CALGARY, ALBERTA–(Marketwired – April 12, 2013) – Arcan Resources Ltd. (TSX VENTURE:ARN) (“Arcan” or the “Corporation“) announced increases in both producing and proven reserves in the 2012 year-end report as well as growth in all categories over the mid-year update, recognizing initial results of Arcan’s waterflood activities. Arcan achieved several key operational and financial objectives in 2012 as the Corporation continued to transition from a junior exploration company into a sustainable producer of oil reserves in Alberta. Compared to 2011, Arcan increased its production, producing reserves and proved reserves, reduced its drilling and operating costs, began to fund its capital program from funds from operations and completed three non-core asset divestitures.
“While 2012 was a challenging year in the junior oil and gas sector generally and for Arcan in particular, we moved well ahead on our strategic objectives and positioned the company for success,” commented Interim Chief Executive Officer Terry McCoy. “Our successful application of horizontal drilling and multi-stage fracture stimulation technology with established waterflood oil recovery techniques is developing our large Swan Hills asset base. The value of our investment in waterflood continued to improve the quantity and quality of our reserves adding both producing and proved reserves over the prior year and up solidly in all categories from our mid-year 2012 update. Our focus on waterflood, stabilizing production, improving well results, reducing operating costs and lowering new well costs to $4.5 million per well is intended to strengthen shareholder value over time.”
Achievement Against Strategic Objectives
Specific Arcan goals during the last three quarters of 2012 have been:
- Stabilize production: Production was 3,978 barrels of oil equivalent (“BOE“) per day in the fourth quarter of 2012, up from 3,917 BOE per day in the third quarter; production is expected to remain reasonably stable at 3,900 to 4,000 BOE per day in the first quarter of 2013 and forecast to increase to average 4,300 to 4,700 BOE per day in 2013. Average production for 2012 was 4,503 BOE per day, up 37 percent from 2011 average production of 3,276 BOE per day. Due to third party pipeline constraints Arcan has had to flare approximately 250 BOE per day of natural gas and is losing 200 barrels of related oil production per day. Arcan anticipates that flaring and related lost volumes will be more permanently alleviated with the completion of the Ethel pipelines expected in May 2013.
- Grow within cash flow: Arcan invested $13.5 million in drilling and completing wells in the second half of 2012 and received $11.4 million in cash from operating activities.
- Increases proved reserves: Arcan continues to expand its waterflood activities and increase recoveries on both a producing and proven basis. The Ethel area is the main focus for waterflood expansion activities for the balance of 2013.
- Continue to implement the Deer Mountain Unit #2 (the “Unit“) waterflood strategy: A well was converted in January 2013 to complete the injection optimization of the Unit. Arcan has witnessed improved production performance from these activities.
- Reduce drilling costs: In addition to reducing the number of drilling days Arcan estimates it has reduced its all-in well costs by approximately 25 percent from approximately $6.0 million per well to between $4.5 and $5.0 million per well.
- Reduce downtime and shorten on-stream time for new wells.
- Dispose of non-core assets: In 2012 Arcan completed three asset dispositions for net proceeds of $28.8 million.
- Develop undeveloped lands: The three joint ventures in addition to the four wells completed in the second half of 2012 have extended Arcan’s development base by over 10 sections.
- Focus on reducing operating and cash general and administrative costs (“G&A“): Operating costs dropped from $24.00 per barrel in the third quarter of 2012 to $19.24 in the fourth quarter, and are expected to be in the range of $15.00 to $18.00 per barrel for 2013. G&A is expected to decline from $8.33 per barrel in 2012 to approximately $8.00 per barrel in 2013.
- Raw acid: With the slowdown in drilling by Arcan as well as other operators in the area, Arcan focused on reducing its raw acid inventory during 2012. In July, the Corporation agreed to a payment of $8.0 million as a settlement of a commitment to purchase approximately $24.3 million of raw acid that had been committed to in the current year, and wrote down its remaining raw acid inventory to market value effective December 31, 2012. The write down of $16.0 million reduced the estimated market value at the end of the year to $2.5 million. This reduced inventory value negatively impacted year end debt and working capital. Arcan continues to work to consume and sell raw acid to third parties to reduce its raw acid exposure.
- Slowing industry activity in the services sector led to lower than expected performance of StimSol, Arcan’s wholly owned services company, in 2012. This softer performance triggered an impairment calculation that resulted in an $11.3 million write down that was recorded against StimSol’s intangible assets.
Commenting on Arcan’s 2012 results, President Douglas Penner said, “We achieved a number of our key strategic, operational and financial objectives in 2012, as we continued to demonstrate the strong potential of the Swan Hills Beaverhill Lake play. Arcan has sufficient liquidity on its bank line to continue to execute its business plan for the balance of 2013 and we plan to take a prudent approach to further development activities in light of market conditions. The plan is simple and transparent: to take advantage of the infrastructure we have in place, develop the asset base and recognize the value of our waterflood activities in order to maximize return on invested capital to ensure long-term sustainability and growth within our funds from operations and available resources.”
