The Globe and Mail

Go to the Globe and Mail homepage

Jump to main navigationJump to main content

Press release from Marketwire

Arcan Releases Third Quarter Results

Wednesday, November 14, 2012

Arcan Releases Third Quarter Results08:25 EST Wednesday, November 14, 2012CALGARY, ALBERTA--(Marketwire - Nov. 14, 2012) - Arcan Resources Ltd. (TSX VENTURE:ARN) ("Arcan" or the "Corporation") announces its financial and operating results for the three and nine month periods ended September 30, 2012. Chief Executive Officer Terry McCoy commented, "We took a number of significant steps during the third quarter to support Arcan's ongoing strategic transition. From non-core asset sales to stabilized capital planning, the changes reflect the evolution underway at Arcan and our vision for the future. As a high-growth junior explorer, we invested heavily in infrastructure and quickly built a solid production base of approximately 4,000 barrels per day. We are now evolving into a sustainable production company developing a high-quality resource play that will deliver long-term value for investors. This transition has not been easy and we have had some growing pains, but we have turned the corner. Having completed some one-time items for immediate impact, including disposing of non-core assets to pay down debt and selling acid inventory to decrease our obligations, we are now pursuing more pervasive, long-term changes such as cutting costs, improving efficiency and ensuring greater accuracy in our operational forecasting. We are starting to see waterflood response stabilizing our production, and we have maintained sufficient financial flexibility to keep our strategic options open. We are striving to position Arcan for long-term success and to regain the market's confidence based on our excellent underlying asset base."FINANCIAL AND OPERATING SUMMARY:($000s except per share amounts)Three Months EndedNine Months EndedSeptember 30, 2012September 30, 2011September 30, 2012September 30, 2011FinancialsCash flow from operating activities5,43210,46938,93429,538Funds from (used in) operations (1)(1,589)10,49031,42129,484Per share diluted (1)(0.02)0.120.320.33Net income (loss)(27,480)776(21,797)2,483Per share basic and diluted(0.28)0.01(0.22)0.03Capital expenditures, net - cash12,39886,696164,828159,097Debenture face value171,25086,250171,25086,250Net debt and working capital, excluding debentures (3)147,43289,692147,43289,692OperatingProduction:Crude oil and NGLs (barrels ("bbls") per day)3,8613,4774,6032,858Natural gas (thousand cubic feet ("Mcf") per day)3391,2424601,090Barrel of oil equivalent ("BOE") per day (6:1) (2)3,9173,6844,6793,040Average realized price:Crude oil and NGLs ($ per bbl)81.7187.3182.7690.55Natural gas ($ per Mcf)2.863.852.654.17Combined price per BOE ($ per BOE)80.7883.7081.6686.63Netback ($ per BOE)(1)Petroleum and natural gas sales80.78 83.7081.66 86.63Pumping and stimulation services revenue 1.24 1.03 3.53 0.42Royalties(14.94)(16.20)(12.47)(17.09)Production and operating expenses(24.00) (24.33)(20.32) (22.42) Cost of sales for pumping and stimulation services(5.01)(2.30)(4.34)(0.94)Consolidated operating netback ($ per BOE) (1)38.0741.9048.0646.60Realized economic hedging gains (losses) - cash1.27-(0.39)(0.42)Cash G&A(8.88)(6.06)(7.61)(5.98)Other- 0.01- 0.14Finance expenses - cash(11.46)(4.29)(8.41)(4.40)Corporate netback19.0031.5631.6535.94Three Months EndedNine Months EndedSeptember 30, 2012September 30, 2011September 30, 2012September 30, 2011Common Shares (000's)Shares outstanding97,86088,42697,86088,426Weighted average - basic97,85988,42597,81888,242Weighted average - diluted97,85989,91997,81889,397Notes:(1)The reader is referred to the section "Non-GAAP 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:Three asset transactions - Arcan received net proceeds of $18.8 million from two non-core asset sales that helped reduce debt during the quarter. The Hamburg area properties sold for net proceeds of $11.9 million, which represented a loss of $25.0 million from the net book value of $36.9 million. The Virginia Hills undeveloped land sold for net proceeds of $6.9 million, representing a gain of $3.9 million over the net book value of $3.0 million. Both assets were sold to the highest bidders in an open process that started in May. Arcan also disposed of approximately $24.3 million of surplus raw acid inventory during the third quarter, realizing a loss of $8.0 million. The inventory disposition corresponds to the slow-down in Arcan's activity levels and reduced our obligations by $16.3 million.Exploration and Production ("E&P") operating netbacks were $15.0 million or $41.84 per BOE in the third quarter of 2012, similar to the $14.6 million or $43.17 per BOE in the third quarter of 2011. For the nine months ended September 30, 2012, E&P operating netbacks were $62.7 million or $48.87 per BOE compared to the $39.1 million or $47.12 per BOE for the