Press release from Marketwire
Arcan Increases Production, Cash Flow and Net Income in Second Quarter
Friday, August 17, 2012
Arcan Increases Production, Cash Flow and Net Income in Second Quarter09:00 EDT Friday, August 17, 2012CALGARY, ALBERTA--(Marketwire - Aug. 17, 2012) - 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:($000s except per share amounts)Three Months EndedSix Months EndedJune 30, 2012June 30, 2011June 30, 2012June 30, 2011FinancialsCash flow from operating activities16,47610,18033,50219,069Funds from operations (1)14,56510,11433,01018,994Per share diluted (1)0.150.110.340.21Net income8,2694,2675,6831,707Per share basic and diluted0.080.050.060.02Capital expenditures, net - cash46,35428,241152,43072,401Debenture face value171,25086,250171,25086,250Net debt and working capital, excluding debentures (3)151,43017,132151,43017,132OperatingProduction:Crude oil and NGLs (barrels ("bbls") per day)5,1732,6954,9782,543Natural gas (thousand cubic feet ("Mcf") per day)4871,0565201,012Barrel of oil equivalent ("BOE") per day (6:1) (2)5,2542,8715,0652,712Average realized price:Crude oil and NGLs ($ per bbl)79.82101.1083.1792.80Natural gas ($ per Mcf)1.964.342.584.38Combined price per BOE ($ per BOE)78.7796.4982.0188.66Netback ($ per BOE)(1)Petroleum and natural gas sales78.7796.4982.0188.66Pumping and stimulation services revenue2.68-4.43-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)-Consolidated operating netback ($ per BOE) (1)47.5655.2951.9649.83Realized economic hedging gains (losses) - cash0.20(1.23)(1.04)(0.71)Cash G&A(8.72)(9.88)(7.12)(5.93)Other-0.21-0.23Finance expenses - cash(7.54)(5.15)(7.22)(4.48)Corporate netback31.5039.2436.5838.94Three Months EndedSix Months EndedJune 30, 2012June 30, 2011June 30, 2012June 30, 2011Common Shares (000's)Shares outstanding97,85588,41697,85588,416Weighted average - basic97,82188,22697,79788,149Weighted average - diluted98,27089,26498,42889,258Notes:(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 Arcanwith 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 AdvisoriesAdditional 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 MeasurementsArcan'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:Funds from OperationsThree Months EndedSix Months Ended($000's)June 30, 2012June 30, 2011June 30, 2012June 30, 2011Cash flow from operating activities (per IFRS)14,17610,18031,20219,069Change in non-cash working capital(1,911)(66)(492)(75)Funds from operations12,26510,11430,71018,994Forward-Looking Information and StatementsThis 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.FOR FURTHER INFORMATION PLEASE CONTACT: Douglas PennerArcan Resources Ltd.Presidentdpenner@arcanres.comORSuite 2500, 308 - 4th Avenue S.W.Arcan Resources Ltd.Calgary, AB T2P 0H7(403) 262-0321Neither 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.