Out of Arcan

I sold out of the rest of my Arcan position this week.  I took the rest off at $1.18.  This was after I had sold the majority of my position a couple weeks ago (September 11th) at $1.25.

I had difficulty making up my mind on the stock.  The company could,  get taken over any day for a premium, and if that happens I will be kicking myself.  But I could also be sitting around for a long time waiting for that day.

I bought Arcan at $1.50 in July.  Thus, I’m taking a loss of about 20% on the sale.

The deciding factor for me was this chart, from a BMO research note on the company released two weeks ago.

The results of the 2012 drilling campaign have been poor.  I don’t see any way that a well with an IP of ~200bbl/d is going to pay back the $4-$5 million finding and development costs in a reasonable amount of time.  Even at $100 oil.

Most of the wells in 2012 have been drilled at Ethel (Township 68, Range 8 W5).  These results suggest to me that this area, which comprises a large chunk of Arcan’s undeveloped land, is simply not as prolific as the northern Deer Mountain unit.

And you can’t blame the poor results on the lack of waterflood.  If this was a waterflood issue we would see initial production rates similar to the 2010 and 2011 results, but they would drop off faster and to a lower level (lack of waterflood support).  Instead what we are seeing are lower rates from the get-go.  This is just a poorer reservoir.

I am reminded of a post from Investorsvillage.com, by a poster that goes by the moniker GreatSwami.  He doesn’t post a lot any more, which is a shame because he had a lot of worthwhile geological analysis.  A few years ago, in a reply to comments about Beaverhill Lake he wrote:

Where the reef edge exists the production is superb, where it is not – the production is almost nil. The reef edge of each buildup stage is like a crenulated ribbon wriggling sinuously through the region – but due to prevailing palaeowind directions from the north east there tends to be a more linear nw-se trending active reef edge margin on the main buildups – at least on a gross scale – with the more anastomosing or crenulated edges occuring in the more sheltered areas between the major reefal bulwarks. Again this edge has been very actively pursued for over 60 years now and the overall geometry of the reefal areas fairly well known and the edges well delineated by historical wells that fell off the edge into the open marine shale or stepped too far into the back reef lagoonal muds.

I was involved way back in the late 90’s with a case where i helped (accurately) define the very narrow reef edge at Sakwatamau for someone to pursue horizontally – after several previous attempts had missed – so I know the play and how elusive the actual zones can be. I think at the time the operator was eventually successful in placing a “flat one” in the right place – but it is moot that the project ever recovered a fraction of the sunk capital used to define it?

Going back to the new Arcan Land block – it s in a quieter channel between main reef fronts – there are some possibilities for a very narrow wavy reef edge to be pursued through part of this acreage – but typically these porous ribbons will be from 100-200m across – probably less, some 20-30m thick and of course not as uniformly porous as the more high energy windward reef front zones tend to be with concomittant decreased potential reserves.

Just my 10 cents worth this morning. But the Swan Hills is not the Bakken or Cardium – the plays, in any system used to compare and contrast them, would appear as different as night and day – or chalk and cheese?!

Swan Hills was a risky endeavor from the start.  Ethel appears to be too much chalk and not enough cheese.

I don’t spend a lot of time contemplating the possibilities when I am wrong. Yes, Arcan could still be taken out.  And yes, the waterflood at Ethel could begin to show positive results in the fourth quarter and in 2013 and that could lead to a boost in the share price.  Nevertheless, I am not comfortable waiting around to see if those possibilities play out.  I am comfortable moving on to other opportunities.  I’ll deploy my capital elsewhere.