Arcan Resources Ltd. (TSX VENTURE:ARN) ("Arcan" or the "Corporation") is pleased
to announce its financial and operating results for the three and six month
periods ended June 30, 2012. Revenue, net income and funds from operations
increased significantly from the second quarter and the first half of 2011, as
production grew by over 80 percent.
"Our financial results for the quarter were solid, in spite of a significant
drop in oil prices, thanks to strong production growth in our core Swan Hills
area," said Arcan President Doug Penner. "We still have further to go in
bringing down our operating and G&A costs. In this regard, completing the Ethel
production corridor of roads and pipelines was a significant milestone for Arcan
in the second quarter and we have slowed the pace of drilling for the latter
part of the year to match our capital investment with our cash flow.
FINANCIAL AND OPERATING SUMMARY:
($000s except per share amounts)
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Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
2012 2011 2012 2011
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Financials
Cash flow from operating activities 16,476 10,180 33,502 19,069
Funds from operations (1) 14,565 10,114 33,010 18,994
Per share diluted (1) 0.15 0.11 0.34 0.21
Net income 8,269 4,267 5,683 1,707
Per share basic and diluted 0.08 0.05 0.06 0.02
Capital expenditures, net - cash 46,354 28,241 152,430 72,401
Debenture face value 171,250 86,250 171,250 86,250
Net debt and working capital,
excluding debentures (3) 151,430 17,132 151,430 17,132
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Operating
Production:
Crude oil and NGLs (barrels
("bbls") per day) 5,173 2,695 4,978 2,543
Natural gas (thousand cubic feet
("Mcf") per day) 487 1,056 520 1,012
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Barrel of oil equivalent ("BOE")
per day (6:1) (2) 5,254 2,871 5,065 2,712
Average realized price:
Crude oil and NGLs ($ per bbl) 79.82 101.10 83.17 92.80
Natural gas ($ per Mcf) 1.96 4.34 2.58 4.38
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Combined price per BOE ($ per BOE) 78.77 96.49 82.01 88.66
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Netback ($ per BOE)(1)
Petroleum and natural gas sales 78.77 96.49 82.01 88.66
Pumping and stimulation services
revenue 2.68 - 4.43 -
Royalties (9.54) (18.65) (11.50) (17.72)
Production and operating expenses (21.61) (22.55) (18.89) (21.11)
Cost of sales for pumping and
stimulation services (2.74) - (4.09) -
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Consolidated operating netback ($
per BOE) (1) 47.56 55.29 51.96 49.83
Realized economic hedging gains
(losses) - cash 0.20 (1.23) (1.04) (0.71)
Cash G&A (8.72) (9.88) (7.12) (5.93)
Other - 0.21 - 0.23
Finance expenses - cash (7.54) (5.15) (7.22) (4.48)
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Corporate netback 31.50 39.24 36.58 38.94
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Three Months Ended Six Months Ended
June 30, June 30, June 30, June 30,
2012 2011 2012 2011
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Common Shares (000's)
Shares outstanding 97,855 88,416 97,855 88,416
Weighted average - basic 97,821 88,226 97,797 88,149
Weighted average - diluted 98,270 89,264 98,428 89,258
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Notes:
(1) The reader is referred to the section "Non-IFRS Measurements".
(2) The reader is referred to the section "Legal Advisories".
(3) Net debt and working capital is calculated by subtracting the current
liabilities and bank debt, but excluding convertible debentures from its current
assets.
FINANCIAL REVIEW:
-- Funds from operations increased 44 percent to $14.6 million during the
second quarter of 2012 over the second quarter of 2011. For the first
six months of the year, the increase was 74 percent. This is a direct
result of the additional volumes from the horizontal wells that Arcan
drilled in the Swan Hills area.
-- Arcan spent $46.4 million of capital on its properties during the three
months ended June 30, 2012, up from $28.2 million for the three months
ended June 30, 2011. During the quarter the Corporation invested heavily
in the Ethel production corridor, including all weather roads, oil and
gas gathering pipelines and waterflood support pipelines, which came on-
line in June 2012.
