Arcan Resources Ltd.

Arcan Resources Ltd.

August 29, 2011 11:16 ET

Arcan Announces Increase in 2011 Exit Rate Target, Senior Officer Appointments, Stock Option Grants, Operations Update and Second Quarter 2011 Results

CALGARY, ALBERTA--(Marketwire - Aug. 29, 2011) - Arcan Resources Ltd. (TSX VENTURE:ARN) ("Arcan" or the "Corporation") is pleased to announce the filing of its interim financial statements and corresponding management's discussion and analysis ("MD&A") for the period ended June 30, 2011.

For the past few quarters Arcan has focused on the next phase of its development plan for the Swan Hills play. With this next phase, current production has almost risen to Arcan's 2011 exit rate target of 5,000 barrels of oil equivalent ("BOE") per day, and as a result, Arcan has increased its 2011 year-end target exit rate to 6,000 BOE per day.

To carry out this next phase, the Corporation has undertaken two key initiatives. First, Arcan has recently assembled a highly experienced team to execute its development plan, and is pleased to announce the following key appointments: Mr. Kevin Gunning, Vice-President, Engineering, Mr. Kyle Baumgardner, Vice-President, Production, and Mr. Thanos Natras, Vice-President, Exploration. Arcan is also pleased to announce the promotion of Mr. Graeme Ryder to Vice-President, Finance and Controller, and Mr. Douglas Penner to Executive Vice-President in addition to his role as Chief Financial Officer. This team combined with additional operational and technical staff is expected to expedite the successful development of the Swan Hills play. To accommodate its growth, Arcan relocated to new offices at the beginning of August 2011.

The second initiative has been to strategically procure the services, equipment, and materials required to execute the development plan in the Swan Hills area. Through various agreements and partnerships, Arcan has secured access to drilling rigs, fracturing equipment, well construction materials, fluid trucking, and stimulation products. This includes a consistent supply of raw acid and access to a centralized blending facility that are essential for Arcan to meet firm benchmarks for drilling, fracturing and completing wells. Through effective contract negotiations and a corporate execution plan, the Corporation believes it is positioned to place at least one new horizontal well on production approximately every 10 days for the balance of 2011 and into 2012. The Corporation has successfully executed this strategy since the beginning of July 2011. The result has been stable production growth over the summer months despite challenging field conditions.

Further details on the Corporation's procurement strategy and its impact are as follows:

  • Drilling Rig and Fracturing Equipment: Arcan expects the number of wells drilled in Swan Hills to increase dramatically over the next few quarters as recent industry-wide weather related issues subside and area operators increase capital programs in the play. Consequently, Arcan anticipates higher levels of drilling activity in the second half of the year. To ensure that the Corporation can maintain the pace of its development program, it has secured access to three drilling rigs and has entered into an agreement for the supply of fracturing equipment.
  • Acid Supply and Acid Blending: Arcan presently uses more than 1,200 cubic meters of acid per well for its stimulation program in the Swan Hills play. Through research and field trials, the Corporation has significantly advanced its acid blend formula. Wells fractured with this acid technique have consistently outperformed offsetting wells stimulated with competing products. Despite a 100% increase in the amount of acid used per well, Arcan's improvement in operational efficiency has resulted in a decrease in overall well completion costs. Arcan has developed relationships throughout the acid supply chain in order procure the raw acid required by the Corporate development program. This includes one of the largest acid aggregators in North America who has the ability to source raw acid from various domestic and international locations.

The Corporation's success to date has been achieved despite the challenging external events in the first half of 2011. In the Swan Hills area, extreme weather conditions impacted road and lease access. Above average snow levels during the winter of 2010-2011 combined with record rainfall in the second quarter of 2011 resulted in widespread flooding in the Swan Hills area. These events resulted in significant damage roads and third party oil pipelines used to transport oil production from Arcan facilities. While Arcan has maintained its pace of drilling, the damage to third party infrastructure has forced Arcan to transport all oil production by truck to pipeline terminals in order to access oil markets. This has negatively impacted operating costs in the second quarter of 2011. Increased trucking costs were also incurred in the Hamburg area due the shutdown of the Rainbow pipeline system that is expected to resume shipping in September 2011 subject to regulatory approval.

