Arcan Resources Ltd(ARN:TSXV, CA)
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Arcan Resources: It is a Canadian oil and gas company which trades at the Toronto Venture stock exchange (ARN.V) and the U.S. stock exchange (ARNBF). It is a pure light oil producer which operates in the Beaverhill Lake formation of the Swan Hills region in Canada. This is where the grossly undervalued Second Wave Petroleum (SCS.TO) also operates as it was analyzed in Part 1. Arcan holds a large, contiguous land position in the Swan Hills oil play of 110,000 net acres (98% WI) which has excellent infrastructure (roads and pipelines) in place. It has identified more than 400 potential horizontal drilling locations as of today.
Arcan had a big drilling success in the first half of 2012 that boosted its share price. However the drop of the oil price, the natural production declines along with some operational disruptions and problems impacted the share price which dropped much in the second half of 2012. The company produced almost 4,000 boepd (99% oil and liquids) in the third quarter of 2012 and notes that the steep initial production declines from the newly drilled horizontal wells have now moderated. As of the latest report, Arcan estimates NAV per diluted share of $4.37 and 35.7 MMBOE total P+P reserves (96% oil).
Arcan has also initiated a Waterflood program in 2012 in both the DM#2 and Ethel areas. With the majority of the required infrastructure now in place, improved results are becoming apparent at wells closer to injectors. According to the company, the initial results are encouraging and Arcan anticipates that these results will translate to incremental reserve bookings by year end 2012 and in years to come. The effective waterflood techniques increase the production of the well from 50% to 120% according to the average industry data.
In addition, the vice president of engineering, Kevin Gunning, and the vice president of production, Kyle Baumgartner, were buying shares in September and October 2012 according to regulatory filings. Both are strong evidences that the waterflood program works and there are some satisfactory IP rates from those wells.
On top of that, a concerted cost focus in the latter half of 2012 and into 2013 is expected to deliver reductions in operating costs going forward and the new wells being drilled and completed at under $4.5 million per well, will generate very attractive rates of return. All that being said, I believe Arcan is a good buying opportunity currently.