NOT FOR DISTRIBUTION TO U.S. NEWSWIRE SERVICES OR FOR DISSEMINATION IN THE
UNITED STATES OF AMERICA
Arcan Resources Ltd. (TSX VENTURE:ARN) ("Arcan" or the "Corporation") increased
production in the first quarter of 2014 by approximately seven percent,
generated a 51 percent increase in funds from operations and reduced costs, as
compared to the fourth quarter of 2013.
"The results from the first quarter 2014 are reflective of our ongoing
improvements in production, cost management and capital efficiencies" said Chief
Executive Officer Terry McCoy. "We continue to pursue strategic initiatives,
such as non-core asset sales, that will help reduce our debt in order to
increase the pace of development and capitalize on these improvements and
efficiencies."
"Arcan's production rose to 3,740 barrels of oil equivalent ("BOE") per day in
the first quarter of 2014. This was above our target of 3,600 BOE per day. The
elevated production was based on the four new wells that Arcan completed this
winter and are performing above our high case expectations. These production
rates were achieved despite third party facility issues and severe weather
conditions that negatively impacted January production, resulting in average
production of 2,868 BOE per day. First quarter production also compensated for
the sale of Arcan's Virginia Hills property at the end of 2013 which had
contributed approximately 234 BOE per day. We believe this production growth
will continue in the second quarter of 2014, and anticipate average production
of approximately 4,000 to 4,200 BOE per day. Based on initial production results
from the four new wells that commenced production during the first quarter of
2014, as well as continued waterflood response, Arcan is raising its annual
average production guidance range to 3,500 to 3,800 BOE per day from 3,400 to
3,800 BOE per day. Furthermore, based on the successful results of our recent
drilling campaign, we anticipate expanding next winter's drilling program
scheduled from September to 2014 to March 2015 to include eight to ten
offsetting wells that will target these higher production rates."
Arcan's netbacks improved by 40 percent during the quarter to $60.20 over the
fourth quarter of 2013 as a result of higher production and improved prices for
crude oil, liquids and natural gas. Funds from operations also increased 51
percent over the fourth quarter of 2013 to $10.5 million. The Corporation's
capital spending program remained on target during the quarter, with Arcan
investing $16.9 million in the successful winter drilling program. Arcan also
continued to focus on lowering expenses, which resulted in reductions to
operating costs of 12 percent to $16.40 per BOE and general and administrative
("G&A") expenses by 28 percent to $5.27 per BOE as compared to the fourth
quarter of 2013.
"The significant production results from our winter drilling program, combined
with improvements on all key metrics in the first quarter of 2014, are starting
to build positive traction," said President Doug Penner. "We expect our drilling
targets to maximize production rates from future wells. We anticipate moderate
increases in production into 2015 as we ramp up new wells. This continued
success is based on our long-term investment in both infrastructure and
waterflood recovery techniques, as well as the improvements we have made to our
drilling and fracturing processes."
"The winter drilling program was the most successful in our history. Arcan's
management team has clear, shared objectives and we are executing effectively on
a well-defined plan. We continue to evaluate sales of our light oil assets,
joint ventures and farm-outs to pay down our debt and address our outstanding
debentures."
