Arcan Resources Ltd.
TSX VENTURE : ARN

Arcan Resources Ltd.

August 26, 2014 18:52 ET

Arcan Increases Second Quarter Production; Focuses on Cost Reductions and Debt Position

CALGARY, ALBERTA--(Marketwired - Aug. 26, 2014) -

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

Arcan Resources Ltd. (TSX VENTURE:ARN) (Arcan or the Corporation) increased oil and natural gas production during the second quarter from the first quarter of 2014 and continued to focus on overall cost reductions and opportunities to address its debt position.

"We continued to make progress towards increasing production, streamlining our operations and reducing operational costs in the second quarter," said Terry McCoy, Arcan's CEO. "Our production increased from wells drilled last winter during the fourth quarter of 2013 and the first quarter of 2014 that were brought on-stream in the latter part of the first quarter. Our production analysis shows that we have managed to achieve a further stabilization of our base decline rates due to the success of our waterflood operations."

"We expect our production rates will slip marginally in the third quarter due to the seasonal nature of the Swan Hills area ahead of the start of our winter drilling program, but we are on track to meet our annual guidance of 3,500 to 3,800 barrels of oil equivalent per day for 2014. We are currently finalizing plans to drill up to nine wells this winter and will be targeting prospects in proximity to the four highly successful wells from our first quarter drilling program. We will also be entering the upcoming winter season with a rig that has been modified to meet our drilling requirements and we expect this will help further reduce our drilling costs. Our drilling program is expected to begin in late September and we plan to run the rig right through winter to maximize efficiency," McCoy said.

On a quarter-over-quarter basis, production increased by ten percent, while production and exploration operating netbacks per BOE grew by four percent and operating costs per BOE fell three percent. The Corporation realized consistent reduced capital and operating costs, but continues to look for cost reductions in all areas of operations. On a quarter-over-quarter basis, funds from operations decreased by 29 percent, largely due to realized losses on commodity contracts and a $3.0 million acid supply settlement payment that occurred in the quarter. General and administrative (G&A) expenses increased from the first quarter as a result of costs associated with the proposed plan of arrangement (the Arrangement) with Aspenleaf Energy Limited (Aspenleaf) and an employee retention program that was introduced in the quarter.

"During the quarter we evaluated opportunities to recapitalize Arcan and implemented staff retention programs, which impacted our financial results," said Doug Penner, Arcan's President. "With the termination of the arrangement on August 20, we will be revisiting our efforts for strategic initiatives to allow us to accelerate development of our light oil assets and to help alleviate our debt burden. We will examine places to optimize operations and reduce costs."

FINANCIAL AND OPERATING HIGHLIGHTS
Three Months Ended Six Months Ended
June 30, 2014 June 30, 2013 June 30, 2014 June 30, 2013
Financials ($000s except per share amounts)
Petroleum and natural gas revenue 35,275 32,507 66,767 63,707
Pumping and stimulation services revenue 207 779 587 1,766
Cash flow from operating activities 11,443 13,108 17,791 24,116
Funds from operations (1) 7,478 12,781 17,973 22,481
Per share basic and diluted(1)(3) 0.08 0.13 0.18 0.23
Net income (loss) (6,325 ) 1,058 (12,911 ) (1,908 )
Per share basic and diluted (3) (0.06 ) 0.01 (0.13 ) (0.02 )
Capital expenditures, net - cash(1) 3,143 8,296 19,987 25,384
Total assets 600,274 616,869 600,274 616,869
Total liabilities 387,419 368,930 387,419 368,930
Debenture face value 171,250 171,250 171,250 171,250
Shareholders' equity 212,855 247,939 212,855 247,939
Bank loan 154,527 164,471 154,527 164,471
Net debt and working capital (1) 323,466 317,953 323,466 317,953
Operating
Production:
Crude oil and NGLs (barrels (bbls) per day) 3,986 4,004 3,811 4,041
Natural gas (thousand cubic feet (Mcf) per day) 713 401 672 256
BOE per day (6:1) (2) 4,105 4,071 3,923 4,084
Average realized price:
Crude oil and NGLs ($ per bbl) 96.55 88.85 95.94 86.88
Natural gas ($ per Mcf) 3.84 3.68 4.74 3.30
Combined price per BOE ($ per BOE) 94.42 87.76 94.02 86.18
Netback ($ per BOE)(1)
Petroleum and natural gas sales 94.42 87.76 94.02 86.18
Pumping and stimulation services revenue 0.56 2.10 0.83 2.39
Royalties (16.37 ) (17.48 ) (16.77 ) (15.56 )
Production and operating expenses (15.83 ) (16.56 ) (16.10 ) (17.04 )
Cost of sales for pumping and stimulation services (0.99 ) (5.66 ) (0.94 ) (5.46 )
Consolidated operating netback ($ per BOE) (1) $ 61.79 50.16 $ 61.04 50.51
Realized economic hedging gains (losses) - cash (11.03 ) 0.90 (10.49 ) 1.20
G&A (9.56 ) (7.58 ) (7.53 ) (6.64 )
Other - - - -
Finance expenses - cash (12.12 ) (12.22 ) (12.46 ) (11.97 )
Corporate netback(1) 29.08 31.26 30.56 33.10
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
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.