- Focused on the sustainability of a long reserve life production company, adding reserves and transitioning reserve categories from probable to proven reserves:
- Added 3.3 million BOE (“MMBOE“) to proved developed producing reserves (“PDP“) during the year. Arcan started 2012 with 10.6 MMBOE in PDP, added 3.3 MMBOE, sold 0.7 MMBOE, produced 1.8 MMBOE to finish the year up a net 0.8 MMBOE at 11.4 MMBOE.
- Added 6.6 MMBOE to total proved reserves (“TP“) during the year. Arcan started 2012 with 21.6 MMBOE, added 6.6 MMBOE, sold 3.0 MMBOE, produced 1.8 MMBOE and finished the year up a net 1.8 MMBOE at 23.4 MMBOE.
- Added 5.2 MMBOE to the corporate total proved and probable reserves (“P+P“) basis during the year. Arcan started 2012 with 41.0 MMBOE, added 5.2 MMBOE, sold 5.7 MMBOE, produced 1.8 MMBOE and finished the year down a net 2.3 MMBOE at 38.7 MMBOE.
- Arcan has a long reserve life index of 26.7 years on a P+P basis.
- Arcan estimates net asset value (“NAV“) per diluted share of $3.58 at December 31, 2012. The impact to NAV due to reduced commodity prices on the December 31, 2012 reserves accounted for approximately $100 million and the impact related to asset sales was approximately $110 million, of the decrease in value, with the balance of the decline being attributable to infrastructure investments and changes in capital profiles. NAV per diluted share was estimated at $7.28 at December 31, 2011.
- Arcan entered into three joint ventures involving 21 sections of land that initially resulted in five wells drilled with PetroBakken Energy Ltd., with a possible two more option wells and a development program to follow. Pursuant to the terms of the joint venture agreements Arcan is responsible for 20 percent of the costs and retains operatorship and an average working interest of 48 percent on these lands after the farm-outs have been completed.
- Arcan secured net proceeds of $28.8 million on the sale of three different asset sales in Virginia Hills, Hamburg and South Swan Hills and used the proceeds to reduce debt levels.
- Recorded average production of 4,503 BOE per day, up 37 percent from 3,276 BOE per day in 2011. Production for the fourth quarter of 2012 was 3,978 BOE per day after asset sales of approximately 237 BOE per day.
- Hedged 2,000 barrels of oil per day in 2013 at approximately $98.25 WTI, 2,000 barrels of oil per day in 2014 at $93.00 WTI, and 1,500 barrels of oil per day in 2015 at approximately $90.92 WTI to hedge approximately 50% of cash flow for the next three years.
- Increased injection in the Unit through the addition of six new injectors and converting four wells to water source during 2012 plus one conversion in Q1 2013. In Ethel, two wells were converted to injection and one well was drilled for injection in 2012.
- Drilled 15.0 (14.0 net) wells and completed 21 (20.5 net) wells in 2012. For Q1 2013 Arcan drilled seven (4.4 net) wells, including the last well in the winter program that spud on March 27, 2013, and completed five (3.9 net) wells in the first quarter of 2013. Arcan expects to complete the last two (1.0 net) drilled wells in Q2 2013, weather permitting.
- Established significant oilfield development in the Ethel area, comprised of drilling producing and water injection wells, installing pipelines, waterflood facilities and access roads.
- 2012 total revenue of $140.0 million, cash from operating activities of $44.9 million and a net operating loss of $49.0 million. This was based on approximately $81.05 per BOE realized prices, $12.60 per BOE royalties and $20.08 per BOE operating costs.
- Net debt and working capital (excluding debentures) at December 31, 2012 was $145.2 before including the impact of the $16.0 million acid write down and a total of $161.2 million, after including the impact of the acid write down.
FINANCIAL AND OPERATING SUMMARY:
Certain selected financial and operations information for the three months and year ended December 31, 2012 and the 2011 comparative information are outlined below and should be read in conjunction with Arcan’s audited annual Consolidated Financial Statements and accompanying Management Discussion and Analysis.
Consolidated Financial and Operating Summary
|Three Months Ended||Year Ended|
|December 31, 2012||December 31, 2011||December 31, 2012||December 31, 2011|
|Financials ($000s except per share amounts)|
|Oil and NGL sales||28,809
|Natural gas sales||65||319||398||1,561|
|Petroleum and natural gas revenue||28,874
|Pumping and stimulation services revenue||1,896||2,869||6,428||3,220|
|Cash flow from operating activities||5,952||15,351||44,886||44,889|
|Funds from operations (1)||7,793||14,988||39,214||44,472|
|Per share basic and diluted (1)(3)||0.08||0.16||0.40||0.49|
|Per share basic and diluted (3)||(0.28||)||(0.03||)||(0.50||)||(0.01||)|
|Capital expenditures, net – cash||5,579||91,189||151,095||250,286|
|Debenture face value||171,250||171,250||171,250||171,250|
|Net debt and working capital (4)||305,270||177,426||305,270||177,426|
|Crude oil and NGLs (bbls per day)||3,944||3,805||4,437||3,097|
|Natural gas (Mcf per day)||201||1,026||395||1,074|
|BOE per day (6:1) (2)||3,978||3,976||4,503||3,276|
|Average realized price:|
|Crude oil and NGLs ($ per bbl)||79.39||93.58||82.01||91.49|
|Natural gas ($ per Mcf)||3.52||3.38||2.76||3.98|
|Combined price per BOE ($ per BOE)||78.90||90.43||81.05||87.80|
|Netback ($ per BOE)|
|Petroleum and natural gas sales||78.90
|Pumping and stimulation services revenue||5.18||7.85||3.90||2.69|
|Production and operating expenses||(19.24||)||(22.18||)||(20.08||)||(22.35||)|
|Cost of sales for pumping and stimulation services||(10.27||)||(6.58||)||(5.66||)||(2.66||)|
|Consolidated operating netback ($/BOE)||41.50||54.94||46.61||49.16|
|Realized economic hedging gains (losses) – cash||2.86||(0.14||)||0.33||(0.33||)|
|Finance expenses – cash||(11.82||)||(7.48||)||(9.17||)||(5.34||)|
|Common Shares (000s)|
|Weighted average – basic and diluted (3)||97,860||97,001||97,828||90,450|
(1) The reader is referred to the section “Non-GAAP Measurements”.
