Alberta’s Gear Energy bullish on prospects of an IPO

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It would be an understatement to say it has been a slow period for energy-sector financing, but Gear Energy Ltd., a small heavy-oil producer, believes it has the right attributes to buck the trend with an initial public offering in coming months.

Gear Energy plans to pursue an IPO or reverse takeover before the end of the year, while it boosts production of heavy crude oil from the Lloydminster area of Alberta.

The privately held Calgary company is run by a well-known team that headed up ARC Energy Trust and is chaired by Don Gray, who made waves in the oil patch in the 1990s and the 2000s as the outspoken chief of Peyto Energy Trust.

Gear has established a strategy of reaping wide margins from a notoriously low-margin game, that of heavy crude. The resource sells for varying discounts to light oil because of the extra refining it requires.

Limited export pipeline capacity has been a big factor in widening that spread significantly, as was the case in late 2012 and early 2013 when a glut of supply led to what became known as the bitumen bubble.

"We moved into the heavy oil basin three years ago and and we've worked very hard to prove that we are an operator to pay attention to," Gear chief executive Ingram Gillmore said. "We've been primarily drilling with horizontal wells and what we've found is per-well economics, even at marginal prices, are incredibly competitive with any other opportunity in Western Canada, to be honest."

In its most recent quarter, Gear reported production of just fewer than 4,000 barrels a day, and expects to grow that by as much as a fifth by year-end. Production has doubled in the past two years. Much of the output is used by Koch Industries' Flint Hills Resources refinery in Minnesota, Mr. Gillmore said.

Mr. Gray said Gear is employing strategy similar to what he adopted with Peyto, which emerged as a junior oil producer after some high-profile flame-outs of other firms in Calgary, then converted into a trust.

Then, like now, the Canadian energy sector had a tough time attracting capital, given less risky opportunities elsewhere. In the first half of this year, the industry raised $2.2-billion in equity, half the value of the year before an amount about equal to that during financial crisis in 2009, according to Sayer Energy Advisors.

The juniors have been among the hardest hit, as was the case in the late 1990s, Mr. Gray noted.

"It's a very similar market because we've had a lot of froth, a lot of hype. And now with the execution, the results having not really shown up, investors decided to move away from that market," he said. "I'm not afraid of that market because we're a company that can actually deliver results, and I know that investors are looking for results."

Gear shares have traded recently on the Macquarie grey market at around $2, putting its market capitalization at around $108-million. However, it reported a net asset value of $3.34 per share based on proved plus probable reserves at the end of 2012, which put the value at $180-million.