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WesternZagros Announces Third Quarter 2015 Operational and Financial Results

The Company remains committed to advancing development on the Garmian and Kurdamir Blocks to grow production and cash flow

WesternZagros Resources Ltd. (TSX VENTURE:WZR) ("WesternZagros" or "the Company") announced today its operating and financial results for the third quarter ended September 30, 2015. A summary of the activities, the financial statements, and the accompanying Management Discussion and Analysis ("MD&A") are available at www.westernzagros.com and on SEDAR at www.sedar.com. All amounts set out in this news release are in US dollars unless otherwise stated. 

  • Third quarter gross sales were approximately 5,000 barrels of light oil per day ("bbl/d"), of which WesternZagros's net oil sales were approximately 1,300 bbl/d. The Sarqala-1 well has averaged approximately 5,200 bbl/d since commencement of production from the well on February 11, 2015. Since the time of the first extended well test in 2011, Sarqala-1 has now produced 2.3 million barrels ("bbl") of light oil with no formation water.
  • Third quarter revenue to WesternZagros was $4.9 million, with an average realized price of $41.71/bbl and field netback was $3.8 million. For the nine months ended September 30, 2015, revenue was $13.3 million, with an average realized price of $41.71/bbl and field netback was $9.7 million.
  • Sarqala-1 well production guidance range for the remainder of 2015 remains at 5,000 to 5,500 bbl/d. Based on these production rates and current domestic oil prices, WesternZagros estimates 2015 revenue of $17 to $18 million and field netback of $10 to $13 million.
  • Hasira-1 has been successfully and safely suspended and future options to utilize the well bore are being evaluated.
  • Operatorship of the Garmian Block is expected to transfer from WesternZagros to Gazprom Neft Middle East B.V. ("Gazprom Neft") by the end of the first quarter of 2016.
  • The Company and Gazprom Neft continue to actively work with the KRG on finalizing the approval of the Garmian Field Development Plan ("Garmian FDP") having incorporated recent comments from the Kurdistan Regional Government ("KRG") into the Plan.
  • WesternZagros and Repsol S.A. continue to actively work with the KRG in advancing the Kurdamir Field Development Plan ("Kurdamir FDP") for the Kurdamir oil and natural gas discovery. It is expected that these plans will be finalized in the first quarter of 2016.
  • During the quarter, primarily as a result of the market conditions, the Company has recognized a non-cash impairment charge of $11.7 million in relation to property, plant and equipment and a non-cash impairment charge of $130.9 million in relation to exploration and evaluation expenditures.
  • The Company ended the third quarter with $133 million in cash and cash equivalents and an undrawn $200 million credit facility: $150 million of the credit facility became available on October 1, 2015 and $50 million is available June 1, 2016. 
  • The Board of Directors of the Company will be transitioning the role of Chairman of the Board from Mr. Fred Dyment to Mr. David Boone as of January 1, 2016.
  • The Company's personnel, operations and assets in the Kurdistan Region of Iraq remain safe and secure. 

Commenting on the third quarter results and subsequent events, WesternZagros's Chief Executive Officer Simon Hatfield said:

"The Company remains committed to advancing development on the Garmian and Kurdamir Blocks to grow production and cash flow. We are focused on managing our production, costs, and capital expenditures to mitigate the impact of low oil prices on the bottom line, in what is a very challenging environment for the industry today." 

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 third quarter averaged approximately 5,000 bbl/d of light oil of which WesternZagros's net oil sales were approximately 1,300 bbl/d. The Sarqala-1 well has produced approximately 2.3 million barrels of light oil for the nine months ended September 30, 2015 including production from the extended well test conducted in 2011 with no formation water.
  • WesternZagros has, under the auspices of the KRG, continued to supply 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.
  • Third quarter revenue to WesternZagros was $4.9 million, with an average realized price of $41.71/bbl and field netback was $3.8 million. For the nine months ended September 30, 2015, revenue was $13.3 million, with an average realized price of $41.71/bbl and field netback was $9.7 million.
  • Production guidance range for the remainder of 2015 is 5,000 to 5,500 bbl/d. 