FINANCIAL HIGHLIGHTS

  • Operating netbacks increased by three percent to $61.79 per barrel of oil equivalent (BOE) in the second quarter from $60.20 per BOE in the first quarter, and increased 23 percent from $50.16 in the second quarter of 2013.

  • Funds from operations decreased 29 percent to $7.5 million during the second quarter from $10.5 million in the first quarter. In year-over-year results, funds from operations fell from $12.8 million in the second quarter of 2013. The decrease from the prior year was primarily a result of realized losses on commodity contracts and a $3.0 million commitment settlement made in the second quarter of 2014.

  • The credit limit under the Corporation's credit facility is $180 million. The credit facility matures on May 28, 2015, unless Arcan and its lenders agree to an amendment, renewal or extension. The $180 million borrowing base is subject to a semi-annual review by the syndicate that will occur on or before October 31, 2014.

  • Invested $3.1 million of net capital during the second quarter, in line with its reduced summer budget. Arcan has weighted its capital program to the winter exploration months, which resulted in capital spending falling below cash flow to date. Capital spending was also lower than the $8.3 million in the second quarter of 2013.

  • Increase in G&A expenses in the second quarter to $9.56 per BOE, up from $5.27 per BOE in the first quarter, and $7.58 per BOE in the second quarter of 2013. The increase is a result of transaction costs associated with the proposed arrangement with Aspenleaf and staff retention initiatives.

  • Arcan terminated its existing hydrochloric acid supply contract held by its non-core subsidiary Stimsol Canada Inc. (Stimsol) for payment of $3.0 million. These supply contracts were listed as future contractual obligations of $20.3 million at year-end 2013 and the first quarter of 2014.

OPERATIONAL HIGHLIGHTS

  • Production increased by ten percent in the second quarter to average 4,105 BOE per day (BOE/d), up from 3,740 BOE/d in the first quarter. In the second quarter of 2013 production averaged 4,071 BOE/d. Arcan anticipates drilling nine offsetting wells during the upcoming winter drilling program.

  • Reduced operating costs by three percent to $15.83 per BOE in the second quarter from $16.40 in the first quarter, and lower than the $16.56 in the second quarter of 2013.

  • Further reductions in operating costs are expected to materialize during the fourth quarter of 2014 and into 2015. Arcan expects further reductions in production and operating expenses as it completes the tie-in of the Ethel oil sales line and the electrification expansion in the Ethel field. Arcan sold the Ethel oil sales pipeline and related equipment for approximately $5.2 million, subsequent to the end of the second quarter. The 14.5 kilometre line was constructed as part of the Ethel pipeline corridor in 2013. The line is expected to reduce trucking and associated costs from the Ethel battery. The electrification expansion project in the Ethel field is expected to be completed towards the end of the first quarter of 2015.

  • Waterflood investment continues as Arcan converted three wells at a combined cost of under $1.0 million to support water injection. One of the wells converted to water injection was in the northern portion and two wells were in the southern portion of the Ethel field. Arcan has also applied for further expansions to the Ethel and Deer Mountain Unit #2 enhanced recovery waterflood schemes in 2014.

  • Arcan entered into an agreement to lease the remaining Stimsol assets following the end of the second quarter, consisting of acid blending facilities, until May 31, 2015. The lessee will cover all the costs of operating Stimsol, pay Arcan a leasing fee on a monthly basis and pay Arcan a percentage of any net profits from the operation of Stimsol. The lessee also has an option to purchase either Stimsol or the assets of Stimsol, subject to certain conditions, during the term of the lease agreement.

OUTLOOK

Arcan is focused on the efficient development of its long-life, conventional light oil play in the Swan Hills. The Corporation holds an extensive multi-year inventory of low-risk drilling opportunities, with the majority of prospects drillable from existing pad sites. The Corporation will continue to expand application of the waterflood process expecting to de-risk specific core properties and improve production decline rates.