-- Arcan's bank line increased to $200 million from $120 million, providing
Arcan with financial flexibility to execute its capital program. At the
end of the second quarter the Corporation had a net debt position of
$151.4 million. The Corporation also has $171.3 million outstanding
under its two series of convertible unsecured subordinated debentures
that mature in 2016 and 2018.
-- Arcan received $79.82 per barrel for its light sweet oil for the three
months ended June 30, 2012 and continues to track approximately $3.00 to
$5.00 per barrel off of Edmonton light sweet oil pricing of $84.14 for
the quarter. Oil prices decreased approximately 20 percent from the
second quarter of 2011 and 10 percent for the six months year to date
2012 versus the same period in 2011.
-- Royalties were down to 12 percent of revenue for the second quarter of
2012 versus 19 percent of revenue in the second quarter of 2011 as a
result of new wells receiving the 5% royalty rates.
-- General and administrative ("G&A") expenses in the second quarter of
2012 were down 12 percent over the same quarter in 2011 period to $8.72
per barrel. G&A included $1.2 million or $2.44 per BOE of G&A expenses
from StimSol running as a separate operating business.
OPERATIONS REVIEW:
-- Production increased 83 percent to 5,254 BOE per day from 2,871 BOE per
day for the first quarter of 2011, and increased eight percent from
4,875 BOE per day in the first quarter of 2012.
-- Arcan achieved a 100 percent success rate drilling during the second
quarter of 2012. The Corporation drilled four wells and completed one
well in the quarter. There were five wells drilled but not yet completed
at the end of the second quarter, and completion was subsequently
delayed by poor weather conditions. One well has recently been fractured
and completion operations are underway. The other four wells are
scheduled for completion starting in September 2012, weather permitting.
-- Arcan reduced per-barrel operating costs by four percent in the second
quarter of 2012 as compared to the second quarter of 2011, and by 11
percent for the first six months of 2012 compared to the first six
months of 2011. Arcan continued to incur significant in-field trucking
costs during the second quarter until Ethel production was pipelined.
While operating costs were elevated in the quarter due to unusually wet
spring weather, Arcan anticipates lower costs for the second half of the
year based on the Ethel production corridor coming on-line in June 2012.
-- Arcan's production weighting reached 98 percent light oil in the second
quarter, due to the continued focus on the long life Swan Hills asset.
Natural gas production for the quarter continued to subside due to
normal declines, as well as uneconomic gas prices that drove the shut-in
of gas wells in the McLeod and Hamburg areas and redeployment of capital
towards oil production.
-- Subsequent to the end of the quarter, Arcan sold approximately ten
sections of undeveloped land assets in the Virginia Hills area of
Alberta for $7.0 million. These lands are isolated from Arcan's existing
core production and infrastructure and do not include the successfully
drilled horizontal well or the related lands at Virginia Hills 13-32-64-
13W5. Arcan originally acquired these lands for approximately $3.4
million. The proceeds of the sale will be used to pay down corporate
debt.
OUTLOOK:
Arcan holds a multi-year inventory of low-risk drilling opportunities targeting
light sweet oil plays. The Corporation is planning further drilling focused on
higher impact production results and continued application of the waterflood
process on core properties.
Arcan plans to execute on its strategy to grow production organically by
drilling in the Swan Hills area, increasing reserves, cash flow and production
on a per-share basis. Having invested in expanding the core Ethel asset from two
townships of undeveloped land only a year ago into a strong producing region
with infrastructure and waterflood in place, Arcan is shifting to a program of
sustainable growth, supported by a strengthened balance sheet and focused cost
reductions.
The Corporation currently plans to bring on-stream up to 19 wells in 2012, down
from the 30 wells originally planned when the business environment was stronger.
Arcan now expects production for the full year to average 4,500 to 5,000 BOE per
day. Capital investment has focused on expanding waterflood operations in the
Ethel and in the Deer Mountain Unit #2 areas where Arcan is seeing the
anticipated response from ongoing water injection operations. Arcan now has
implemented waterflood programs in three separate project areas: Deer Mountain
Unit #2, the Morse Unit and Ethel Unit.
