Arsenal Energy Inc. announces the results of operations for the three-month period ended March 31, 2007.
First Quarter Corporate Highlights
• Cashflow of $1.8 million for the three months ended March 31, 2007.
• Average production of 1,846 boe/d.
• Initiation of the drilling phase of the exploration program in Egypt.
• Seismic acquisition program commenced in North Dakota to assess the potential of the Bakken zone.
• Negotiated farm-in agreement at Evi providing access to up to 5,120 acres in a core area under attractive terms.
For the first quarter ended March 31, 2007, Arsenal reported a 59 percent increase in gross revenue from oil and gas sales of $8.38 million versus $5.28 million in the same period in 2006. The increase in revenue reflects the impact of a 25 percent year – over – year increase in production and the successful implementation of Arsenal’s strategy to increase the amount of light oil and natural gas in its production mix. Operating costs increased from $1.87 million in first quarter of 2006 to $3.03 in first quarter of 2007 due the increased production and costs associated with work over programs undertaken in the first quarter of 2007. For the first quarter of 2007, Arsenal reported a net loss of $7.99 million ($0.11 per share) versus a net loss of $0.85 million ($0.02 per share) in the same period last year. The loss in the first quarter of 2007 is primarily due to a $4.8 million write down of goodwill, and additional depletion of $1.5 million which is attributable to the drilling expenditures for the SET-1 well in Egypt.
Operations Review
Egypt
In February, Arsenal initiated a two well drilling program on the 5.625 million acre Nuqra concession. The first well, SET-1, was drilled to a total depth of approximately 4,500 feet. The well encountered an excellent trap and reservoir rock, however no hydrocarbons were encountered and the well was plugged and abandoned. Upon completion of SET-1, the drilling rig was moved to the second location, NARMER-1, approximately 17 miles from Set-1. The NARMER-1 well was drilled to 8,860 feet and tested a separate structure with Cretaceous and Jurassic potential. This well encountered strong hydrocarbon shows and reservoir potential in the Cretaceous sands from 1,250 to 2,750 feet, however the well logs indicated that the sands were water bearing. The well was targeting Jurassic sands and was not optimally located for a Cretaceous target. The hydrocarbon shows, at the shallower Cretaceous depth, indicate a reduced risk and cost of future exploration drilling. NARMER-1 has confirmed that hydrocarbons are being generated in this under explored basin. The seismic data is currently being remapped to identify Cretaceous targets for a possible future drilling program. The NARMER-1 well has been plugged and abandoned. Plans for a third contingent well to be drilled later this year have been cancelled as it was targeting a Jurassic prospect similar to NARMER -1. The drilling rig was released on May 11 to the operator of the adjacent exploration block where a test well targeting a Cretaceous formation is expected to be drilled. Arsenal and its partners will utilize the SET-1 and NARMER-1 data, and data from the well on the offsetting prospect, to reassess the concession and determine the next phase of drilling. The two test wells drilled to date satisfy the current drilling requirements for the concession until July 17, 2009 and the concession can be extended until July 17, 2012 with an exploration commitment of two additional wells.
North Dakota
Production has remained stable throughout the first quarter at 390 boe/d. During the last few years, a large, technology driven oil play has developed targeting the Williston Basin Bakken formation. Low permeability in the Bakken has limited its development in the past; however new fracture stimulation technology for horizontal wells has advanced the play. In 2006, the play expanded into Mountrail County of North Dakota where Arsenal has its existing production base with an average working interest of 98% in the Stanley field. Five horizontal wells, two north and three south of Arsenal's lands, have been drilled by other operators with average initial production rates of 800 bbls/d of oil each. The oil is light, sweet and free of water. Arsenal has recently acquired a 3D survey over its Stanley lands and plans to spud its first horizontal well in the fourth quarter of 2007. We are currently acquiring and reviewing seismic data to identify drilling targets for our 2007 and 2008 capital expenditure program in North Dakota.
EVI
In the first quarter, Arsenal entered into a farm-in agreement where the Company can earn a 100 percent interest in up to eight contiguous sections (5,120 acres) of prospective lands. The first well will earn 1,280 acres and each well thereafter will earn an additional 1,280 acres subject to a non-convertible gross overriding royalty. In addition, Arsenal has a two-year seismic option and subsequent drilling option on another two sections of prospective lands immediately offsetting this acreage. The farmin significantly increases our land position and gave us access to the 3D seismic covering the acreage. Since the fourth quarter of 2005 Arsenal has participated in eight wells based on 3D seismic, with a 75% success rate. Current production from Evi is approximately 250 net boe/d of light, sweet crude.
Lloydminister
Production at Lloydminster increased slightly from the fourth quarter of 2006 to approximately 800 boe/d as a result of workovers completed late in the year. During the first quarter, one oil well was drilled and completed on the Wildmere prospect and one oil well was successfully drilled at Lashburn. The Lashburn well is scheduled be completed and brought into production after spring break-up. Success in these wells has set up ten to twelve additional locations with year around access.
Tower Creek
Tie-in operations have commenced on the 2-21 well and production is anticipated to begin in June 2007 at approximately 25 mmscf/d (400 boe/d net to Arsenal). The operator has given notice to partners that the second well, a 4,500 meter Wabamun test identified by the same 3D seismic program, will spud in late May or early June. The Company will pay 17.142% of costs through completion for a 13.1385 % working interest in this well. If successful, this well can be brought into production quite quickly, as it will tie into the 2-21 facilities approximately 4.5 km away.
Outlook
With average production in the first quarter of 1,846 boe/d and approximately 500 boe/d currently behind pipe, execution of our 2007 capital program will ensure that we can offset natural declines and achieve our target exit rate of 2,500 boe/d.
Additional production from Tower Creek in June is expected to significantly improve our future cash flow and net income. The success of Bakken wells adjacent to our properties in North Dakota has de-risked the play to a more suitable level for a company our size. Based on production levels and reserve additions experienced by our competitors, drilling success in North Dakota could have an immediate and measurable impact on corporate production and cashflow.
Results Of Operations
Production And Marketing
Production volumes for the three-month period ended March 31, 2007 increased 25% over the comparable period in 2006. The increase in volume is attributable to the integration of corporate and property acquisitions and new wells drilled during 2006. Production during the first quarter of 2007 has declined from the fourth quarter of 2006 as a result of natural declines.
Oil and Gas Revenue
Crude oil sales for the three-month period ended March 31, 2007 were 25% higher than the comparable period in 2006, reflecting increased production and higher experienced price realizations. Natural gas sales increased 179% over the comparable period, reflecting the impact of the production acquired from Tiverton in 2006. Other income is comprised of processing fees on facilities and contracts acquired from Tiverton. Revenue per boe increased 24% over the comparable period in 2006, attributable to the production portfolio and the expiry of a forward contract in 2006.
