Arsenal Energy Inc.

Arsenal Energy Inc.

March 26, 2008 01:20 ET

Arsenal Energy Inc. Releases Year End Results

CALGARY, ALBERTA--(Marketwire - March 25, 2008) -


2007 was a year of retrenchment and reorganization for Arsenal Energy (TSX:AEI)(FRANKFURT:A1E) and the results are already showing. Arsenal has made a strategic decision to shift its focus from high-risk international exploration to regional exploration and development in North America. The company also moved to a more conservative financial model, reducing leverage on its balance sheet.


- Average production of 1709 boe/d

- Yearend P+P reserves of 5.477 mmboe

- 2007 F&D costs of $21.65/boe on a proved basis and $10.43/boe on a P+P basis

- Yearend bank debt + debenture + working capital deficiency of $20,731,800

- Sold Tower Creek for $15.5 million

- Q4 drilling success at Evi/Galahad/Consort


Arsenal had a net loss of $23,379,000 in 2007. Arsenal's quarterly results have fluctuated significantly in the past eight quarters due to one-time items such as ceiling test write-downs, adjustments arising from tax audits and recognition of impairment of properties and goodwill. Moving forward these items will become less significant and have a lesser impact, if any, on operations.

Three Months Ended Year Ended
FINANCIAL December 31 December 31
2007 2006 2007 2006
Loss (15,379,974) (22,938,690) (23,379,000) (23,787,148)
Per share- basic
and diluted (0.20) (0.33) (0.31) (0.44)

Funds from operations 134,648 1,048,820 3,955,266 7,817,054
Per share -basic 0.00 0.03 0.05 0.13
Per share- diluted 0.00 0.03 0.05 0.12
Debt (excluding
convertible debentures) 17,391,760 19,184,717 17,391,760 19,184,717
Operating costs per Boe 25.16 18.06 22.28 17.26
Operating netbacks per Boe 21.73 21.48 17.43 19.99
Shares Outstanding
End of Period 83,698,042 73,642,173 83,698,042 73,642,173
Weighted average -basic 76,295,862 70,154,281 74,419,541 62,033,289
Weighted average
-diluted 76,824,388 71,312,150 74,948,067 63,191,158
Shares trading
High 0.50 1.01 1.06 1.88
Low 0.33 0.72 0.33 0.72
Close 0.41 0.78 0.41 0.78
Average daily volume 126,300 12,500 140,200 137,000
Daily Production
Crude oil (bbl) 1,256 1,618 1,310 1,329
NGL's (bbl) 42 43 45 55
Natural gas (mcf) 2,318 1,930 2,124 2,124
Total (Boe) 1,685 1,982 1,709 1,760
Realized commodity
prices ($ Cdn.)
Total crude oil (bbl) 63.60 47.06 54.14 50.19
NGL's (bbl) 53.97 51.11 57.25 45.91
Natural gas (mcf) 6.73 7.77 6.50 5.97
Average (Boe) 56.95 47.07 51.09 46.98
Reference Pricing
WTI Cushing ($US/bbl) 90.68 60.21 72.31 66.22
AECO C daily spot
($ Cdn./mcf) 6.15 6.99 6.45 6.54
Foreign Exchange
($Cdn./$US) 0.98 1.14 1.07 1.13


A key change in Arsenal's exploration strategy was a move away from promoted industry deals towards internally generated grassroots plays. This strategy builds core properties and core competencies, which should deliver competitive advantages and lower costs. As a result of the new strategy, the company has established three key plays at Evi Alberta, East Central Alberta, and Stanley North Dakota.


Three successful wells were drilled at Evi during 2007. In addition, the company completed a strategic acquisition that included an oil battery and a substantial undeveloped land base covered by 3D seismic. Current production of approximately 200 bbls/d net is expected to be tied into the battery in 2008 Q1, and Arsenal plans to drill two (.75 net) wells during 2008 Q1. In addition, Arsenal has an additional 6 gross drill locations in inventory. The increasing production combined with reduced operating costs resulting from the battery and pipelines should improve Arsenal's overall operating costs and netbacks.


The Lower Mannville sandstones of East Central Alberta offer attractive full cycle economics for small niche players like Arsenal. Arsenal currently produces approximately 400 boe/d of medium grade oil from three properties, and two significant discoveries were made at Galahad and Consort late in 2007.

The Galahad 100% WI well encountered a targeted new pool Ellerslie oil zone as well as an uphole Glauconitic gas zone. The gas zone has been completed and tie in operations are underway. Arsenal anticipates production of 1mmcf/d by the end of March.

At Consort, the company drilled a 100% WI Ellerslie medium gravity oil discovery. The well has been on production for two months at 135 bbls/d of oil. Arsenal has proprietary 3D seismic over the discovery and has identified three additional development locations. The development wells and the associated infrastructure are increases to Arsenal's 2008 capital program which Arsenal intends to fund from its recently announced private placement.

The Company has also developed plays on four other East Central Alberta properties. Arsenal has three drill ready locations at Wildmere, two at Provost, two at Princess and four at Alderson.


Arsenal produces approximately 100 boe/d of light oil from the Mississippian at Stanley. In addition the Company holds 1896 net acres of Bakken deep rights. Bakken drilling continues all around Arsenal's land base, with production results released to date varying from 100 bbls/d to 2000 bbls/d per well The Company has budgeted three gross (0.5 net) Bakken wells for 2008.


The company has retained Canaccord Capital to explore strategic alternatives for the company's Egyptian concession. The process should conclude sometime in the second quarter of 2008.


Arsenal obtained an evaluation of its reserves at December 31, 2007. The AJM report was prepared in accordance with National Instrument 51-101, Standards of Disclosure for Oil and Gas Activities ("NI 51-101"). The AJM report forecast WTI oil prices of $85 US per barrel and gas prices of AECO $6.90 CDN per mcf for 2008.

