Arcan Resources Ltd.

TSX VENTURE : ARN


Arcan Resources Ltd.

May 12, 2014 08:10 ET

Arcan Increased Production, Funds From Operations and Lowered Costs in First Quarter of 2014

Recent drilling program results exceed production expectations

CALGARY, ALBERTA--(Marketwired - May 12, 2014) -

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Arcan Resources Ltd. (TSX VENTURE:ARN) ("Arcan" or the "Corporation") increased production in the first quarter of 2014 by approximately seven percent, generated a 51 percent increase in funds from operations and reduced costs, as compared to the fourth quarter of 2013.

"The results from the first quarter 2014 are reflective of our ongoing improvements in production, cost management and capital efficiencies" said Chief Executive Officer Terry McCoy. "We continue to pursue strategic initiatives, such as non-core asset sales, that will help reduce our debt in order to increase the pace of development and capitalize on these improvements and efficiencies."

"Arcan's production rose to 3,740 barrels of oil equivalent ("BOE") per day in the first quarter of 2014. This was above our target of 3,600 BOE per day. The elevated production was based on the four new wells that Arcan completed this winter and are performing above our high case expectations. These production rates were achieved despite third party facility issues and severe weather conditions that negatively impacted January production, resulting in average production of 2,868 BOE per day. First quarter production also compensated for the sale of Arcan's Virginia Hills property at the end of 2013 which had contributed approximately 234 BOE per day. We believe this production growth will continue in the second quarter of 2014, and anticipate average production of approximately 4,000 to 4,200 BOE per day. Based on initial production results from the four new wells that commenced production during the first quarter of 2014, as well as continued waterflood response, Arcan is raising its annual average production guidance range to 3,500 to 3,800 BOE per day from 3,400 to 3,800 BOE per day. Furthermore, based on the successful results of our recent drilling campaign, we anticipate expanding next winter's drilling program scheduled from September to 2014 to March 2015 to include eight to ten offsetting wells that will target these higher production rates."

Arcan's netbacks improved by 40 percent during the quarter to $60.20 over the fourth quarter of 2013 as a result of higher production and improved prices for crude oil, liquids and natural gas. Funds from operations also increased 51 percent over the fourth quarter of 2013 to $10.5 million. The Corporation's capital spending program remained on target during the quarter, with Arcan investing $16.9 million in the successful winter drilling program. Arcan also continued to focus on lowering expenses, which resulted in reductions to operating costs of 12 percent to $16.40 per BOE and general and administrative ("G&A") expenses by 28 percent to $5.27 per BOE as compared to the fourth quarter of 2013.

"The significant production results from our winter drilling program, combined with improvements on all key metrics in the first quarter of 2014, are starting to build positive traction," said President Doug Penner. "We expect our drilling targets to maximize production rates from future wells. We anticipate moderate increases in production into 2015 as we ramp up new wells. This continued success is based on our long-term investment in both infrastructure and waterflood recovery techniques, as well as the improvements we have made to our drilling and fracturing processes."

"The winter drilling program was the most successful in our history. Arcan's management team has clear, shared objectives and we are executing effectively on a well-defined plan. We continue to evaluate sales of our light oil assets, joint ventures and farm-outs to pay down our debt and address our outstanding debentures."

