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TSX Venture 50 Spotlight: Arcan Resources Ltd.

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By Justin Yan

Junior oil producer Arcan Resources Ltd. (TSXV:ARN) ranks fifth in the Oil & Gas sector of this year's TSX Venture 50 ranking.

For year ended Dec. 31, 2010, the company's market capitalization grew by 789 per cent to $488M from $55M while share price increased by 292 per cent to $5.68 from $1.45. As at press time, the company has 88.1M shares outstanding, currently trading at $4.23 per share with a market capitalization of $370M.

Based in Calgary, the company operates in the Swan Hills, McLeod and Hamburg areas of Alberta. Its main focus is on the Swan Hills Beaverhill Lake light oil reef play where original oil in place is estimated to be up to 600 million barrels of oil equivalent – up to 40 per cent of it recoverable by waterflood. Approximately 90 per cent oil weighted, Arcan has 150 net sections of land with an estimated inventory of over 400 horizontal drilling locations.

In 2010, Arcan increased its land holdings by 210 per cent and completed 15 horizontal multi-stage fracture wells. In addition, it increased production by 63 percent to 2,243 barrels of oil equivalent per day.

President and CEO Ed Gilmet discusses the company's rapid growth and 2011 goals with TMX News as well as his outlook on the oil and gas industry.

TMX: What factors led to the company's success in the past year?

EG: I believe long-term planning with a focus on a solid core of oil assets and continuous execution has been key to our success. Arcan entered the Swan Hills oil play in 2005. We rapidly recognized the extent of the play and started accumulating additional interests. Since early 2007, the company has focused entirely on oil and enhanced oil recovery using waterfloods. We also built new facilities to handle a large production base and implemented a waterflood which was followed by a large land purchase and farm-in in 2008. Then early in 2010 we accumulated another large land block. Rising oil prices since 2005 helped solidify the economics of our land base, but the key change came with the successful application of the horizontal multi-stage fracturing technology to the Swan Hills Beaver Hill lake oil play.

TMX: What made the company stand out from the competition?

EG: When advances in frac technology came about, we were very quick to execute on our growth strategy. This is what made Arcan stand out in the midst of competition from larger intermediates and majors. We have drilled or recompleted more than 25 wells to date using multi-stage fracturing technology, which is more than any of our competitors.

TMX: How will Arcan continue to build on its drilling success?

EG: We have a large scale resource development play. There are over 70 vertical wells across our undeveloped lands that help direct us where to drill with minimum risk. Arcan has already proven the success of the technology on our lands over a distance of 30 kilometres along the Western, Northern and most recently the central portions of our land block and in the next few weeks we should have some solid information from wells on the southern portion.

TMX: What challenges did your company face in the past year, either as a company or within the industry as a whole?

EG: The biggest challenge has been how to manage growth with the sheer magnitude of this asset. We already had invested in the land and facilities, but being a junior company bringing on $5 million wells required a great deal of logistics as well as balanced planning of short and long-term goals. Economically and for the short term, Arcan is focusing most of its efforts close to its existing facilities over the Northern portion of its land base. We balance that off against proving up the corners of our large undeveloped land base to the south so we can provide our shareholders with information about the significance and scope of the potential. It also helps us plan and implement successive stages of our growth program for the next 3 months as well as for the next 3-5 years.

TMX: How did competition in this space affect the company?

EG: Providing information to our shareholders means that our competitors also get rapid access to this same information. As a junior testing these large wells, Arcan had to publicly release results as soon as possible. This made it challenging to continue to expand and grow our play. Our success has led to recent land sales where competitors have been paying $1.5 - $2 million per section along the edges of Arcan's land base. We already own 160 sections. Those sales alone lead to a mathematical calculation indicating that Arcan's shares are priced today at only our undeveloped land value.

TMX: Arcan has grown quite rapidly over the last year. Has this been a particular challenge?

EG: Yes. Given our drilling and assets, Arcan anticipates 25-30% growth in production for the next 2-4 years. We carefully want to manage that type of growth against dilution and debt. Fortunately, we were able to secure $86 million in new financing in February 2011. This gives us access to approximately $100 – $125 million of development capital – even after a very significant capital investment program over the last 15 months.

TMX: What are your thoughts on the current state of the oil industry?

EG: Natural disasters like that in Japan and unrest in the Middle East will cause wild fluctuations in the market and in turn affect oil and gas prices. These events make predicting oil prices extremely difficult. I do feel that with the supply side being challenged, the oil industry will remain strong and supported by higher demand. I think we will see the world getting used to $100 oil. In addition, I see the current tide going against the nuclear industry and so that will be positive in the medium to long term for natural gas which is and I expect will continue to languish for a few more years.
Further to the strength in the oil side of the industry, I see that drilling and related services are strong, will remain so, and are likely to expand even further as natural gas prices recover.

TMX: What is the ultimate vision of the company and what are the short-term plans to achieve this?

EG: Arcan's five year development plan includes the drilling of 200-250 Horizontal multi-stage-frac wells throughout its 160 contiguous sections of oil rights in the Swan Hills area. This drilling should provide our shareholders with continued significant year- over-year growth in value. In the short, medium and long term it comes down to drilling more wells. We have a massive resource land base already. We have secured financing for 2011 and could expand our program inside of our existing financial capabilities. Arcan had 15 horizontal wells by the end of 2010 and we expect to have 20 – 25 more by year-end 2012. At that pace, we see over 30 per cent annual growth in production as well as the ability to drill up our inventory within the next five years. This will grow Arcan into a good sized intermediate light oil company.

Ed Gilmet, President and CEO of Arcan Resources, receives TSX Venture 50 award in Toronto.

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