WesternZagros Announces First Quarter 2016 Operational and Financial Results

CALGARY, ALBERTA--(Marketwired - May 19, 2016) -

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

WesternZagros Resources Ltd. (TSX VENTURE:WZR) ("WesternZagros" or "the Company") announced today its operating and financial results for the first quarter ended March 31, 2016. A summary of the activities, the financial statements, and the accompanying Management Discussion and Analysis ("MD&A") are available at www.westernzagros.com and on SEDAR at www.sedar.com. All amounts set out in this news release are in US dollars unless otherwise stated.

• Financial - The Company ended the first quarter with $43.4 million in cash and cash equivalents and an undrawn $200 million credit facility.

• The Company entered into a second letter agreement with Crest Energy International LLC ("Crest") on April 26, 2016 to further extend the timing to draw the US$200 million unsecured credit facility to better meet the Company's capital expenditure profile and reduce near term financing costs.

• Production - With the introduction of new payment arrangements for crude oil sales in Kurdistan and the outage of the export pipeline, production was limited in the first quarter. Subsequent to March 31, 2016, the Company announced the resumption of crude oil production and sales from the Sarqala-1 well during the second quarter.
  
  Due to limitations on production, first quarter gross sales were 704 barrels of light oil per day ("bbl/d"), of which WesternZagros's net oil sales were 174 bbl/d. For 2015, the Sarqala-1 well has averaged approximately 5,100 bbl/d since commencement of production from the well on February 11, 2015. The Sarqala-1 has now produced 2.7 million barrels ("bbl") of cumulative light oil with no formation water and no hydrogen sulphide.

• Revenue - First quarter revenue to WesternZagros was $0.6 million, with an average realized price of $35.70/bbl.

• Development Plans - WesternZagros and its co-venturers, Repsol S.A. ("Repsol"), and Gazprom Neft Middle East B.V. ("Gazprom Neft"), on the Kurdamir and Garmian blocks, respectively, continue to work with the Kurdistan Regional Government ("KRG") in finalizing the respective field development plans.

• Operatorship - Pursuant to the terms of the Garmian Production Sharing Contract ("PSC"), operatorship of the Garmian Block transitioned from WesternZagros to Gazprom Neft effective February 29, 2016.

• Cost Reduction Initiatives - In light of the significant decline in oil price, the current capital market conditions and the transfer of operatorship on the Garmian Block, the Company continued to focus on strict cost management across the entire spectrum of its activities. These efforts included: optimizing capital investments, reducing staff and renegotiating contracts with service suppliers.

• Corporate - The Board of Directors of the Company transitioned the role of Chairman of the Board from Mr. Fred Dyment to Mr. David Boone as of January 1, 2016 and appointed Mr. James Houck to the new role of Vice Chairman.
  
  The Company announced organizational changes to further reduce costs and refocus the Company as a co-venturer in the development of its Garmian and Kurdamir Blocks. The Company has closed its offices in the Kurdistan Region but will continue its support and oversight of the operator's activities on both blocks. In addition the Company has completed a further reduction of its workforce in Calgary including the elimination of the positions of Vice President of Exploration and Reservoir Development and Vice President and General Manager Kurdistan.

Commenting on the first quarter results and subsequent events, WesternZagros's Chief Executive Officer Simon Hatfield said:

"Our disciplined efforts to reduce costs, minimize spending, and conserve cash delivered good results during the first quarter. Liquidity remains a key focus in 2016 and the resumption of production and sales is an important achievement. We are encouraged by the consistent monthly payment from the KRG to oil producers and the recently increased international oil prices. Managing our cash balance is the primary lever, of which the latest Crest loan amendments provide additional flexibility and reduce financing costs.

"We are actively protecting our cash balance and seeking additional forms of financing in an attempt to ensure that we are prepared to build on the success of our significant discoveries on both the Kurdamir and Garmian Blocks. Going forward, we are working closely with our co-venturers, Repsol and Gazprom Neft, who bring strong technical and financial resources in advancing our respective developments in conjunction with the Kurdistan Regional Government."

Operations Summary

WesternZagros's assets comprise two contract areas, the Kurdamir and Garmian blocks, with significant oil and natural gas discoveries.