Three Months Ended
March 31, 2014 March 31, 2013 Dec 31, 2013
Financials ($000s except per share amounts)
Petroleum and natural gas revenue 31,492 31,200 25,811
Pumping and stimulation services revenue 380 987 1,815
Cash flow from operating activities 6,348 11,008 9,059
Funds from operations (1) 10,495 9,700 6,944
Per share basic and diluted (1) (2) 0.11 0.10 0.07
Loss (6,586 ) (2,966 ) (17,988 )
Per share basic and diluted (2) (0.07 ) (0.03 ) (0.18 )
Capital expenditures, net - cash 16,844 17,088 (2,024 )
Total assets 610,302 616,411 609,071
Total liabilities 391,135 370,741 383,368
Debenture face value 171,250 171,250 171,250
Shareholders' equity 219,167 245,670 225,703
Bank loan 150,751 149,898 159,423
Net debt and working capital (1) 325,280 317,788 313,311
Operating
Production:
Crude oil and NGLs (barrels ("bbls") per day) 3,635 4,080 3,433
Natural gas (thousand cubic feet ("Mcf") per day) 631 110 429
BOE per day(3) 3,740 4,098 3,504
Average realized price:
Crude oil and NGLs ($ per bbl) 95.27 84.93 81.36
Natural gas ($ per Mcf) 5.78 1.91 3.03
Combined price per BOE ($ per BOE) 93.57 84.60 80.07
Three Months Ended
March 31, 2014 March 31, 2013 Dec 31, 2013
Netback ($ per BOE)(1)
Petroleum and natural gas sales 93.57 84.60 80.07
Pumping and stimulation services revenue 1.13 2.68 5.63
Royalties (17.22 ) (13.65 ) (17.01 )
Production and operating expenses (16.40 ) (17.52 ) (18.58 )
Cost of sales for pumping and stimulation services (0.88 ) (5.25 ) (7.09 )
Consolidated operating netback ($ per BOE) (1) 60.20 50.86 43.02
Realized economic hedging gains (losses) - cash (9.89 ) 1.51 (2.33 )
Cash G&A (1) (5.27 ) (5.69 ) (7.37 )
Cash finance expenses(1) (12.83 ) (11.72 ) (13.88 )
Corporate netback (1) 32.21 34.96 19.44
Common Shares (000's)
Shares outstanding 97,860 97,860 97,860
Weighted average - basic and diluted(2) 97,860 97,860 97,860
Notes:
(1) The reader is referred to the section "Non-IFRS Measurements".
(2) Basic and diluted weighted average shares are the same as the Corporation incurred a loss in these periods.
(3) The reader is referred to the section "Legal Advisories".

FINANCIAL HIGHLIGHTS

  • Operating netbacks increased by 40 percent to $60.20 per BOE in the first quarter of 2014 from $43.02 per BOE in the fourth quarter of 2013, and increased 18 percent from $50.86 in the first quarter of 2013.

  • Funds from operations increased 51 percent to $10.5 million during the first quarter of 2014 over the fourth quarter of 2013. In year-over-year results, funds from operations increased eight percent from $9.7 million in the first quarter of 2013.

  • Arcan decreased the draw on its bank line by $8.7 million, reflecting its ongoing efforts to pay down debt. Arcan currently has $155.2 million drawn on its credit facilities, down from $159.4 million at the end of 2013, but slightly up from $149.9 million at this time last year. Arcan has completed its winter capital spending program and expects a restricted summer program will contribute to further reductions in the debt level.

  • Invested $16.9 million of capital ($16.8 million net of dispositions) during the first quarter of 2014 as part of the successful winter drilling program. The amount spent in the first quarter of 2014 was down from $21.6 million ($17.1 million net of dispositions) during the first quarter a year earlier. As budgeted, capital spending was higher than funds from operations of $10.5 million because Arcan has weighted its capital program to the winter months and expects capital spending to fall below funds from operations in the summer months of 2014.

  • Decrease in G&A expenses of 28 percent to $5.27 per BOE from $7.37 per BOE in the fourth quarter of 2013. G&A expenses were lower by seven percent from $5.69 per BOE in the first quarter of 2013.

  • Arcan eliminated the hydrochloric acid inventory held by its non-core subsidiary Stimsol Canada Inc. As a result, the Corporation held no acid inventory at the end of the first quarter of 2014. Furthermore, Arcan terminated its existing hydrochloric acid supply contract that contained a reservation fee to be paid by Arcan up to a maximum of $20.3 million if no additional hydrochloric acid was purchased over the period of the contract. In order to terminate this contract, Arcan agreed to pay the supplier thereunder $1.5 million on or before March 31, 2014 and $1.5 million on or before January 1, 2015. Furthermore, a portion of the proceeds from any sale of StimSol is required to be paid to the supplier.

