Arrow Exploration Corp. announces the filing ofits unaudited interim Financial Statements and Management's Discussion and Analysis ("MD&A") for the quarter ended September 30, 2022, which are available on SEDAR (www.sedar.com). All dollar figures are in U.S. dollars, except as otherwise noted.
Highlights:
The Third Quarter has been the best quarter in the Company's history generating record cashflow from operations and a threefold increase in production from the date of the AIM Admission.
o EBITDA of $4,664,345 compared to $966,234 in Q3 2021.
o Average corporate production of 1,503 boe/d compared to Q3 2021 575 boe/d and Q2 2022 980 boe/d.
Operating netbacks quarter-over-quarter, increased to $56.75/boe in the third quarter of 2022 from $49.18/boe in the second quarter of 2022 due to higher crude oil production and better netbacks from natural gas sales.
Capital raised at the time of Admission to AIM has been deployed on a successful two well drilling campaign at Rio Cravo on the Tapir Block in Colombia, both of which were on production for most of the quarter.
At the end of the quarter, positive working capital position of $7.4 million and a cash position of $11 million.
Generation of positive cashflows in Q3 means that the Company is committing to a further drilling program.
Subsequent to Q3 2022, the Company also completed two workovers to the RCE-1 and RCS-1 wells and has tied in the East Pepper well.
Outlook:
The Company expects to commence drilling, around the end of 2022, the first of five additional wells - three wells at Rio Cravo and two wells at Carrizales Norte on the Tapir Block.
The Company anticipates the robust CAPEX program will be funded from cash on hand and cashflow from operations.
Robust operational tempo ensures that the Company is on track to achieve 3,000 bopd within 18 months of the AIM listing (H1 2023).
Arrow continues to focus on shareholder value, improving its strong balance sheet, and free cash flow.
Marshall Abbott, CEO of Arrow Exploration Corp., commented:
"We have initiated the largest capital program in the history of the Company. Arrow has successfully executed the two workovers with production improving daily. The plan to add further perforations to RCS-1 provides additional and material production increase potential. The RCE infill drilling program will aid in achieving our 3,000 (net) bopd production target in H1 2023. The low risk Carrizales Norte project has significant production and reserve potential. In addition, the West Tapir seismic project is expected to add low risk exploration prospects, which have the potential to provide material production and reserves increases in the near term. The seismic project will highlight the reserves potential of the western section of the Tapir block. The Company's plans are to explore the east half of the Tapir block with a second seismic shoot in 2024. The Arrow Team continues to execute our strategy to increase shareholder value."
Operations Update
Canadian operations
East Pepper tie-in
o The East Pepper well was put on production October 25, 2022, at 7 Mmcf/d (1,167 boe/d). As expected, initial production decline was steep and the well appears to have now stabilized and is producing in excess of 250 boe /d.
o The Company expects typical production declines of 2-3% per month going forward.
Colombian operations
RCS-1 and RCE-1 Workovers:
o The workover of RCS-1 and RCE-1 is in progress and the wells are continuing to clean-up. Due to electrical storms in the area causing power outages, the clean-up of the wells is taking longer than expected.
o RCS-1, the first well to be worked over, is currently producing at 660 bop/d (gross), 330 bop/d (net) with daily decreases to water cut and corresponding increases in oil production. Prior to the workover, the well was producing 330 bop/d (gross).
o RCS-1 has shown a 330 bop/d (gross) increase since the recompletion procedure. The production gain results in payout of the workover cost in 17 days at current Brent prices.
o An upper unit in the Carbonara 7A was perforated and flowed 330 bop/d (gross) after stabilizing. Management believes a thin shale barrier bifurcates the C7A. It is apparent that a thin shale break prevents inflow from the C7A main sand, which has superior reservoir characteristics akin to RCE-2. Arrow now plans to perforate the C7A in RCS-1 as it is the highest reservoir in the pool. The Company expects that RCS-1 should have a comparable flow rate to RCE-2, where C7A is currently producing 1,025 bop/d (gross) / 512 bop/d (net) with a flat watercut.
o RCE-1, the second recompletion, is continuing to show a high water-cut as it cleans-up. Prior to the workover, the C7A was flowing at 110 bop/d (gross) with a very high watercut. The C7A Stringer was then perforated and is slowly recovering. Production continues to increase daily, currently at 90-110 bop/d (gross), and watercut continues to decrease daily as the well continues to clean up.
RCE-3, RCE-4, and RCE-5 Infill Drilling:
o Operations remain on track for RCE-3 to spud in late December/early January 2023, and mobilization of the camp facilities is underway. Civil works on the pad are nearing completion. Subsequent to completion of RCE-3, both RCE-4 and RCE-5 will follow in sequence.
Carrizales Norte
o After drilling RCE-3, RCE-4 and RCE-5, the same drilling rig will be moved to the Carrizales Norte field.
o Currently Arrow is building a road and pad for the Carrizales Norte field. The road and pads are expected to be completed in mid-February 2023.
o The spud of Carrizales 1 is anticipated to begin in the latter part of Q1 2023 with Carrizales 2 expected to spud immediately thereafter, followed by a contingent Carrizales 3.