Kurdamir Block

The Kurdamir co-venturers are progressing the negotiations with the KRG in advancing the Kurdamir FDP. In the quarter, the co-venturers have:

• Progressed the field development plan with the co-venturers seeking alignment on facility design, drilling programs and future oil development including negotiations of the contracts necessary to operate a shared gas facility for the Kurdamir and Topkhana Blocks;
• Received Engineering, Procurement and Construction ("EPC") bids from two engineering firms for the construction and commissioning of a 150 mmcf/d gas plant and associated liquid handling facilities to be shared across the Kurdamir and Topkhana Blocks. Clarifications with the bidders are underway and an award is anticipated in the second half of 2016; and
• Advanced negotiations with the KRG for a gas sales agreement for the delivery and sale of natural gas from Phase 1 of the Kurdamir FDP to supply gas for local power generation.

Garmian Block

• New payment arrangements were announced by the KRG on February 1, 2016 to compensate International Oil Companies ("IOC's") on the basis of their contractual revenue entitlement under the PSCs, with payment expected on the tenth of the month following crude delivery. Crude oil pricing terms are now linked to average monthly Brent crude prices less quality and transportation differentials.
• The transition of operatorship from WesternZagros to Gazprom Neft was completed effective February 29, 2016.
• Sales for the first quarter of 2016 were limited due to the introduction of the new payment arrangements for crude oil sales in Kurdistan and the outage of the Kurdistan export pipeline. As such, production at Sarqala-1 well was 704 bbl/d for this period. Since inception, the well has produced over 2.7 MMbbls of light oil with no formation water and no hydrogen sulphide. Subsequently, the Company announced the resumption of crude oil production and sales under the auspices of the KRG in the second quarter. Gross production rates are expected to average approximately 5,000 bbl/d for the remainder of the year. The co-venturers continue to work with the KRG in securing final approval of the FDP which will include a solution to manage the associated natural gas produced from the Sarqala field and the most effective strategy to manage asphaltene accumulations in the producing wellbores. Subject to FDP approval, the Sarqala-2 well is anticipated to be spud following the contracting of drilling services. The Sarqala-2 well site has been prepared and long lead equipment has been secured.

Corporate Management

• The Company announced organizational changes to further reduce costs and refocus the Company as a co-venturer in the development of its Garmian and Kurdamir Blocks. The Company has closed its offices in the Kurdistan Region but will continue its support and oversight of the operator's activities on both blocks. In addition the Company has completed a further reduction of its workforce in Calgary. As part of these changes Michael Tinkler, Vice President of Exploration and Reservoir Development, and Bill Jack, Vice President and General Manager Kurdistan, left the Company in March 2016.
• After eight years as Chairman of the Board of Directors of the Company, Mr. Fred Dyment stepped down from this role on December 31, 2015 and Mr. David Boone assumed the Chairman position effective January 1, 2016. Mr. Dyment will continue as a Board member until the Company's 2016 annual general meeting. In addition, Mr. James Houck became Vice-Chairman effective January 1, 2016 which is a new role created by the Board as part of this transition in board leadership. Messrs. Boone and Houck have both served as directors of the Company since 2007.

Financial

• As at March 31, 2016, WesternZagros had $43.4 million in cash and cash equivalents and an undrawn $200 million credit facility, which is available in two tranches and subject to certain conditions precedent to drawdown: Tranche 1 - $150 million available and Tranche 2 - $50 million available beginning in June 2016.
• Subsequent to March 31, 2016, the Company and Crest entered into a second letter agreement to extend the date by which the Company must deliver to Crest the first drawdown notice for each of the two tranches under the Loan Agreement and reverses the ordering of these tranches to better align with the Company's anticipated capital needs. The drawdown deadline for the $50M Tranche has been extended from the original date of June 1, 2016 to November 1, 2016. In addition, the maturity date for this tranche has also been extended from June 1, 2018 to November 1, 2018. The drawdown deadline for the $150M Tranche has been extended from May 1, 2016 to April 1, 2017, with a corresponding extension of the maturity date for this tranche from October 1, 2017 to April 1, 2019.
• Due to restricted pipeline and ongoing pricing negotiations between the co-venturers and the MNR, oil sales during the first quarter of 2016 were limited to 704 bbl/d. The Company recognized revenue of $0.6 million for the quarter.
• The Company capitalized $1.5 million of exploration and evaluation ("E&E") for the first quarter of 2016, related mainly to WesternZagros's 60 percent share of Kurdamir Block appraisal costs.
• The Company capitalized its 50 percent share of applicable oil and natural gas assets expenditures to property, plant and equipment related to Garmian Block activities of $4.6 million, which was comprised of Sarqala-2 planning costs, production facilities upgrades and related in-country supervision and office costs. Costs related to Sarqala-1 well operations and the operation of production facilities have been accounted for as operating costs.

