Arcan Resources Ltd. (TSX VENTURE:ARN) ("Arcan" or the "Corporation") is pleased
to announce the filing of its annual information form for the year ended
December 31, 2010 ("AIF"). The AIF contains 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 required to be provided under National Instrument 51-101 -
Standards of Disclosure for Oil and Gas Activities and the Canadian Oil and Gas
Evaluation Handbook. In addition, to its AIF, Arcan has publicly filed its
annual financial statements and management's discussion and analysis for the
year ended December 31, 2010. These documents can be retrieved electronically
from the SEDAR system under Arcan's profile at www.sedar.com.
2010 HIGHLIGHTS
Statistics 2010 2009 % chg
----------------------------------------------------------------------------
Net Asset Value per Diluted 5.56 3.08 80
Share ($) (P+P, PV 10)
Net Asset Value ($ millions) 534.2 155.2 244
(P+P, PV 10)
Reserves volumes (MMBOE) 21.1 (94% light oil) 9.4 (89% light oil) 124
(P+P)
FD&A (per BOE) (P+P) 25.05 14.29 75
Production (BOE per day) 2,243 1,375 63
Swan Hills Land (acres) 96,000 31,000 210
Swan Hills horizontal wells 15 -
Swan Hills horizontal 400 50 700
locations
Funds Flow ($ millions) 22.7 5.3 328
Available funds- including 137.7 15.2 805
$86M raised Feb/2011
Shares Outstanding (million) 87.7 47.9 83
Corporate Strategy
Solidify our identity as the leading junior oil weighted resource player on the
Swan Hills trend.
-- Production increased 63 percent to 2,243 barrels of oil equivalent
("BOE") per day: in 2010 from 1,375 BOE per day in 2009. Natural gas
production declined 27 percent but was offset with an increase of 94
percent in light oil production, leaving Arcan production with a 92
percent light oil weighting at the end of 2010;
-- This play is predictable, scalable, and repeatable: 100% drilling
success, Arcan owns 150 square miles of land drillable to 4 wells per
sections with a three year drilling inventory already surveyed inside of
cash flow and existing debt capacity. 70 vertical pre-existing wells and
a new 3D seismic delineate the play over the land base;
-- Increased land and values: Arcan increased its landholdings 210 percent
in 2010 and currently has approximately 96,000 net acres (38,400
hectares or 150 net sections) of land with Swan Hills Beaverhill Lake
reservoir ("Swan Hills") potential. Prices paid for crown land adjacent
to our land holdings have exceeded $6,000/hectare ($2,500/acre); and
-- Arcan makes the TSX Venture 50(R), which are the top ten companies
listed on the TSX Venture Exchange in each of five major industry
sectors.
Operations Strategy
Arcan's strategy is to drill wells, increase production and prove-up reserves on
our land base. We intend to utilize our infrastructure, balance drilling
locations to capture reserves and maximize land continuations, production and
waterflood patterns for enhanced recovery.
-- Completed and tested fifteen (12.9 net) horizontal multi-stage fracture
wells covering a 30 kilometre segment in Arcan's Swan Hills light 40
degrees API sweet oil play. Subsequent to the end of the year, Arcan
drilled eight (7.4 net) successful horizontal multi-stage fractured
light oil wells, re-entered and multi-stage fractured one (1.0 net)
existing old horizontal well is currently drilling on well number 25 in
the Swan Hills play, and anticipates utilizing up to three drilling rigs
during the break-up period. Estimated 20 to 25 new wells in 2011
totalling 35 to 40 horizontal multi-stage fracture wells by the end of
2011;
-- Success: The Deer Mountain Unit #2 ("the Unit") horizontal well program
and waterflood effect: 7.7 net sections of Arcan's land, being only five
percent of its 150 section land base, define the Unit; currently the
Unit comprises approximately 40 percent of Arcan's value and reserves.
These results have been achieved even after the Unit has produced
approximately four million BOE ("MMBOE"), highlighting the value that
may be achieved through the application of a waterflood over our land
base;
-- Swan Hills: In addition to its wells already drilled, Arcan has
estimated approximately 400 additional drilling locations in Swan Hills.
