three months financial and operatios highlights FINANCIAL HIGHLIGHTS
Funds from operations increased 24 percent to $9.7 million during the first quarter of 2013 over the fourth quarter of 2012. In year-over-year results, funds from operations decreased from $18.4 million in the first quarter of 2012, as capital spending decreased by 84 percent from a year earlier (after dispositions).
Arcan decreased its bank line to $190 million from $200 million, reducing bank fees and extending the term of the facility by one year, and reflecting its efforts to pay down debt. Arcan currently has approximately $171.1 million drawn on its credit facilities based on its active winter capital program and expects its restricted summer capital program will reduce debt accordingly.
Arcan received $4.2 million in net proceeds from the disposal of non-core assets in the Swan Hills area, and used these proceeds to reduce debt levels.
Invested $17.1 million of capital (net), after dispositions during the first quarter of 2013 as part of a successful winter drilling program. The amount of capital expenditures in the first quarter of 2013 was down substantially from $106.1 million for the same quarter a year earlier. As budgeted, capital spending was higher than cash flow of $11 million, as Arcan weighted its capital program to the winter months and expects capital spending to fall below cash flow in the summer months.
Decrease in general and administrative ("G&A") expenses of 48 percent from the fourth quarter of 2012, to $5.69 per barrel, due largely to cost-cutting measures taken by the Corporation.
Arcan added to its hedging program to secure approximately 50 percent of its expected cash flow for the next three years.
OPERATIONAL HIGHLIGHTS
Production averaged 4,098 BOE per day during the first quarter of 2013, up three percent from the previous quarter. Production was down from 4,875 in the first quarter of 2012, due to much higher capital spending and high flush production a year ago. Arcan expects waterflood response to enable the Corporation to gradually increase production for the balance of the year.
Waterflood investment and changes to drilling and completion processes strengthened per well production, including higher drilling rate efficiency, optimizing the amount of acid placed per fracture stimulation stage, incorporating cross-linked gels and adding proppant into fracturing operations. Continuous analysis of operating practices and critical review of each well is building a growing knowledge base within Arcan of how to maximize long-term production from this formation.
Reduced per barrel operating costs by nine percent, to $17.52 per BOE in the first quarter in 2013 compared to $19.24 per BOE in the fourth quarter of 2012. Combined with the increased utilization of the pipeline and oil battery infrastructure that has been built, Arcan has made a number of changes to its initial production operating procedures to increase the efficiency of getting wells on production that has led to this reduction in operating costs. Operating costs were up from $15.95 per barrel in the first quarter of 2012 due to several preventative workovers completed during the first quarter of 2013 to reduce the possibility of lost production or having to conduct a remedial workover during spring break-up when it would be more expensive to gain access to the well. Arcan continues to show improvement in our operating costs per barrel in the second quarter of 2013.
Arcan deployed capital into three joint venture farm-out arrangements with Lightstream Resources Ltd. (formerly PetroBakken Energy Ltd.), involving a total of 21 sections of land. Five wells have been drilled, with two more option wells and a development program still possible. Arcan is responsible for 20 percent of the costs of the wells associated with the joint venture farm-out arrangement while retaining operatorship and an average working interest of 48 percent.
Advances in the Ethel pipeline corridor with three pipelines (being a natural gas, oil and an effluent line) in the ground with the natural gas sales pipeline projected to be fully operational in June, 2013.
OUTLOOK
Arcan remains focused on efficient development of its long-life conventional light oil play in the Swan Hills area of Alberta. In an environment of limited access to capital, Arcan is making excellent progress on its core objective of delivering sustainable and profitable production with capital programs that are based on operating cash flow.
Arcan's management team has taken a careful and disciplined review of every aspect of drilling and completions operations and has made substantial changes in several areas, ranging from how lease pads are constructed, how specific sections of the wells are drilled, changes in the fracture stimulation design and execution and what pumps are used as a well transitions to production. These changes have brought total well costs down from approximately $6 - $7 million per well to approximately $4.5 - $5 million per well, and Arcan believes that costs can come down further to average below $4.5 million per well. The average time to drill and complete a well has also dropped by approximately five days. Arcan is working to deliver further reductions in operating costs and is seeking to maintain costs at $15 to $18 per BOE for the remainder of 2013.
Capital expenditure will be reduced during the second and third quarter, when site access is more challenging, and will increase again in the later part of the third quarter and throughout the fourth quarter of 2013. For the remainder of 2013 Arcan has 7 gross (4.9 net) drilling locations currently identified and ready to be drilled. Into the first quarter of 2014, Arcan has 12 gross (9.4 net) drilling locations identified. Of these locations several are follow ups on existing lease locations and others are well advanced in the planning process but the pace of this drilling will depend on capital availability.
Factors impacting 2013 production include the level of waterflood response in the reservoir, and the prevalence of outages or restrictions on third-party infrastructure. Arcan is working on a new reservoir model to improve its ability to accurately forecast the impact of the waterflood in different parts of the reservoir. Since changing its fracturing techniques beginning in late 2012, initial production from each new well has exceeded the previous type curves, which may be a positive signal for future well productivity.
Production in the first quarter of 2013 was negatively impacted by a third-party pipeline outage that impacted about 400 BOE per day, but this is expected to be alleviated in the second half of 2013 with the completion of the Ethel natural gas sales pipeline. Arcan currently anticipates that second quarter production will be approximately 4,000 to 4,200 BOE per day, and expects full-year production to fall into the lower end of its earlier guidance range of 4,300 to 4,700 BOE per day in 2013.
"With the improvement in operating costs, G&A expenses and capital efficiencies in the first quarter of 2013, we feel like we have turned a corner at Arcan as we mature as an organization," said President Doug Penner. "Our management team has come together around clear shared objectives and we are now executing more effectively on a well-defined plan."
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, 2013, with the Canadian securities regulatory authorities. These filings are available for review at www.sedar.com or www.arcanres.com.
ANNUAL AND SPECIAL GENERAL MEETING
Arcan's annual and special meeting is scheduled for June 6, 2013, at 3:00 PM in the McMurray Room of the Petroleum Club, located at 319 - 5th Avenue SW, Calgary, Alberta.