WesternZagros Resources Ltd.
TSX VENTURE : WZR

WesternZagros Resources Ltd.

August 29, 2013 07:30 ET

WesternZagros Announces Second Quarter 2013 Operational and Financial Results

CALGARY, ALBERTA--(Marketwired - Aug. 29, 2013) -

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 second quarter ended June 30, 2013, and additional key highlights and activities to date. A summary of the activities, the financial statements the accompanying Management Discussion and Analysis ("MD&A") are available at www.westernzagros.com and on SEDAR at www.sedar.com.

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

"We're continuing testing in the Kurdamir-3 well to provide valuable information on the Kurdamir Discovery as we progress towards commerciality and to help us plan future well locations. In addition, our two Garmian wells, Baram-1 and Hasira-1, are drilling with completion anticipated in late Q4 2013 and early Q1 2014, respectively. Hasira-1 will help us in our development plans for our Sarqala Discovery. The timing of declaration of commerciality and submission of development plans are actively in discussion with our partners and will represent a major step for our Company. We have also completed our first 3D seismic program at Sarqala and the second, our North Garmian, is underway. This is a busy year for WesternZagros."

Exploration and Appraisal Operations - Kurdamir Block

  • Testing of the Oligocene reservoir in the Kurdamir-3 well is ongoing with final results anticipated in late third quarter 2013 or early fourth quarter 2014. As operator of the Kurdamir-3 well, Talisman (Block K44) B.V. ("Talisman") has conducted two DSTs in the deepest zones of the Oligocene reservoir at Kurdamir-3. Log and sample analysis obtained from testing to date has warranted the testing of two other intervals in the upper zones of the Oligocene reservoir. Interim test results from Kurdamir-3 have increased the risk associated with the undiscovered Prospective Resource assessment that the Company carries for the Kurdamir Oligocene reservoir.
  • The acquisition of the Kurdamir Block 3D seismic survey, which comprised 184 square kilometers, has been completed in order to define more clearly the areal extent of the Oligocene, Eocene and Cretaceous reservoirs. Processing and interpretation of the data are currently underway with completion anticipated in the first quarter of 2014. The results will be utilized to select the location of the Kurdamir-4 well to further appraise the extent of the oil discovery in the Oligocene reservoir.

Exploration and Appraisal Operations - Garmian Block

  • The Baram-1 well was spudded on August 13, 2013 and is preparing to drill ahead after setting 20 inch casing at 816 metres. This well is exploring whether the Baram structure is a separate structure from Kurdamir or a potential extension of the oil leg discovered in the Oligocene reservoir of the Kurdamir structure onto the northern portion of the Garmian Block. The Company expects the well to be drilled to planned total depth of 3,800 metres by the end of 2013. If successful (the extension is confirmed and it is oil bearing) the Company believes that this could be the highest impact well of the 2013 drilling program, with the potential to add substantial contingent resources in both the Garmian Block and in the Kurdamir Block. The interim results of Kurdamir-3 testing increase the risk associated with the undiscovered Prospective resource assessment for the Baram-1 well. Alternatively, the Baram structure may be separated from the Kurdamir structure by a fault, in which case the Kurdamir-3 well results have no material impact on the chance of success of Baram-1.
  • The Hasira-1 appraisal and exploration well is currently drilling ahead at 2,886 metres after setting 16 inch casing at 2,047 metres. The next casing point is planned for approximately 3,900 metres just above the Jeribe reservoir. The well is planned to drill to a total depth of approximately 4,100 metres in the Oligocene reservoir. WesternZagros plans to complete the well either in the Jeribe or the Oligocene reservoir depending on testing results. Hasira-1 is anticipated to be completed in late fourth quarter 2013 or early first quarter 2014.
  • The acquisition phase of the 2D seismic survey over the Chwar and Alyan prospects and the 3D seismic survey over the Sarqala and Mil Qasim oil discoveries and the Zardi Complex prospect was completed on April 8, 2013, on time and on budget. Processing and interpretation of the data are currently underway and expected to be completed in the fourth quarter, 2013.
  • The acquisition phase of the 3D seismic survey over the northern portion of the Garmian block commenced on August 6, 2013 in order to define more clearly the areal extent of the Baram and Qulijan structures. Acquisition is anticipated to be completed in the third quarter with processing and interpretation completed by the end of the year.
  • The Company is also beginning to prepare for future exploration wells, with the Qulijan well site prepared and long lead items ordered. Preliminary interpretation and technical evaluations are underway of the Chwar Prospect in the southwest of the Garmian Block, the Alyan Prospect in the west of the Block and the Qula Prospect on the southeast of the Block, Qula is in close proximity to Genel Energy plc's Chia Surkh oil discovery on the adjacent block. The Company will determine its 2014 drilling program in the fourth quarter 2013.

