Canadian Company Spotlight

Arsenal Energy Inc. is an energy exploration and production company with producing properties in Canada and the United States. Corporate headquarters are located in Calgary, Alberta, Canada.

Profile

Arsenal Energy Inc. has several properties located in strategic areas of western Canada and in North Dakota, USA. The Company's strategy is to establish and grow three to five core properties with good investment characteristics in areas where the Company has technical expertise. With Oil prices starting to rebound, the outlook for Companies such as Arsenal are looking better every day. The Company is not only in the exploration stages, but it also has oil producing properties earning significant revenue for the Company. At the end of 2008, Arsenal had record funds from operations of $31.3 million for the year 2008. These record funds were due to high commodity prices and increasing production volumes.  During the fourth quarter of 2008, when prices declined, revenue was augmented by the Company’s hedging program. Without these hedges, funds from operations would have been $23.4 million for the year. Net income for the year 2008 was $20.5 million.

As a result of successful exploration programs at Evi, Galahad, and Stanley and the significant corporate acquisition of GEOCAN Energy, the Company was able to increase average production by 16% yearend proved plus probable reserves by 64%. These activities also increased the Company’s reserve life and lowered operating costs.

In August 2008, Arsenal entered into an agreement to acquire all of the outstanding common shares of GEOCAN Energy for $30.0 million cash and the issuance of 10,623,498 Arsenal shares valued at $9.2 million. In addition, the Company assumed $14.5 million of GEOCAN debt and working capital deficiency. As part of Arsenal’s acquisition strategy, the Company entered into a series of crude oil hedges to protect the economics of the transaction.

Based on the Q4 production rate of 2,516 boe/d, Arsenal has a reserve life of 5.6 years on a total proved basis and 9.0 years on a proved plus probable basis.  On a total proved basis, reserves increased by 76% and reserves/share increased by 28%.  Additions replaced production by 348%.  On a proved plus probable basis, reserves increased by 64% and reserves/share increased by 25%. Based on the 2008 netback of $38.23/boe Arsenal’s proved plus probable recycle ratio was 1.6. This bodes well for long-term investors looking for management with forward-looking experience, which seems to be the case here.

Low oil prices and high royalties caused Arsenal to cancel its 2008 Q4 drilling program at Evi in northern Alberta. However, the recent changes announced by the government of Alberta have now made those wells economically attractive. The Company has scheduled 2 gross (0.8 net) wells for the third and fourth quarter of 2009.

The first quarter of 2009 was challenging for the oil industry and for Arsenal. In the previous 6 months oil prices fell by $100/bbl and gas prices fell by $5/mcf. These price drops resulted in operating margins of only $10.99/boe in the first quarter. Arsenal was, however, able to maintain strong cash flows due to hedging gains.

Arsenal had record Q1 funds from operations of $10.3 million due to realized hedges and increased production volumes. The gains were offset by operating margins that declined significantly due to lower oil and gas prices. Net loss for Q1 was $3.1 million.

With Oil prices on the rebound and consumers never ending demand for petroleum, finding a $0.24 stock with several oil and gas properties and significant revenues was no easy task, and when that search found Arsenal Energy Inc., we felt compelled to share it with our readers.

Properties

The Company has properties in various stages of development in British Columbia, Alberta, Saskatchewan and North Dakota in the U.S. Below is more information on some of the more advanced projects.

Evi/Lubicon Project

The Evi/Lubicon Area is located approximately 200 miles north of Edmonton, Alberta. Evi is a multizone hydrocarbon rich area containing high netback light oil from Devonian aged sediments.

In the 3rd quarter of 2007, Arsenal participated in the drilling of 3 wells resulting in 2 Granite Wash oilwells and 1 Slave Point oil well delivering 170 bbl/d of incremental net production.

Early in the fourth quarter of 2007 Arsenal made a strategic asset aquistion in the Evi area, resulting in 30 bbd/d net production, an Oil battery, and significant undeveloped acreage along with multiple 3D seismic programs.