To date, Arcan's reserves bookings from GLJ cover approximately 29 net
sections. 11 of these 20 sections reflect only primary and no waterflood
recovery. At the end of 2010, 18.7 MMBOE of recoverable reserves were
recognized by GLJ. Based on extensive mapping, Arcan's Discovered
Petroleum Initially in Place ("DPIIP") over this land is estimated by
Arcan to be over 600 MMBOE with possible recoveries up to 40 percent on
the Swan Hills play; and
-- Reserves with a 20 year reserve life index weighted 94 percent to light
oil created a 1.5 times recycle ratio on operating netbacks of $36.36
per BOE and a $25.05 per BOE finding, development and acquisition
("FD&A") costs (proved plus probable ("P+P") discounted at ten percent
("PV 10")). Arcan's reserve report recognizes future FD&A costs to be
$15 in the Swan Hills area, combined with new well netbacks of over $75
thereby driving high recycle ratios.
Financial Strategy
Maintain a solid balance sheet and financial stability.
-- Increased net asset value ("NAV") 81 percent to $5.56 per diluted share:
NAV per share increased to $5.56 per diluted share at December 31, 2010
from $3.08 per diluted share at December 31, 2009 (P+P PV 10);
-- Funds from operations increased 328 percent to $22.7 million in 2010
from $5.3 million in 2009 translating into 129 percent per share growth
from $0.14 to $0.32 per share as well as growth on a BOE basis from
$10.65 to $27.78 on a year over year basis. Oil prices increased 14
percent over same period and natural gas prices increased seven percent;
-- Increased credit facility and completed debenture offering: in 2010
Arcan replaced its existing $50 million bank line of credit with a
syndicated $100 million two year banking facility (the "Credit
Facility"). In the first quarter of 2011 Arcan raised $86.25 million
through an offering of 6.25 percent convertible unsecured subordinated
debentures due February 28, 2016 ("Debentures"), providing Arcan with
over $90 million in capital capacity plus cash flow after the first
quarter of 2011;
-- Raised equity and closed a large acquisition: raised $65 million in
equity and purchased 81 net sections of land in the Swan Hills play for
$52.8 million (the "Acquisition"), both of which closed on March 31,
2010 and raised $50.0 million in equity in the fourth quarter of 2010 to
fund the drilling of Arcan's horizontal multi-stage fracture wells in
the Swan Hills play; and
-- Insurance on cash flow: Hedged 2,000 bbls per day for all of 2011 at a
$70 floor with an approximate $100 ceiling Canadian dollar West Texas
Intermediate ("WTI"). Subsequent to year end Arcan hedged 1,000 barrels
("bbls") per day for all of 2012 at an approximate $75 floor with an
approximate $126 ceiling Canadian dollar WTI.
2010 Year in Review
2010 was a significant year of growth for Arcan as it worked to revive and
transition the nearly 60-year-old Swan Hills reef reservoir into a horizontal
multi-stage fractured light oil resource play. On the drilling side, Arcan
started 2010 with its first horizontal well, ended the year with 15 horizontal
wells, is drilling well number 25 today and anticipates it will have a total of
35 to 40 wells by the end of 2011. Arcan estimates that there are over 400
drilling locations through the center of its land base and anticipates that with
150 sections of land drilled to four wells per section, the inventory of
locations could continue to show substantial growth. Arcan is utilizing the 70
pre-existing vertical well bores on or in the vicinity of Arcan's undeveloped
land base as well as a new 3D seismic program shot in the first quarter of 2011,
to provide details on where to drill and what Arcan may find. In the Swan Hills
area, at the beginning of the year, Arcan had 93 gross (61 net) sections of
land, approximately 600 BOE per day and 6.4 MMBOE of reserves worth
approximately $123.1 million P+P PV 10). By the end of 2010 Arcan had 160 gross
(150 net) sections of land, fourth quarter 2010 had 2,349 BOE per day and 18.7
MMBOE of reserves worth approximately $428.0 million (P+P PV 10) in Swan Hills.
