Arcan Resources Ltd ARNBF

Year End

[nlr2]

News out before the expected day, how nice.

Fairly interesting report. Deer Mountain has stablilized at 1250 BOE/D which is positive, new well results with IP's of 400 is also positive. The infrastructure improvements are almost complete with only the oil sales pipeline at Ethel left to commission. These investments are showing tangible improvements in the cost structure. After approval the Ethel waterflood will have 24 producers and 9 injectors, which seems good, but no mention of the current production or estimate after approval. Average production in Q4 of 3500 BOE/D but with first quarter production exiting at 4500, so it should be realistic for the year average to be 3500-3800 BOE/D.

The craziest thing though is that operationally things are alright but due to their past spending they can't afford to build off the success. Cashflow should be way up in Q1 with the stronger pricing inspite of the hedging at 92 dollars canadian a barrel. So the debt will come down a bit.

With the NAV discounted at 10% leaving a value of $2.53 per share after debt and the current share price at less than 10% of that the question is how to realize this value? They don't have enough cashflow to drill themselves out of it, they can't go to the capital markets so what are the options?

Sell Deer Mountain, which they are trying to do and they say there is more interest. That would hopefully bring in 100-120 million which leaves the line of credit at 38-58 million and the debentures still outstanding, but drops production to 2250 BOE/D. That would give them some flexibility to ramp up spending and replace the lost production organically, which is possible with the well results being seemingly better.

Do nothing and hope that the Ethel waterflood outperforms. With two years before the first debenture is due they could focus on expanding the Ethel flood and increase production that way. Without knowing how the flood is performing its difficult to see how this would work. If there was 40 wells and 15 injectors would they produce 2000 or 3000 or 4000 BOE/D? Who knows. I am not really an expert in debentures but what happens when they come due and everyone chooses to be paid out at par? Arcan clearly can't afford that so would they default? or do they just convert into shares?

Lastly try to sell the whole company. I don't know how well this would work as there is a huge discrepancy in the reserves vs. production. Longview had proved plus producing reserves of 37,936,000 BOEs at year end and was taken out for 430 million, so $11.33 per BOE. Arcan has gross 39,004,000 and net after royalties 29,617,000 BOEs which would be more valuable as they are more oil weighted. So using the same valuation that is on a gross basis 441,995,000 and on a net basis 335,560,610. I looked at a few other companies and none of them seem to break there reserves out on a pre and post royalty basis so I think the gross figure should be used, but I'm not 100% sure. I think Surge paid 73,000 per flowing barrel for Longview but for 98% oil up to $100,00 could be fair. So at 3500 BOE/D that gives between $255,500,000 to $350,000,000. The obvious issue being that to pay a "fair" value for the reserves the acquirer will have to overpay for current production. Which I don't see happening unless Swan Hills can somehow regain the reputation for being the hot play, or the acquirer sees a real value to purchasing a large contingent land block with facilities in place. 

Lightsteam is the perfect buyer. They have already indicated that they plan on making Swan Hills there 3rd major area, they are our farm in partner and their lands border ours. However they are also strapped for cash and have a low share price. So they are probably out.

Pengrowth is focused on Lindbergh, Whitecap and Surge just made major acquistions, Crescent Point is still a major shareholder but hasn't shown much interest lately in the area. Apache is a major player in the area so they are possible.

Realistically it will probably be the status quo for at least this year. They have enough money to keep production flat, to maybe increasing, depending on waterflood. They can pay the interest on the money they owe but they can't drill enough to return to high growth status. So for now the difference between the NAV of $2.53 and the share price of $0.285 will most likely remain. Hopefully I'm wrong though and some unexpected positive will occur.

[profess]

It all sounds so Fine & Dandy - albeit the one exception of primary concern for investors - the pathetic STOCK PRICE!!  Their glaring omission to acknowledge that fact is revealing of their complete lack of accountability and responsibility to shareholders IMHO.

[hardeehar]

What I find disturbing is that I've heard the CEO state on more than one occasion is that they have no control over the share price.  Thats just what shareholder's want to hear - NOT!

[dropzone]

Thank you for this post, makes sense to me.