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."
2012 Highlights
-- 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 December December December
31, 2012 31, 2011 31, 2012 31, 2011
----------------------------------------
Financials ($000s except per share
amounts)
Oil and NGL sales 28,809 32,760 133,181 103,408
Natural gas sales 65 319 398 1,561
----------------------------------------
Petroleum and natural gas revenue 28,874 33,079 133,579 104,969
Pumping and stimulation services
revenue 1,896 2,869 6,428 3,220
Cash flow from operating activities 5,952 15,351 44,886 44,889
Funds from operations (1) 7,793 14,988 39,214 44,472
Per share basic and diluted (1)(3) 0.08 0.16 0.40 0.49
Net loss (27,187) (3,262) (48,984) (779)
Per share basic and diluted (3) (0.28) (0.03) (0.50) (0.01)
Capital expenditures, net - cash 5,579 91,189 151,095 250,286
Total assets 613,389 527,369 613,389 527,369
Total liabilities 365,402 238,813 365,402 238,813
Debenture face value 171,250 171,250 171,250 171,250
Shareholders' equity 247,987 288,556 247,987 288,556
Bank loan 159,422 - 159,422 -
Net debt and working capital (4) 305,270 177,426 305,270 177,426
----------------------------------------------------------------------------
Operating
Production:
Crude oil and NGLs (bbls per day) 3,944 3,805 4,437 3,097
Natural gas (Mcf per day) 201 1,026 395 1,074
----------------------------------------
BOE per day (6:1) (2) 3,978 3,976 4,503 3,276
Average realized price:
Crude oil and NGLs ($ 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 90.43 81.05 87.80
Pumping and stimulation services
revenue 5.18 7.85 3.90 2.69
Royalties (13.07) (14.58) (12.60) (16.32)
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
($/BOE) 41.50 54.94 46.61 49.16
Realized economic hedging gains
(losses) - cash 2.86 (0.14) 0.33 (0.33)
Cash G&A (10.84) (13.64) (8.33) (8.32)
Other revenue - 0.21 - 0.16
Finance expenses - cash (11.82) (7.48) (9.17) (5.34)
----------------------------------------
Corporate netback 21.70 33.89 29.44 35.33
----------------------------------------------------------------------------
Common Shares (000s)
Shares outstanding 97,860 97,761 97,860 97,761
Weighted average - basic and diluted
(3) 97,860 97,001 97,828 90,450
Notes:
(1) The reader is referred to the section "Non-GAAP Measurements".
(2) The reader is referred to the section "Legal Advisories".
(3) Basic and diluted weighted average shares are the same in 2012 and 2011 as
the Corporation incurred a loss in these periods.
(4) Net debt and working capital is calculated by subtracting the Corporation's
current liabilities, bank debt, and convertible debentures from its current
assets.
2012 Reserves Highlights
----------------------------------------------------------------------------
Reserves Volumes (MMBOE) Reserves Values ($MM NPV 10)
----------------------------------------------------------------------------
June 30/12 June 30/12
Dec 31/12 (i) Dec 31/11 Dec 31/12 (i) Dec 31/11
----------------------------------------------------------------------------
PDP 11.4 10.8 10.6 278.1 301.7 294.0
----------------------------------------------------------------------------
TP 23.4 19.1 21.6 399.1 426.4 490.2
----------------------------------------------------------------------------
P+P 38.7 35.7 41.0 611.6 659.6 829.2
----------------------------------------------------------------------------
(i)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 2012
(MMBOE) Dec 31/12 Dec 31/11 Change ProductionAsset Sales
----------------------------------------------------------------------------
PDP 11.4 10.6 0.8 (1.8) (0.7)
----------------------------------------------------------------------------
TP 23.4 21.6 1.8 (1.8) (3.0)
----------------------------------------------------------------------------
P+P 38.7 41.0 (2.3) (1.8) (5.7)
----------------------------------------------------------------------------
-------------------------------------------
Reserves Volumes 2012
(MMBOE) Reserve Additions
Additions Percentage
-------------------------------------------
PDP 3.3 31.1
-------------------------------------------
TP 6.6 30.6
-------------------------------------------
P+P 5.2 12.7
-------------------------------------------
-- $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.
Waterflood Progress
-- 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.