(2) The reader is referred to the section “Legal Advisories”.
(3) Basic and diluted weighted average shares are the same in 2012 and 2011 as the Corporation incurred a loss in these periods.
(4) Net debt and working capital is calculated by subtracting the Corporation’s current liabilities, bank debt, and convertible debentures from its current assets.
2012 Reserves Highlights
|Reserves Volumes (MMBOE)||Reserves Values ($MM NPV 10)|
|Dec 31/12||June 30/12 *||Dec 31/11||Dec 31/12||June 30/12 *||Dec 31/11|
|*Reserves as at June 30, 2012 adjusted by removing asset sales (as press released November 6, 2012) which occurred in the third quarter.|
- Overall solid increases from Arcan’s mid-year update net of dispositions press released November 6, 2012: PDP reserves increased 0.6 MMBOE from 10.8 MMBOE; TP reserves increased 4.3 MMBOE from 19.1 MMBOE; and P+P reserves increased 3.0 MMBOE from 35.7 MMBOE.
|Reserves Volumes (MMBOE)||Dec 31/12||Dec 31/11||Change||2012 Production||Asset Sales||2012 Reserve Additions||Additions Percentage|
- $611.6 million net present value of future net revenue of working interest total P+P reserves before tax at a ten percent discount rate.
- Reserves and additions at December 31, 2012 are increasingly focused on existing developed acreage and are very limited on areas of lands with longer dated development plans.
- Arcan successfully advanced its resources through the reserves categories: PDP reserves were 29 percent of P+P at the end of 2012, up from 26 percent a year earlier. TP reserves also moved from 53 percent of P+P at the start of the year to 60 percent at the end of 2012.
- Arcan’s reserves continue to be weighted 94 percent to light oil and natural gas liquids (“NGLs“), even after taking into account 2012 asset sales packages.
- The GLJ Petroleum Consultants Ltd. (“GLJ“) report, effective December 31, 2012 and dated March 26, 2013, included 88.5 net proved producing wells in the Swan Hills area with a total of 167.3 net P+P wells booked. Future capital has increased by $21.3 million on a total proved basis and decreased by $64.9 million on a total P+P basis since December 31, 2011. The increase in proven future capital and well count and decrease in probable future capital and well count reflects ongoing higher quality classifications of reserve bookings.
- Reserves were recorded on approximately 56 sections, or approximately 37 percent, of Arcan’s land in the Swan Hills area, leaving Arcan with approximately 95 sections of land on which no reserves have yet been recorded.
- Arcan expended net capital of $151.1 million ($181.9 spent on asset development and $30.8 million received in asset sales).
- On remaining assets, Arcan recorded FD&A P+P of $32.97 and TP of $36.27. All in finding, development and acquisition costs (“FD&A“) on a P+P basis, including the impact of asset sales, P+P reserves declined from 41.0 MMBOE to 38.7 MMBOE at the end of 2012. With the negative change in reserves on net expended capital of $151.1 million FD&A calculations were not meaningful and on a TP basis were $47.67.
- On remaining assets, on a P+P basis, Arcan posted a 1.4 recycle ratio based on a $46.61 operating netback in 2012. Life to date Arcan has posted a 1.8 recycle ratio on a P+P basis.
- Deer Mountain Unit #2 continues to respond as anticipated based upon waterflood investments over the past year. The responses include a declining gas rate and an inclining production base from early in the year with a stabilized production at over 1,200 BOE per day since November 2012, offsetting the natural decline of the pool. Opportunities currently being addressed are on individual well optimizations to match pump performance to reservoir deliverability in order to grow production. Voidage replacement targets are being achieved due to an injector conversion in Q1 2013. Recoverable reserves equivalent to approximately 26 percent of the oil initially-in-place have been booked by GLJ.
- In Ethel, an enhanced recovery scheme expansion application has been submitted to include the two injection wells drilled in Q1 2013. There are currently ten producing wells under the waterflood pattern support of four existing injectors. Post expansion approval there will be 15 producers being supported by six injectors. A focus sub area in the northern portion of Ethel comprising 11.5 sections has been booked by GLJ with future capital to achieve recoverable reserves equivalent to approximately 26 percent of the oil initially-in-place. As results are demonstrated, Arcan anticipates recoverable reserves to elevate towards 40 percent.