Tapir Seismic
o The Company has received all commensurate approvals to proceed with the 100 km2 seismic program.
o The Company is permitting and moving equipment and personnel to the program area on the west side of the Tapir field.
o The estimated cost of the seismic program is $5 million gross ($2.5 million net to Arrow) and is expected to provide multiple prospects beyond what has been identified on the coarse 2D seismic grid.
o Processing and interpretation of the seismic will take place over Q2 2023 with drilling plans to be pursued in Q4 2023.
This robust operational tempo is expected to see the Company achieve 3,000 bop/d within 18 months of the AIM listing (H1 2023). Furthermore, the integrated seismic and geological data will provide significant running room for production growth on the Tapir Block.
Corporate Production
Corporate production in November 2022 to date ranges between 1,900 boe/d and 2,000 boe/d net. Total net production from the Rio Cravo field is 887 bop/d. Contribution from the workover program continues to increase Rio Cravo's production. The Pepper Field has been producing approximately 563 boe/d net, partially curtailed by the facility operator. The two Pepper wells, along with continuing and expected robust natural gas prices in North America, are expected to further enhance the value of the Pepper field. Arrow has 23,000 acres of contiguous Montney rights in the Pepper Area.
DISCUSSION OF OPERATING RESULTS
The Company's third quarter 2022 average corporate production was 1,503 boe/d, a 53% increase when compared to Q2 2022 average production of 980 boe/d. This increase was largely attributable to the two new wells in the Rio Crave Este field (RCE-2 and RCS-1), which were in production for most of the quarter. Arrow's production on a quarterly basis is summarized below:
For the three months ended September 30, 2022, the Company's average production mix consisted of crude oil and natural gas production in Colombia of 1,179 bbl/d (2021: 481 bbl/d) and 1,917 Mcf/d (2021: 501 Mcf/d) , along with minor amounts of natural gas liquids, from Arrow's Canadian properties.
DISCUSSION OF FINANCIAL RESULTS
- During Q3 2022 the Company continued to realize strong oil and gas prices, as summarized below.
- Arrow realized better operating netbacks quarter-over-quarter, increasing to $56.75/boe in the third quarter of 2022 from $49.18/boe in the second quarter of 2022. This increase is due to higher crude oil production and better netbacks from natural gas.
During 2022, the Company incurred $5.6 million of capital expenditures, primarily in connection with the drilling of the RCE-2 and RCS-1 wells. At the end of the quarter, Arrow had a positive working capital position of $7.4 million and a cash position of $11 million, which are expected to fund the Company's expenditure plan for the foreseeable future.
Subsequent to September 30, 2022, the Company completed workovers in its Rio Cravo Este-1 and Rio Cravo Sur-1 wells to increase production on the Tapir Block. The Company has also tied in its East Pepper Montney well in Canada. Civil works are currently underway to start drilling three more wells in Rio Cravo. The Company has started to move equipment to start shooting 100 km2 of seismic in the Tapir block to highlight existing leads and prospects for drilling initiating in Q4 2023. This acceleration in operational tempo will be active throughout the balance of 2022 and 2023, funded by cash on hand and cashflow.
With this significant improvement in the Company's financial performance, the Company has approved additional compensation to its non-executives' directors for $210,000 in aggregate which has been paid in Q4 2022.
Colombia Tax Reform
Early in November, Colombia's congress approved some articles of a tax reform bill that is expected to raise an additional US$4 billion annually for the next four years, in part through increased taxes on oil and coal. Once in effect, the new changes seek to fund social projects. At this time, the final bill has been completed by the Colombian congress and now awaits approval by the President to be enacted.
There are two main components of the changes that will impact Arrow:
1. Royalties are not going to be tax deductible for income tax purposes.
2. Corporate tax rate will increase contingent on historic prices of oil.
There will be no impact on Arrow in 2022 as these new tax laws will be effectively enacted on January 1, 2023. Arrow's investment has created tax pools currently available in Colombia that, together with future capital projects, will provide shelter for corporate income taxes. Currently, Arrow is expecting to invest approximately US$23 million (net) in 2023 on capital projects in Colombia. The impact of the new tax laws on 2023 tax payable is currently under review by management.
At this time, Arrow is not considering any changes to the Q1 and Q2 2023 capital program. All future projects' economics are being evaluated in the light of these changes to the Colombian tax regime.
Overall, when Brent oil prices are low, royalties and taxes will remain low and the tax reforms will have little effect on Arrow's bottom line. When Brent oil prices are high and the Company has high netbacks and net income, the tax liability is expected to increase.
ISSUANCE OF COMMON SHARES AND TOTAL VOTING RIGHTS
Further to its announcement on 7 November 2022 regarding the application to AIM for a total block admission of 40,000,000 new common shares in the Company ("Common Shares") (the "Block Admission"), the Company provides below a monthly update to its total voting rights as a result of the exercise of instruments subject to the Block Admission during November 2022.
As at 28 November 2022, the Company had 217,901,931 Common Shares in issue. This figure may be used as the denominator for the calculations by which they will determine if they are required to notify their interest in, or a change to, their interest in the share capital of the Company under the Financial Conduct Authority's Disclosure Guidance and Transparency Rules.