Outlook

In 2016, the Company anticipates the average daily productive capacity of Sarqala-1 will range from 4,500 to 5,000 bbl/d. Assuming continuous production for the remaining nine months of 2016, and an average Brent price of $35 to $45 per barrel, WesternZagros estimates 2016 revenues of $5 to $8 million.

WesternZagros will continue to focus on strict cost management while securing KRG approval of the phased development plans for the Kurdamir and Garmian blocks. The Company has $43.4 million in cash and cash equivalents as at March 31, 2016 to advance the field development plans with its co-venturers and secure KRG approval. The Company estimates capital and operating expenditures of $35 to $45 million for 2016 to operate the Sarqala production operations, advance the respective development plans on the Kurdamir and Garmian blocks with its co-venturers and for general and administrative costs for the Kurdistan joint venture offices and the WesternZagros head office.

As previously announced, the Company has extended the timing for the draw down dates under the Crest Loan Agreement providing the Company with additional flexibility and reducing potential financing costs as it works to finalize its development plans and capital programs. In addition, the Company is reviewing all financing alternatives including but not limited to, the completion of an alternative debt financing or equity financing, or the farm down or sale of some of the assets of the Company to advance the developments. The Company will provide further guidance on the anticipated quantum and timing of capital expenditures for the respective Kurdamir and Garmian projects as the field development plans are finalized and approved.

About WesternZagros Resources Ltd.

WesternZagros is an international natural resources company focused on acquiring properties and exploring for, developing and producing crude oil and natural gas in Iraq. WesternZagros, through its wholly-owned subsidiaries, holds a 40 percent working interest in two Production Sharing Contracts with the Kurdistan Regional Government in the Kurdistan Region of Iraq. WesternZagros's shares trade in Canada on the TSX Venture Exchange under the symbol "WZR".

This news release contains certain forward-looking statements relating to, but not limited to, expected working capital, expected capital and other commitments and the timing thereof, expectations regarding the necessity for further funding and the timing and potential sources thereof, operational information, future development concepts and plans and capacity of facilities and expected production rates, revenues, field netback, and petroleum costs (as defined in each Production Sharing Contract ("PSC")). Forward-looking information typically contains statements with words such as "anticipate", "estimate", "expect", "potential", "could", or similar words suggesting future outcomes. The Company cautions readers and prospective investors in the Company's securities to not place undue reliance on forward-looking information as, by its nature, it is based on current expectations regarding future events that involve a number of assumptions, inherent risks and uncertainties, which could cause actual results to differ materially from those anticipated by WesternZagros.

Forward looking information is not based on historical facts but rather on management's current expectations as well as assumptions made by, and information currently available to management, concerning, among other things, development plans and concepts, future capital and other expenditures (including the amount, nature and sources of funding thereof), the ability to identify appropriate financing transactions, the outcomes of future well operations, results of drilling activity and testing, future capital and other expenditures (including the amount, nature and sources of funding thereof), the availability of debt financing or access to alternate financing, the continued ability to sell production in the domestic or export markets and the payments to be received in connection therewith, anticipated operating costs, future economic conditions, future currency and exchange rates, continued political stability, continued security in the Kurdistan Region, timely receipt of any necessary co-venturer, government or regulatory approvals, the successful resolution of any disputes, the Company's continued ability to employ qualified staff and to obtain equipment in a timely and cost efficient manner and the participation of the Company's co-venturers in joint activities.
In addition, budgets are based upon WesternZagros's current development plans and anticipated costs, both of which are subject to change based on, among other things, the outcome of negotiations with co-venturers and the government, the actual outcomes of well operations and the installation and commissioning of facilities, unexpected delays, availability of future financing and changes in market conditions. Although the Company believes the expectations and assumptions reflected in such forward-looking information are reasonable, they may prove to be incorrect. Forward-looking information involves significant known and unknown risks and uncertainties. A number of factors could cause actual results to differ materially from those anticipated by WesternZagros including, but not limited to, risks associated with the oil and gas industry (e.g. operational risks in development and production; inherent uncertainties in interpreting geological data; changes in plans with respect to capital expenditures; interruptions in operations together with any associated insurance proceedings; the uncertainty of estimates and projections in relation to timing, costs and expenses and health, safety and environmental risks), the risk of commodity price and foreign exchange rate fluctuations, risks relating to domestic refining capacity and continuing ability to access the domestic market, risks relating to the ability to access export markets and receive payments in accordance with the PSC terms on a timely basis, the uncertainty associated with any dispute resolution proceedings, the uncertainty associated with negotiating with foreign governments and risk associated with international activity, including the lack of federal petroleum legislation and ongoing political disputes and recent terrorist activities in Iraq in particular.

