WesternZagros Resources Ltd.
TSX VENTURE : WZR

WesternZagros Resources Ltd.

August 11, 2016 07:30 ET

WesternZagros Announces Second Quarter 2016 Operational and Financial Results

CALGARY, ALBERTA--(Marketwired - Aug. 11, 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 second quarter ended June 30, 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.

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

"A significant key milestone was reached with the approval of the Garmian Field Development Plan confirming the commercial potential of this project. The Sarqala-1 well has now produced over 3 million barrels of light oil to date with no indications of formation water and no hydrogen sulphide. In parallel, the Kurdamir project continues to advance with the submission of the Kurdamir Field Development Plan in conjunction with Repsol's Topkhana Field Development Plan which envisions surface facilities shared between Kurdamir and Topkhana."

We believe the quality and scale of our oil and gas assets provide opportunities to realize the fundamental inherent value related to our long-life, low-decline assets and significant long-term oil and gas potential related to the Kurdamir and Garmian projects. We are encouraged by the leadership demonstrated by our co-venturers, Repsol and Gazprom Neft, to progress our respective major development and growth projects."

Financial and Operating Highlights

  • Development Plans - WesternZagros and its co-venturer, Gazprom Neft Middle East B.V. ("Gazprom Neft") received approval of the Garmian Block Field Development Plan ("Garmian FDP") from the Kurdistan Regional Government ("KRG") on May 26, 2016. The Garmian FDP is focused on the development of the Jeribe/Upper Dhiban reservoir. With the approval of the Garmian FDP, the Company paid its share of the first production bonus due to the KRG in accordance with the terms of the Garmian PSC of $1.0 million.

    On May 27, 2016, the Company and Talisman (Block K344) B.V., a wholly owned subsidiary of Repsol S.A. ("Repsol") submitted the revised Kurdamir Block Field Development Plan ("Kurdamir FDP") to the KRG to develop the Block's significant oil and gas resources. Phase 1 is focused on the development of the Oligocene oil and gas discovery and includes a 150 million cubic feet per day ("mmcf/d") central processing facility ("CPF") shared equally between the Kurdamir Block and Repsol's adjacent Topkhana Block.

  • Financial - The Company ended the second quarter with $34.0 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 - Second quarter gross oil sales averaged 4,884 barrels of light oil per day ("bbl/d"), of which WesternZagros's net oil sales were 1,317 bbl/d. Gross production averaged approximately 5,500 bbl/d over 80 days in the second quarter. Production was down a total of eleven days during the second quarter due to marketing restrictions and equipment upgrades. Total gross oil sales delivered in the quarter were approximately 444,000 barrels ("bbl") for the Sarqala field, 120,000 bbl net to the Company.

  • Revenue - Revenue recognized by WesternZagros was $4.3 million for approximately 120,000 bbl, (net) oil sales delivered during the second quarter with an average realized price of $36.01/bbl, of which $1.9 million has been realized by the Company with $2.4 million outstanding.

  • Cost Reduction Initiatives - WesternZagros's ongoing cost reduction initiatives drove efficiencies across the Company in the second quarter. The Company will continue to maintain a conservative approach to capital spending for the remainder of 2016. The Company has done a prudent job in reducing G&A and capital costs over the past 18 months. Many of the cost savings have become permanent and the overall cost structure of the Company has been permanently reduced.

  • Corporate - The restructuring of senior management intended to align the organization structure with the current business environment resulted in the elimination of the position of Vice President Human Resources.

    In announcing the change to senior management, Simon Hatfield acknowledged the contributions of Mary Benassi, former Vice President Human Resources, who left the Company in May, 2016. "I want to thank Mary for her leadership role during a time of considerable change for WesternZagros - especially for preserving the distinct culture of the Company and for the example she set in her effective and respectful focus on people. We wish Mary all the best in her future endeavours," said Hatfield.

    WesternZagros continues to review strategic initiatives to improve financial flexibility including but not limited to potentially accessing the debt and/or equity markets or seeking additional partnerships, farmouts or other strategic arrangements.

Operations

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

Garmian Block

Garmian Block Field Development Plan Approval

  • WesternZagros and its co-venturer, Gazprom Neft received approval for the Garmian FDP for the Sarqala Field from the KRG on May 26, 2016.
  • The Garmian FDP is focused on the development of the Jeribe/Upper Dhiban reservoir which is estimated to contain 13 MMbbl of 2P oil Reserves and 66 MMbbl of unrisked P50 Prospective oil Resources (both Gross Block). The first phase of development includes the continuation of production from the Sarqala-1 well, and the drilling of two additional development wells to increase production and to convert prospective resources into reserves.
  • The Sarqala-2 well is anticipated to spud in the first half of 2017 and is planned to target a fractured portion of the reservoir identified on the 3D seismic. The Sarqala-3 well is planned to follow with similar objectives. The potential for further development of the Jeribe/Upper Dhiban reservoir will be assessed following the results from this first phase.