On the financing side, Arcan ended 2010 with $48.6 million in debt and working
capital deficit on its existing $100 million Credit Facility and Arcan estimates
that at the end of the first quarter of 2011 it has approximately $90 million in
debt and working capital deficits leaving Arcan with approximately $90 million
of capital capacity plus cash flow. At the end of 2010 Arcan had $48.6 in debt
and working capital deficits on its $100 million of bank lines. This $51.4
million of capital capacity plus the $86.3 million in Debentures left Arcan with
approximately $137.7 million in available funds.
Arcan believes that the results it has experienced in the Unit can be applied to
the balance of Arcan's land base in the Swan Hills play. By the end of 2010,
Arcan had drilled ten (8.1 net) horizontal multi-stage fractured wells covering
approximately one-half of Arcan's 7.7 net sections of land in the Unit. The Unit
has been on production for 50 years, produced approximately four MMBOE, and, as
at the end of 2010, still made up over 40 percent of Arcan's reserves and value
based on a waterflood that was started in 2007. Arcan is of the position that
the Unit results depict the value of horizontal multi-stage fractured wells
combined with waterflood. As the Unit covers only five percent of Arcan's 150
section land base in the Swan Hills area, Arcan has extended the multi-stage
technology over Arcan's Swan Hill lands with four (3.8 net) successful
horizontal wells drilled off of the Unit in 2010 plus one re-entry well and
leaving Arcan with a total of 24 (22.5 net) wells to date in 2011, with one more
well currently drilling. In the past few weeks Arcan has also obtained initial
test from two more wells in the Unit and two wells in the Ethel area tested at
rates similar to previous Arcan wells at more than 600 BOE per day. A
multi-stage stimulation treatment was performed on the existing 6-36-65-9W5M
horizontal well in the Ethel field. The well has tested at rates more than 400
bbls per day and has been equipped with artificial lift. The well is currently
pumping at 160 bbls per day of total fluid with 1,600 bbls of load fluid left to
recover. Arcan is encouraged by the results of these completions and is
evaluating additional stimulations on existing horizontal wells in the Unit and
in the Ethel area.
Arcan is spearheading the development of the Swan Hills Beaverhill Lake
reservoir. With recent well results and re-entries, Arcan has internally
calculated a resource of DPIIP of over 600 MMBOE net to Arcan. DPIIP only
includes discovered petroleum even though there is no certainty that it will be
commercially viable to produce any portion of those resources, unlike other
industry terms like Total Petroleum Initially-In-Place (TPIIP) which includes
discovered and undiscovered reserves that may never be discovered and is being
utilized by the industry to characterise many resource plays. In determining
DPIIP, Arcan used a rigorous petrophysical evaluation of over 100 data points to
identify all pay intervals within the Swan Hill complex and their resulting
porosity and net thickness values and advanced modeling software was used to
determine the vertical and lateral heterogeneities and extent of the reservoir
bodies across the fairway. In-place volumes were calculated using a discrete set
of Phi-h contours that were generated with a three percent porosity cut off.
Based on waterflood recoveries of up to 40 percent in offsetting areas of the
reef, Arcan is of the view that this has the potential to translate into
recoveries over 200 MMBOE (95 percent light oil), with Arcan having recorded
under ten percent of those recoverable reserves at 18.7 MMBOE of its total 21.1
MMBOE in the $5.56 per share NAV.
Arcan anticipates that current global economic uncertainty combined with
political unrest in some of the largest oil producing regions will cause oil
prices to stay above the $75 or even $100 per bbl mark for the next few years,
as indicated by forward strip pricing. Arcan is a light oil company that has had
a rigorous start to developing a large oil asset inventory. Current price levels
provide Arcan with the opportunity to capture significant short and long term
asset growth. Arcan continues to monitor and modify its drilling, completion and
operations programs based on new information and results are relayed to Arcan's
shareholders to provide data about the significance and scope of the asset base.
As part of that growth, Arcan has estimated that 2011 annual production will
average up to approximately 4,000 BOE per day, 80 percent higher than the 2,243
BOE per day in 2010 and that 2011 will see an exit production rate of up to
5,000 BOE per day.
