WesternZagros Resources Ltd.
TSX VENTURE : WZR

WesternZagros Resources Ltd.

August 16, 2012 07:30 ET

WesternZagros Second Quarter 2012 Operational and Financial Results

CALGARY, ALBERTA--(Marketwire - Aug. 16, 2012) -

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, 2012, and additional key highlights and activities to date. The financial statements and the accompanying MD&A are available at www.westernzagros.com and on SEDAR at www.sedar.com.

Headlines

  • WesternZagros completed a private placement with Crest at Cdn$1.40 per share for $57 million at an approximate 10% premium to the August 4 closing price.
  • The KRG has chosen Gazprom Neft to be the Third Party Participant ("TPP") in the Garmian Block, with a 40 percent interest in the Garmian PSC. WesternZagros received a net amount of $56 million in back costs from Gazprom Neft and retains operatorship of the Garmian Block.
  • At the Kurdamir-2 well, Talisman and WesternZagros are in the final stages of preparation to test three intervals in the Cretaceous Shiranish reservoir which has a potential gross hydrocarbon pay interval of over 500 metres. Testing has not yet started but is anticipated to be within the next two weeks.
  • The Company reported a substantial increase in the mean estimate of gross unrisked prospective resources ("Mean Prospective Resources") in the Eocene reservoir at Kurdamir. The revised Mean Prospective Resource is now 278 million barrels ("MMbbl") of oil as of June 1, 2012 compared to 124 MMbbl reported previously.
  • WesternZagros had $18.5 million in working capital at end Q2 2012. Combined with the subsequent receipts of $57 million and $56 million net, from Crest and Gazprom Neft, respectively, the cash on hand is $131.5 million.
  • The Company estimates its capital expenditures for the second half of fiscal 2012 to be in the range of $60-70 million.

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

"We look forward to working with our respective co-venturers on both of our Blocks as we ramp up for high potential exploration and appraisal activities. We will be drilling important new wells over the next 12 months. Our strategy is focused on exploration success, operational excellence and cost management. Our goal is to steadily increase efficiency and reliability. There is more to come from WesternZagros."

Operational & Financial Review

On August 7, 2012 the Company announced that it had signed a strategic investment agreement (the "Agreement") with Crest Energy International LLC ("Crest"). Under the Agreement, Crest purchased, through a non-brokered, private placement, 40,714,286 Common Shares in the Company at $1.40 per share for $57 million. Crest owns 9.88 percent of the Company's issued and outstanding Common Shares upon closing of the private placement. This price represented an approximate 10 percent premium to the August 4, 2012 closing share price. Under the terms of the agreement, Eric Stoerr, a representative from Crest has been appointed to the WesternZagros board of directors.

On August 1, 2012, the Company announced that the Kurdistan Regional Government ("KRG") assigned Gazprom Neft Middle East B.V. ("Gazprom Neft") as the Third Party Participant ("TPP") with a 40 percent interest in the Garmian Production Sharing Contract ("Garmian PSC"). WesternZagros received a net amount of $56 million in connection with the TPP assignment. Operatorship remains with WesternZagros, which maintains its 40 percent interest, until the commencement of the development period under the PSC. WesternZagros and Gazprom Neft will each fund 50 percent of costs on the Garmian Block effective from June 1, 2012.

At the Kurdamir-2 well, the operator, Talisman (Block K44) B.V. ("Talisman"), and WesternZagros are in the final stages of preparation to test three intervals in the Cretaceous Shiranish reservoir which has a potential gross hydrocarbon pay interval of over 500 metres. Testing has not yet started but is anticipated to be within the next two weeks. The Company is also working with Talisman to prepare for testing of the additional 275 metres and 118 metres of gross oil pay in the Eocene and Oligocene reservoirs respectively. The co-venturers are also planning a 3D seismic program and a further appraisal well (Kurdamir-3) to assess the ultimate size of this giant discovery.

