Arcan Resources Ltd.
TSX VENTURE : ARN

Arcan Resources Ltd.

November 27, 2014 21:54 ET

Arcan Delivers Solid Production, Reduced Operating Expenses and Completes Bank Line Review

CALGARY, ALBERTA--(Marketwired - Nov. 27, 2014) -

NOT FOR DISSEMINATION IN THE UNITED STATES OR THROUGH U.S. NEWSWIRE SERVICES

Arcan Resources Ltd. (TSX VENTURE:ARN) ("Arcan" or the "Corporation") commenced its winter drilling program in the third quarter, reduced operating expenses and continued efforts to improve its debt position.

"We are on track with our operating performance delivering average daily production of 3,924 barrels of oil equivalent (BOE) in the third quarter, which exceeded our quarterly guidance of 3,650 to 3,850 BOE per day." said Terry McCoy, Arcan's Chief Executive Officer. "The wells we drilled last spring continue to meet or exceed our production expectations as our operating teams optimize their development programs. We expect to meet our annual guidance of 3,500 to 3,800 BOE per day, despite the impact related to the current short-term shut down of a third-party processing facility."

With the rapid change of market conditions and decline of oil prices in the current quarter, Arcan plans to curtail a portion of its winter drilling program to conserve capital. During the fourth quarter of 2014, the Corporation plans to drill four (3.0 net) wells. The first two wells (1.0 net) have been drilled and completed already and are expected to be on production prior to year-end. These wells are joint interest wells in Morse River and Deer Mountain West. Drilling has commenced on the first of the remaining two wells off of the existing pad-site in the Ethel field. These wells are in proximity to the four wells drilled earlier this year and are expected to be completed and placed on production early in the first quarter of 2015. Arcan had originally anticipated drilling up to nine wells (7.0 net) this winter, however, Arcan is evaluating its first quarter 2015 drilling plans in light of current market conditions.

"Our hedging program was designed to stabilize Arcan through the downturns in oil prices," said Doug Penner, Arcan's President. "We've hedged approximately 90 percent of Arcan's production after royalties through to the end of the year, throughout 2015 and through the first quarter of 2016 using prices above $90 Canadian per barrel. We also continue to evaluate options to improve our debt position and provide additional flexibility to invest in accelerating the development of our extensive light oil asset base."

During the quarter, Arcan was able to make further in-field adjustments to lower operating costs. This remains an ongoing priority and further cost improvements are expected as optimization efforts advance. Arcan commenced filling the Ethel oil sales pipeline and anticipates the line to be placed in service during December 2014 providing further improvement in operating and transportation costs.

Arcan's general and administrative (G&A) costs were lower quarter-over-quarter, but were elevated due to the costs associated with restructuring efforts last summer and the Corporation's ongoing staff retention program.

During the Corporation's recent semi-annual borrowing base review, the credit facility was revised to $170 million from $180 million. The credit facility matures on May 28, 2015, unless Arcan and its lenders agree to an amendment, renewal or extension.