Garmian Block Production

  • Second quarter gross oil sales for the Sarqala field averaged 4,884 bbl/d of light oil, of which WesternZagros's net oil sales were 1,317 bbl/d. Gross production averaged approximately 5,500 bbl/d over 80 days in the second quarter. Production was down a total of eleven days during the second quarter due to marketing restrictions and equipment upgrades. Total gross oil sales delivered in the quarter were approximately 444,000 bbl for the Sarqala field, 120,000 bbl net to the Company. The Sarqala-1 well has now produced over 3 MMbbl of light oil to date with no indications of formation water and no hydrogen sulphide.

Kurdamir Block

Kurdamir Block Field Development Plan Submission

  • WesternZagros and its co-venturer, Repsol, submitted a revised Kurdamir FDP to the KRG on May 27, 2016 to develop the significant oil and gas resources discovered on the Kurdamir Block.
  • The Kurdamir FDP is a phased development that will be executed over a period of several years. Phase 1 is focused on the development of the Oligocene oil and gas discovery and includes a CPF shared equally between the Kurdamir Block and Repsol's adjacent Topkhana Block. The facility will have a capacity of 150 mmcf/d of gas per day with liquids handling for condensate and oil. Repsol is the operator of both the Topkhana and Kurdamir blocks.
  • The co-venturers and the KRG continue to negotiate a gas sales agreement to provide Phase 1 gas from the Kurdamir and Topkhana blocks to the domestic market. Future phases are anticipated to provide gas to the export market. In addition, the KRG is responsible for the construction of a gas pipeline from the Kurdamir/Topkhana block boundary to a tie in point at Chemchemal. A final investment decision to advance the project is anticipated upon completion of the gas sales negotiations, the pipeline engineering, procurement and construction award and approval of the Kurdamir FDP.

Corporate Management

  • The restructuring of senior management intended to align the organization structure with the current business environment has resulted in the elimination of the position of Vice President Human Resources. Mary Benassi left the Company in May 2016 after overseeing the difficult but necessary realignment and reduction of its workforce resulting from the transition of operatorship on the Garmian Block that was completed on February 29, 2016.
  • During the second quarter of 2016, the Company remained focused on executing its plans to maintain production and minimize costs. Sustainability during the prolonged volatile market environment remains a key objective.
  • WesternZagros continues to review strategic initiatives to improve financial flexibility including but not limited to potentially accessing the debt and/or equity markets or seeking additional partnerships, farmouts or other strategic arrangements.

Financial

  • As at June 30, 2016, WesternZagros had $34.0 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 and Tranche 2 - $50 million.
  • On April 26, 2016, the Company and Crest entered into a second letter agreement to extend the deadline date by which the Company must deliver to Crest the first drawdown notice for each of the two tranches under the Loan Agreement and to reverse 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.
  • Revenue recognized was $4.3 million for approximately 120,000 bbl (net) oil sales delivered during the second quarter with an average realized price of $36.01/bbl. Based on the new payment arrangements implemented by the KRG in 2016, the Company realized $1.9 million with $2.4 million of revenue outstanding.
  • The Company capitalized $3.6 million of exploration and evaluation ("E&E") for the quarter, 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 $4.8 million, which was comprised of Sarqala-2 planning costs, production facilities upgrades, related in-country supervision and office costs, and the first production bonus due to the KRG of $1 million upon approval of the Garmian FDP in accordance with the terms of the Garmian PSC. Costs related to Sarqala-1 well operations and the operation of production facilities have been accounted for as operating costs.

Outlook

WesternZagros continues to focus on advancing development of the approved FDP on the Garmian Block and securing KRG approval of the phased development plan for the Kurdamir Block despite the challenging market conditions.

For the remainder of 2016, the Company anticipates the average daily productive capacity of Sarqala-1 will be approximately 5,000 bbl/d. Assuming continuous production and an average Brent price of $40 to $50 per barrel, WesternZagros estimates revenues for the remainder of 2016 to be $7 to $9 million.

The Company has $34.0 million in cash and cash equivalents as at June 30, 2016 to advance the field development plans with its co-venturers. The Company estimates spending for the remainder of the year of approximately $20 million to operate the Sarqala production operations, advance the respective development of the Kurdamir and Garmian blocks with its co-venturers and the WesternZagros head office. The first Garmian development well is anticipated to spud in the first half of 2017.

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. The Company has completed its organizational re-structuring and has implemented strict cost management. 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 and related development budgets 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 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 AIF dated March 16, 2016 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 August 10, 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 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 AIF dated March 16, 2016 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 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.

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

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