- Ethel pipeline corridor: A total length of over 45 kilometers, including a sales line for natural gas, a sales line for oil from the Ethel battery as well as an emulsion line to bring production to the Ethel battery, are expected to be completed by May 1, 2013.
- Arcan is drilling its seventh (3.0 net capital paid) well since the winter drilling program started in December 2012. Arcan has completed five (2.6 net capital paid) new wells and anticipates completing the remaining two wells as weather permits. Arcan’s latest drilling program is experiencing an above average production curve believed to have been accomplished through changes to completion techniques, high-grade drilling locations and optimizations.
- Arcan also completed four 100 percent interest wells, drilled earlier in 2012, during this winter drilling program. Three of these wells were fractured in the fourth quarter of 2012 and one was fractured in January of 2013.
- State of readiness: Arcan has 37 wells licenced, 8 drill ready locations and locations identified for the balance of 2013 and each of its 2014 and 2015 drilling programs.
Stock Option Cancellation
Holders of an aggregate 5,050,000 stock options of the Company have voluntarily surrendered such options for nominal consideration. Following the surrender of these options the Company has 2,312,334 options outstanding.
Restricted Share Unit Plan adopted
The Company has adopted a restricted share unit retention plan. The sole purpose of this plan is retention oriented, in light of market conditions. Directors, officers and employees were awarded a total of $2.3 million in value of restricted shares under this plan, which vest in one half increments on January 31, 2014 and January 31, 2015.
Outlook and Guidance – Development and Waterflood
In 2013, Arcan will seek to continue to build investors’ confidence in its further growth potential through continued operational success in the Swan Hills light oil play. Arcan continues to focus solely on developing its assets in the Swan Hills Beaverhill Lake light oil reef. Arcan has primary components of well delineation, infrastructure and waterflood approvals in place that are expected to sustain consistent production results and generate long term secure cash flow from the development of this significant asset. Arcan has budgeted cash flow and capital for 2013 at $52.0 million and estimates production to average 4,300 to 4,700 BOE per day in 2013. A cost reduction focus in the latter half of 2012 and into 2013 is expected to deliver reductions in operating and drilling costs going forward and generate maximum returns on invested capital. Arcan has almost completed executing its winter capital program and expects a curtailment of capital during the second and third quarters of 2013, capturing weather and access related capital efficiencies, providing for debt reduction.
Arcan’s management (“Management“) continues to look strategically at all of Arcan’s assets and will consider all opportunities for development and acceleration as they arise. The continued implementation of enhanced oil recovery through waterflood is expected to stabilize Arcan’s production base and deliver low cost reserves. To secure cash flow Arcan is hedged at approximately 50% of production for 2013 to 2015, which is expected to provide Arcan with a stable financial base. Arcan continues to implement changes to maximize shareholder value and provide secure growth per share. Arcan recently updated its website with a frequently asked questions section and its recent corporate presentation.
OIL AND GAS RESERVES
Arcan’s Statement of Reserves Data and Other Oil and Gas Information, Report on Reserves Data by Independent Qualified Reserves Evaluator and Report of Management and Directors on Oil and Gas Disclosure were prepared in accordance with National Instrument 51-101 – Standards of Disclosure for Oil and Gas Activities and the Canadian Oil and Gas Evaluation Handbook for the year ended December 31, 2012 and is dated March 26, 2013.
Summary of Oil and Gas Reserves – Forecast Prices and Costs
The table below provides a summary of the oil, NGLs and natural gas reserves attributable to Arcan, as evaluated by Arcan’s independent qualified reserves evaluator, GLJ, and contained in their report dated March 26, 2013, effective December 31, 2012 (the “GLJ Report“) based on forecast price and cost assumptions. The tables summarize the data contained in the GLJ Report and, as a result, may contain slightly different numbers than those contained in the original report due to rounding. Also due to rounding, certain columns may not add exactly. Readers should review the definitions and information contained in “Presentation of Arcan’s Oil and Gas Reserves” and “Abbreviations” in Arcan’s Annual Information Form, dated April 11, 2013, in conjunction with the following table and notes. All of Arcan’s reserves are on-shore in Canada.
|Light & Medium Oil||Natural Gas Liquids||Natural Gas(1)||Total|
|Reserves Category||Gross (2)
|Total Proved + Probable||34,118||25,396||2,120||1,524||14,951||13,056||38,730||29,096|
(1) Estimates of reserves of natural gas include associated and non-associated gas.
(2) “Gross” reserves are Arcan’s working interest share of remaining reserves before the deduction of royalties.
(3) “Net” reserves are Arcan’s working interest share of remaining reserves less all Crown, freehold, and overriding royalties and interests owned by others.
GLJ employed the following pricing, exchange rate and inflation rate assumptions as of December 31, 2012, in the GLJ Report in estimating reserves data using forecast prices and costs(1):
|Medium and Light Crude Oil||Natural Gas|
|Alberta Gas Reference
(1) All pricing in the above table, excluding inflation and the exchange rate, is escalated at 2.0 percent per year thereafter Thereafter, inflation is assumed to be constant at 2.0 percent and the exchange rate is assumed to be constant at 1.000.