Highlights of the second quarter of 2011:

  • Operating netbacks increased to $55.29 per BOE (on revenue of $96.49 per BOE with operating costs of $22.55 per BOE), up 52 percent from $36.31 per BOE in the second quarter of 2010 and up 27 percent respectively from $43.63 per BOE in the first quarter of 2011;
  • Funds from operations rose 125 percent to $10.1 million ($0.11 per diluted share) in the second quarter of 2011 from $4.5 million ($0.06 per diluted share) in the second quarter of 2010 and up 14 percent from $8.9 million ($0.10 per diluted share) in the first quarter of 2011;
  • Income of $4.3 million in the second quarter of 2011 up from a loss of $0.1 million in the second quarter of 2010 and a loss of $2.6 million in the first quarter of 2011;
  • Production was up 48 percent to 2,871 BOE per day for the three months ended June 30, 2011 from 1,943 BOE per day for the three months ended June 30, 2010, and up 13 percent from 2,551 BOE per day in the first quarter of 2011. Second quarter production and completions were hampered by forest fires and floods, as well as unanticipated shut-ins related to pump modifications on previously existing horizontal wells. Current production is approximately 4,865 BOE per day, a 70 percent increase from the second quarter of 2011;
  • In the second quarter of 2011, seven horizontal wells were drilled and four horizontal multi-stage fractured oil wells were completed. Since that time, Arcan has drilled an additional five horizontal wells and completed seven horizontal multi-stage fracture treatments. Four wells were fractured in both July and August with an additional four wells scheduled to be stimulated in September;
  • A capital expenditure program of $28.2 million was completed, leaving Arcan's available funds totalling $103 million (net of working capital) at the end of the second quarter.
Financial and Operating Summary(1) Three Months Ended Six Months Ended
June 30, 2011 June 30, 2010 June 30, 2011 June 30, 2010
Financials ($000s except per share amounts)
Oil and NGL sales
Natural gas sales
Petroleum and natural gas revenue 25,214 11,056 43,520 20,048
Cash provided by operating activities 10,180 3,668 19,069 6,217
Funds from operations (2) 10,114 4,501 18,994 7,328
Per share basic (2) 0.11 0.06 0.22 0.12
Per share diluted (2) 0.11 0.06 0.21 0.12
Net income (loss) 4,267 (627 ) 1,707 (2,754 )
Per share basic 0.05 (0.01 ) 0.02 (0.04 )
Per share diluted 0.05 (0.01 ) 0.02 (0.04 )
Capital expenditures, net – cash 28,241 21,240 72,401 92,075
Total assets 361,406 244,234 361,406 244,234
Total liabilities 137,992 89,687 137,992 89,687
Shareholders' equity 223,414 156,172 223,414 156,172
Bank loan - 33,903 - 33,903
Net debt and working capital 89,779 57,263 89,779 57,263
6.25% Debentures maturing February 28, 2016 86,250 - 86,250 -
Crude oil and NGLs (bbls per day) 2,695 1,674 2,543 1,410
Natural gas (Mcf per day) 1,056 1,613 1,012 1,782
BOE per day (6:1) (3) 2,871 1,943 2,712 1,707
Average realized price:
Crude oil and NGLs ($ per bbl) 101.10 68.13 92.80 71.84
Natural gas ($ per Mcf) 4.34 4.60 4.38 5.32
Combined price per BOE (incl. processing revenue) ($ per BOE) 96.49 62.52 88.66 64.89
Netback ($ per BOE)
Petroleum and natural gas sales 96.49 62.52 88.66 64.89
Royalties (18.65 ) (14.09 ) (17.72 ) (15.68 )
Operating and transportation expenses (22.55 ) (12.12 ) (21.11 ) (14.67 )
Operating netback ($/BOE) 55.29 36.31 49.83 34.54
Realized economic hedging losses – cash (1.23 ) - (0.71 ) -
G&A expenses – cash (9.88 ) (8.72 ) (5.93 ) (8.34 )
Other revenue
Finance expenses - cash
) -
) 0.23
) 0.01
Corporate netback 39.24 25.50 38.94 23.77
Common Shares (000s)
Shares outstanding 88,416 75,173 88,416 75,173
Weighted average – basic 88,226 75,029 88,149 61,748
Weighted average – diluted (4) 89,264 75,029 89,258 61,748
(1) The quarters ended June 30, 2010 have been restated for the effect of adopting IFRS. Further information on the impact of IFRS is provided in the unaudited financial statements for those periods and in the "Accounting Policies" section of the MD&A.
(2) The reader is referred to the section "Non-IFRS Measurements".
(3) The reader is referred to the section "Legal Advisories".
(4) Basic and diluted weighted average shares (each a "share") are the same in 2010 as the Corporation incurred a loss in these periods.

