Arcan Resources Ltd.
TSX VENTURE : ARN

Arcan Resources Ltd.

November 20, 2013 08:58 ET

Arcan Third Quarter Results on Target; Production Stable and Reserves Independently Verified

CALGARY, ALBERTA--(Marketwired - Nov. 20, 2013) - Arcan Resources Ltd. (TSX VENTURE:ARN) ("Arcan" or the "Corporation") reports that production and reserves remained stable. The third quarter financial metrics illustrate Arcan's progress towards bringing capital spending within cash flow while delivering consistent results. Arcan expects to achieve its 2013 production target of 3,800 to 4,000 barrels of oil equivalent ("BOE") per day and capital spending of $40.8 million, which is in line with its guidance.

"We're successfully demonstrating cost controls, while optimizing our development and production," said Chief Executive Officer Terry McCoy. "This is evident in our latest production and reserves figures, which have remained stable over the last year despite a dramatic reduction in our capital spending. We also continue to focus on reducing expenses and capital while realizing production efficiencies towards an end goal of strengthening our balance sheet. To that end we continue to review alternatives, such as monetizing assets, further joint ventures, farm-outs or other arrangements, that would enhance its valuation and financial flexibility while accelerating development of its multi-year inventory of low-risk drilling opportunities."

Arcan has received an updated mid-year independent reserves evaluation showing that its reserves are largely unchanged from the 2012 year-end reserves report. This updated reserves report was prepared with an effective date of July 1, 2013 and was supplied to Arcan's banking syndicate, which reviewed the information and confirmed the Corporation's existing borrowing base at $190 million.

FINANCIAL HIGHLIGHTS

Three Months Ended Nine Months Ended
September 30,
2013
September 30,
2012
September 30,
2013
September 30,
2012
Financials ($000s except per share amounts)
Petroleum and natural gas revenue 33,317 29,111 97,024 104,705
Pumping and stimulation services revenue 420 447 2,186 4,532
Cash flow from operating activities 8,655 5,432 32,711 38,934
Funds from operations (1) 10,009 (1,589 ) 32,490 31,421
Per share basic and diluted(1)(3) 0.10 (0.02 ) 0.33 0.32
Net income (loss) (4,622 ) (27,480 ) (6,530 ) (21,797 )
Per share basic and diluted (3) (0.05 ) (0.28 ) (0.07 ) (0.22 )
Capital expenditures, net - cash 5,039 12,398 30,423 164,828
Total assets 612,031 640,443 612,031 640,443
Total liabilities 368,599 367,012 368,599 367,012
Debenture face value 171,250 171,250 171,250 171,250
Shareholders' equity 243,432 273,431 243,432 273,431
Bank loan 164,408 164,504 164,408 164,504
Net debt and working capital (1) 318,053 290,178 318,053 290,178
Operating
Production:
Crude oil and NGLs (barrels ("bbls") per day) 3,616 3,861 3,898 4,603
Natural gas (thousand cubic feet ("Mcf") per day) 662 339 393 460
BOE per day (6:1) (2) 3,726 3,917 3,964 4,679
Average realized price:
Crude oil and NGLs ($ per bbl) 99.70 81.71 90.89 82.76
Natural gas ($ per Mcf) 2.41 2.86 2.80 2.65
Combined price per BOE ($ per BOE) 97.17 80.78 89.66 81.66
Netback ($ per BOE)(1)
Petroleum and natural gas sales 97.17 80.78 89.66 81.66
Pumping and stimulation services revenue 1.23 1.24 2.02 3.53
Royalties (18.60 ) (14.94 ) (16.53 ) (12.47 )
Production and operating expenses (18.87 ) (24.00 ) (17.62 ) (20.32 )
Cost of sales for pumping and stimulation services (3.27 ) (5.01 ) (4.77 ) (4.34 )
Consolidated operating netback ($ per BOE) (1) 57.66 38.07 52.76 48.06
Realized economic hedging gains (losses) - cash (6.21 ) 1.27 (1.14 ) (0.39 )
Cash general and administrative expenses ("Cash G&A") (8.44 ) (8.88 ) (7.21 ) (7.61 )
Other - - - -
Finance expenses - cash (13.06 ) (11.46 ) (12.31 ) (8.41 )
Corporate netback(1) 29.95 19.00 32.10 31.65
Common Shares (000's)
Shares outstanding 97,860 97,860 97,860 97,860
Weighted average - basic 97,860 97,859 97,860 97,818
Weighted average - diluted 97,860 97,859 97,860 97,818