Arcan has drilled or re-entered 24 (21.3 net) horizontal wells to date, 23 (20.3
net) of which have been multi-stage fractured. In addition, Arcan is currently
drilling two wells, wells number 25 at 08-20-068-08W5 and 26 at 05-35-67-8W5. In
2010, Arcan multi-stage fractured 15 (12.9 net) horizontal wells of which, ten
(8.1 net) of the wells were in the Unit, two (2.0 net) wells were in the Ethel
and non-unit lands to the south of the Unit, one (0.8 net) well was in the Morse
River Unit #1, one (1.0 net) well was at 04-02-66-9W5 and one (1.0 net) was in
the south west corner of Arcan's land base at 02-20-66-09W5. On average, the
wells that were on for 30 days produced 360 BOE per day each, the 13 wells that
were on for 60 days produced 330 BOE per day each, the 13 wells that were on for
90 days produced an average of 280 BOE per day each and the nine wells that were
on for 180 days produced an average of 200 BOE per day each. These wells produce
about five percent natural gas and 95 percent light oil. Of Arcan's 24 wells
which have been multi-stage fractured, three wells will be undergoing operations
to resolve production issues, four wells are shut in to facilitate drilling off
pad-sites, two new wells had initial test rates in excess of 600 BOE per day and
the re-entry well, which tested over 400 BOE per day, has had a pump installed
and is producing at approximately 160 BOE per day. Also, three wells are
awaiting installation of production equipment, one well is drilled, two re-entry
wells are waiting fracture and two wells are currently drilling.
Arcan experienced production issues in the first quarter of 2011. A third party
pipeline which had shut-in approximately 700 BOE of production for the first
quarter was repaired and the impacted Arcan production was back on-stream by the
end of the quarter. Arcan also experienced well production issues with six of
its horizontal wells in the Unit. Arcan has conducted workover operations on
three of these wells in order to determine the reason behind the production
issues observed in the first quarter of 2011. These operations have utilized
several techniques to address these production issues. Two of these wells have
been put back on production with the average well production increasing from 40
BOE per day to 100 BOE per day. Production is expected to increase with
additional optimization of the pumping equipment and operation. The third well
is currently back on-line and is recovering load fluid used during the workover.
Initial results are positive with the well producing at rates of more than 125
bbls per day with significant volumes of load fluid left to recover. Based on
the results of these workovers Arcan has developed a plan to address these
production issues in the remaining three wells currently experiencing production
issues. As well, the technical staff has initiated a review of current drilling,
completion, and production practices applied in the Swan Hills area. Based on
the initial findings, Arcan believes that these production issues can be
eliminated in order to ensure long term stable production and reserve recovery.
Arcan's current stabilized production at the start of the second quarter of 2011
is 3,000 BOE per day with four producing horizontal wells shut-in due to
drilling and completion activities being conducting on offsetting padsite wells.