Readers are cautioned that the foregoing list of important factors is not exhaustive and that these factors and risks are difficult to predict. The forward-looking statements contained in this news release are made as of the date of this news release and, except as required by law, WesternZagros does not undertake any obligation to update publicly or to revise any of the included forward-looking statements, whether as a result of new information, future events or otherwise. The forward-looking statements contained in this news release are expressly qualified by this cautionary statement. See the "Risk Factors" section of the Company's Annual Information Form dated March 16, 2016 ("AIF") filed on SEDAR at www.sedar.com for a further description of these risks and uncertainties facing WesternZagros. Additional information relating to WesternZagros is also available on SEDAR at www.sedar.com, including the Company's AIF.

Non-IFRS Measures

Field netback is a non-IFRS measure that represents the Company's working interest share of oil sales, after deducting royalties and operating expenses. Management believes that the field netback is a useful measure to analyze operating performance and provides an indication of the Company's results of business activities prior to other income and expenses. Field netback does not have a standard meaning under IFRS and may not be comparable to similar measures used by other companies. It should not be considered in isolation or as a substitute for measures of performance prepared in accordance with IFRS such as total income (loss) or cash flow from (used in) operating activities. See the "Financial Performance" section of the Company's MD&A dated May 19, 2016 for a reconciliation of field netback.

Reserves and Resources Advisory

In addition, statements relating to reserves and other resources contained herein are deemed to be forward-looking statements, as they involve the implied assessment, based on certain estimates and assumptions that the resources described can be economically produced in the future. Future net revenue values are estimated values only and do not represent fair market value. There is no assurance that the forecast prices and cost assumptions, the initial phases of the development plans as submitted to the Kurdistan Regional Government ("KRG") and anticipated future phases contemplated in completing the full field development utilized in such estimated values will be attained and variances could be material. The reserve and resource estimates provided herein are estimates only and there is no assurance that the estimated reserves and other resources will be recovered. Actual reserves and other resources may be greater than or less than the estimates provided herein. Terms related to resource classifications referred to herein are based on the definitions and guidelines in the Canadian Oil and Gas Evaluation Handbook which are as follows. The reserves have been evaluated by Sproule International Limited ("Sproule"). Resources other than reserves have been estimated by the Company and audited by Sproule.

"Reserves" are estimated remaining quantities of oil and natural gas and related substances anticipated to be recoverable from known accumulations, as of a given date, based on (a) analysis of drilling, geological, geophysical and engineering data, (b) the use of established technology and (c) specified economic conditions which are generally accepted as being reasonable and shall be disclosed. Reserves are classified as Proved, Probable or Possible according to the degree of certainty associated with the estimates. "Proved Reserves" are those Reserves that can be estimated with a high degree of certainty to be recoverable. It is likely that the actual remaining quantities recovered will exceed the estimated Proved Reserves. If probabilistic methods are used, there should be at least a 90 percent probability that the quantities actually recovered will equal or exceed the estimated Proved Reserves. "Probable Reserves" are those additional Reserves that are less certain to be recovered than Proved Reserves. It is equally likely that the actual remaining quantities recovered will be greater or less than the sum of the estimated Proved plus Probable (2P) Reserves. If probabilistic methods are used, there should be at least a 50 percent probability that the quantities actually recovered will equal or exceed the sum of the estimated 2P Reserves. "Possible Reserves" are those additional Reserves that are less certain to be recovered than Probable Reserves. It is unlikely that the actual remaining quantities recovered will exceed the sum of the estimated Proved plus Probable plus Possible (3P) Reserves. If probabilistic methods are used, there should be at least a 10 percent probability that the quantities actually recovered will equal or exceed the sum of the estimated 3P Reserves.

