta
We plan to drill 4 gross (4.0 net) Belly River, frac'd multi-stage horizontal light oil wells in Q3 2025 (on-stream-late Q3). Lotus Creek will have an enviable land base in this emerging Basal Belly River light oil play along with 6 additional prospective light oil zones. Similar to Tucker Lake, the Wilson Creek lands have been derisked by thorough technical work and compelling offset competitor results. Lotus Creek has currently identified the potential for over 30 future development locations.
Tucker Lake - Cold Lake Alberta
We plan to drill 3 gross (3.0 net) Mannville, open hole, multi-lateral heavy oil wells in Q1 2025 (on-stream late Q1). These wells will be the first on a 7.5 section contiguous land block in the Cold Lake region of Alberta where 6 prospective Mannville sands have been mapped. Detailed internal technical work and strong offset operator results have materially derisked the lands and highlight the potential for more than 60 future development locations.
Strategic Investments
Concurrently with growing production and cashflow, we are also investing in future projects that create lasting strategic advantages in our core areas. During Q1 2025, we plan to shoot a new, 100% owned, 44 square mile 3D seismic program in Wilson Creek. The new 3D seismic and advanced interpretation techniques will not only reinforce existing inventory but is expected to identify new light oil opportunities through the latest 3D seismic inversion technology.
In Q4 2025, we plan to commence detailed design and procurement work for a new, 100% owned and operated, oil battery in Wilson Creek. Construction of the battery is tentatively planned to begin in 2026 with an approximate design capacity of 4,000 bbl/d, which will be easily expandable with ongoing growth.
In 2025, we will continue to acquire prospective undeveloped lands in both our core areas and on internally generated organic growth opportunities that offer scalable and high-quality drilling inventory.