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 Petroleum Consultants Ltd. ("GLJ"), effective December 31, 2010
based on forecast price and cost assumptions. The tables summarize the data
contained in the report prepared by GLJ (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 AIF 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 5,885 4,163 601 365
Developed Non-Producing 839 740 61 43
Undeveloped 5,353 4,129 388 290
----------------------------------------------------
Total Proved 12,077 9,031 1,050 699
Total Probable 6,206 4,231 598 392
----------------------------------------------------
Total Proved + Probable 18,283 13,262 1,647 1,091
Natural Gas(1) Total
----------------------------------------------------
Gross (2) Net (3) Gross (2) Net (3)
Reserves Category (MMcf) (MMcf) (Mbbls) (Mbbls)
----------------------------------------------------
Proved
Developed Producing 2,693 2,210 6,935 4,897
Developed Non-Producing 283 241 947 823
Undeveloped 1,202 1,036 5,942 4,592
----------------------------------------------------
Total Proved 4,178 3,487 13,823 10,312
Total Probable 2,814 2,354 7,273 5,015
----------------------------------------------------
Total Proved + Probable 6,992 5,841 21,096 15,327
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, 2010, in the GLJ Report in estimating reserves data using
forecast prices and costs(1):
Medium and Light Crude Oil Natural Gas
------------------------------------------------
WTI Edmonton
Cushing Par Cromer Alberta
Oklahoma Price Medium Gas
40 40 29.3 Reference
degrees degrees degrees Price AECO - Exchange
API API API Plant Gate C Spot Rate
Year Inflation (US$/bbl) ($/bbl) ($/bbl) ($/MMBTU) ($/MMBTU)(US$/$Cdn)
2010
(actual) 1.8 79.42 78.02 73.81 3.93 4.17 0.971
2011 2.0 88.00 86.22 82.78 3.92 4.16 0.980
2012 2.0 89.00 89.29 83.04 4.51 4.74 0.980
2013 2.0 90.00 90.92 83.64 5.06 5.31 0.980
2014 2.0 92.00 92.96 84.59 5.52 5.77 0.980
2015 2.0 95.17 96.19 87.54 5.97 6.22 0.980
2016 2.0 97.55 98.62 89.75 6.28 6.53 0.980
2017 2.0 100.26 101.39 92.26 6.50 6.76 0.980
2018 2.0 102.74 103.92 94.57 6.65 6.90 0.980
2019 2.0 105.45 106.68 97.08 6.80 7.06 0.980
2020 2.0 107.56 108.84 99.04 6.95 7.21 0.980
Note:
(1) All pricing in the above table, excluding inflation and the exchange rate,
is escalated at 2.0 percent per year after 2020.
Net Asset Value
As detailed in the table below, the NAV of $5.56 per diluted share at December
31, 2010 (on the basis of P+P reserves discounted at ten percent) has increased
by 80 percent over December 31, 2009. The increase in net asset value is
primarily attributable to the impact of the new horizontal multi-stage fracture
wells in the Swan Hills reef play. In 2010, Arcan invested $148.3 million and
grew the present value of the Corporation's reserves by $321.3 million (P+P PV
10) ($467.9 million closing reserves plus $29.8 million in operating netbacks
less $176.4 million opening reserves). Arcan expects that its investment in
horizontal multi-stage acid fracture wells and waterfloods will continue to add
value going forward.
The following NAV calculation is presented for December 31, 2010 and December
31, 2009 and incorporates estimates that may not be comparable year-over-year
and are only at one point in time. An independent evaluation was performed on
Arcan's reserves; however, the land values and seismic values used are based on
management estimates. The working capital deficit (including bank debt) from
the December 31, 2010 financial statements and the dilution proceeds are
computed by taking the outstanding stock options at December 31, 2010 multiplied
by their exercise prices (all options were dilutive as they were exercisable
under $5.45 per share, which was the December 31, 2010 closing share price of
Arcan). The reader is cautioned that the presentation does not reflect all
aspects of the Corporation. Reserve estimates are derived from the GLJ Report
which has an effective date of December 31, 2010.
Net Asset Value December 31, 2010 December 31, 2009
----------------------------------------------------------------------------
($000s except number (P+P (P+P (P+P (P+P
of shares and per discounted discounted discounted discounted
share) at 5%) at 10%) at 5%) at 10%)
-------------------------------------------------------
Present value of
reserves 629,623 467,917 236,782 176,410
Undeveloped acreage
(2010 - $1,000 per
acre) 81,600 81,600 10,220 10,220
Seismic 1,200 1,200 600 600
Working capital
deficit (Including
bank debt) (48,592) (48,592) (34,779) (34,779)
Dilution proceeds(1) 32,052 32,052 2,745 2,745
Estimated value 695,883 534,177 215,568 155,196
Shares (thousands) 96,061(1) 96,061(1) 50,331(1) 50,331(1)
-------------------------------------------------------
Estimated NAV per
share (1) 7.24 5.56 4.28 3.08
Note:
(1) Share figures for 2010 include all dilutive securities namely: 87,670,446
common shares and 8,390,500 stock options that are in the money at their average
exercise price of $3.82 (these were all dilutive securities exercisable below
the $5.45 December 31, 2010 share trading price). For 2009, share figures
include 47,940,060 common shares; 750,000 performance warrants exercisable at
$1.00 per share; and 1,641,000 stock options that are in the money at their
average exercise price of $1.23 (these were all dilutive securities exercisable
below the $1.45 December 31, 2009 share trading price).
