Divestiture package Arcan Resources Ltd. has engaged RBC Capital Markets and Scotia Waterous Inc. as its financial advisers to examine the sale of certain light oil, early-stage properties in the Swan Hills region of Alberta.
"Over the past four years, we have focused on efficiently developing these light oil reservoirs, and we are now looking to capture a return that will help strengthen our balance sheet," said Doug Penner, president of Arcan. "The assets total approximately one-third of Arcan's production and reserves, and a sale would provide financial flexibility, allowing Arcan to drive cash flow into the further development of our inventory of long-life, light oil properties. We believe the divestiture of these assets and further investment in our remaining core assets will be accretive to shareholder value."
The company has engaged RBC, as its lead adviser, to solicit interest in Deer Mountain unit No. 2 and its adjacent non-unit leases, Deer Mountain West, and Virginia Hills. In June, 2013, the offered properties produced approximately 1,482 barrels of oil equivalent per day. This production was 97 per cent light oil or 1,431 barrels of oil and liquids per day of 37-degree to 40-degree sweet API oil plus approximately 307,000 cubic feet per day of natural gas from the established Beaverhill Lake Swan Hills production platform.
Arcan has invested in core infrastructure in Deer Mountain unit No. 2 and on some of its adjacent non-unit leases to implement fully enhanced water flood recovery and stabilize production, while Deer Mountain West and Virginia Hills are offered as development-stage properties. These properties produce light oil from the Swan Hills region capturing strong prices and attractive netbacks. The company believes that the offered properties are long-life production assets where a defined-well inventory has been derisked by recent industry activity and Arcan drilling. Arcan believes that the offered properties hold significant potential for production growth, with additional water flood and infill development drilling locations.
The offered properties:
- Deer Mountain Unit No. 2 and its Adjacent Non-Unit Leases
- 1,119 BOE per day, low decline light oil production
- Operated position of 8,960 gross (7,573 net) acres
- Arcan 80.8742 percent unit and 80.0 percent non-unit working interest
- Waterflood at Deer Mountain Unit No. 2 has been implemented across entire unit
- Arcan estimates 66 million bbls of discovered oil initially in place ("DOIIP")
- Total proved plus probable reserves of 9,040 thousand BOE
- 3D seismic across asset
- Additional potential infill drilling locations
- Newly constructed oil battery supporting 8,000 bbls per day
- High grade road system for year-round well access
- Deer Mountain West
- 201 BOE per day net production from two wells
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- 00/14-28 - peak initial 30 day gross production of 281 bbls per day; cumulative oil production to date of 20 thousand bbls in three months
- 00/06-28 - peak initial 30 day gross production of 282 bbls per day; cumulative oil production to date of 56 thousand bbls in eight months
- Operated position of 2,880 gross (1,440 net) acres
- Arcan 50.0 percent working interest
- Arcan estimates 27 million bbls of DOIIP
- Total proved plus probable reserves of 1,017 thousand BOE
- Potential to drill up to 14 additional infill horizontal drilling locations
- Established infrastructure capacity capable to support growth
- Believed to be a strong waterflood candidate for enhanced oil recovery
- Virginia Hills
- 162 bbls per day from one well which has been on production since March, 2012
- Arcan 100 percent working interest -- Arcan estimates 2.5 million bbls DOIIP
- Total proved plus probable reserves of 537 thousand BOE
- Additional location licensed on the existing lease
Value Summary Table Asset Working Interest Production(3) Financial(4) Operating Netbacks Operating Oil/NGL Gas Total (2) CostsNetback(2) (bbls/d) (Mcf/d) (BOE/d) (MM$) ($/BOE) ($/BOE) Deer Mountain Unit No.2 and Deer Mountain non-unit wells 1,074 270 1,119 15.4 19.07 39.64 Deer Mountain West 195 37 201 4.4 7.19 73.23 Virginia Hills 162 - 162 4.1 10.57 46.08 Total 1,431 307 1,482 23.9 16.32 44.47 Value Summary Table Asset Reserves NPV(1) (5) Proved & Proved Probable (MM$) (MM$) Deer Mountain Unit No.2 and Deer Mountain non-unit wells 120.8 145.9 Deer Mountain West 14.9 23.0 Virginia Hills 6.3 9.8 Total 142.0 178.8 Notes: (1) See "Legal Advisories" below for more information with respect to NPV. (2) See "Legal Advisories" below for the method of calculation of this non-GAAP measurement. (3) Working interest production numbers are for June, 2013. (4) Financial numbers represent annualized values as of the year-to-date June 30, 2013. (5) Reserves information from the GLJ Report effective July 1, 2013.
OIL AND GAS RESERVES
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 were prepared in accordance with National Instrument 51-101 - Standards of Disclosure for Oil and Gas Activities and the Canadian Oil and Gas Evaluation Handbook effective July 1, 2013 and is dated September 20, 2013.