On June 6, 2012, the Company reported a substantial increase in the mean estimate of gross unrisked prospective resources ("Mean Prospective Resources") in the Eocene reservoir at Kurdamir, following an independent audit of the estimates by Sproule International Limited ("Sproule"). During the drilling of the Kurdamir-2 well, an interpreted oil bearing, fractured Eocene reservoir section with gross thickness of 275 metres was encountered similar to the Eocene reservoir section encountered in Kurdamir-1. A petrophysical interpretation of the Kurdamir-2 wireline logs through the Eocene reservoir has been completed and this, together with mud gas data, hydrocarbon shows from cuttings, correlation to the Kurdamir-1 well and revised seismic mapping, have resulted in the revised prospective resource assessment. Similar to the Oligocene reservoir, the lowest known oil in Kurdamir-2 indicates that the oil column extends significantly deeper than the limit of four-way closure of the Kurdamir structure, as mapped on seismic. This indicates that the Eocene reservoir is involved in a much larger trap which also likely extends off the Kurdamir Block onto the adjacent blocks. Based upon both this new information and the fact that no formation water was encountered while drilling, the revised assessment for Mean Prospective Resources increased from 124 million barrels ("MMbbl") of oil to 278 MMbbl of oil for the Eocene reservoir on the Kurdamir Block as of May 31, 2012.

On April 23, 2012, WesternZagros reported an increase of over 400 percent in the mean estimate of gross unrisked contingent resources ("Mean Contingent Resources") and 300 percent in the estimate of Mean Prospective Resources in the Oligocene reservoir in the Kurdamir exploration block. The updated estimate of Mean Contingent Resources as of April 20, 2012, is 147 MMbbls of oil (corresponding to 464 MMbbl of mean estimated gross discovered oil initially in place) or 384 million barrels of oil equivalent ("BOE") when oil, gas and condensate contingent resources are included. The updated estimate of Mean Prospective Resources for the Oligocene reservoir on Kurdamir as at April 20, 2012, is 1.2 billion barrels of oil ("Bbbl"), or 1.4 billion BOE when gas and condensate prospective resources are included. These updated estimates have been independently audited by Sproule.

The significantly increased estimate of the Kurdamir resources is a result of the discovery of a major oil column in the Oligocene reservoir at the Kurdamir-2 exploration well. Wireline logs indicated a porous zone of 140 metres thickness within the Oligocene interval, between 2,422 and 2,562 metres, all of which is hydrocarbon bearing. Within this hydrocarbon zone, well log data indicates 22 metres of gross gas pay above 118 metres of gross oil pay. No evidence of a water leg has been encountered within the Oligocene interval. An open hole drill stem test was conducted from 2,315 metres to 2,477 metres, which included 55 metres of the Oligocene porous zone. This test was conducted across the interpreted gas-oil contact at 2,444 metres. The test achieved a flow rate of 7.3 million cubic feet ("MMcf") per day of gas and a stabilized flow rate of 950 barrels per day ("bbl/d") of 47 degree API mixture of light oil and condensate over the final seven hours of the main flow period. This rate was achieved through a 56/64 inch choke at an average flowing well head pressure of 650 pounds per square inch and without any stimulation. There was no observed decline and no formation water was recovered during testing. According to analysis by an independent third party engineering expert, the 33 metres of oil pay tested to date is capable of flowing at rates of 4,000 bbl/d if isolated from the gas pay and stimulated.

These latest audited estimates represent an increase in the combined Mean Prospective Resources on the Kurdamir and Garmian exploration blocks ("PSC Lands") to 3.3 Bbbl of oil, or 4.9 billion BOE when gas and condensate are included. The current combined Mean Contingent Resources on are 171 MMbbl of oil, or 415 million BOE when gas and condensate are included.

For the three month period ended June 30, 2012, the Company generated $13.7 million of gross proceeds from the sales of approximately 281,000 barrels of test oil from the Sarqala-1 well. The extended well test was temporarily suspended on May 28, 2012, when the Company began planned well repairs that carried on until July 2012. The well is ready to resume testing when the KRG issues its approval.