"Contingent Resources" are those quantities of petroleum estimated, as of a given date, to be potentially recoverable from known accumulations using established technology or technology under development, but which are not currently considered to be commercially recoverable due to one or more contingencies. Contingent Resources have an associated chance of development (economic, regulatory, market and facility, corporate commitment or political risks). The Contingent Resources estimates referred to herein have not been risked for the chance of development. There is no certainty that the Contingent Resources will be developed and, if developed, there is no certainty as to the timing of such development or that it will be commercially viable to produce any portion of the Contingent Resources.

"Prospective Resources" are those quantities of petroleum estimated, as of a given date, to be potentially recoverable from undiscovered accumulations by application of future development projects. Prospective Resources have both an associated chance of discovery (geological chance of success) and a chance of development (economic, regulatory, market, facility, corporate commitment or political risks). The chance of commerciality is the product of these two risk components. Unless otherwise indicated, the estimates referred to herein have not been risked for either the chance of discovery or the chance of development. There is no certainty that any portion of the Prospective Resources will be discovered. If a discovery is made, there is no certainty that it will be developed or, if it is developed, there is no certainty as to the timing of such development or that it will be commercially viable to produce any portion of the Prospective Resources.

Gross Block resource estimates presented herein represent the total volumes for the indicated reservoirs attributable to 100 percent of the relevant block, without any adjustment for the Company's working interest therein whereas the Working Interest (Gross) or Company Gross resource estimates presented represent the Company's 40 percent working interest (operating or non-operating) share before deduction of royalty petroleum, profit petroleum, production bonuses and capacity building support payments pursuant to the provisions of the applicable Production Sharing Contract.

Best Estimate (P50) or (2C) is considered to be the best estimate of the quantity that will actually be recovered. It is equally likely that the actual remaining quantities recovered will be greater of less than the best estimate. If probabilistic methods are used, there should be at least a 50 percent probability that the quantities actually recovered will equal or exceed the best estimate.

A barrel of oil equivalent (BOE) is determined by converting a volume of natural gas to barrels using the ratio of 6 thousand cubic feet (Mcf) to one barrel. BOEs may be misleading, particularly if used in isolation. A BOE conversion ratio of 6 Mcf:1 BOE is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. Given that the value ratio based on the current price of oil as compared to natural gas is significantly different from the energy equivalency of 6:1, utilizing a conversion on a 6:1 basis may be misleading as an indication of value.

The section "Statement of Reserves and Other Oil and Gas Information" (including Schedule A) contained in the Company's Annual Information Form dated March 16, 2016 ("AIF") filed on SEDAR at www.sedar.com, contains additional detail with respect to the Company's resource assessments and the estimates of net present value associated with its Reserves. This section includes the significant risks and uncertainties associated with the volume estimates and the recovery and development of the resources, the forecast prices and cost assumptions, descriptions of the applicable projects and field development plans ("FDPs") and the specific contingencies which prevent the classification of the Contingent Resources as Reserves.

As indicated above, unless otherwise indicated, the estimates of Contingent Resources and Prospective Resources contained in this document are presented on an unrisked basis. Readers should refer to the AIF for the associated risked estimates of Contingent Resources and Prospective Resources. Such risked estimates are based upon the Company's estimates of chance of commerciality set forth therein which involves assessing various risks based upon a number of assumptions and other factors. While the Company believes that such estimates and underlying assumptions are reasonable, many of these assumptions are beyond the Company's control, are subject to change and may not, over time, prove to be accurate. As such, the actual level of various risks (including those currently identified and additional risks which may be identified in the future) could prove to be greater and the chance of commerciality lower than currently estimated and such differences could be material.

No additional projects have been defined at this time in respect of the Contingent Resources and Prospective Resources pertaining to other reservoirs for the Garmian and Kurdamir blocks since these reservoirs do not form part of the initial phases of the field development plans.

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