Net Asset Value
As detailed in the table below, the NAV of $3.58 per diluted share at December 31, 2012 (on the basis of P+P reserves discounted at ten percent) has decreased by 51 percent over December 31, 2011. The decrease in net asset value is primarily attributable to the impact of lower commodity prices. In 2012, Arcan invested $181.9 million and grew the Corporation’s proved developed producing reserves by 0.8 MMBOE, its proved reserves by 1.8 MMBOE while proved and probable reserves declined by 2.3 MMBOE.
The following NAV calculations are presented for December 31, 2012 and December 31, 2011 and incorporate estimates that may not be comparable year-over-year and are presented as at one point in time. GLJ performed an independent evaluation on Arcan’s reserves, however the land values and the value of Stimsol Canada Inc. (“StimSol“), Arcan’s wholly-owned services subsidiary, are based on Management estimates. The working capital deficit (including working capital, bank debt and debentures) is from the December 31, 2012 audited financial statements and the dilution proceeds are computed by taking the outstanding stock options that were in the money at December 31, 2012 multiplied by their exercise prices (only 35,000 were in the money at an $0.88 per share exercise price compared to the 1.02 per share December 31, 2012 closing share price of Arcan). Reserve estimates are derived from the GLJ Report, which has an effective date of December 31, 2012. Readers are cautioned that this presentation does not reflect all aspects of the Corporation and that estimates of future net revenue do not represent fair market value. The January 1, 2013 pricing assumptions are listed below with market changes having a material impact on this NAV calculation.
|Net Asset Value||December 31, 2012||December 31, 2011|
|($000s except number of shares and per share)||(P+P discounted
|(P+P discounted at 10%)||(P+P discounted at 5%)||(P+P discounted at 10%)|
|Present value of reserves||894,871||611,582||1,198,169||829,242|
|Working capital deficit (including debt) (1)||(332,403||)||(332,403||)||(209,966||)||(209,966||)|
|Shares (thousands) (2)||97,895||97,895||104,906||104,906|
|Estimated NAV per share (2)||6.47||3.58||10.80||7.28|
(1) Debt for 2012 and 2011 includes both Arcan debentures at their full face value of $171.3 million.
(2) Share figures for 2012 include all dilutive securities, namely: 97,860,013 common shares and 35,000 stock options that are in the money at their average exercise price of $0.88 (these were all dilutive securities exercisable below the $1.02 December 31, 2012 share trading price). Share figures for 2011 include all dilutive securities, namely: 97,760,846 common shares and 7,144,833 stock options that are in the money at their average exercise price of $3.85 (these were all dilutive securities exercisable below the $4.98 December 31, 2011 share trading price).
For the year ended December 31, 2012 (removing the impact of dispositions), Arcan added 5.2 MMBOE of P+P reserves (38.7 MMBOE closing reserves plus 1.8 MMBOE production plus 5.7 MMBOE of asset sales less 41.0 MMBOE opening reserves) to its $170.6 million capital program ($181.9 million of capital estimated December 31, 2012 financial statements (audited) plus $427.1 million of closing future development capital in the GLJ Report (P+P) less $492.1 million closing future development capital in Arcan’s December 31, 2011 reserve report (P+P) plus $53.7 million of future capital related to asset sales) to calculate a $32.97 FD&A cost per P+P BOE. The aggregate of the exploration and development costs incurred in the most recent fiscal year and the change during that year in estimated future development costs generally will not reflect total FD&A costs related to reserves additions for that year.
The FD&A costs are depicted below. Arcan has invested substantially in its infrastructure and waterflood through facilities, pipelines, drilling water source wells, and drilling and converting producing vertical wells into injector wells. In waterflood projects, the majority of the capital expended were one-time expenses at the front end that are anticipated to produce results over the long-term. With a front loaded capital profile and recoveries expected to elevate over time, Arcan anticipates that the full impact of its waterflood development in Swan Hills and the related shift in reserves will be realized over the next few years, reducing FD&A costs in the future through the benefit of existing infrastructure.
|P+P FD&A Costs (including Dispositions & Acquisitions)||2012||2011||3 year||Life To Date|
|Total capital ($ millions)||117.0||518.7||896.0||1,115.1|
|Disp. / Acq. capital ($millions)||(30.8||)||24.0||46.0||46.0|
|Total capital ($ millions)||86.2||542.7||942.0||1,161.1|
|Reserve additions (MMBOE)||(0.5||)||21.1||33.1||44.2|
|P+P FD&A ($ per BOE)||—||$||25.71||$||28.44||$||26.25|
|Proved FD&A Costs (including Dispositions & Acquisitions)||2012||2011||3 year||Life To Date|
|Total capital ($ millions)||203.2||356.7||769.1||981.0|
|Disp. / Acq. capital ($millions)||(30.8||)||24.0||46.0||46.0|
|Total capital ($ millions)||172.4||380.7||815.1||1,027.0|
|Reserve additions (MMBOE)||3.6||9.0||20.1||28.9|
|Proven FD&A ($ per BOE)||$||47.67||$||42.52||$||40.59||$||35.53|
|P+P FD&A Costs (excluding Dispositions & Acquisitions)||2012||2011||3 year||Life To Date|
|Total capital ($ millions)||170.6||518.7||949.7||1,115.1|
|Reserve additions (MMBOE)||5.2||21.1||37.1||47.7|
|Proven FD&A ($ per BOE)||$||32.97||$||24.58||$||25.60||$||23.36|
|Proved FD&A Costs (excluding Dispositions & Acquisitions)||2012||2011||3 year||Life To Date|
|Total capital ($ millions)||238.9||356.7||804.7||981.0|
|Reserve additions (MMBOE)||6.6||9.0||21.6||34.2|
|Proven FD&A ($ per BOE)||$||36.27||$||39.84||$||37.21||$||28.70|
Recycle ratio is a measure for evaluating the effectiveness of a company’s reinvestment program. The ratio measures how well a company replaced every BOE of production. The table below depicts that Arcan received a net $46.61 per BOE sold and it cost $32.97 in 2012 to find a replacement BOE. Arcan strives for a recycle ratio of 2.0 or higher. In 2012, Arcan achieved a recycle ratio of 1.4 times, including the infrastructure investments. Arcan determined it was important to demonstrate the effectiveness of the combination of the horizontal multi-stage fracture wells across the Ethel land base, where waterflood has been started and will be expanded in 2013, as well as drilling in new areas across the expanded land base.