FD&A Costs
For the year ended December 31, 2010, Arcan added 12.5 MMBOE of P+P reserves
(21.1 MMBOE closing reserves plus 0.8 MMBOE production less 9.4 MMBOE opening
reserves) on its $313.1 million capital program ($148.3 million capital per the
December 31, 2010 financial statements plus $199.7 million of closing future
capital in the GLJ Report (P+P) less $34.8 million closing future capital in
Arcan's December 31, 2009 reserve report (P+P)) to calculate a $24.08 FD&A cost
per P+P BOE (excludes the effect of the Acquisition). Including the Acquisition,
the FD&A costs was $25.05 per P+P BOE. The aggregate of the exploration and
development costs incurred in the most recent fiscal year and the change during
that year in estimated future development costs generally will not reflect total
FD&A costs related to reserves additions for that year.
The FD&A costs below are depicted after eliminating the effects of acquisitions
and dispositions, including eliminating the Acquisition. It is anticipated that
the full impact of Arcan's horizontal development in the Swan Hills play and the
related shift in reserves will be realized over the next few years.
Life To
P+P FD&A Costs (excl. Acq.) 2010 2009 3 year Date
----------------------------------------------------------------------------
Total Capital ($millions) 313.1 1.1 367.7 532.2
Acquisition capital ($millions) 52.8 - 52.8 52.8
Total capital ($millions) 260.4 1.1 314.9 479.4
Reserve additions (MMBOE) 10.8 0.1 14.2 21.9
P+P FD&A ($ per BOE) $ 24.08 $ 14.29 $ 22.15 $ 21.87
Proved FD&A Costs (excl. Acq.) Life To
2010 2009 3 year Date
----------------------------------------------------------------------------
Total Capital ($millions) 261.9 1.0 316.1 473.8
Acquisition capital ($millions) 52.8 - 52.8 52.8
Total capital ($millions) 209.1 1.0 263.3 421.0
Reserve additions (MMBOE) 6.1 0.1 9.4 14.9
Proven FD&A ($ per BOE) $ 34.36 $ 8.48 $ 28.05 $ 28.23
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.
Arcan has invested substantially in infrastructure in prior years through
facilities, drilling water source wells, and converting producing vertical wells
into injector wells. In waterflood projects the majority of the capital expended
has historically been invested at the front end to produce results over the long
term. The Acquisition in 2010 was land focused adding 81 net sections to Arcan's
land base in the Swan Hills and the costs of the Acquisition are reflected in
the 2010 FD&A costs. In 2011, Arcan expects an upward transition in revenues and
netbacks as commodity prices related to oil rise and Arcan invests in horizontal
multi-stage fracture oil wells in the Swan Hills reef play.
Recycle Ratio
Recycle ratio is a measure for evaluating the effectiveness of a Corporation's
reinvestment program. The ratio measures how well the Corporation replaced every
BOE of production. The table below depicts that Arcan received a net $36.36 per
BOE sold and it cost $25.05 in 2010 to find a replacement BOE. Arcan strives for
a recycle ratio of 2.0 or higher. In 2010, Arcan only achieved a recycle ratio
of 1.5 times which was due primarily to capital expenditures for horizontal
drilling activity focused in the Unit where reserves had already been recorded
on vertical wells in prior years and the higher portion of land acquired during
the year. Arcan determined it was important to demonstrate the effectiveness of
the combination of the horizontal multi-stage fracture wells with the waterflood
and template that over the expanded land base.
For the year ended December 31, 2010, Arcan estimated that it had a 1.5 times
recycle ratio on 12.5 MMBOE P+P reserve additions and a $25.05 FD&A cost (using
a ten percent discount factor) with a 20 year reserve life index. Life to date
("LTD"), Arcan estimates it has a recycle ratio of 1.7 times based on a $22.55
P+P FD&A (discounted at ten percent) and a $38.10 operating netback.