OPERATIONAL HIGHLIGHTS

  • The Q1 2014 drilling program production results continue to exceed expectations from four new wells. The wells have average production rates of 388 BOE per day per well since they came on production and are currently producing approximately 350 BOE per day per well. Drilling and completing these four wells cost an average of $4.7 million each, which is down 23 percent from Arcan's cost of drilling and completing a well in 2012. Arcan anticipates drilling eight to ten offsetting wells during next winter's drilling program.

  • Average production increased seven percent to 3,740 BOE per day during the first quarter of 2014, up from the previous quarter's 3,504 BOE per day. Production was down from 4,098 BOE per day in the first quarter of 2013. This was primarily due to the sale of Arcan's Virginia Hill property in the fourth quarter of 2013, which had contributed approximately 234 BOE per day of production. Arcan's production rates have remained relatively flat over the past six quarters, ranging from 3,500 to 4,100 BOE per day. Production was approximately 4,553 BOE per day during March 2014 and 4,500 BOE per day for April 2014.

  • Reduced operating costs by 12 percent to $16.40 per BOE in the first quarter of 2014 from $18.58 per BOE in the fourth quarter of 2013, and down six percent from $17.52 in the first quarter of 2013. Arcan expects further reductions in operating expenses as a result of the electrification infrastructure completed for Deer Mountain Unit #2. The Corporation is planning an extension of electrical service to the northern portion of Ethel and to the Ethel battery, expected to be completed in the second half of 2014.

  • Further reductions in operating costs are expected as Arcan has entered into an agreement to sell the Ethel oil sales pipeline for approximately $5.2 million, with closing expected in the second quarter of 2014. The 14.5 kilometre pipeline was constructed as part of the Ethel pipeline corridor in 2013. The final commissioning of the line is expected to be completed in the second half of 2014, when commissioned the pipeline is expected to reduce trucking and associated costs by an estimated $1.50 per BOE.

  • Waterflood investment continues as Arcan converted two wells at a combined cost of less than $1 million to support water injection in the southern portion of Ethel. Arcan has applied for further expansions to the Ethel and Deer Mountain Unit #2 enhanced recovery waterflood schemes.

OUTLOOK

Arcan remains focused on the efficient development of its long-life, conventional light oil play in the Swan Hills area of Alberta. Arcan is advancing its core objective of delivering sustainable and profitable production with capital programs designed within funds from operations and is doing so in an environment of limited access to capital. Arcan is also working to deliver further reductions in operating costs and is seeking to drive operating costs towards $15.00 per BOE by the end of 2014.

Arcan's management team has undertaken a careful and disciplined review of every aspect of drilling and completions operations. The resulting improvements have brought total well costs down to an average of $4.7 million per well from approximately $6.1 million per well and Arcan continues its efforts to drive these costs even lower.

The Corporation expects to reduce capital expenditures during the second and third quarters when well site access is typically more challenging due to wet weather conditions. Expenditures will increase again in the latter portion of the third quarter and throughout the fourth quarter of 2014. During the next two quarters Arcan will focus on upgrading its Ethel oil battery as well as extending electrical service from Deer Mountain through the northern portion of the Ethel Field to the Ethel oil battery.

Arcan anticipates drilling 5 gross (4.0 net) locations in the second half of 2014 as part of its winter drilling program which is scheduled to commence in September 2014. These wells are part of the Corporation's 2014/2015 winter drill period where Arcan plans to double its 2013/2014 winter program to drill a total of 10 gross (9.0 net) locations. The majority of next winter's expected drilling locations are in proximity to the four recent, highly successful wells. Arcan's forward drilling programs are being guided by thorough geological mapping of its assets based upon detailed reservoir and well performance models.

Arcan expects second quarter production to average between 4,000 to 4,200 BOE per day, and has updated its expectations for full-year production to average 3,500 to 3,800 BOE per day. Positive factors impacting 2014 production thus far include excellent initial production results from Arcan's latest drilling program, continued waterflood response and expansion of the amount of production supported by waterflood.

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 month period ended March 31, 2014, with the Canadian securities regulatory authorities. These filings are available for review at www.sedar.com and www.arcanres.com.