Three Months Ended
March 31, 2014 March 31, 2013 Dec 31, 2013
------------------------------------------------
Financials ($000s except per
share amounts)
Petroleum and natural gas
revenue 31,492 31,200 25,811
Pumping and stimulation
services revenue 380 987 1,815
Cash flow from operating
activities 6,348 11,008 9,059
Funds from operations (1) 10,495 9,700 6,944
Per share basic and
diluted (1) (2) 0.11 0.10 0.07
Loss (6,586) (2,966) (17,988)
Per share basic and
diluted (2) (0.07) (0.03) (0.18)
Capital expenditures, net -
cash 16,844 17,088 (2,024)
Total assets 610,302 616,411 609,071
Total liabilities 391,135 370,741 383,368
Debenture face value 171,250 171,250 171,250
Shareholders' equity 219,167 245,670 225,703
Bank loan 150,751 149,898 159,423
Net debt and working capital
(1) 325,280 317,788 313,311
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Operating
Production:
Crude oil and NGLs
(barrels ("bbls") per
day) 3,635 4,080 3,433
Natural gas (thousand
cubic feet ("Mcf") per
day) 631 110 429
------------------------------------------------
BOE per day(3) 3,740 4,098 3,504
Average realized price:
Crude oil and NGLs ($ per
bbl) 95.27 84.93 81.36
Natural gas ($ per Mcf) 5.78 1.91 3.03
------------------------------------------------
Combined price per BOE ($
per BOE) 93.57 84.60 80.07
Three Months Ended
March 31, 2014 March 31, 2013 Dec 31, 2013
------------------------------------------------
Netback ($ per BOE)(1)
Petroleum and natural gas
sales 93.57 84.60 80.07
Pumping and stimulation
services revenue 1.13 2.68 5.63
Royalties (17.22) (13.65) (17.01)
Production and operating
expenses (16.40) (17.52) (18.58)
Cost of sales for pumping
and stimulation services (0.88) (5.25) (7.09)
------------------------------------------------
Consolidated operating
netback ($ per BOE) (1) 60.20 50.86 43.02
Realized economic hedging
gains (losses) - cash (9.89) 1.51 (2.33)
Cash G&A (1) (5.27) (5.69) (7.37)
Cash finance expenses(1) (12.83) (11.72) (13.88)
------------------------------------------------
Corporate netback (1) 32.21 34.96 19.44
----------------------------------------------------------------------------
Common Shares (000's)
Shares outstanding 97,860 97,860 97,860
Weighted average - basic
and diluted(2) 97,860 97,860 97,860
Notes:
(1) The reader is referred to the section "Non-IFRS Measurements".
(2) Basic and diluted weighted average shares are the same as the
Corporation incurred a loss in these periods.
(3) The reader is referred to the section "Legal Advisories".
FINANCIAL HIGHLIGHTS
-- Operating netbacks increased by 40 percent to $60.20 per BOE in the
first quarter of 2014 from $43.02 per BOE in the fourth quarter of 2013,
and increased 18 percent from $50.86 in the first quarter of 2013.
-- Funds from operations increased 51 percent to $10.5 million during the
first quarter of 2014 over the fourth quarter of 2013. In year-over-year
results, funds from operations increased eight percent from $9.7 million
in the first quarter of 2013.
-- Arcan decreased the draw on its bank line by $8.7 million, reflecting
its ongoing efforts to pay down debt. Arcan currently has $155.2 million
drawn on its credit facilities, down from $159.4 million at the end of
2013, but slightly up from $149.9 million at this time last year. Arcan
has completed its winter capital spending program and expects a
restricted summer program will contribute to further reductions in the
debt level.
-- Invested $16.9 million of capital ($16.8 million net of dispositions)
during the first quarter of 2014 as part of the successful winter
drilling program. The amount spent in the first quarter of 2014 was down
from $21.6 million ($17.1 million net of dispositions) during the first
quarter a year earlier. As budgeted, capital spending was higher than
funds from operations of $10.5 million because Arcan has weighted its
capital program to the winter months and expects capital spending to
fall below funds from operations in the summer months of 2014.
-- Decrease in G&A expenses of 28 percent to $5.27 per BOE from $7.37 per
BOE in the fourth quarter of 2013. G&A expenses were lower by seven
percent from $5.69 per BOE in the first quarter of 2013.
-- Arcan eliminated the hydrochloric acid inventory held by its non-core
subsidiary Stimsol Canada Inc. As a result, the Corporation held no acid
inventory at the end of the first quarter of 2014. Furthermore, Arcan
terminated its existing hydrochloric acid supply contract that contained
a reservation fee to be paid by Arcan up to a maximum of $20.3 million
if no additional hydrochloric acid was purchased over the period of the
contract. In order to terminate this contract, Arcan agreed to pay the
supplier thereunder $1.5 million on or before March 31, 2014 and $1.5
million on or before January 1, 2015. Furthermore, a portion of the
proceeds from any sale of StimSol is required to be paid to the
supplier.
OPERATIONAL HIGHLIGHTS
-- The Q1 2014 drilling program production results continue to exceed
expectations from four new wells. The wells have average production
rates of 388 BOE per day per well since they came on production and are
currently producing approximately 350 BOE per day per well. Drilling and
completing these four wells cost an average of $4.7 million each, which
is down 23 percent from Arcan's cost of drilling and completing a well
in 2012. Arcan anticipates drilling eight to ten offsetting wells during
next winter's drilling program.