Planning and Development (Garmian and Kurdamir Blocks)

  • Design work is underway on future development plans for the WesternZagros oil discoveries in the Sarqala and Kurdamir areas.
  • On the Garmian Block, the preliminary engineering design of the Sarqala-1 first phase central processing facility with 20,000 bbl/d capacity is advancing. WesternZagros is in active discussions with its co-venturer Gazprom Neft Middle East B.V. ("Gazprom Neft") regarding the timing of the Declaration of Commerciality for the Sarqala discovery. WesternZagros and Gazprom Neft have formed a dedicated team to plan the phased development of the Sarqala Discovery.
  • On the Kurdamir Block, Talisman has staffed a dedicated team which has commenced development planning and the joint venture has created a sub-committee to focus on designing the development plan for the Kurdamir Discovery. Subject to the extended test results from the Kurdamir-3 well and the interpretation of the 3D seismic, the Kurdamir Joint Venture is contemplating a Declaration of Commerciality for the Kurdamir structure by the second quarter of 2014.
  • The Company and its co-venturers continue discussions with the Kurdistan Regional Government ("KRG") to advance plans for the utilization of natural gas from both the Garmian and Kurdamir Blocks. Gas conservation studies are ongoing for pipeline routing, gas re-injection options to maximize oil recovery, and options for temporary and permanent power generation.

Financing

  • On April 4, 2013 the Company completed a marketed private placement of 11,431,422 common shares with Crest Energy International LLC ("Crest") of Houston, USA, and Jasmine Capital (a wholly-owned subsidiary of Richard Chandler Corporation) at Cdn$1.25 per common share for gross proceeds of $14.1 million. This followed the non-brokered private placement of 51 million common shares at Cdn$1.25 per common share and the entering of a loan agreement with Crest for $57.5 million. The net proceeds of the marketed private placement of $13.5 million were used to repay $13.3 million of the principal amount of the loan from Crest plus $0.2 million of accrued interest.
  • On June 18, 2013, the Company completed a non-brokered private placement of Cdn$70 million aggregate principal amount of 4.00% Convertible Senior Unsecured Notes of WesternZagros ("Convertible Notes") to investment funds managed by Paulson & Co. Inc. Effective June 28, 2013 the Company completed a second non-brokered private placement of Cdn$30 million aggregate principal amount of Convertible Notes. A portion of the proceeds from the private placements were used to repay the remaining Crest debt of $44.5 million plus accrued interest as per the terms of the loan agreement with the balance to be used to fund the Company's capital and operating activities.
  • All of the Convertible Notes issued in the second quarter of 2013 have a face value of Cdn$1,000 per note, a coupon of 4 percent per annum, a maturity date of December 31, 2015 and are convertible into common shares of the Company ("Common Shares") at the option of the holder at a conversion price of Cdn$1.45 per share (subject to adjustment in certain events), representing a conversion premium of approximately 27 percent to the thirty day average price for the Common Shares prior to issuance of the Convertible Notes.
  • As at June 30, 2013, WesternZagros had $167.4 million in working capital, excluding the $16.9 million additional non-current portion of the deposit held in trust pertaining to the drilling contract. The Company is fully funded for its currently planned activities.

Corporate

  • The Company is considering the optimal timing to pursue admittance to the Standard Listing segment of the Official List of the London Stock Exchange ("LSE") in order to provide access to an alternate market with a strong understanding of the Middle East and particularly Kurdistan focused companies.
  • On June 3, 2013, Ms. Mary Benassi was appointed to the position of Vice President Human Resources with responsibility for WesternZagros's overall Human Resources function.