Since the commencement of its horizontal, multi-stage fracture program, Arcan has drilled 35 wells and performed three re-entry multi-stage fracture completions. Of the total number of wells, 30 are currently on production and five are awaiting fracture completions. Arcan is now drilling wells number 36 and 37, and has identified fifteen additional re-entry candidates. Arcan has kept two rigs active for most of the year to date and due to improvements in drilling technique and execution, each rig is able to rig release a new well every 20 days. Recent activities, combined with the ongoing success of Arcan's next phase of development drilling and completion program, has prompted the Corporation to increase its exit production target rate to 6,000 BOE per day.

For the first half of 2011, Arcan's expenditures reached $72.4 million. With the successful implementation of the next phase of its development, Arcan has raised its 2011 capital budget to $175.0 million, up from $135.0 million. The Corporation's new 2011 budget could potentially accommodate adding up to 35 new horizontal multi-stage fracture wells in 2011, up from the previous estimate of 20 wells. As at June 30, 2011, Arcan had $103 million in available funds (including a $17.1 million working capital deficiency and $120.0 million in bank lines of credit), plus cash flow from the second half of 2011 that could be directed towards its development program.

In August Arcan received approval for water injection in the Ethel area. Wells are currently being converted to water injectors and water handling facilities are currently being constructed in order to commence water injection. The company has also received regulatory approval for the initial phase of the Ethel pipeline system that will allow production in the Ethel oil pool to be transported to the Arcan Deer Mountain Unit #2 oil facility. This pipeline infrastructure is expected to be completed in order to reduce operating expenses in the next phase of the Ethel pool development. In addition to the pipeline, the Corporation is nearing completion of a high grade road system that will connect the Deer Mountain Unit #2 through the Ethel property into its Morse River Unit #1. This infrastructure development will enable resources and services to move more efficiently throughout the asset base and reduce operating expenses.

Drilling operations for 2011 remain focused on undeveloped lands covering a large portion of Township 67 surrounding Arcan's Ethel oil pool. With only two horizontal wells drilled by Arcan in this eight mile stretch of the Swan Hills play at year-end 2010, the Corporation believes that it will enhance reserves by the end of 2011 while continuing to expand outside the main area of activities.

In the second quarter of 2011, Arcan's funds from operations were $10.1 million on a 2,871 BOE per day basis with an operating netback of $55.29 per BOE. Operating netbacks increased as a result of oil prices rising to $101.10 per barrel with royalties at $18.65 per BOE and operating costs of $22.55 per BOE. These results compare to operating netbacks of $36.31 per BOE in the second quarter of 2010 and $43.63 per BOE in the first quarter of 2011. Operating costs were higher in the second quarter of 2011 based on trucking requirements caused by third party pipeline issues, weather and, as previously announced, well repair and work-over activity performed on all horizontal multi-stage fracture wells. Arcan expects that operating costs will decline on a BOE basis as key pipeline connections restart.

As of January 1, 2011, Arcan now employs International Financial Reporting Standards ("IFRS"). The Corporation encourages you to carefully read its MD&A together with its quarterly unaudited financial statements as it has provided information regarding IFRS accounting policies and prepared reconciliations between previous Canadian generally accepted accounting principles ("GAAP") and IFRS. Comparative numbers for 2010 have also been updated to reflect IFRS changes. The changes resulting from the Corporation's transition to IFRS have not impacted the operating assets of Arcan, but have significantly modified its financial statements and related notes. Further information on the impact of the changeover to IFRS is provided in the "Accounting Policies" section of the Arcan's MD&A.

