Gear Energy Ltd. is providing the following second quarter operating update to shareholders.
MESSAGE TO SHAREHOLDERS
With these second quarter results Gear has made great strides in generating value by delivering the exceptional capital discipline that shareholders have come to expect from their Company. Significant free funds from operations have again been realized through the quarter while maintaining stable production levels and aggressively reducing outstanding debt. Gear has continued to efficiently and economically deliver the energy that society requires to maintain the quality of life and high standard of living that we have all come to expect in the developed world.
The latest US Energy Information Administration inventory report dated July 28, 2021 showed that US crude oil inventory levels were a staggering 101 million barrels lower than one year prior. As a result, West Texas Intermediate ("WTI") prices are continuing to show strength as the year progresses. Prices are currently averaging US$73 per barrel, a modest increase compared to the second quarter 2021 average of US$66 per barrel. Both numbers are a dramatic improvement over a year ago when second quarter 2020 WTI oil prices averaged only US$28 per barrel, a record low for Gear. The outlook for the remainder of 2021 continues to look strong with the second half predicted to have continual debt repayments, production growth, and material free funds from operations. Using current forward strip prices, net debt is forecasted to be approximately $12 million by the end of 2021. In addition to the balance sheet strengthening, Gear is forecasting fourth quarter 2021 production to be approximately 5,900 boe per day or an eight per cent growth from the second quarter 2021 production as a result of a robust 2021 drilling program. With material amounts of free funds from operations, Gear continues to weigh the various opportunities to increase shareholder value. The options currently include the potential declaration of dividends, increased organic growth, acquisitions, and/or share buybacks.
Funds from operations for the second quarter of 2021 was $12.2 million, an increase of 48 per cent from the first quarter of 2021 as a result of significantly higher commodity prices, lower operating costs, and increased production. Second quarter realized prices increased from $50.46 per barrel in the first quarter of 2021 to $59.90 per barrel. The improved commodity prices were driven by an increase in the WTI benchmark oil price which averaged US$66.07 per barrel in the second quarter along with narrowing Canadian oil differentials on both the heavy and the light oil benchmarks. The strong funds from operations was net of $2.7 million of hedging costs realized during the quarter.
Operating netback for the second quarter of 2021 was $34.54 per boe, Gear's highest operating netback since the third quarter of 2014 when WTI averaged US$97 per barrel. Operating costs inclusive of transportation was $0.80 per boe lower than the first quarter of 2021 due to unseasonably cold weather experienced in the first quarter. In comparison to 2020, 2021 operating costs are slightly higher as a result of increased field maintenance costs incurred to help support stable production into the future.
Production for the second quarter of 2021 was 5,440 boe per day, a slight increase of two per cent from the first quarter of 2021 as a result of new production from the first quarter drilling program of 11 gross wells (10.3 net). For the second quarter, these wells contributed an average of 552 boe per day of production. Production continues to incline for these wells with the last 30 days of production averaging 634 boe per day.
In the second quarter of 2021, Gear successfully drilled one light oil well in Tableland, Saskatchewan and one multi-lateral unlined heavy oil well in Wildmere, Alberta. The Tableland light oil well was completed in July and is expected to be on production in early August. A total of $5.8 million of capital was incurred for the quarter including $1.1 million for pipelines and $0.8 million for facilities. Subsequent to quarter end, the drilling rig remained active, drilling an additional multi-lateral well in Wildmere and currently drilling the final 2021 heavy oil well in Wildmere before a planned move to Provost to drill a four well program to follow up on Gear's successful medium oil Sparky discovery in 2020. Additionally, during the quarter, Gear received regulatory approval for three water flood projects in Maidstone, Saskatchewan, and Wildmere, Alberta with the fourth quarter implementation planned to assist year end production and reserves.
Reduced net debt by 52 per cent from $70.2 million in the second quarter of 2020 to $33.4 million at the end of the second quarter of 2021 and 22 per cent from the first quarter of 2021. Since the second quarter of 2020, debt has been lowered as a result of funds from operations significantly exceeding capital investment. Additionally, all of the remaining $13.2 million convertible debentures were retired in the first half of 2021 through the issuance of 41.2 million common shares. As of June 30, 2021, net debt consists of $38.1 million of bank debt and $4.7 million of positive working capital.
The balance sheet remains strong with an annualized net debt to funds from operations of 0.7 times for the second quarter of 2021 and bank debt of $38.1 million as at June 30, 2021. In June 2021, Gear completed its annual borrowing base redetermination of its credit facilities with the maturity date extended to May 27, 2023. As a result of Gear forecasting continual debt reductions for the remainder of the year, a gradual reduction of the borrowing base will be put in place to reduce standby fees. Gear's credit facilities will have the following borrowing base:
In the second quarter Gear realized a hedging loss of $5.55 per boe compared to the second quarter of 2020 when Gear generated a realized hedging gain of $35.85 per boe as a result of 2,500 barrels per day hedged out of 2,749 boe per day of production. The second half of 2021 hedging program will consist solely of 3-way collars with 800 barrels per day capped at a WTI price of C$71 per barrel, 800 barrels per day capped at C$74 per barrel, and 400 barrels per day capped at C$83 per barrel.