The Corporation will continue its pursuit of its objective of delivering sustainable and profitable production. In particular, it will continue to design its capital programs within funds from operations. The Corporation will seek strategic alternatives to reduce its debt burden, including opportunities to share development costs with third parties through joint ventures and farm-outs. This is intended to advance project development while reducing capital investment and improving project returns.

Arcan continues to work toward reductions to company-wide costs. Completion of the tie-in of the Ethel oil sales line and expansion of electrical power service in the Ethel field, combined with other initiatives are expected to help reduce operating costs towards the target of $15.00 per BOE by the end of 2014. Arcan has instituted a careful and disciplined evaluation structure for drilling completions operations. Recent improvements have stabilized well costs at approximately $4.5 million to $5.3 million per well. With the intent to further reduce well costs, Arcan has worked collaboratively to modify and upgrade a drilling rig for the winter drilling season that is expected to further improve efficiencies. The Corporation is seeking to drill, complete and tie-in wells at a cost of $4.3 million to $5.0 million.

Arcan reduced its capital expenditures in the second quarter, which reductions have continued through the current quarter when site access is challenging due to wet conditions. Expenditures will increase again in late September with the start of the winter drilling program. This higher activity level will continue through the fourth quarter of 2014 and into 2015. The Board of Directors is currently reviewing a winter drilling program that proposes drilling five wells in the second half of 2014 and an additional four wells in the first quarter of 2015. The drilling program will prioritize prospects in proximity to the successful wells drilled in last year's program.

In the first quarter of 2014, Arcan used the last of the toted hydrochloric acid that was purchased by Stimsol in 2012. This followed the shutdown of Stimsol's pumping and stimulation division in mid-2013. Arcan has entered into an agreement to lease its Stimsol assets, Swan Hills acid blending facility, laboratory and all related equipment. The lessee also has a right to acquire Stimsol on certain terms. Arcan does not expect any further Stimsol inventory write-downs in 2014.

Arcan expects third quarter production to average between 3,650 and 3,850 BOE per day, in line with its annual guidance of 3,500 to 3,800 BOE/d for 2014. The Corporation has benefitted from the production results from wells in last year's drilling program, continued water flood response and reduced operating costs.

Arcan has identified employee retention as a key risk in its ability to retain and develop highly skilled individuals and key management employees. In August 2014, the Corporation implemented a retention program for all employees of the Corporation which will pay a total of approximately $3.4 million, of which one half is payable on March 31, 2015 and one half is payable on August 31, 2015.

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 six month periods ended June 30, 2014, and these documents will be 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. 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 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, 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 Six Months Ended
($000s) June 30, 2014 June 30, 2013 June 30, 2014 June 30, 2013
Cash flow from operating activities (per IFRS) 11,443 13,108 17,791 24,116
Change in non-cash working capital and RSU's (3,965 ) (327 ) 182 (1,635 )
Funds from operations 7,478 12,781 17,973 22,481

Arcan determines net debt and working capital as follows:

Net debt and working capital
As At
($000s) June 30, 2014 December 31, 2013
Current assets 14,013 24,030
Less:
Current liabilities (excluding bank debt and convertible debentures) (30,329 ) (28,185 )
Bank loan (154,527 ) (159,423 )
Debentures (152,623 ) (149,733 )
Net debt and working capital (323,466 ) (313,311 )

Arcan determines cash finance expenses as follows:

Cash finance expenses
Three Months Ended Six Months Ended
($000s) June 30, 2014 June 30, 2013 June 30, 2014 June 30, 2013
Finance expense (per IFRS) 6,236 6,106 12,256 11,975
Less:
Accretion on convertible debenture liability 1,453 1,396 2,891 2,780
Accretion on decommissioning obligations 254 185 518 348
Cash finance expenses 4,529 4,525 8,847 8,847

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", "will", "intend", "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: current and year-to-date anticipated production and production to be brought on stream; annual and quarterly production; Arcan's expectations respecting its growth and activities throughout the remainder of 2014, including its objective of becoming a sustainable producer of oil reserves; current and future operating costs per barrel; Arcan's execution of its business plans and strategy, including the pursuit of strategic alternatives and debt repayment efforts; future growth including development, exploration, acquisition, construction and operational activities and related expenditures; Arcan's drilling and waterflood program and drilling location inventory; the Ethel pipeline and benefits thereof; results from operations; cost and expense estimates and expectations; StimSol inventory writedowns; 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: Arcan's status as a going concern; 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 on terms acceptable to management of Arcan or at all; 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; 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.

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