ANNUAL AND SPECIAL GENERAL MEETING

Arcan's annual and special meeting is scheduled for June 24, 2014, at 3:00 PM in the McMurray Room of the Petroleum Club, located at 319 - 5th Avenue SW, Calgary, Alberta.

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. Arcan also presents "funds from operations per share", whereby funds from operations are divided by the basic and diluted weighted average number of common shares of Arcan (each, a "share") outstanding to determine per share amounts. Arcan also presents "net debt and working capital" which should not be considered an alternative to, or more meaningful than, "current liabilities" or "working capital". Net debt and working capital is calculated by subtracting the current liabilities (excluding bank debt), bank debt, and convertible debentures from current assets. Arcan also presents "cash general and administrative expenses" ("Cash G&A") which should not be considered an alternative to, or more meaningful than, "general and administrative expenses". Cash G&A is calculated by subtracting capitalized stock based compensation included in general and administrative expenses, from general and administrative expenses. Arcan also presents "cash finance expenses" which should not be considered an alternative to, or more meaningful than, "finance expenses". Cash finance expenses is calculated by subtracting accretion of convertible debenture liability and accretion of decommissioning obligations, from finance expenses.

Operating netbacks are presented on an operating segment and consolidated basis. "Operating netbacks" for the exploration and production segment represent Arcan's petroleum and natural gas revenue, less royalties and production and operating expenses. "Operating netbacks" for the pumping and stimulation segment represent pumping and stimulation services revenue, less cost of sales for pumping and stimulation services. "Consolidated operating netbacks" represent the sum of the operating netbacks for the exploration and production and pumping and stimulation segments. "Corporate netbacks" represent Arcan's consolidated operating netback, plus other revenue, plus or minus realized economic hedging gains or losses, less Cash G&A and cash finance expenses 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 may not be comparable to similar measures presented by other companies. Management believes that funds from operations and both operating and corporate netbacks are useful supplemental measures as they indicate Arcan's ability to fund future growth through capital investment and/or to 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.

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
($000's) March 31, 2014 March 31, 2013
Cash flow from operating activities (per IFRS) 6,348 11,008
Change in non-cash working capital 4,147 (1,308 )
Funds from operations 10,495 9,700

Arcan determines net debt and working capital as follows:

Net debt and working capital
As At
($000s) March 31, 2014 December 31, 2013
Current assets 16,089 24,030
Less:
Current liabilities (excluding bank debt and convertible debentures) 39,447 28,185
Bank loan 150,751 159,423
Debentures 151,171 149,733
Net debt and working capital (325,280 ) (313,311 )

Arcan determines Cash G&A as follows:

Cash G&A
Three Months Ended
($000's) March 31, 2014 March 31, 2013
General and administrative expenses (per IFRS) 1,773 2,097
Less:
Stock based compensation - -
Cash G&A 1,773 2,097

Arcan determines cash finance expenses as follows:

Cash finance expenses
Three Months Ended
($000's) March 31, 2014 March 31, 2013
Finance expense (per IFRS) 6,020 5,869
Less:
Accretion of convertible debenture liability 1,438 1,384
Accretion of decommissioning obligations 264 162
Cash finance expenses 4,318 4,323

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'', ''will'', ''should'', ''believe'', ''plans'' 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: Arcan's production and guidance in respect thereof; Arcan's cash flow, cost management and capital efficiencies; Arcan's strength of daily operations; Arcan's growth and activities throughout the remainder of 2014; operating costs per barrel; Arcan's business plans, strategic initiatives and objectives and its ability to execute thereon; the timing, method, cost and results of drilling and waterflood operations; estimated additional drilling locations; Arcan's debt level; the infrastructure development and the timing and effects thereof; the sale of the Ethel oil sales pipeline and the timing of closing thereof; cost and expense estimates and expectations; 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; the application and modification of horizontal, multi-stage fracture technologies including the application of additional fracture stimulation stages may not have the impact currently anticipated by Arcan; 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; StimSol Canada Inc. may not 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.

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