Throughout the first half of 2011, Arcan continued to deliver on its strategy of maximizing value for the Swan Hills play through the use of the latest technology. This play was economically viable prior to the application of a horizontal, multi-stage fracture program; however, following the initiation of Arcan's program, robust additions to the economics of the play have been achieved and are expected to continue. The Corporation owns 150 net sections of land on the Swan Hills/Beaverhill Lake light oil play first established in the 1960's, and waterflood recoveries of 40 percent of the original oil-in-place have been demonstrated throughout the area. Modifications to the application of new technologies in the area may occur pending future results. In addition, Arcan has drilled or re-entered old well bores covering 30 kilometres across Swan Hills enhancing the solid economics associated with its horizontal, multi-stage fracture program. Early in 2010, Arcan focused on drilling close to existing facilities, and over time has expanded into its Ethel area land base. The Corporation estimates that the combination of cash flow and credit facilities will provide the necessary resources to support its ongoing development activities. With a large, defined inventory at the forefront of an emerging light oil play, Arcan expects that the Swan Hills area will continue to transform Arcan through 2011 and beyond.

Arcan also announces that on August 24, 2011, pursuant to the provisions of its stock option plan, it granted an aggregate of 170,000 options to acquire an equivalent number of common shares of Arcan to certain officers and employees of Arcan. The options have an exercise price of $5.47 per share. The options expire on August 24, 2016. All stock option grants of Arcan are subject to receipt of the necessary regulatory approvals.

About Arcan Resources Ltd.

Arcan Resources Ltd. is an Alberta, Canada corporation that is principally engaged in the exploration, development and acquisition of petroleum and natural gas located in Canada's Western Sedimentary Basin.

Legal Advisories

BOEs may be misleading, particularly if used in isolation. The calculation of BOEs is based on a conversion ratio of six Mcf of natural gas to one bbl of oil based on an energy equivalency conversion primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.

Please refer to the "Abbreviations" in the Corporation's AIF for meanings of certain abbreviations used in this press release.

Additional information about the Corporation, including the Corporation's annual information form for the year ended December 31, 2010, is available under Arcan's profile on SEDAR at

Basis of Presentation

Arcan's unaudited financial statements for the three months ended March 31, 2011 and for the three and six months ended June 30, 2011 have been prepared in accordance with IFRS. The Corporation adopted IFRS on January 1, 2011 with a transition date of January 1, 2010. Previously, Arcan had prepared its financial statements in accordance with GAAP. The Corporation has provided IFRS accounting policies and prepared reconciliations between GAAP and IFRS in the notes to its unaudited interim financial statements for the three months ended March 31, 2011 and for the three and six months ended June 30, 2011. Further information on the impact of IFRS is provided in the "Accounting Policies" section of the MD&A.

Non-IFRS Measurements

Readers are cautioned that this press release contains the term "funds from operations", which should not be considered an alternative to, or more meaningful than, "cash provided by operating activities" or "net earnings" as determined in accordance with IFRS as an indicator of Arcan's performance. Arcan also presents "funds from operations per share", whereby funds from operations are divided by the basic weighted average number of shares of Arcan outstanding to determine per share amounts. Operating and corporate netbacks are also presented. "Operating netbacks" represent Arcan's revenue, less royalties and operating expenses, and "corporate netbacks" represent Arcan's operating netback, realized economic hedging losses, general and administrative and interest income and expense, in order to determine the amount of funds generated by production. Operating and corporate netbacks have been presented on a per BOE basis, as well.

The measures referenced above do not have any standardized meaning prescribed by IFRS and therefore are unlikely to be comparable to similar measures presented by other companies. Management believes that funds from operations and operating and corporate netbacks are useful supplemental measures as they provide an indication of the ability of Arcan to fund future growth through capital investment and/or repay debt. These measures have been described and presented in this press release in order to provide shareholders and potential investors with additional information regarding Arcan's liquidity and its ability to generate funds to finance its operations. Arcan's method of calculating funds from operations may differ from that of other companies, and, accordingly, may not be comparable. Please see the "Results of Operations – Netbacks" section of the MD&A for a reconciliation between both operating netbacks and corporate netbacks to revenue.

Arcan determines funds from operations as cash flow from operating activities before changes in non-cash working capital as follows:

Funds from Operations
Three Months Ended Six Months Ended
($000's) June 30, 2011 June 30, 2010 June 30, 2011 June 30, 2010
Cash flow from (used in) operating activities (per IFRS) 10,180 3,668 19,069 6,217
Change in non-cash working capital (66 ) 833 (75 ) 1,111
Funds from operations 10,114 4,501 18,994 7,328

Readers are cautioned that this press release contains summarized communications and is not a suitable source of information for readers who are unfamiliar with Arcan. This press release is not in any way a substitute for reading the unaudited interim financials and the MD&A, because the reader relying on a summary alone might overlook decision-critical information.