nine month period ended September 30, 2011.Funds from operations decreased to a negative ($1.6) million during the third quarter of 2012 over the $10.5 million from third quarter of 2011. The decrease was mainly due to the loss on acid inventory as well as costs related to Arcan's subsidiary StimSol Canada Inc. ("StimSol"), cash general and administrative ("G&A") expenses and finance charges. For the first nine months of the year, Arcan's funds from operations increased seven percent to $31.4 million.Arcan received $81.71 per barrel for its light sweet oil for the three months ended September 30, 2012 versus Edmonton light sweet oil pricing of $84.72 for the quarter. Oil prices decreased approximately eight percent from the third quarter of 2011 and eight percent for the nine months year to date 2012 versus the same period in 2011. Royalties were down to 18 percent of revenue for the third quarter of 2012 versus 19 percent of revenue in the third quarter of 2011 as a result of new wells receiving a royalty rate of five percent. Third quarter 2012 royalties include the impact of a $1.1 million revision from prior periods. G&A expenses in the third quarter of 2012 were $8.88 per BOE up from $6.06 per BOE in the same quarter in 2011 to but were relatively unchanged from the $8.72 per BOE from the second quarter of 2012. G&A included $0.8, million or $2.13 per BOE, of G&A expenses incurred as a result of StimSol running as a separate operating business. Arcan is relocating its corporate head offices in November to reduce ongoing G&A expenses by approximately $0.8 million per year.In line with Arcan's commitment to reducing capital, Arcan spent $12.4 million of capital on its properties during the three months ended September 30, 2012, versus expenditures of $86.7 million for the three months ended September 30, 2011. During the quarter the Corporation invested in completing one well in Gere, building pipelines and access roads for the four wells being completed in northern Ethel and in waterflood activities in both Deer Mountain Unit #2 and Ethel. Arcan announced updated reserves information effective June 30, 2012 highlighting stabilized proved producing reserves from December 31, 2011.Arcan's credit facility borrowing base was confirmed at $200.0 million, providing Arcan with financial flexibility to execute its capital program. At the end of the third quarter the Corporation had a net debt position, in addition to its outstanding long-term debentures, of $147.4 million, which is down from $151.4 million at the end of the second quarter. OPERATIONS REVIEW:Production increased six percent to 3,917 BOE per day from 3,684 BOE per day for the third quarter of 2011. Year to date production increased 54 percent to 4,679 BOE per day from 3,040 BOE per day for the same nine month period in 2011. However, production decreased from 5,254 BOE per day in the second quarter of 2012 due to flush production and steep initial production declines on newly drilled horizontal wells. These declines have now moderated.Arcan's per-barrel operating costs decreased by one percent in the third quarter of 2012 as compared to the third quarter of 2011, and by nine percent for the first nine months of 2012 compared to the first nine months of 2011. During the third quarter of 2012, Arcan incurred significant one-time costs including with respect to the removal of rental equipment from wells that were tied in to the newly constructed Ethel production pipeline, in addition to costs incurred as a result of weather related issues. Arcan anticipates lower costs for the balance of the year based on the Ethel production corridor.Arcan's production weighting reached 99 percent light oil in the third quarter, due to the continued focus on the long life Swan Hills asset and the sale of the Hamburg area assets. Arcan fractured one well during the third quarter of 2012. Completions on four wells previously drilled commenced on October 27, 2012, after significant delays related to poor weather conditions. Subsequent to the end of the third quarter, Arcan drilled a well on one of the 4.5 sections of land farmed out to the west of Deer Mountain Unit #2. Completion of the well is expected during the fourth quarter of 2012. Arcan has also entered into another farm-out on three sections of land. Arcan is the operator in respect of the farmed-out lands and expects to drill a well on the lands in the first quarter of 2013. OUTLOOK:Arcan's activities are focused on developing the large light oil resource in the Swan Hills area. Over the last 18 months Arcan has transformed more than 60 square miles of undeveloped land into a large development inventory of drill-ready locations within a proven oil reservoir. This development is now supported by an infrastructure corridor consisting of roads, pipelines, and facilities. Arcan is already starting to benefit from the key components of this infrastructure, as