For the year ended December 31, 2011, Arcan estimated that it had a 2.0 times recycle ratio on 21.1 MMBOE P+P reserve additions and a $24.58 FD&A cost (including changes to future development capital). Life to date, Arcan estimates it has a recycle ratio of 1.8 times based on a $23.36 P+P FD&A (including changes to future development capital) and a $42.02 operating netback.
|Recycle Ratio (including Dispositions & Acquisitions)||2012||2011||3 year||Life to Date|
|Operating netback ($/BOE)||46.61||49.13||43.38||42.02|
|Proven finding and development costs ($/BOE)||47.68||42.52||40.59||35.53|
|Proven reinvestment efficiency ratio||1.0||1.1||1.1||1.2|
|Proven plus probable finding and development costs ($/BOE)||—||25.71||28.44||26.25|
|Proven plus probable reinvestment efficiency ratio||—||1.9||1.5||1.6|
|Recycle Ratio (excluding Dispositions & Acquisitions)||2012||2011||3 year||Life to Date|
|Operating netback ($/BOE)||46.61||49.13||43.38||42.02|
|Proven finding and development costs ($/BOE)||36.27||39.84||37.21||28.70|
|Proven reinvestment efficiency ratio||1.3||1.2||1.2||1.5|
|Proven plus probable finding and development costs ($/BOE)||32.97||24.58||25.60||23.36|
|Proven plus probable reinvestment efficiency ratio||1.4||2.0||1.7||1.8|
Reserve Life Index
Using the fourth quarter ended December 31, 2012 average production of 3,978 BOE per day and December 31, 2012 year-end proved plus probable reserves, Arcan has a reserve life index of approximately 27 years. Arcan estimates that the reserve life index will decline as production rates are anticipated to elevate.
|Production (fourth quarter ended December 31, 2012 average BOE per day)||3,978|
|Proved reserves (MBOE)||23,410|
|Proved reserve life index (years)||16.1|
|Proved plus probable reserves (MBOE)||38,730|
|Proved plus probable reserve life index (years)||26.7|
AUDITED FINANCIAL STATEMENTS, MANAGEMENT DISCUSSION AND ANALYSIS AND ANNUAL INFORMATION FORM
Arcan has filed with Canadian securities regulatory authorities its audited financial statements and accompanying Management Discussion and Analysis for the three months and year ended December 31, 2012. Arcan has also filed the Annual Information Form for the year ended December 31, 2012. These filings are available at www.sedar.com and the Corporation’s website at www.arcanres.com.
ANNUAL AND SPECIAL GENERAL MEETING
Arcan’s annual and special meeting is currently scheduled for June 6, 2013 at 3:00 PM at the Petroleum Club in the McMurray Room, located at 319 – 5th Avenue SW, Calgary, Alberta.
ABOUT ARCAN RESOURCES LTD.
Arcan Resources Ltd. is an Alberta, Canada corporation that is principally engaged in the exploration, development and acquisition of petroleum and natural gas located in Canada’s Western Sedimentary Basin.
All information contained in the press release relating to reserves comes from the GLJ Report dated March 26, 2013, which has an effective date of December 31, 2012, and was prepared by GLJ, a qualified reserves evaluator, in accordance with the COGE Handbook. The disclosure was made assuming that development of each property in respect of which the estimate is made will occur, without regard to the likely availability of funding required for that development. Readers are also cautioned that the estimated future net revenue values do not represent fair market value.
BOEs may be misleading, particularly if used in isolation. The calculation of BOEs is based on a conversion ratio of six thousand cubic feet (“Mcf“) of natural gas to one barrel (“bbl“) of oil based on an energy equivalency conversion primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. In addition, given that the value ratio based on the current price of oil as compared to natural gas is significantly different from six to one, utilizing a BOE conversion ratio of six Mcf to one bbl would be misleading as an indication of value.
Estimates of reserves and future net revenue for individual properties may not reflect the same confidence level as estimates of reserves and future net revenue for all properties, due to the effects of aggregation.
Additional information about the Corporation, including the Corporation’s annual information form for the year ended December 31, 2012, is available under Arcan’s profile on SEDAR at www.sedar.com.