Financial and Operating Highlights

Three Months Ended Nine Months Ended
September
30, 2014
September 30, 2013 September 30, 2014 September 30, 2013
Financials ($000s except per share amounts)
Petroleum and natural gas revenue 30,605 33,317 97,372 97,024
Cash flow from operating activities 6,981 12,904 24,788 46,835
Funds from operations(1) 9,027 11,500 27,641 38,053
Per share basic and diluted(1)(3) 0.09 0.12 0.28 0.39
Net income (loss)(4) 5,126 (4,622 ) (7,785 ) (6,530 )
Per share basic and diluted(3) 0.05 (0.05 ) (0.08 ) (0.07 )
Capital expenditures, net - cash(1) (1,878 ) 7,351 18,109 32,879
Total assets(4) 582,430 612,031 583,430 612,031
Total liabilities(4) 364,399 368,599 364,399 368,599
Debenture face value 171,250 171,250 171,250 171,250
Shareholders' equity 218,031 243,432 218,031 243,432
Bank loan 144,415 164,408 144,415 164,408
Net debt and working capital(1) 307,476 318,053 307,476 318,053
Operating
Production:
Crude oil and NGLs (barrels ("bbls") per day) 3,802 3,616 3,808 3,898
Natural gas (thousand cubic feet ("Mcf") per day) 728 662 691 393
BOE per day (6:1)(2) 3,924 3,726 3,923 3,964
Average realized price:
Crude oil and NGLs ($ per bbl) 86.83 99.70 92.88 90.89
Natural gas ($ per Mcf) 3.49 2.41 4.30 2.80
Combined price per BOE ($ per BOE) 84.79 97.17 90.91 89.66
Netback ($ per BOE)(1)
Petroleum and natural gas sales 84.79 97.17 90.91 89.66
Royalties (15.29 ) (18.60 ) (16.27 ) (16.53 )
Production and operating expenses (14.13 ) (18.87 ) (15.43 ) (17.62 )
Operating netback ($ per BOE)(1) 55.37 59.70 59.21 55.51
Realized economic hedging gains (losses) - cash (7.60 ) (6.21 ) (9.52 ) (1.14 )
G&A (8.57 ) (6.15 ) (7.38 ) (4.85 )
OtherFinance expenses - cash -
(12.73
) -
(13.05
) -
(12.55
) -
(12.32
)
Corporate netback(1) 26.47 34.29 29.76 37.20
Common Shares (000's)
Shares outstanding 97,860 97,860 97,860 97,860
Weighted average - basic 97,860 97,860 97,860 97,860
Weighted average - diluted 97,860 97,860 97,860 97,860

All amounts in the above table exclude Stimsol's discontinued operations unless otherwise indicated.

Notes:

(1) The reader is referred to the section "Non-IFRS Measurements".

(2) The reader is referred to the section "Legal Advisories".

(3) Basic and diluted weighted average shares are the same as the effect of stock options and debentures were anti-dilutive.

(4) Includes both continuing and discontinued operations.

FINANCIAL HIGHLIGHTS

  • Operating netbacks decreased by 11 percent to $55.37 per BOE in the third quarter from $62.22 per BOE in the second quarter, and fell seven percent from $59.70 in the third quarter of 2013. Operating netbacks were lower in the quarter due to the decrease in oil prices that impacted revenues.
  • Funds from operations rose 20 percent to $9.0 million during the third quarter from $7.5 million in the second quarter. In year-over-year results, funds from operations fell from $11.5 million in the third quarter of 2013.
  • Arcan further decreased the draw on its bank line by $10.1 million, reflecting its continuing efforts to pay down debt. At the end of the third quarter Arcan had $144.4 million drawn on its credit facilities, down from $154.5 million in the second quarter. This is also a reduction from $164.4 million in the third quarter of 2013. As of the date hereof, the credit facility is drawn by approximately $136.2 million.
  • During the Corporation's recent semi-annual borrowing base review, the credit facility was revised to $170 million from $180 million. The credit facility matures on May 28, 2015, unless Arcan and its lenders agree to an amendment, renewal or extension.
  • Invested $3.4 million of capital during the third quarter, with the majority of the capital being invested in upgrading Arcan's Ethel battery. Arcan also completed the sale of the Ethel oil sales pipeline during the third quarter for $5.2 million. Third quarter capital expenditures were in line with Arcan's reduced summer budget and expenditures are expected to rise during the winter drilling months. Capital spending was comparable to the $3.6 million in the second quarter of 2014 and down from $7.4 million in the third quarter of 2013.
  • Reduced G&A expenses by three percent in the third quarter to $8.57 per BOE, down from $8.82 per BOE in the second quarter, but higher than the $6.15 per BOE in the third quarter of 2013. G&A expenses in the third quarter of 2014 were impacted by staff retention initiatives and costs resulting from restructuring initiatives.
  • Amalgamated with Stimsol on September 30, 2014 and on October 3, 2014, completed the sale of all Stimsol assets. The associated property, plant and equipment were sold for total gross proceeds of $2.5 million, with Arcan receiving $0.5 million and $2.0 million going to a third party for the termination of a previous hydrochloric acid supply contract.