Forward-Looking Information and Statements

This press release contains certain forward-looking information and statements within the meaning of applicable securities laws. The use of any of the words ''expect'', ''anticipate'', ''continue'', ''estimate'', ''guidance'', ''objective'', ''ongoing'', ''may'', ''will'', ''project'', ''should'', ''believe'', ''plans'', ''intends'', "possible" and similar expressions are intended to identify forward-looking information or statements. In particular, but without limiting the foregoing, this press release contains forward-looking information and statements pertaining to, among other things, the following: the timing, method and results of drilling, completion and waterflood operations; anticipated production; waterflood and CO2 recoveries; future liquidity and financial capacity and resources; the potential inherent in Arcan's Swan Hills land base and the Ethel oil pool; the timing and resumption of service at the Rainbow pipeline; Arcan's reserves bookings; expectations relating to shareholder value; results from operations and financial ratios; the application and modification of horizontal, multi-stage fracture technologies; cost and expense estimates and expectations; recovery; cash flow ratios and sensitivities; Arcan's expansion into the Ethel area; capital expenditures; Arcan's 2011 budget; future growth including development, exploration, acquisition, construction and operational activities and related expenditures.

The forward-looking information and statements contained in this press release reflect several material factors and expectations and assumptions of Arcan including, without limitation: that Arcan will continue to conduct its operations in a manner consistent with past operations; the accuracy of current horizontal production data, historical well production and waterflood results; the general continuance of current or, where applicable, assumed industry conditions; continuity of reservoir conditions across Arcan's Swan Hills land base and its Ethel oil pool; availability of debt and/or equity sources to fund Arcan's capital and operating requirements as needed; the continuance of existing and, in certain circumstances, proposed tax and royalty regimes; the accuracy of the estimates of Arcan's reserve volumes; the accuracy of current horizontal production data; and certain commodity price and other cost assumptions.

Arcan believes the material factors, expectations and assumptions reflected in the forward-looking information and statements are reasonable at this time but no assurance can be given that these factors, expectations and assumptions will prove to be correct. The forward-looking information and statements included in this press release are not guarantees of future performance and should not be unduly relied upon. Such information and statements involve known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in such forward-looking information or statements including, without limitation: changes in commodity prices; unanticipated operating results or production declines; waterflood and CO2 impacts; Arcan's implementation of the next phase of its development plan may not be completed in the timelines anticipated, in the manner anticipated or at all and the execution of the development plan may not have the results currently anticipated by Arcan; shareholder value may not be maximized in the manner anticipated by Arcan or at all; changes in tax or environmental laws or royalty rates; increased debt levels or debt service requirements; inaccurate estimation of Arcan's oil and gas reserves volumes; limited, unfavourable or no access to debt or equity capital markets; for reasons currently unforeseen, the current drilling locations identified by Arcan may prove to be unsuitable or unavailable and drilling on the locations identified may not occur; service at the Rainbow pipeline may not resume in the timelines currently anticipated by Arcan; increased costs and expenses; the impact of competitors; reliance on industry partners; and certain other risks detailed from time to time in Arcan's public disclosure documents including, without limitation, those risks identified in this press release, and in Arcan's annual information form for the year ended December 31, 2010, copies of which are available on Arcan's SEDAR profile at

The forward-looking information and statements contained in this press release speak only as of the date of this press release, and Arcan does not assume any obligation to publicly update or revise them to reflect new events or circumstances, except as may be required pursuant to applicable laws.

Neither TSX Venture Exchange nor its Regulation Services Provider (as that term is defined in the policies of the TSX Venture Exchange) accepts responsibility for the adequacy or accuracy of this release.

Contact Information

  • Arcan Resources Ltd.
    Ed Gilmet
    Chief Executive Officer and President
    (403) 262-0321

    Arcan Resources Ltd.
    Douglas Penner
    Executive Vice President and Chief Financial Officer
    (403) 262-0321

    Arcan Resources Ltd.
    Suite 2500, 308 - 4th Avenue S.W.
    Calgary, AB T2P 0H7