Readers are cautioned that this press release contains the term “funds from operations”, which should not be considered an alternative to, or more meaningful than, cash provided by operating activities or net earnings, as determined in accordance with generally accepted accounting principles (“GAAP“), which is within the framework of International Financial Reporting Standards (“IFRS“), as an indicator of Arcan’s performance. Arcan also presents “funds from operations per share”, whereby funds from operations is divided by the basic weighted average number of common shares of Arcan outstanding to determine per share amounts. Operating and corporate netbacks are also presented. Operating netbacks represent Arcan’s revenue, less royalties and operating expenses, and corporate netbacks represent Arcan’s operating netback, less realized economic hedging losses, general and administrative (“G&A“) and interest expense, in order to determine the amount of funds generated by production. Operating and corporate netbacks have been presented on a per BOE basis, as well.
Arcan determines funds from operations as cash flow from operating activities before changes in non-cash working capital as follows:
|Funds from Operations|
|Three Months Ended||Year Ended|
|($000’s)||December 31, 2012||December 31, 2011||December 31, 2012||December 31, 2011|
|Cash flow from operating activities (per IFRS)||5,952||15,351||44,886||44,889|
|Change in non-cash working capital||1,841||(363||)||(5,672||)||(417||)|
|Funds from operations||7,793||14,988||39,214||44,472|
These measures do not have any standardized meaning prescribed by GAAP and therefore are unlikely to be comparable to similar measures presented by other companies. Management believes that funds from operations and operating and corporate netbacks are useful supplemental measures as they provide an indication of the ability of Arcan to fund future growth through capital investment and/or repay debt. These measures have been described and presented in this press release in order to provide shareholders and potential investors with additional information regarding Arcan’s liquidity and its ability to generate funds to finance its operations. Arcan’s method of calculating funds from operations may differ from that of other companies, and, accordingly, may not be comparable.
Readers are cautioned that this press release contains the term “net asset value”, which Management believes is a useful supplemental measure as it provides a measure of the potential value of the Corporation. Arcan’s method for calculating NAV is detailed in this press release in the section “Net Asset Value” and may differ from that of other companies, and, accordingly, may not be comparable. This measure does not have any standardized meaning prescribed by GAAP and therefore is unlikely to be comparable to similar measures presented by other companies. Management believes there is no GAAP measure that is directly comparable to the NAV calculation, although there are GAAP financial statement amounts used in the calculation that have been articulated in that section of the press release, and readers are cautioned in their use of the measure.
Readers are cautioned that this press release contains the term “finding, development, and acquisition” costs which Management believes is a useful supplemental measure as it provides a measure of the capital costs to add proved and probable reserves. Arcan’s method for calculating FD&A costs is detailed in this press release in the section “FD&A Costs” and may differ from that of other companies, and, accordingly, may not be comparable. This measure does not have any standardized meaning prescribed by GAAP and therefore is unlikely to be comparable to similar measures presented by other companies. Management believes there is no GAAP measure that is comparable to the FD&A calculation, although there are GAAP financial statement amounts used in the calculation that have been articulated in that section of the press release, and readers are cautioned in their use of the measure.
Readers are cautioned that this press release contains the term “recycle ratio” which Management believes is a useful supplemental measure as it provides a measure for evaluating the effectiveness of a Corporation’s reinvestment program. Arcan’s method for calculating the recycle ratio is detailed in this press release in the section “Recycle Ratio” and may differ from that of other companies, and, accordingly, may not be comparable. This measure does not have any standardized meaning prescribed by GAAP and therefore is unlikely to be comparable to similar measures presented by other companies. Management believes there is no GAAP measure that is comparable to the recycle ratio calculation, although there are GAAP financial statement amounts used in the calculation that have been articulated in that section of the press release, and readers are cautioned in their use of the measure.
Readers are cautioned that this press release contains the term “reserve life index” which Management believes is a useful supplemental measure as it provides a measure for estimating the number of years it will take to produce the Corporation’s reserves at current production levels. Arcan’s method for calculating the reserve life index is detailed in this press release in the section “Reserve Life Index” and may differ from that of other companies, and, accordingly, may not be comparable. This measure does not have any standardized meaning prescribed by GAAP and therefore is unlikely to be comparable to similar measures presented by other companies. Management believes there is no GAAP measure that is comparable to the reserve life index calculation and readers are cautioned in their use of the measure.