For the second half of fiscal 2012, WesternZagros estimates its capital expenditures, including the requirement for the Company to fund 50 percent of Garmian activities and 60 percent of the Kurdamir activities to be approximately $60-70 million. This includes approximately $15-20 million for the planned testing of the Oligocene, Eocene and Cretaceous reservoirs at Kurdamir-2; $5-$10 million for the Kurdamir-3 appraisal well; $10 million for designing, planning and procurement of the necessary long lead materials for the Hasira-1, Sarqala-2, Upper Bakhtiari, Baran and Qulijan wells; $15 million for the seismic programs on Garmian and Kurdamir Blocks; $5 million for planning and procuring the permanent facilities for Sarqala; $5 million for in-country support costs and other PSC expenditures for both the Kurdamir and Garmian Blocks; and approximately $5 million for corporate and general and administrative costs. This excludes any of the proceeds from the sale of crude oil from the extended well test at Sarqala-1.

About the Company

WesternZagros is a publicly-traded, Calgary-based, international oil and gas company engaged in acquiring properties and exploring for, developing and producing crude oil and natural gas in Iraq. WesternZagros holds two Production Sharing Contracts ("PSCs") with the Kurdistan Regional Government ("KRG") in the Kurdistan Region of Iraq that are both on trend with, and adjacent to, a number of prolific historic oil and gas discoveries. The Kurdamir and Garmian PSCs each govern separate contract areas (collectively referred to as the "PSC Lands"). The Garmian contract area (1,780 square kilometres) is operated by WesternZagros. The Kurdamir contract area (340 square kilometres) is operated by Talisman (Block K44) B.V. ("Talisman") with a 40 percent working interest. WesternZagros holds a 40 percent working interest in both PSCs. The KRG holds a 20 percent working interest in both PSCs. The remaining 40 percent third party participant interest ("TPPI") in the Amended Garmian PSC is held by Gazprom Neft.

Strategy

WesternZagros continues to move forward on its growth strategy for exploration and development of its PSC Lands in the Kurdistan Region of Iraq. WesternZagros's objective is to be recognized, through consistently superior business performance and operations excellence, as one of the leading junior oil and gas companies active in Iraq. The Company is committed to apply the lessons learned from its operations and from operations occurring elsewhere within the Kurdistan Region to improve its operating performance. The Company is committed to operating in Iraq in a safe and secure manner. In executing its strategy, WesternZagros has made it a priority to recruit and retain local personnel and to actively participate in, and contribute to, community development projects. WesternZagros believes it has developed a relationship with government authorities, local communities and the business community in the Kurdistan Region that has enabled access to opportunities and to facilitate the cooperation needed to successfully execute projects.

Additional information relating to the Company, including its operational and financial report for the three months ended 30th June 2012, together with the accompanying MD&A for the period is available on SEDAR at www.sedar.com.

This news release contains certain forward‐looking information relating, but not limited, to operational information, future drilling and testing plans, future well designs and completions and future production rates and the timing 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. Readers are also cautioned that disclosed test rates and AOFs may not be indicative of ultimate production levels. 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.

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. Discovered Petroleum Initially-In-Place (equivalent to discovered resources) is that quantity of petroleum that is estimated, as of a given date, to be contained in known accumulations on company lands. The petroleum type for the Kurdamir property is crude oil and natural gas. The recoverable portion of discovered petroleum initially in place includes production, reserves, and contingent resources; the remainder is unrecoverable (there are no reserves or production for the Oligocene reservoir). Undiscovered Petroleum Initially-In-Place (equivalent to undiscovered resources) is that quantity of petroleum that is estimated, as of a given date, to be contained in accumulations yet to be discovered on company lands. The petroleum type for the Kurdamir property is crude oil and natural gas.

The recoverable portion of undiscovered petroleum initially-in-place is referred to as prospective resources; the remainder is unrecoverable. These are the gross undiscovered initially-in-place volumes estimated for the Oligocene carbonate reservoir in the Kurdamir structure below the lowest known oil. The undiscovered petroleum initially-in-place has not been risked for chance of discovery. 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. The Company's Statement of Oil and Gas Information contained in its Annual Information Form dated March 26, 2012 ("AIF") and Material Change Reports dated June 5, 2012 and April 23, 2012 ("Material Change Reports") filed on SEDAR at www.sedar.com contain additional detail with respect to the resource assessments and include 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 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 and the Material Change Report for a detailed breakdown of the high (P10), low (P90) and best (P50) estimates for each of the individual reservoir assessments.

For further information on WesternZagros and the risks associated with its business, please see the Company's's current Annual Information Form which is available on SEDAR at www.sedar.com.

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

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