Operated Joint Venture: Garmian Block

  • As previously disclosed, operatorship of the Garmian Block was to transition from WesternZagros to Gazprom Neft at the end of the exploration period for the block pursuant to agreements entered into in 2012. While the Company had been requested to continue operatorship for a period of time following the end of the exploration period, the co-venturers are now implementing this transfer of operatorship and expect to complete the process before the end of the first quarter of 2016.The Garmian FDP was submitted to the KRG on June 19, 2014 and the Company is seeking final approval of the FDP. Based on the current anticipated timing of FDP approval, the first development well, Sarqala-2, is projected to be spud in the first quarter of 2016. The Sarqala-2 well site is ready and long lead equipment has been secured. In the meantime, the co-venturers will finalize the transfer of operatorship and continue to evaluate options to secure lower-cost drilling rigs and support contracts to reduce capital costs.
  • 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.
  • During the third quarter, Hasira-1 was successfully and safely suspended. Previously announced logging and open-hole tests confirmed the presence of light oil in both the Mio-Oligocene and the shallower Jeribe reservoir. While the Company does not currently have a plan to develop the Mio-Oligocene reservoir, WesternZagros and Gazprom Neft continue to evaluate future options to utilize the well bore. 

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 continued the negotiations with WesternZagros and the KRG. The parties continue to actively work with the KRG to advance the Kurdamir FDP. It is expected that these plans will be finalized in the first quarter of 2016.
  • 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 the sale of gas, oil and condensate production, to support the final submission of the Kurdamir FDP to the KRG. 

Corporate Management

  • After eight years as Chairman of the Board of Directors of the Company, Mr. Fred Dyment will be stepping down from this role on December 31, 2015 and Mr. David Boone will assume the Chairman position effective January 1, 2016. Mr. Dyment will continue as a board member until the Company's 2016 annual general meeting. In addition, Mr. James Houck will become Vice-Chairman effective January 1, 2016 which is a new role created by the Board as part of this transition in board leadership. Messrs. Boone and Houck have both served as directors of the Company since 2007. 

Financial

  • As at September 30, 2015, WesternZagros had $133 million in cash and cash equivalents.
  • During the three months ended September 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 revenue of $4.9 million. For the nine month period ended September 30, 2015, the Company has recognized revenue of $13.3 million.
  • 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 current domestic oil prices, WesternZagros estimates 2015 revenue of $17 to $18 million and field netback of $10 to $13 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 September 30, 2015, WesternZagros's share for these PSC activities and other related capitalized costs was $8.7 million, comprised of $5.4 million of drilling-related costs and $3.3 million in other appraisal and development costs. For the nine months ended September 30, 2015, WesternZagros's share for these PSC activities and other related capitalized costs was $35.4 million, comprised of $20.5 million of drilling-related costs and $14.9 million in other appraisal and development costs.
  • During the third quarter of 2015, the Company identified an indicator of impairment for E&E expenditures for each of the Garmian Block cash generating unit ("CGU") and the Kurdamir Block CGU due to current market conditions, plus various other factors. In reviewing the carrying costs separately for each CGU, a non-cash impairment loss of $130.9 million has been recognized in the third quarter of 2015 for the amount by which the E&E expenditures for the Garmian Block exceeded its recoverable amount. For the nine months ended September 30, 2015, a non-cash impairment loss of $207.9 million has been recognized in relation to the Garmian Block CGU. No impairment was recognized in regards to the Kurdamir Block CGU since the estimated recoverable amount was greater than the carrying value.
  • 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 nine months ended September 30, 2015, the Company incurred $1.7 million and $8.7 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.
  • During the third quarter of 2015, the Company identified an indicator of impairment associated with oil and gas assets, primarily due to a further decrease in the forecasted oil price. In reviewing the carrying costs of the oil and gas assets for the Garmian Block CGU, a non-cash impairment loss of $11.7 million has been recognized for the amount by which such assets exceeded its estimated recoverable amount. 

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