demonstrated by reduced development capital on a newly drilled well; declining operating costs; and response from an enhanced oil recovery program in the early stages of the field production. Arcan continues to shift to a program of sustainable growth, supported by a strengthened balance sheet and focused cost reductions and is working to deliver average production of approximately 4,500 BOE per day for 2012. To secure cash flow, Arcan is hedged at 2,000 bbls per day for all of 2013 and 2014 at approximately $100 WTI for 2013 and at $93 WTI for 2014. In line with its strategic direction, Arcan plans to manage capital within its existing cash flow stream for the first half of 2013 and to further reduce operating costs as the benefits of completed infrastructure investments are realized. In addition, reducing general and administrative costs remains a key area of focus, including an office move slated for November 16, 2012. Management continues to look strategically at all of Arcan's assets, and will consider all opportunities for development and acceleration as they arise. 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. Recently, both WTI price changes as well as the Edmonton par discount to WTI have impacted Arcan. To further manage and mitigate fluctuations in oil prices, Arcan continues its efforts to reduce committed capital and control the pace of its development. This is expected to ensure that the Corporation can continue financially sustainable growth and efficient deployment of capital. Arcan anticipates higher capital spending during the winter months spanning the fourth quarter of 2012 and the first quarter of 2013 to provide for capital efficiencies, followed by a curtailment of capital in the second quarter of 2013 to provide for cash flow to reduce leverage. The changing environment is driving Arcan to make operational adjustments as well. Two new farm-out agreements provide for capital-efficient development on areas of Arcan's land base that would not otherwise have been developed in the near term. Arcan will continue to implement changes that provide for a stable financial base, maximize shareholder value and provide secure growth per share.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 nine month periods ended September 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-GAAP 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" for the exploration and production segment, or "exploration and production netbacks", represent Arcan's petroleum and natural gas revenue, less royalties and production and operating expenses. "Operating netbacks" for the pumping and stimulation segment, or "pumping and stimulation operating netbacks", 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 expenses and cash interest 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 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. Reconciliations between both operating netbacks and corporate netbacks to revenue are set out in the section "Results of Operations - Netbacks" in the Corporation's management's discussion and analysis for the period ended September 30, 2012. Arcan determines funds from operations as cash flow from operating activities before changes in non-cash working capital as follows:Funds from OperationsThree Months EndedNine Months Ended($000's)September 30, 2012September 30, 2011September 30, 2012September 30, 2011Cash flow from operating activities (per IFRS)5,43210,46938,93429,538Change in non-cash working capital(7,021)21(7,513)(54)Funds from (used in) operations(1,589)10,49031,42129,484Forward-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; anticipated reserves increases; the timing, method and results of drilling and waterflood operations; the timing of pay-out for Arcan's 2012 and 2012 drilling program; anticipated production volumes; estimated additional drilling locations; changes and improvements to Arcan's drilling and completion techniques; impact of and estimated waterflood recoveries; the application and modification of horizontal, multi-stage facture technologies; future revenues; future liquidity and financial capacity and resources; cost and expense estimates and expectations; expectations respecting the use of proceeds from Arcan's drilling program; oil and natural gas prices and Arcan's risk management programs; 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; and Arcan's plans to further reduce operating 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; 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 and 2013 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: 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. Contact Information: Arcan Resources Ltd.Douglas PennerPresidentdpenner@arcanres.comArcan Resources Ltd.Suite 2500, 308 - 4th Avenue S.W.Calgary, AB T2P 0H7(403) 262-0321New address effective November 19, 2012:Suite 2200, 500 - 4th Avenue S.W.Calgary, AB T2P 2V6(403) 262-0321