Operations Update
-- 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
----------------------------------------
Gross (2) Net (3) Gross (2) Net (3)
Reserves Category (Mbbls) (Mbbls) (Mbbls) (Mbbls)
----------------------------------------
Proved
Developed Producing 10,231 7,514 565 376
Developed Non-Producing 240 217 21 17
Undeveloped 10,233 8,087 668 515
----------------------------------------
Total Proved 20,704 15,819 1,254 908
Total Probable 13,414 9,577 865 615
----------------------------------------
Total Proved + Probable 34,118 25,396 2,120 1,524
Natural Gas(1) Total
----------------------------------------
Gross (2) Net (3) Gross (2) Net (3)
Reserves Category (MMcf) (MMcf) (Mbbls) (Mbbls)
----------------------------------------
Proved
Developed Producing 3,739 3,140 11,420 8,414
Developed Non-Producing 197 177 295 264
Undeveloped 4,775 4,272 11,696 9,315
----------------------------------------
Total Proved 8,711 7,590 23,410 17,992
Total Probable 6,240 5,466 15,320 11,103
----------------------------------------
Total Proved + Probable 14,951 13,056 38,730 29,096
Notes:
(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
---------------------------------------------
WTI Cromer
Cushing Edmonton Medium
Oklahoma Par Price 29.3 degrees
40 degrees API 40 degrees API API
Year Inflation (US$/bbl) ($/bbl) ($/bbl)
----------------------------------------------------------------------------
2012 (actual) 2.0 94.10 86.86 81.56
2013 2.0 90.00 85.00 79.90
2014 2.0 92.50 91.50 84.18
2015 2.0 95.00 94.00 86.48
2016 2.0 97.50 96.50 88.78
2017 2.0 97.50 96.50 88.78
2018 2.0 97.50 96.50 88.78
2019 2.0 98.54 97.54 89.74
2020 2.0 100.51 99.51 91.55
2021 2.0 102.52 101.52 93.40
2022 2.0 104.57 103.57 95.28
Natural Gas
------------------------------
Alberta Gas
Reference
Price AECO - Exchange
Plant Gate C Spot Rate
Year ($/MMBTU) ($/MMBTU) (US$/CDN$)
-------------------------------------------------------------
2012 (actual) 2.23 2.45 1.001
2013 3.19 3.38 1.000
2014 3.63 3.83 1.000
2015 4.08 4.28 1.000
2016 4.53 4.72 1.000
2017 4.75 4.95 1.000
2018 5.02 5.22 1.000
2019 5.12 5.32 1.000
2020 5.22 5.43 1.000
2021 5.33 5.54 1.000
2022 5.44 5.64 1.000
Note:
(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
----------------------------------------------------------------------------
(P+P (P+P (P+P (P+P
($000s except number of discounted discounted discounted discounted
shares and per share) at 5%) at 10%) at 5%) at 10%)
----------------------------------------------------
Present value of
reserves 894,871 611,582 1,198,169 829,242
Undeveloped acreage 56,000 56,000 87,000 87,000
StimSol 15,000 15,000 30,000 30,000
Working capital deficit
(including debt) (1) (332,403) (332,403) (209,966) (209,966)
Dilution proceeds(2) 31 31 27,509 27,509
Estimated value 633,499 350,210 1,132,711 763,786
Shares (thousands) (2) 97,895 97,895 104,906 104,906
----------------------------------------------------
Estimated NAV per share
(2) 6.47 3.58 10.80 7.28
Note:
(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).
FD&A Costs
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
$32.97 FD&A cost per P+P BOE. The aggregate of the exploration and development
costs incurred in the most recent fiscal year and the change during that year in
estimated future development costs generally will not reflect total FD&A costs
related to reserves additions for that year.
The FD&A costs are depicted below. Arcan has invested substantially in its
infrastructure and waterflood through facilities, pipelines, drilling water
source wells, and drilling and converting producing vertical wells into injector
wells. In waterflood projects, the majority of the capital expended were
one-time expenses at the front end that are anticipated to produce results over
the long-term. With a front loaded capital profile and recoveries expected to
elevate over time, Arcan anticipates that the full impact of its waterflood
development in Swan Hills and the related shift in reserves will be realized
over the next few years, reducing FD&A costs in the future through the benefit
of existing infrastructure.
P+P FD&A Costs (including Dispositions Life To
& Acquisitions) 2012 2011 3 year Date
----------------------------------------------------------------------------
Total capital ($ 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 Life To
Dispositions & Acquisitions) 2012 2011 3 year 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 & Life To
Acquisitions) 2012 2011 3 year 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 Life To
Dispositions & Acquisitions) 2012 2011 3 year 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
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 $42.02 operating netback.
Recycle Ratio (including Dispositions & Life to
Acquisitions) 2012 2011 3 year Date
----------------------------------------------------------------------------
Operating netback ($/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 & Life to
Acquisitions) 2012 2011 3 year 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.
Legal Advisories
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.
Non-GAAP Measurements
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
---------------------------------------
December December December December
($000's) 31, 2012 31, 2011 31, 2012 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.
FOR FURTHER INFORMATION PLEASE CONTACT:
Arcan Resources Ltd.
Terry McCoy
Interim Chief Executive Officer
(403) 262-0321
tmccoy@arcanres.com
Arcan Resources Ltd.
Douglas Penner
President
(403) 262-0321
dpenner@arcanres.com
Arcan Resources Ltd.
Suite 2200, 500 - 4th Avenue S.W.
Calgary, AB T2P 2V6
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