Thanks to the newly acquired 3D seismic information on the undeveloped property, Arsenal has identified a number of new drilling opportunities and plans to drill an additional 2 to 4 gross wells in 2008 with an additional inventory of 3 well locations.

Galahad Area

The Galahad area is approximately 100 km east of Red Deer, Alberta. Galahad is a 100% working interest property, containing a company operated facility which was acquired in 2006 from Tiverton. Production in 2007 averaged 130 boe/d of medium gravity oil.

In 2007 Arsenal drilled 1 well that tested in excess of 4 mmcf/d and will be brought on production at 1mmcf/d. The new discovery well also encountered a new pool accumulation of oil in the targeted Ellerslie formation.

Late in the 3rd quarter of 2007 Arsenal entered into an area farm-in agreement which will allow for future drilling potential.

Looking forward Arsenal plans to drill at least 2 Development wells in early 2008 along with shooting a proprietary 3D seismic program on the farm-in lands.

Lloydminster Area

The company has interests in a variety of heavy oil fields within a 40 mile radius of the city of Lloydminster. The largest operations are at Maidstone Sask., Lashburn Sask. and Wildmere AB.

In 2007, Arsenal produced an average of 700 boe/d from its heavy oil properties. To optimize production Arsenal drilled 3 wells and performed a number of successful well workovers in 2007. Arsenal also shot two 3D seismic programs (Wildmere and Provost) and has a identified over 10 development drilling opportunities, of which 5 are planned for the third quarter of 2008. The company plans to capitalize on the recent surge in heavy oil prices. Arsenal anticipates short term higher netbacks and will be evaluating smaller, expensive non-op properties for divesture.

North Dakota - Stanley Area

Arsenal's most consistent low decline producing assets are its fields in North Dakota. Arsenal's US production averaged 500 boe/d of light sweet oil in 2007 split between 6 fields, the largest of which are Lindahl, Stanley and Rennie Lake.

Since 2006 a large very exciting, technologically driven play has emerged in the Williston Basin Bakken formation. Due to the low permeability of the Bakken, past production had been very limited and uneconomic.

Recent developments in horizontal fracture technology have allowed for the rapid advancement of this large resource play. Most of the recent activity has been surrounding Arsenal's Stanley area where there are over 20 producing Bakken oil wells with stable production of over 6000 boe/d. The oil is light, sweet and water-free.

Arsenal is in the process of actively pooling its land interests and anticipates drilling as many as 3 gross wells before the end of 2008.

Tony van Winkoop, Director, President and CEO
• B.Sc Geological Engineering with 27years experience
• Hired as Arsenal VP Exploration July 2006 and was appointed President July 2007
• Co-Founder of Venator Petroleum (12 years) (sold to PrimeWest Energy for $32 million-$4 million capital invested)
• Manager of Development PrimeWest Energy (5 years)

J. Paul Lawrence, Vice President Finance and CFO
• Chartered accountant with 30 years experience including 13 years as CFO of both private and public companies
• Co-Founder and Director of Clearwater Energy Inc. (private) and Lexxor Energy Inc. (public)
• Previously employed at Silverwing Energy Inc., Quadron Resources Inc. and Westmin Resources Limited

Jay LaForge, Vice President Operations
• 14 years operations and field experience
• Previously employed at Renaissance Energy Ltd. and most recently at Enerplus Resources

Gjoa Taylor, Vice President Land
• 20 years experience as a Professional Landman
• Previously employed at Imperial Oil, Crestar and most recently as Manager Negotiations at PrimeWest Energy

Ron Forth, Vice President Engineering
• 26 years as Professional Engineer
• Previously employed at Petro Canada, Encana and most recently as CBU Manager at PrimeWest Energy.

Greg Kaidannek, Chief Geophysicist
• 10 years exploration and development experience
• Previously employed at Crestar, Conoco Phillips and most recently as Geophysical Manager at PrimeWest Energy

Wade Hansen, Chief Geologist
• 9 years exploration and development experience
• Previously employed at Cypress Energy, PrimeWest Energy as Senior Geologist.

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