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.
  • Net capital expenditures were within funds from operations in the third quarter of 2013 and for the first nine months of 2013. Arcan has maintained relatively flat production through the past five quarters despite reducing it's a capital spending program to operate within funds from operations.
  • Funds from operations increased by three percent to $32.5 million for the nine months ended September 30, 2013, up from $31.4 million for the nine months ended September 30, 2012 despite significantly lower capital expenditures. For the third quarter of 2013, funds from operations were $10.0 million compared to $12.8 million during the second quarter of 2013 and up from negative funds from operations of $1.6 million in the third quarter of the 2012.
  • Reduced net capital expenditures by 82 percent to $30.4 million for the nine months ended September 30, 2013, down from $164.8 million for the nine months ended September 30, 2012. For the third quarter of 2013, net capital expenditures were $5.0 million which was comprised of the drilling of 2 wells (1.5 net). This compares to $8.3 million in the second quarter of 2013 and $12.4 million of net capital expenditures during the third quarter of 2012.
  • Cash G&A expenses decreased by 20 percent to $7.8 million for the nine months ended September 30, 2013, down from $9.8 million for the nine months ended September 30, 2012. For the third quarter of 2013, Cash G&A expenses were $2.9 million including one-time costs associated with closing down StimSol Canada Inc.'s pumping and stimulation division. This compares to $2.8 million in the second quarter of 2013 and $3.2 million incurred in the third quarter of 2012.
  • Arcan's draw on its bank line has remained consistent from the second quarter of 2013 and also consistent with September 30, 2012. Arcan has drawn $164.4 million on its credit facility of $190.0 million as at the end of the third quarter of 2013. Arcan intends to fund future expenditures from cash flow and focus on debt reduction through the remainder of 2013 and into 2014.
  • Arcan continued to build on its hedging program in the quarter to add security to its product pricing over the next three years.

OPERATIONAL HIGHLIGHTS

  • Production averaged 3,964 BOE per day for the nine months ended September 30, 2013, and was 3,726 BOE per day during the third quarter of 2013. This compares to 4,679 BOE per day for the nine months ended September 30, 2012, and 3,917 BOE per day during the third quarter of 2012. The year over year reduction reflects initial well rates, which have since moderated, from the large capital program during early 2012 and included production from assets that were subsequently sold. Third quarter 2013 production dipped slightly after being impacted by a third party oil pipeline failure in July, as well as normal and expected seasonal factors. Third party facility issues resulted in significant production shut-ins during early October with a few additional days anticipated at the end of November, which are expected to impact the fourth quarter of 2013. In spite of external facility and pipeline issues, Arcan estimates it is on track to reach its annual average production target of 3,800 and 4,000 BOE per day.
  • Reduced production and operating expenses by thirteen percent to $17.62 per BOE for the nine months ended September 30, 2013, down from $20.32 per BOE for the nine months ended September 30, 2012. For the third quarter of 2013 production and operating expenses were $18.87 per BOE, well below the same seasonal quarter of 2012 where production and operating expenses were $24.00 per BOE. The cause for the reductions is ongoing operating efficiencies being implemented in the field. Costs were up modestly from the second quarter of 2013, where they were $16.56 per BOE, mainly due to the effects of seasonality.
  • Continued waterflood response in Deer Mountain Unit #2 demonstrating a flat production profile from August 2012 through the third quarter of 2013 with no drilling activity. The waterflood in Ethel was expanded in the second quarter of 2012 to include two new patterns and these patterns are exhibiting positive early results.
  • Drilling costs continue to decline following the careful and disciplined review of drilling and completions operations earlier in 2013. Arcan continues to implement improvements to various aspects of its field operations with the goal of drilling and completing wells at costs between $4.5 million to $5.0 million.
  • The Ethel pipeline corridor is being finalized with the natural gas sales and emulsion pipelines operational and the connection of the oil sales pipeline expected in 2014.
  • Completed the drilling of two (1.5 net) budgeted wells in the quarter. The first well was 100% Arcan and the second well was the last farm-out option well where Arcan pays 20 percent of the costs to retain a 48 percent ownership.
  • Upcoming drilling activities include one well scheduled for December 2013 and an additional three to five wells planned for drilling in the first quarter of 2014. The wells will target priority locations throughout Arcan's land base and will be drilled using funds from existing cash flow.

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 periods ended September 30, 2013, 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 and development of light oil resources located in the Western Canadian 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. In addition, given that the value ratio based on the current price of oil as compared to natural gas is significantly different from six to one, utilizing a BOE conversion ratio of six Mcf to one bbl would be misleading as an indication of value.