-- Average production increased seven percent to 3,740 BOE per day during
the first quarter of 2014, up from the previous quarter's 3,504 BOE per
day. Production was down from 4,098 BOE per day in the first quarter of
2013. This was primarily due to the sale of Arcan's Virginia Hill
property in the fourth quarter of 2013, which had contributed
approximately 234 BOE per day of production. Arcan's production rates
have remained relatively flat over the past six quarters, ranging from
3,500 to 4,100 BOE per day. Production was approximately 4,553 BOE per
day during March 2014 and 4,500 BOE per day for April 2014.
-- Reduced operating costs by 12 percent to $16.40 per BOE in the first
quarter of 2014 from $18.58 per BOE in the fourth quarter of 2013, and
down six percent from $17.52 in the first quarter of 2013. Arcan expects
further reductions in operating expenses as a result of the
electrification infrastructure completed for Deer Mountain Unit #2. The
Corporation is planning an extension of electrical service to the
northern portion of Ethel and to the Ethel battery, expected to be
completed in the second half of 2014.
-- Further reductions in operating costs are expected as Arcan has entered
into an agreement to sell the Ethel oil sales pipeline for approximately
$5.2 million, with closing expected in the second quarter of 2014. The
14.5 kilometre pipeline was constructed as part of the Ethel pipeline
corridor in 2013. The final commissioning of the line is expected to be
completed in the second half of 2014, when commissioned the pipeline is
expected to reduce trucking and associated costs by an estimated $1.50
per BOE.
-- Waterflood investment continues as Arcan converted two wells at a
combined cost of less than $1 million to support water injection in the
southern portion of Ethel. Arcan has applied for further expansions to
the Ethel and Deer Mountain Unit #2 enhanced recovery waterflood
schemes.
OUTLOOK
Arcan remains focused on the efficient development of its long-life,
conventional light oil play in the Swan Hills area of Alberta. Arcan is
advancing its core objective of delivering sustainable and profitable production
with capital programs designed within funds from operations and is doing so in
an environment of limited access to capital. Arcan is also working to deliver
further reductions in operating costs and is seeking to drive operating costs
towards $15.00 per BOE by the end of 2014.
Arcan's management team has undertaken a careful and disciplined review of every
aspect of drilling and completions operations. The resulting improvements have
brought total well costs down to an average of $4.7 million per well from
approximately $6.1 million per well and Arcan continues its efforts to drive
these costs even lower.
The Corporation expects to reduce capital expenditures during the second and
third quarters when well site access is typically more challenging due to wet
weather conditions. Expenditures will increase again in the latter portion of
the third quarter and throughout the fourth quarter of 2014. During the next two
quarters Arcan will focus on upgrading its Ethel oil battery as well as
extending electrical service from Deer Mountain through the northern portion of
the Ethel Field to the Ethel oil battery.
Arcan anticipates drilling 5 gross (4.0 net) locations in the second half of
2014 as part of its winter drilling program which is scheduled to commence in
September 2014. These wells are part of the Corporation's 2014/2015 winter drill
period where Arcan plans to double its 2013/2014 winter program to drill a total
of 10 gross (9.0 net) locations. The majority of next winter's expected drilling
locations are in proximity to the four recent, highly successful wells. Arcan's
forward drilling programs are being guided by thorough geological mapping of its
assets based upon detailed reservoir and well performance models.
Arcan expects second quarter production to average between 4,000 to 4,200 BOE
per day, and has updated its expectations for full-year production to average
3,500 to 3,800 BOE per day. Positive factors impacting 2014 production thus far
include excellent initial production results from Arcan's latest drilling
program, continued waterflood response and expansion of the amount of production
supported by waterflood.
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 period ended March 31, 2014, with the Canadian securities regulatory
authorities. These filings are available for review at www.sedar.com and
www.arcanres.com.