In line with its strategic direction, Arcan plans to spend capital within its
existing cash flow stream for the second half of the year and to further reduce
operating costs as the benefits of completed infrastructure investments are
realized. Notably, the Ethel pipeline completion in June 2012 is expected to
decrease associated trucking costs signficantly. In addition, reducing general
and administrative costs remains a key area of focus. Management is looking
strategically at all Arcan assets, and will consider divesting additional
non-core assets or review other opportunities as they arise.
FINANCIAL STATEMENTS AND MANAGEMENT'S DISCUSSION AND ANALYSIS:
Arcan has filed its unaudited condensed interim consolidated financial
statements and the accompanying management's discussion and analysis for the
three month and six month periods ended June 30, 2012, with the Canadian
securities regulatory authorities. These filings are available for review at
www.sedar.com or www.arcanres.com.
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
Additional information about the Corporation, including the Corporation's annual
information form for the year ended December 31, 2011, is available under
Arcan's profile on SEDAR at www.sedar.com.
BOEs may be misleading, particularly if used in isolation. The calculation of
BOEs is based on a conversion ratio of six Mcf of natural gas to one 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 the energy equivalent of six to one,
utilizing a BOE conversion ratio of 6 Mcf: 1 bbl would be misleading as an
indication of value.
Non-IFRS Measurements
Arcan's financial statements have been prepared in accordance with IFRS.
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 IFRS as an indicator of Arcan's performance. Arcan
also presents "funds from operations per share", whereby funds from operations
are divided by the basic and diluted 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.
The measures referenced above do not have any standardized meaning prescribed by
IFRS 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 other companies, and as such, may not be
comparable.
Arcan determines funds from operations as cash flow from operating activities
before changes in non-cash working capital as follows:
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Funds from Operations
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Three Months Ended Six Months Ended
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June 30, June 30, June 30, June 30,
($000's) 2012 2011 2012 2011
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Cash flow from operating activities
(per IFRS) 14,176 10,180 31,202 19,069
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Change in non-cash working capital (1,911) (66) (492) (75)
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Funds from operations 12,265 10,114 30,710 18,994
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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:
Arcan's plans to shift to a program of sustainable growth, strengthening its
balance sheet and focusing on cost reduction; Arcan's plans to bring its capital
spending more in line with its cash flow; Arcan's expectation that it will
consider divesting non-core assets as opportunities arise; Arcan's plan to
ensure that continued growth also delivers value for shareholders over time;
Arcan's expectations that expenses will grow marginally going forward as the
Corporation continues to increase activity levels and its expectation that BOE
numbers will decline as production volumes increase; the Corporation's plans
respecting further drilling and application of waterflood processes to de-risk
specific core properties; Arcan's plans to execute on its strategy to grow
production organically by drilling in the Swan Hills area, creating value for
shareholders through increasing reserves, cash flow and production on a per
share basis; the Corporation's current drilling plans and production forecasts;
Arcan's plans to operate within its existing cash flow stream for the second
half of the year and to further reduce operating costs; and Arcan's expectation
that the completion and operation of the pipeline in June 2012 will
significantly decrease associated trucking costs.
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 results;
the general continuance of current or, where applicable, assumed industry
conditions; continuity of reservoir conditions across Arcan's Swan Hills land
base; the continued availability of cash flow and/or debt and equity sources to
fund Arcan's capital and operating requirements as needed; Arcan's 2012 capital
budget and strategic business plans; 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 2012 as well as its plans to reduce operating expenses
may not be completed in the timelines anticipated or in the manner anticipated
and the execution of such plans and reductions may not have the results
currently anticipated by Arcan; enhanced recovery operations at additional sites
on Arcan's properties may not have the impact on production currently
anticipated by Arcan; the completion of the pipeline may not have the effect on
operating expenses currently anticipated or at all; changes in commodity prices;
unanticipated operating results or production declines; 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; 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; should any one of a number of issues
arise, Arcan may find it necessary to alter its current business strategy and/or
capital expenditure program; 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
for the year ended December 31, 2011, copies of which are available on Arcan's
SEDAR profile at www.sedar.com.
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.
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