Summary of Oil and Gas Reserves and Net Present Values
(as of December 31, 2007)
Crude Oil Natural Gas NGL Equiv.
(mbbl) (mmcf) (mbbl) (mboe)
Forecast Prices and Costs
Marketable reserves
Proved producing 2,038 3,345 220 2,815
Proved developed non-producing 42 753 4 172
Proved undeveloped 185 688 22 321
Total Proved 2,265 4,785 246 3,309
Probable additional 1,551 3,051 110 2,169
Total proved plus probable 3,815 7,837 356 5,477

Undisc. 5% 10% 15%
Present Values Before Income Taxes (000$) (CDN)

Proved producing 87,160 64,740 53,364 46,403
Proved developed non-producing 4,718 3,993 3,445 3,019
Proved undeveloped 9,169 5,953 4,432 3,523
Total Proved 101,047 74,686 61,242 52,945
Probable additional 80,856 40,005 26,340 19,746
Total proved plus probable 181,904 114,691 87,582 72,692

Arsenal Year/Year NAV
31 Dec 06 31 Dec 07

P+P PV10 (MM$) 77.1 87.6

Land (56K net acres) 1.5 1.5

Seismic 0.3 0.8

Total Debt (MM$) -28.5 -20.7
NAV (MM$) 50.4 69.2

Shares Outstanding
basic (MM) 73.3 83.7

NAV/Share ($/share) 0.69 0.83

Arsenal Yearend 2007 Reserve Reconciliation
Acquired / Adds /
31/12/06 Sold Production Revisions 31/12/07
TP (Mboe) 3512 -293 -550 639 3308
TP value (MM$) 55.8 -15.2 -11.9 32.5 61.2
P+P (boe) 5213 -667 -550 1481 5477
P+P value (MM$) 77.1 -15.2 -11.9 37.6 87.6

2007 Finding and Development Costs
Reserve Net Cap Cap
Adds Exp 2007 F&D Costs Required All in F&D

Total Proved 346 6.96 20.11 0.53 21.65

Proved + Probable 814 6.96 8.55 1.53 10.43


Arsenal's production mix is dominated by heavy oil and low rate light oil. This mix yields higher BOE operating costs relative to Arsenal's peers. Over the medium term, production from new wells and disposition of small non-core properties is expected to average down Arsenal's operating expenses.


In the second quarter of 2007 Arsenal made a strategic decision to adopt a more conservative financial model. The company sold its Tower Creek property for $15.5 million and applied the proceeds against working capital. Over the medium term the company will target a total debt plus working capital to cash flow ratio of one to one. The anticipated improvement is expected to primarily be a result of increases in cash flow from increased production, lighter crude oil and cost reductions.


Arsenal is 85% weighted to oil production with approximately half of that being heavy oil. During 2007 the Company realized a price of $51.09/boe. Higher oil and gas prices as well as lower heavy differentials have increased March 2008 prices to approximately $85/boe for Arsenal's blend of production.


Higher oil prices and lower differentials should translate into much improved operating netbacks and cash flow in the first quarter. The average production quality mix should also improve. The Company's reorganization is nearing completion and the status of our Egyptian assets should be known by the end of Q2.

In February of 2008 R.K. Howard, VP Land, left Arsenal to pursue other interests. The Company thanks him for his contribution. In March, Gjoa Taylor joined Arsenal as VP of Land. Gjoa brings 20 years of experience, most recently as manager of land negotiations at Primewest Energy Trust. Also in March, Paul Lawrence agreed to join Arsenal as Chief Financial Officer. Paul brings 30 years of industry experience, in both the public and private sectors.

Going forward, the Company's capital requirements will be much more aligned with its cash flow. The Company has a very promising exploration program underway for 2008, and over the longer term it is confident that its team can continue to develop and grow its high return portfolio of projects.


Certain statements and information contained in this press release, including but not limited to management's assessment of Arsenal's future plans and operations, production, reserves, revenue, commodity prices, operating and administrative expenditures, funds from operations, capital expenditure programs and debt levels contain forward-looking statements. All statements other than statements of historical fact may be forward looking statements. These statements, by their nature, are subject to numerous risks and uncertainties, some of which are beyond Arsenal's control including the effect of general economic conditions, industry conditions, changes in regulatory and taxation regimes, volatility of commodity prices, escalation of operating and capital costs, currency fluctuations, the availability of services, imprecision of reserve estimates, geological, technical, drilling an processing problems, environmental risks, weather, the lack of availability of qualified personnel or management, stock market volatility, the ability to access sufficient capital from internal and external sources and competition from other industry participants for, among other things, capital, services, acquisitions of reserves, undeveloped lands and skilled personnel that may cause actual results or events to differ materially from those anticipated in the forward looking statements. Such forward-looking statements although considered reasonable by management at the time of preparation, may prove to be incorrect and actual results may differ materially from those anticipated in the statements made and should not unduly be relied on. These statements speak only as of the date of this press release. Arsenal does not intend and does not assume any obligation to update these forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law. Arsenal's business is subject to various risks that are discussed in its filings on the System for Electronic Document Analysis and Retrieval (SEDAR).

In this press release per barrel of oil equivalent ("boe") amounts may be misleading, particularly if used in isolation. A boe conversion ratio has been calculated using a conversion rate of six thousand cubic feet of natural gas to one barrel of oil (6 Mcf: 1 bbl) and is based on an energy equivalency conversion method applicable at the burner tip and does not represent a value equivalency at the wellhead.

Arsenal Energy's complete Annual Information Form, Management Discussion and Analysis, and financials are posted on SEDAR or Arsenal's website

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