OPERATIONAL HIGHLIGHTS

  • Production reduced by four percent in the third quarter to average 3,924 BOE per day, down slightly from 4,105 BOE per day in the second quarter. In the third quarter of 2013 production averaged 3,726 BOE per day. Arcan's fourth quarter production will be impacted by the unplanned and short-term shutdown and maintenance at a third-party gas plant. This has shut-in approximately 1,200 BOE per day of production, with a resumption expected in early December.
  • Reduced operating costs by 11 percent to $14.13 per BOE in the third quarter, down from $15.83 in the second quarter and $18.87 in the third quarter of 2013. Arcan benefitted from its efforts to introduce additional operating efficiencies, as well as the operation of the sales gas pipeline through Ethel to Deer Mountain.
  • Further reductions in operating costs are expected with the electrification expansion in the Ethel field, which Arcan anticipates will reduce power expenses and downtime. Arcan will also benefit from the expected tie-in of the Ethel oil sales line, which is expected to reduce trucking expenses.
  • Arcan anticipates drilling four (3.0 net) wells during the current fourth quarter 2014 drilling program and is evaluating its first quarter 2015 drilling plans in light of current market conditions.

OUTLOOK

Arcan continues to advance its objective of delivering sustainable and profitable light oil production from long-life, conventional light oil plays in the Swan Hills. The majority of identified prospects are drillable from existing pad sites or readily available access from existing road and pipeline infrastructure. Based on geological assessment and offset production performance, Arcan has high graded 120 of these locations. Arcan expects to continue to expand application of the waterflood process to enhance oil recovery, improve production decline rates and provide incremental economic value.

As a key aspect of its strategy, the Corporation is seeking reductions in company-wide operating costs. Currently, efforts are advancing for the electrification of the Ethel Field, which Arcan anticipates will reduce power generation costs, and tying-in of the Ethel sales pipeline to Deer Mountain, which is expected to reduce trucking costs. Arcan is seeking to maintain costs at or below $15.00 per BOE. This cost-conscious approach also extends to other aspects of the Corporation's operational platform. Arcan is planning to drill, complete and tie-in wells for a cost ranging from $4.5 million to $5.0 million. To meet this target, additional operational improvements are being made in the field and efforts are being taken to instill a culture of disciplined, cost-effective operations.

Arcan has increased its activity levels in the fourth quarter and has spud the third well of the winter drilling program. All of the wells drilled in the fourth quarter of 2014 are expected to be completed and tied-in prior to spring break-up. Arcan is evaluating the balance of its winter program in light of current market conditions. Reductions from the nine (7.0 net) wells originally planned are intended to preserve capital during the current period of weak oil prices. The Corporation has designed its capital programs to fall within funds from operations due to limited access to capital and its debt ceiling. Arcan also continues to actively pursue options to reduce its debt burden or expand its development program.

The Corporation continues to benefit from positive production results from wells in last year's drilling program and continued water flood response and expansion. Arcan expects fourth quarter production to be in line to meet its annual guidance of 3,500 to 3,800 BOE/d for 2014.

FINANCIAL STATEMENTS AND MANAGEMENT'S DISCUSSION AND ANALYSIS:

Arcan has filed its unaudited condensed interim consolidated financial statements and the accompanying management's discussion and analysis for the three and nine month period ended September 30, 2014, with the Canadian securities regulatory authorities. These filings are available for review at www.sedar.com or www.arcanres.com.

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

Additional information about the Corporation, including the Corporation's annual information form for the year ended December 31, 2013, is available under Arcan's profile on SEDAR at www.sedar.com.

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. In addition, given that the value ratio based on the current price of oil as compared to natural gas is significantly different from the energy equivalent of six to one, utilizing a BOE conversion ratio of 6 Mcf: 1 bbl would be misleading as an indication of value.

Non-IFRS Measurements

Arcan's financial statements have been prepared in accordance with IFRS.

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. 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, less realized economic hedging losses, G&A and interest 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 other companies, and as such, may not be comparable.