Forward-Looking Information and Statements
This press release contains certain forward-looking information and statements within the meaning of applicable securities laws. The use of any of the words ”expect”, ”anticipate”, ”continue”, ”estimate”, ”guidance”, ”objective”, ”ongoing”, ”may”, ”will”, ”project”, ”should”, ”believe”, ”plans”, ”intends”, “possible” and similar expressions are intended to identify forward-looking information or statements. In particular, but without limiting the foregoing, this press release contains forward-looking information and statements pertaining to, among other things, the following: current and year-to-date anticipated production and production to be brought on stream; year end production exit rates; the application and modification of horizontal, multi-stage fracture technologies including expectations respecting the application of additional fracture stimulation stages; Arcan’s expectations respecting its growth and activities throughout the remainder of 2013, including its continued transition into a sustainable producer of oil reserves; Arcan’s ability to execute on its business plans, including plans to take a prudent approach to future development activities and continued focus on the Swan Hills Beaverhill Lake light oil reef; future growth including development, exploration, acquisition, construction and operational activities and related expenditures; Arcan’s liquidity position and the ability of Arcan to execute its business plan therefrom; the timing, method and results of drilling and waterflood operations; the focus of the 2013 waterflood expansion activities; waterflood and CO2 recoveries; asset write downs, including a write down of Arcan’s acid inventory; Arcan’s continued efforts to reduce its raw acid exposure; future liquidity and financial capacity and resources; the expected benefits of Arcan’s hedging program; the potential inherent in Arcan’s Swan Hills land base and the expected benefits from the development thereof; reserve life index; the timing and location of the upcoming shareholder meeting; estimates of all-in well cost reductions; estimated additional drilling locations; the completion of the Ethel pipeline and the timing of the effects thereof; expectations relating to increased shareholder value and growth per share; results from operations and financial ratios; the volume and product mix of Arcan’s oil and gas production; the timing of the vesting of the restricted share units; cost and expense estimates and expectations; Arcan’s income taxes and tax liabilities; oil and natural gas prices and the US$ to CDN$ exchange rate; recovery; the amount of asset retirement obligations; cash flow ratios and sensitivities; royalty rates and their impact on Arcan’s operations and results; and capital expenditures.
The forward-looking information and statements contained in this press release reflect several material factors and expectations and assumptions of Arcan including, without limitation: that Arcan will continue to conduct its operations in a manner consistent with past operations; the accuracy of current horizontal production data, historical well production and waterflood and CO2 recovery results; the general continuance of current or, where applicable, assumed industry conditions; continuity of reservoir conditions across Arcan’s Swan Hills land base; availability of debt and/or equity sources to fund Arcan’s capital and operating requirements as needed; the continuance of existing and, in certain circumstances, proposed tax and royalty regimes; the accuracy of the estimates of Arcan’s reserve volumes; the accuracy of current horizontal production data; and certain commodity price and other cost assumptions.
Arcan believes the material factors, expectations and assumptions reflected in the forward-looking information and statements are reasonable at this time but no assurance can be given that these factors, expectations and assumptions will prove to be correct. The forward-looking information and statements included in this press release are not guarantees of future performance and should not be unduly relied upon. Such information and statements involve known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in such forward-looking information or statements including, without limitation: for reasons currently unanticipated, Arcan’s production rates may not increase in the manner currently expected; the application and modification of horizontal, multi-stage fracture technologies including the application of additional fracture stimulation stages may not have the impact currently anticipated by Arcan; Arcan’s capital spending and operational plans for 2013 may not be completed in the timelines anticipated, in the manner anticipated or at all and the execution of such plans may not have the results currently anticipated by Arcan; water injection and CO2 may not have the impact on production currently anticipated by Arcan; currently unforeseen issues may arise in the continuing integration of the business and operations of Arcan and StimSol and acquisition may not positively impact Arcan’s business and operations in the manner currently anticipated or at all; changes in commodity prices; unanticipated operating results or production declines; waterflood and CO2 impacts; Arcan may be unable to solve its mechanical/operational issues in the timelines anticipated, in the manner anticipated or at all; shareholder value may not be maximized in the manner suggested by Arcan or at all; changes in tax or environmental laws or royalty rates; increased debt levels or debt service requirements; inaccurate estimation of Arcan’s oil and gas reserves volumes; limited, unfavourable or no access to debt or equity capital markets; inaccuracies in Arcan’s calculation of reserve life index; for reasons currently unforeseen, the current drilling locations identified by Arcan may prove to be unsuitable or unavailable and drilling on the locations identified may not occur; increased costs and expenses; the impact of competitors; reliance on industry partners; reviews of Arcan’s credit facility and/or budget may not occur on the timelines anticipated or at all; and certain other risks detailed from time to time in Arcan’s public disclosure documents including, without limitation, those risks identified in this press release, and in Arcan’s annual information form, copies of which are available on Arcan’s SEDAR profile at www.sedar.com.
This press release contains reserves information. The process of estimating reserves is complex. It requires significant judgments and decisions based on available geological, geophysical, engineering and economic data. These estimates may change substantially as additional data from ongoing development activities and production performance becomes available and as economic conditions impacting oil and gas prices and costs change. The reserve estimates contained herein are based on current production forecasts, prices and economic conditions. As circumstances change and additional data becomes available, reserve estimates also change. Estimates made are reviewed and revised, either upward or downward, as warranted by the new information. Revisions are often required due to changes in well performance, prices, economic conditions and governmental restrictions. Although every reasonable effort is made to ensure that reserve estimates are accurate, reserve estimation is an inferential science. As a result, the subjective decisions, new geological or production information and a changing environment may impact these estimates. Revisions to reserve estimates can arise from changes in year-end oil and gas prices, and reservoir performance. Such revisions can be either positive or negative.
The forward-looking information and statements contained in this press release speak only as of the date of this press release, and Arcan does not assume any obligation to publicly update or revise them to reflect new events or circumstances, except as may be required pursuant to applicable laws.
Arcan Resources Ltd.
Interim Chief Executive Officer
Arcan Resources Ltd.
Arcan Resources Ltd.
Suite 2200, 500 – 4th Avenue S.W.
Calgary, AB T2P 2V6