WesternZagros Falls on Q2 Results

By John Lee.

Shares in WesternZagros Resources Ltd. (TSX VENTURE:WZR) closed 3 percent down on Thursday following the announcement of its operating and financial results for the second quarter ended June 30, 2015.

  • Second quarter production from the Sarqala-1 well averaged 5,427 barrels of oil per day (“bbl/d”). The Sarqala-1 well has produced approximately 1.8 million barrels of light oil to date including production from the extended well test conducted in 2011.
  • Second quarter gross sales were 493,854 barrels of oil (“bbl”), of which WesternZagros’s net oil sales were 133,202 bbl.
  • Second quarter sales revenue to WesternZagros was $5.6 million, with an average realized price of $41.71 per barrel and field netback was $3.9 million. Year-to-date sales revenue is $8.4 million.
  • Sarqala-1 well production guidance range for the remainder of 2015 is amended to the 5,000 to 5,500 bbl/d range. Based on these revised production rates and domestic oil prices in the range of $42 to $52 per barrel, WesternZagros now estimates 2015 sales revenue of $15 to $22 million and field netback of $10 to $17 million.
  • Operations are proceeding according to plan to suspend the Hasira-1 well and are expected to be completed in the third quarter. While the Company does not currently have a plan to develop the Mio-Oligocene reservoir, WesternZagros and Gazprom Neft continue to assess its potential.
  • The Company has recognized in the second quarter a non-cash impairment charge in relation to the exploration and evaluation expenditures for the Garmian block.
  • The Company is in the final approval stage of the Garmian Field Development Plan (“Garmian FDP”) having incorporated concluding comments from the Kurdistan Regional Government (“KRG”) into its Plan.
  • With the completion of the Repsol S.A. acquisition of Talisman Energy Inc. in early May 2015, Repsol has re-entered the negotiations with WesternZagros and the KRG regarding the development of the Kurdamir Block. The parties are actively engaged in advancing the Kurdamir Field Development Plan (“Kurdamir FDP”) for oil and gas production although it is anticipated to take until the first quarter of 2016 for the co-venturers to finalize the FDP.
  • Ended the second quarter with $145 million in cash and cash equivalents and an available undrawn $200 million credit facility.
  • Operations in the Kurdistan Region of Iraq remain safe and secure.

Commenting on the second quarter results and subsequent events, WesternZagros’s Chief Executive Officer Simon Hatfield (pictured) said:

“The Company is committed to advancing development on the Garmian and Kurdamir Blocks to grow production and cash flow. We are also focused on delivering on our cost controls and capital efficiency.

“On the Kurdamir Block, we’re encouraged by Repsol’s engagement as the KRG is keen to progress this oil and gas project. We have established a strong financial position for our Company and are well positioned to weather the adverse global market conditions.

“In light of the ongoing oil price environment, the Company continues to implement strict cost reduction efforts that have meaningful impact to the bottom line, including optimizing capital investment, renegotiating contracts with service companies and cutting discretionary expenditures.

“We have a solid foundation supported by great assets that provide us with the opportunity to create long-term value for all investors. While these are challenging times for both the Kurdistan Region and international oil companies, we continue to benefit from the relative security in the Kurdistan Region, where we are unaffected by the military operations elsewhere in Iraq.”

Operations Summary

WesternZagros’s assets comprise two contract areas, the Garmian and Kurdamir blocks, with significant oil and natural gas discoveries.

Production: Garmian Block

  • Production from Sarqala-1 in the second quarter averaged 5,427 barrels of oil per day (“bbl/d”) and has averaged 5,355 bbl/d since commencement of production from the well on February 11, 2015. The Sarqala-1 well has produced approximately 1.8 million barrels of light oil to date including production from the extended well test conducted in 2011.
  • Gross sales during the second quarter were 493,854 barrels of oil (“bbl”), of which WesternZagros’s net oil sales were 133,202 bbl. Year-to-date gross sales are 749,661 bbl of oil, of which WesternZagros’s year-to-date net oil sales were 202,199 bbl.
  • WesternZagros has, under the auspices of the KRG, supplied this crude oil to the domestic market under pre-paid contracts. The local market has a strong demand for crude for diesel generation, so WesternZagros continues to work with the Kurdistan Region’s Ministry of Natural Resources and domestic purchasers to secure additional sales volumes. The Company now has two domestic customers for its oil production.
  • Second quarter sales revenue to WesternZagros was $5.6 million, with the average realized price of $41.71 per barrel. Year-to-date sales revenue is $8.4 million. Second quarter field netback was $3.9 million and $5.8 million year-to-date.
  • Production guidance range for the remainder of 2015 is amended from 5,700 to 6,700 bbl/d to 5,000 to 5,500 bbl/d as the Sarqala-1 well is encountering asphaltene production issues. Asphaltenes formulate naturally from solution and can occur in reservoirs with changes in pressure. This production limitation is currently being addressed with chemical treatments to mitigate asphaltene formulation in the wellbore. Additional work is being carried out to determine the optimal production capability of the well.