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 Nine Months Ended
($000s) September 30, 2014 September 30, 2013 September 30, 2014 September 30, 2013
Cash flow from operating activities 6,981 12,904 24,788 46,835
Change in non-cash working capital and RSU's 995 (1,404 ) 1,773 (8,782 )
Transaction costs(1) 1,051 - 1,080 -
Funds from operations 9,027 11,500 27,641 38,053

(1) Transaction costs are related to the Aspenleaf arrangement and are excluded from Funds from Operations as they are not operational and considered non-recurring.

Arcan determines net debt and working capital as follows:

Net debt and working capital
As At
($000s) September 30, 2014 December 31, 2013
Current assets 15,593 24,030
Less:
Current liabilities (excluding bank debt and convertible debentures) (24,565 ) (28,185 )
Bank loan (144,415 ) (159,423 )
Debentures (154,089 ) (149,733 )
Net debt and working capital (307,476 ) (313,311 )

Arcan determines cash finance expenses as follows:

Cash finance expenses
Three Months Ended Nine Months Ended
($000s) September 30, 2014 September 30, 2013 September 30, 2014 September 30, 2013
Finance expense 6,310 6,080 18,562 18,049
Less:
Accretion on convertible debenture liability 1,465 1,411 4,357 4,191
Accretion on decommissioning obligations 245 193 763 534
Cash finance expenses 4,600 4,476 13,442 13,324

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: current and year-to-date anticipated production and production to be brought on stream; annual and quarterly production; cost improvements as a result of optimization efforts; Arcan's expectations respecting its growth and activities throughout the remainder of 2014, including its continued transition into a sustainable producer of oil reserves; current and future operating costs per barrel; Arcan's ability to execute on its business plans, including plans to take a prudent approach to future development activities and continued focus on the Swan Hills Beaverhill Lake light oil reef; future growth including development, exploration, acquisition, construction and operational activities and related expenditures; the timing and costs of Arcan's winter drilling program; Arcan's liquidity position and the ability of Arcan to execute its business plan therefrom; the timing, method, cost and results of drilling and waterflood operations; waterflood recoveries; future liquidity and financial capacity and resources; the expected benefits of Arcan's hedging program; the resolution of the third-party pipeline outage and the timing thereof; estimates of all-in well cost reductions; estimated additional drilling locations; the completion of the Ethel pipeline and the timing and the effects thereof; expectations relating to increased shareholder value and growth per share; results from operations and financial ratios; the volume and product mix of Arcan's oil and gas production; cost and expense estimates and expectations; oil and natural gas prices; and capital 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 recovery results; the general continuance of current or, where applicable, assumed industry conditions; continuity of reservoir conditions across Arcan's Swan Hills land base; 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; 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: for reasons currently unanticipated, Arcan's production rates may not increase in the manner currently expected; Arcan's capital spending and operational plans for 2014 may not be completed in the timelines anticipated, in the manner anticipated or at all and the execution of such plans may not have the results currently anticipated by Arcan; water injection may not have the impact on production currently anticipated by Arcan; currently unforeseen issues may arise in the continuing integration of the business and operations of Arcan and StimSol Canada Inc. and acquisition may not positively impact Arcan's business and operations in the manner currently anticipated or at all; changes in commodity prices; unanticipated operating results or production declines; waterflood impacts; Arcan may be unable to solve its mechanical/operational issues in the timelines anticipated, in the manner anticipated or at all; shareholder value may not be maximized in the manner suggested 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; inaccuracies in Arcan's calculation of reserve life index; 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; increased costs and expenses; the impact of competitors; reliance on industry partners; reviews of Arcan's credit facility and/or budget may not occur on the timelines anticipated or at all; 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, copies of which are available on Arcan's SEDAR profile at www.sedar.com.

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.
    Terry McCoy
    Chief Executive Officer
    tmccoy@arcanres.com

    Arcan Resources Ltd.
    Douglas Penner
    President
    dpenner@arcanres.com

    Arcan Resources Ltd.
    Suite 2200, 500 - 4th Avenue S.W.
    Calgary, AB T2P 0H7
    (403) 262-0321