Outlook

In accordance with the Kurdamir and Garmian PSCs, the end of the exploration periods are September 1, 2014 and December 31, 2014, respectively, after which the development periods begin. On the Kurdamir Block, the Company's focus will continue to delineate the existing 943 MMBOE of unrisked gross contingent resources (combined mean estimate ("Gross Mean Contingent Resources") and an estimated 1.6 billion BOE of unrisked gross prospective resources (combined mean estimate) ("Gross Mean Prospective Resources"). On the Garmian Block, the Company's focus will be on exploration and appraisal drilling to delineate the following estimated Gross Mean Prospective Resources: 527 MMBOE on the Baram prospect and 463 MMBOE on the Sarqala Discovery. In addition, WesternZagros's work program on the Garmian Block over the next 18 months will also include exploration activities to rank, prioritize and drill the highest ranked additional prospects prior to the end of the exploration period. This ranking will be based on the results of the North and South Garmian Seismic Programs (2D and 3D), the 2013 drilling results from the Company's planned wells on the Garmian and Kurdamir Blocks and other operators' well results on neighbouring blocks. Possible prospects for future exploration drilling in 2014 include Qulijan, Qula, Chwar, and Alyan. At the same time, the Company has started discussions with its respective co-venturers with respect to timing of declaring commerciality and submitting development plans. Subject to the completion of the exploration and appraisal programs, WesternZagros anticipates issuing Declarations of Commerciality before the end of the Exploration period on the Kurdamir and Garmian Blocks of September 1, 2014 and December 31, 2014, respectively.

Kurdamir Block

The Company continues to work with the operator, Talisman, to appraise the giant Kurdamir discovery. Activities in the second half of 2013 will focus on further testing at Kurdamir-3, the processing and interpretation of the 3D seismic, analysis and integration into reservoir models of the data from Kurdamir-3 acquired to date (including cores, log data, oil samples, and water samples), and the preparation and planning required for a declaration of commerciality in 2014 and the start of field development. The remaining tests at Kurdamir-3 will be conducted on the upper part of porous zone of the Oligocene reservoir which was oil-bearing in Kurdamir-2 and which is more than 87 meters below the depths of the gas-oil contact as seen in Kurdamir-2. This testing is anticipated to be completed early in the fourth quarter.

Planned expenditures for the remainder of 2013 include approximately $12-$17 million for the Kurdamir-3 testing program (including the costs of DST#1 and #2 estimated at $7-8 million), $4 million for the remainder of Kurdamir 3D seismic program and processing costs, and $4-8 million for preparation and planning for declaration of commerciality and field development. Contingent projects during 2013 may also include $9 million for a potential Kurdamir-3 sidetrack.

Garmian Block

Sarqala-1 Extended Well Test ("EWT")

WesternZagros expects to recommence the EWT at Sarqala upon KRG approval to gain additional information in order to appraise the discovery for future development. Upon receipt of KRG approval, and the procurement of a suitable rig and tubular equipment, the Company also plans to complete a workover of the Sarqala-1 well in the first half of 2014 in order to allow future EWT production capability to increase beyond the current 5,000 bbl/d. Long lead items have been ordered for this workover.

Engineering work is also underway for permanent facilities to increase EWT production capability at Sarqala including gas conservation measures. In particular, preliminary engineering design of the Sarqala first phase permanent facilities with 20,000 bbl/d capacity is underway in readiness to request engineering procurement and construction tenders at the appropriate time. Work is continuing on opportunities to utilize the associated natural gas from any future crude oil production to minimize the flaring of natural gas.

Hasira-1 Exploration and Appraisal Well

The Hasira-1 appraisal and exploration well was spudded on June 6, 2013 and is currently drilling ahead at 2,886 metres after setting 16 inch casing at 2,047 metres. WesternZagros plans to complete the well either in the Jeribe or the Oligocene reservoir depending on drilling and testing results. Hasira-1 will appraise the extent of the oil leg previously encountered in the Jeribe reservoir, targeting 25-50 MMBOE of Gross Mean Prospective Resources, at the Sarqala-1 well and also to explore the deeper Oligocene reservoir, targeting a further 25-50 MMBOE of Gross Mean Prospective Resources. Significant oil shows were encountered in the Oligocene interval at Sarqala-1 but the Company was unable to evaluate them at that due to wellbore conditions. The Company expects Hasira-1 to take approximately seven months to drill.

Baram-1 Exploration Well

The Baram-1 well was spudded on August 13, 2013 to explore the potential extension of the oil leg discovered in the Oligocene reservoir of the Kurdamir structure onto the northern portion of the Garmian Block. The Company expects the well to reach the planned total depth of 3,800 metres by the end of 2013. If successful and it is oil bearing, the Company believes that this could be the highest impact well of the 2013 drilling program with the potential to add substantial contingent resources in both the Garmian Block and in the Kurdamir Block. The interim results of Kurdamir-3 testing increase the risk associated with the undiscovered Prospective resource assessment for the Baram-1 well. Alternatively, the Baram structure may be separated from the Kurdamir structure by a fault, in which case the Kurdamir-3 well results have no material impact on the chance of success of Baram-1.