Additional information about the Corporation, including the Corporation's AIF for the year ended December 31, 2012, is available under Arcan's profile on SEDAR at www.sedar.com.

Non-IFRS Measurements

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

Readers are cautioned that this news 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 its current assets.

Operating netbacks are presented on an operating segment and consolidated basis. "Operating netbacks" for the exploration and production segment, or "exploration and production netbacks", represent Arcan's petroleum and natural gas revenue, less royalties and production and operating expenses. "Operating netbacks" for the pumping and stimulation segment, or "pumping and stimulation operating netbacks", 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 interest 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, net debt and working capital 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 news 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. Please see the section "Financial Highlights" for reconciliations 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 Nine Months Ended
($000s) September 30,
2013
September 30,
2012
September 30,
2013
September 30,
2012
Cash flow from operating activities (per IFRS) 8,655 5,432 32,771 38,934
Change in non-cash working capital and RSU's 1,354 (7,021 ) (281 ) (7,513 )
Funds from operations 10,009 (1,589 ) 32,490 31,421

Arcan determines net debt and working capital as follows:

Net debt and working capital
As At
($000s) September 30,
2013
September 30,
2012
Current assets 20,341 46,823
Current liabilities (excluding bank debt and convertible debentures) 25,678 29,751
Bank loan 164,408 164,504
Debentures 148,308 142,746
Net debt and working capital (318,053 ) (290,178 )

Forward-Looking Information and Statements

This news 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'', "considering", "would", ''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 news release contains forward-looking information and statements pertaining to, among other things, the following: anticipated commodity prices for both oil and natural gas; the potential of significant asset divestitures, including a sale of the core Deer Mountain Unit #2 asset; the ability of Arcan to pay down debt and retain financial flexibility; the timing, method and results of drilling and waterflood operations; anticipated production volumes; impact of and estimated waterflood recoveries; ability of Arcan to spend capital below operating cash flow during the balance of 2013 and on a going-forward basis; future revenues; future liquidity and financial capacity and resources including the availability of such resources; the impact of third party facility issues on production; Arcan's expected cash flows; results of operations and financial ratios; the impact of asset sales on production; the finalization of the Ethel pipeline corridor and the timing thereof; the volume and product mix of Arcan's oil and gas production; matters relating to the joint venture agreement; Arcan's risk management programs; Arcan's 2013 capital program including the costs associated therewith; Arcan's pursuit and examination of asset divestments, joint ventures, farm-outs and other similar arrangements, as well as sales of non-core assets; expectations respecting the financing and completion of Arcan's capital program; the expected benefits of continued infrastructure development; and the expected benefits of Arcan's hedging program.

The forward-looking information and statements contained in this news 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; new well completions; 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 land base; availability of sources to fund Arcan's capital and operating requirements as needed; the continuance of existing and, in certain circumstances, proposed tax and royalty regimes; expectations respecting Arcan's reserves generally; the continuance of laws and regulations relating to environmental matters; ability to retain key employees and executives; assumptions relating to the cost of future wells; the ability of Arcan to operate a capital expenditure program that is less than funds from operations; 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 news 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; 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; third party pipeline issues may adversely impact Arcan in a manner or magnitude which is currently unanticipated; changes in tax or environmental laws or royalty rates; increased debt levels or debt service requirements; reductions to the amounts available under Arcan's credit facility as well as amendments thereto that are unfavourable to Arcan; inaccurate estimation of Arcan's oil and gas reserves volumes; limited, unfavourable or no access to debt or equity capital markets; increased costs and expenses; the impact of competitors; reliance on industry partners; circumstances may arise, including changes in accounting policies, regulations or economic conditions, which could change the assumptions, estimates or expectations or the information provided; shareholder value may not be maximized in the manner suggested by Arcan or at all; there may be circumstances where, for unforeseen reasons, a reallocation of funds may be necessary as may be determined at the discretion of Arcan and there can be no assurance as at the date of this news release as to how those funds may be reallocated; should any one of a number of issues arise, Arcan may find it necessary to alter its current business strategy and/or capital expenditure program; and certain other risks detailed from time to time in Arcan's public disclosure documents including, without limitation, those risks identified in this news release, and in Arcan's annual information form for the year ended December 31, 2012, copies of which are available on Arcan's SEDAR profile at www.sedar.com.

The forward-looking information and statements contained in this news release speak only as of the date of this news 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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