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 the offered properties, as evaluated by Arcan's independent qualified reserves evaluator, GLJ Petroleum Consultants ("GLJ"), and contained in their report dated September 20, 2013, effective July 1, 2013 (the "GLJ Report") based on forecast price and cost assumptions. The tables summarize the data contained in 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 Annual Information Form, dated April 11, 2013, in conjunction with the following table and notes. All of the offered properties' reserves are located on-shore in Canada.
1. Deer Mountain Unit No. 2 and its Adjacent Non-Unit Leases Light & Medium Oil Natural Gas Liquids Gross (2) Net (3) Gross (2) Net (3) Reserves Category (Mbbls) (Mbbls) (Mbbls) (Mbbls) Proved Developed Producing 4,404 2,774 208 120 Developed Non-Producing 6 6 - - Undeveloped 1,688 1,142 76 48 Total Proved 6,099 3,921 285 169 Total Probable 2,139 1,255 101 58 Total Proved + Probable 8,238 5,176 386 227 Natural Gas(1) Total Gross (2) Net (3) Gross (2) Net (3) Reserves Category (MMcf) (MMcf) (MBOEs) (MBOEs) Proved Developed Producing 1,339 1,033 4,836 3,067 Developed Non-Producing 2 1 7 6 Undeveloped 494 384 1,847 1,254 Total Proved 1,834 1,419 6,689 4,327 Total Probable 661 510 2,351 1,399 Total Proved + Probable 2,495 1,929 9,040 5,726 2. Deer Mountain West Light & Medium Oil Natural Gas Liquids Gross (2) Net (3) Gross (2) Net (3) Reserves Category (Mbbls) (Mbbls) (Mbbls) (Mbbls) Proved Developed Producing 154 125 6 5 Developed Non-Producing - - - - Undeveloped 461 402 18 15 Total Proved 615 527 25 20 Total Probable 323 251 13 10 Total Proved + Probable 938 778 38 30 Natural Gas(1) Total Gross (2) Net (3) Gross (2) Net (3) Reserves Category (MMcf) (MMcf) (MBOEs) (MBOEs) Proved Developed Producing 41 38 168 135 Developed Non-Producing - - - - Undeveloped 120 111 499 436 Total Proved 161 148 667 571 Total Probable 87 79 350 274 Total Proved + Probable 248 227 1,017 845 3. Virginia Hills Light & Medium Oil Natural Gas Liquids Gross (2) Net (3) Gross (2) Net (3) Reserves Category (Mbbls) (Mbbls) (Mbbls) (Mbbls) Proved Developed Producing 219 129 15 10 Developed Non-Producing - - - - Undeveloped - - - - Total Proved 219 129 15 10 Total Probable 259 197 18 14 Total Proved + Probable 478 326 33 24 Natural Gas(1) Total Gross (2) Net (3) Gross (2) Net (3) Reserves Category (MMcf) (MMcf) (MBOEs) (MBOEs) Proved Developed Producing 71 62 246 149 Developed Non-Producing - - - - Undeveloped - - - - Total Proved 71 62 246 149 Total Probable 84 76 291 224 Total Proved + Probable 155 138 537 373 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 July 1, 2013, in the GLJ Report in estimating reserves data using forecast prices and costs(1):
Medium and Light Crude Oil WTI Cushing Edmonton Cromer Alberta Gas Oklahoma Par Price Medium Reference 40 degrees 40 degrees29.3 degrees Price API API API Plant Gate Year Inflation (US$/bbl) ($/bbl) ($/bbl) ($/MMBTU) 2013 Q1 0.9 94.37 88.75 80.75 2.87 2013 Q2 (estimate) 0.4 93.69 92.47 86.31 3.36 2013 Q3-Q4 2.0 95.00 92.50 85.10 3.51 2014 2.0 95.00 94.00 86.48 3.62 2015 2.0 95.00 94.00 86.48 4.07 2016 2.0 97.50 96.50 88.78 4.51 2017 2.0 97.50 96.50 88.78 4.74 2018 2.0 97.50 96.50 88.78 5.00 2019 2.0 98.54 97.54 89.74 5.10 2020 2.0 100.51 99.51 91.55 5.21 2021 2.0 102.52 101.52 93.40 5.32 2022 2.0 104.57 103.57 95.28 5.42 Natural Gas AECO - Exchange C Spot Rate Year ($/MMBTU) (US$/CDN$) 2013 Q1 3.18 0.991 2013 Q2 (estimate) 3.60 0.983 2013 Q3-Q4 3.71 1.000 2014 3.83 1.000 2015 4.28 1.000 2016 4.72 1.000 2017 4.95 1.000 2018 5.22 1.000 2019 5.32 1.000 2020 5.43 1.000 2021 5.54 1.000 2022 5.64 1.000 Note: (1) All pricing in the above table, excluding inflation and the exchange rate, is escalated at 2.0 percent per year thereafter. Thereafter, inflation is assumed to be constant at 2.0 percent and the exchange rate is assumed to be constant at 1.000.