ANNUAL AND SPECIAL GENERAL MEETING
Arcan's annual and special meeting is scheduled for June 24, 2014, at 3:00 PM in
the McMurray Room of the Petroleum Club, 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
Additional information about the Corporation, including the Corporation's annual
information form for the year ended December 31, 2013, 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 (each, a "share") outstanding to determine per share amounts. Arcan also
presents "net debt and working capital" which should not be considered an
alternative to, or more meaningful than, "current liabilities" or "working
capital". Net debt and working capital is calculated by subtracting the current
liabilities (excluding bank debt), bank debt, and convertible debentures from
current assets. Arcan also presents "cash general and administrative expenses\"
("Cash G&A") which should not be considered an alternative to, or more
meaningful than, "general and administrative expenses". Cash G&A is calculated
by subtracting capitalized stock based compensation included in general and
administrative expenses, from general and administrative expenses. Arcan also
presents "cash finance expenses" which should not be considered an alternative
to, or more meaningful than, "finance expenses". Cash finance expenses is
calculated by subtracting accretion of convertible debenture liability and
accretion of decommissioning obligations, from finance expenses.
Operating netbacks are presented on an operating segment and consolidated basis.
"Operating netbacks" for the exploration and production segment represent
Arcan's petroleum and natural gas revenue, less royalties and production and
operating expenses. "Operating netbacks" for the pumping and stimulation segment
represent pumping and stimulation services revenue, less cost of sales for
pumping and stimulation services. "Consolidated operating netbacks" represent
the sum of the operating netbacks for the exploration and production and pumping
and stimulation segments. "Corporate netbacks" represent Arcan's consolidated
operating netback, plus other revenue, plus or minus realized economic hedging
gains or losses, less Cash G&A and cash finance expenses 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 may not be comparable to similar measures presented by other
companies. Management believes that funds from operations and both operating and
corporate netbacks are useful supplemental measures as they indicate Arcan's
ability to fund future growth through capital investment and/or to 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.
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:
Funds from Operations
----------------------------------------------------------------------------
Three Months Ended
-------------------------------
($000's) March 31, 2014 March 31, 2013
-------------------------------
Cash flow from operating activities (per
IFRS) 6,348 11,008
Change in non-cash working capital 4,147 (1,308)
Funds from operations 10,495 9,700
Arcan determines net debt and working capital as follows:
Net debt and working capital
----------------------------------------------------------------------------
As At
December 31,
($000s) March 31, 2014 2013
--------------------------------
Current assets 16,089 24,030
Less:
Current liabilities (excluding bank debt and
convertible debentures) 39,447 28,185
Bank loan 150,751 159,423
Debentures 151,171 149,733
--------------------------------
Net debt and working capital (325,280) (313,311)
Arcan determines Cash G&A as follows:
Cash G&A
----------------------------------------------------------------------------
Three Months Ended
------------------------------
($000's) March 31, 2014 March 31, 2013
------------------------------
General and administrative expenses (per IFRS) 1,773 2,097
Less:
Stock based compensation - -
------------------------------
Cash G&A 1,773 2,097
Arcan determines cash finance expenses as follows:
Cash finance expenses
----------------------------------------------------------------------------
Three Months Ended
------------------------------
($000's) March 31, 2014 March 31, 2013
------------------------------
Finance expense (per IFRS) 6,020 5,869
Less:
Accretion of convertible debenture liability 1,438 1,384
Accretion of decommissioning obligations 264 162
------------------------------
Cash finance expenses 4,318 4,323
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'', ''will'', ''should'', ''believe'', ''plans'' 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 production and guidance in respect thereof;
Arcan's cash flow, cost management and capital efficiencies; Arcan's strength of
daily operations; Arcan's growth and activities throughout the remainder of
2014; operating costs per barrel; Arcan's business plans, strategic initiatives
and objectives and its ability to execute thereon; the timing, method, cost and
results of drilling and waterflood operations; estimated additional drilling
locations; Arcan's debt level; the infrastructure development and the timing and
effects thereof; the sale of the Ethel oil sales pipeline and the timing of
closing thereof; cost and expense estimates and expectations; 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 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; 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 2014 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 may not
have the impact on production currently anticipated by Arcan; StimSol Canada
Inc. may not 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 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.
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.
Neither TSX Venture Exchange nor its Regulation Services Provider (as that term
is defined in the policies of the TSX Venture Exchange) accepts responsibility
for the adequacy or accuracy of this release.
FOR FURTHER INFORMATION PLEASE CONTACT:
Terry McCoy
Chief Executive Officer
tmccoy@arcanres.com
Douglas Penner
President
dpenner@arcanres.com
Arcan Resources Ltd.
Suite 2200, 500 - 4th Avenue S.W.
Calgary, AB T2P 0H7
Telephone (403) 262-0321
(TSXV:ARN)
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