Operated Joint Venture: Garmian Block

  • The Garmian FDP was submitted to the KRG on June 19, 2014. The Company has recently incorporated concluding comments from the KRG and is seeking final approval of the FDP. The first development well is anticipated to spud once the Garmian FDP has been approved in accordance with the PSC terms. The well site is ready and long lead equipment is secured.
  • The KRG is advancing its plans for the award of a contract to a third party for the construction of a natural gas plant close to WesternZagros’s Garmian production facility to utilize the associated natural gas from the Sarqala field. Pursuant to the terms of the Garmian PSC, the KRG has the right to take, gather, process and market the associated natural gas from the field. The natural gas plant will help fuel domestic electrical power needs and minimize future gas flaring.
  • Operations are proceeding according to plan to suspend the Hasira-1 well and are expected to be completed in the third quarter. Previously announced logging and open-hole tests confirmed the presence of light oil in both the Mio-Oligocene and the shallower Jeribe reservoir. The oil that flowed in those tests was similar to that being produced from the Jeribe reservoir at the nearby Sarqala-1 well and had no indications of hydrogen sulphide or formation water. While the Company does not currently have a plan to develop the Mio-Oligocene reservoir, WesternZagros and Gazprom Neft continue to assess its potential.

Non-Operated Joint Venture: Kurdamir Block

  • The Company estimates that the Kurdamir discovery contains unrisked Contingent Resources of 541 MMbbl of oil, and unrisked Prospective Resources of 1.3 billion barrels of oil and 1.4 trillion cubic feet of gas (all Gross Block combined mean estimates).
  • On August 31, 2014, the Joint Venture submitted a Kurdamir FDP for the oil and natural gas resources on the Kurdamir Block to the KRG for approval. Following a review, the KRG requested changes to the plan. In December 2014, Talisman Energy Inc. put forward notice to relinquish its interest in the Kurdamir Block and WesternZagros took the lead in refining and submitting an amended FDP to the KRG.
  • With the completion of the Repsol S.A. acquisition of Talisman Energy Inc. in early May 2015, Repsol has re-entered the negotiations with WesternZagros and the KRG. All parties are actively engaged in advancing the Kurdamir FDP to achieve oil and gas production although it is anticipated to take until the first quarter of 2016 for the co-venturers to finalize the FDP.
  • The Kurdamir Joint Venture is conducting a number of activities, including front-end engineering of the necessary facilities and future wells and negotiating sales agreements for early gas sales in addition to oil and condensate production, to support the final submission of the Kurdamir FDP to the KRG.
  • Because the FDP for Kurdamir remains under discussion with the KRG and Repsol, Reserves have not yet been recognized by a qualified independent reserves evaluator. Accordingly, all expenditures that pertain to the Kurdamir Block continue to be capitalized in accordance with the Company’s exploration and evaluation accounting policy.

Financial

  • As at June 30, 2015, WesternZagros had $145 million in cash and cash equivalents.
  • During the three months ended June 30, 2015, the Company continued production and sales of crude oil to the Kurdistan domestic market, under the auspices of the KRG. The Company recognized net sales revenue of $5.6 million in accordance with the commercial terms of the Garmian PSC. For the six month period ended June 30, 2015, the Company has recognized net sales of $8.4 million in accordance with the commercial terms of the Garmian PSC.
  • The Company anticipates that gross production from Sarqala-1 will be in the range of 5,000 to 5,500 bbl/d for the remainder of 2015. Based on these production rates and domestic oil prices in the range of $42 to $52 per barrel, WesternZagros estimates 2015 sales revenue of $15 to $22 million and field netback of $10 to $17 million.
  • WesternZagros’s share of exploration and evaluation (“E&E”) expenditures includes 50 percent of Garmian Block costs and 60 percent of Kurdamir Block costs. For the quarter ended June 30, 2015, WesternZagros’s share for these PSC activities and other related capitalized costs was $11.0 million, comprised of $7.0 million of drilling-related costs and $4.0 million in other appraisal and development costs. For the six months ended June 30, 2015, WesternZagros’s share for these PSC activities and other related capitalized costs was $26.7 million, comprised of $15.1 million of drilling-related costs and $11.6 million in other appraisal and development costs.
  • During the second quarter of 2015, the Company identified an indicator of impairment. In reviewing the carrying costs for the Garmian Block cash generating unit “CGU”), an impairment loss has been recognized for the amount by which the E&E expenditures for the Garmian Block exceeds its recoverable amount. The recoverable amount pertaining to the Garmian Block amount was estimated to be $158 million, based on prospective resource estimates provided by an independent qualified reserve engineer, which resulted in an impairment charge of $77 million. No impairment was recognized in regards to the Kurdamir Block CGU.
  • The Company capitalized its 50 percent share of applicable oil and natural gas assets expenditures related to Garmian Block activities, which was comprised of costs for the upgrades to the Sarqala production site and planning and design costs related to the next Sarqala development well. For the three and six months ended June 30, 2015, the Company capitalized $3.5 million and $7.0 million, respectively, for these costs. Subsequent to the commencement of production during the first quarter of 2015, costs related to Sarqala-1 well operations and the operation of related production facilities have been accounted for as operating costs.

Outlook

2015 Operations Outlook

The Company anticipates that gross production from Sarqala-1 will range from 5,000 to 5,500 bbl/d for the remainder of 2015. This is reduced from the Company’s previous guidance of 5,700 to 6,700 bbl/d. Based on these revised production rates and domestic oil prices in the range of $42 to $52 per barrel, WesternZagros now estimates 2015 sales revenue of $15 to $22 million and field netback of $10 to $17 million as compared to its prior estimates of 2015 sales revenue of $17 to $25 million and field netback of $12 to $20 million.

2015 Capital Outlook

On the Garmian Block, the Company has incorporated final comments from the KRG into its Garmian FDP and is seeking final approval of the Garmian FDP. The Company will provide further guidance on the anticipated quantum and timing of capital expenditures upon approval of the Garmian FDP.

(Sources: WesternZagros, Yahoo!)

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