Recycle Ratio (Including
Acquisitions) 2010 2009 3 year average LTD
----------------------------------------------------------------------------
Operating netback ($/BOE) 36.36 24.10 38.42 38.10
Proven finding and
development costs ($/BOE) 34.89 8.48 29.25 29.01
Proven reinvestment
efficiency ratio 1.0 2.8 1.3 1.3
Proven plus probable finding
and development costs
($/BOE) 25.05 14.29 23.12 22.55
Proven plus probable
reinvestment efficiency
ratio 1.5 1.7 1.7 1.7
Recycle Ratio (Excluding
Acquisitions) 2010 2009 3 year average LTD
----------------------------------------------------------------------------
Operating netback ($/BOE) 36.36 24.10 38.42 38.10
Proven finding and
development costs ($/BOE) 34.36 8.48 28.05 28.23
Proven reinvestment
efficiency ratio 1.1 2.8 1.4 1.3
Proven plus probable finding
and development costs
($/BOE) 24.08 14.29 22.15 21.87
Proven plus probable
reinvestment efficiency
ratio 1.5 1.7 1.7 1.7
Reserve Life Index
Using the fourth quarter ended December 31, 2010 average production of 2,800 BOE
per day and December 31, 2010 year-end proved plus probable reserves, Arcan has
a reserve life of 20 years. Arcan anticipates the reserve life index to decline
as production rates are anticipated to elevate.
Production (fourth quarter ended December 31, 2010 average BOE per
day) 2,800
Proved reserves (MBOE) 13,825
Proved reserve life index (years) 13.5
Proved plus probable reserves (MBOE) 21,099
Proved plus probable reserve life index (years) 20.6
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
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.
Additional information about the Corporation, including the Corporation's annual
information form for the year ended December 31, 2010, 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 GAAP 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.
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.
Please see the section "Annual and Fourth Quarter Results of Operations -
Netbacks" in Arcan's management's discussion and analysis for the year ended
December 31, 2010 for a reconciliation between both operating netbacks and
corporate netbacks to revenue.
Arcan determines funds from operations as cash flow from operating activities
before changes in non-cash working capital as follows:
Funds from
Operations Quarter Ended Quarter Ended Year Ended Year Ended
($000's) December 2010 December 2009 December 2010 December 2009
----------------------------------------------------------------------------
Cash flow from (used
in) operating
activities (per
GAAP) 8,044 (371) 19,631 4,327
Change in non-cash
working capital (285) 1,038 3,108 1,018
-------------------------------------------------------
Funds from
operations 7,759 667 22,739 5,345
Readers are cautioned that this press release contains the term "net asset
value" ("NAV") which Management of Arcan 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 are unlikely to be comparable to
similar measures presented by other companies. Arcan's 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" ("FD&A") 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 are
unlikely to be comparable to similar measures presented by other companies.
Arcan's 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 are unlikely to be
comparable to similar measures presented by other companies. Arcan's 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 are unlikely to be comparable to
similar measures presented by other companies. Arcan's 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: the
timing, method and results of drilling and waterflood operations; the timing and
resolution of mechanical/operational issues faced by Arcan; waterflood and CO2
recoveries; future liquidity and financial capacity and resources; the potential
inherent in Arcan's Swan Hills land base; reserve life index; estimated
additional drilling locations; expectations relating to increased shareholder
value; results from operations and financial ratios; the volume and product mix
of Arcan's oil and gas production; cost and expense estimates and expectations;
Arcan's income taxes, tax liabilities and tax pools; oil and natural gas prices
and Arcan's risk management programs; recovery; the impact of the Acquisition;
the amount of asset retirement obligations; cash flow ratios and sensitivities;
estimated DPIIP; royalty rates and their impact on Arcan's operations and
results; capital expenditures; Arcan's review of its Credit Facility; the
reassessment of Arcan's 2011 budget; future growth including development,
exploration, and acquisition, construction and development activities and
related 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 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: 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 internal estimate of DPIIP; 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; review's 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.
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