The completion of either Baram-1 or Hasira-1 in 2013 would fulfill the Company's obligations under the second exploration sub-period of the Garmian PSC, prior to any extension of such sub-period.

Garmian Seismic Programs

WesternZagros has completed the acquisition phase of a 3D seismic appraisal survey over the Sarqala, Mil Qasim and adjacent Zardi Complex structures as well as the 2D seismic survey at the Chwar and Alyan prospects which are to the north and west-northwest of Sarqala to elevate these low risk, Jeribe oil opportunities to drill ready status. The Company will utilize the 3D information to optimize the number and placement of future appraisal and development well, improve its understanding of fracturing within these structures and further evaluate the Jeribe, Oligocene, Eocene and Cretaceous reservoirs on the southern portion of the Block.

The Company is conducting a 3D seismic program in the second half of 2013 over the northern portion of the Garmian Block targeting the Baram and Qulijan structures utilizing the seismic crew from the Kurdamir/Tophkana program. The 3D data over Baram will assist in determining whether Baram is an extension of the existing Kurdamir Oligocene discovery or a separate structure.

Planned expenditures for the remainder of 2013 include $20 million for the Hasira-1 well, $20 million for the Baram-1 well $4 million for the Sarqala planning and predevelopment activities, $ million for long leads for future wells, $10 million for the planned North Garmian 3D seismic program and $3 million for other costs.

This news release contains certain forward‐looking information relating, but not limited, to operational information, future drilling and testing plans, seismic programs and the timing and costs associated therewith. Forward-looking information typically contains statements with words such as "anticipate", "plan", "estimate", "expect", "potential", "could", or similar words suggesting future outcomes. The Company cautions readers not to 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. In addition, the forward‐looking information is made as of the date hereof, and the Company assumes no obligation to update or revise such to reflect new events or circumstances, except as required by law.

Forward‐looking information is not based on historical facts but rather on management's current expectations and assumptions regarding, among other things, plans for and results of drilling activity and testing programs, future capital and other expenditures (including the amount, nature and sources of funding thereof), continued political stability, and timely receipt of any necessary government or regulatory approvals. 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 exploration; inherent uncertainties in interpreting geological data; changes in plans with respect to exploration or capital expenditures; interruptions in operations together with any associated insurance proceedings; the uncertainty of estimates and projections in relation to costs and expenses and health, safety and environmental risks), the risk of commodity price and foreign exchange rate fluctuations, the uncertainty associated with negotiating with foreign governments and risk associated with international activity. For further information on WesternZagros and the risks associated with its business, please see the Company's Annual Information Form dated March 22, 2013, which is available on SEDAR at www.sedar.com.

In addition, statements relating to "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. 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. "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. 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. "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 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. All resource estimates presented are gross volumes for the indicated reservoirs, without any adjustment for the Company's working interest or encumbrances. A barrel of oil equivalent (BOE) is determined by converting a volume of natural gas to barrels using the ratio of 6 million 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 Company's Statement of Oil and Gas Information contained in its Annual Information Form dated March 22, 2013 ("AIF") filed on SEDAR at www.sedar.com contains additional detail with respect to the resource assessments and includes the significant risks and uncertainties associated with the estimates and the recovery and development of the resources, and, in respect of contingent resources, the specific contingencies which prevent the classification of the resources as reserves. In addition, combined mean estimates of resources which are presented in this MD&A are an arithmetic sum of the mean estimates for individual reservoirs and each such individual mean estimate is the average from the probabilistic assessment that was completed for the reservoir. Readers should refer to the AIF for a detailed breakdown of the high (P10), low (P90) and best (P50) estimates for each of the individual reservoir assessments.

NEITHER THE TSX VENTURE EXCHANGE NOR ITS REGULATION SERVICES PROVIDER (AS THAT TERM IS DEFINED IN POLICIES OF THE TSX VENTURE EXCHANGE) ACCEPTS RESPONSIBILITY FOR THE ADEQUACY OR ACCURACY OF THIS RELEASE.

WESTERNZAGROS RESOURCES WAS RECOGNIZED AS A TSX VENTURE 50® COMPANY IN 2012 AND 2013. TSX VENTURE 50 IS A TRADE-MARK OF TSX INC. AND IS USED UNDER LICENSE.

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