Zargon Oil & Gas Ltd.

Zargon Oil & Gas Ltd.

March 12, 2008 17:32 ET

Zargon Energy Trust Announces the Acquisition of Newpact Energy Corp. and Updates Production Guidance

CALGARY, ALBERTA--(Marketwire - March 12, 2008) - Zargon Energy Trust ("Zargon") (TSX:ZAR.UN) (TSX:ZOG.B) is pleased to announce that Zargon has entered into an agreement (the "Acquisition Agreement") whereby Zargon will make an offer to acquire all of the outstanding common shares of Newpact Energy Corp. ("Newpact"), a private oil and gas company, for total consideration of approximately 426,000 Zargon trust units or approximately 0.0534 trust units for each outstanding Newpact common share. Zargon will also assume approximately $3.65 million of net debt (including adjustments and transaction costs) for a total transaction value of approximately $14.00 million.

Newpact is currently producing approximately 350 barrels of oil equivalent per day, primarily from two Alberta properties, which consists of 100 barrels per day of crude oil and 1.50 million cubic feet per day of natural gas. Approximately 48 percent of Newpact's current production is from the operated St. Anne oil and natural gas property, which is located northwest of Edmonton, and 25 percent of current production is from the Ghost Pine natural gas property, which primarily consists of shallow decline coal bed methane production and is located northeast of Calgary.


The Acquisition Agreement includes customary non-solicitation covenants and Newpact has reserved the right to respond to superior proposals, which Zargon has the right to match. Newpact's Board of Directors has unanimously resolved to recommend that all Newpact shareholders tender their common shares in accordance with Zargon's offer. In connection with the offer, certain Newpact shareholders, including all of the directors and officers of Newpact, have entered into lock-up agreements with Zargon, pursuant to which they have agreed to tender all of their common shares to the offer, subject to certain exceptions, representing approximately 50 percent of the issued and outstanding common shares of Newpact.

The transaction is expected to be completed in late April and will be conditional on 90 percent of Newpact shareholders tendering to the offer, as well as on regulatory approvals, the approval of the Toronto Stock Exchange, and other typical conditions for this type of transaction.


Over its history, Zargon has followed a counter-cyclical and value-seeking business strategy with the specific objectives of building a sustainable trust, and over the long term, per unit production and reserve growth. The acquisition of Newpact, along with the recently announced acquisition of Rival Energy Ltd. ("Rival"), are a good fit in supporting these objectives as Zargon continues to pursue acquisition opportunities during this time of reduced competition for property and corporate acquisitions. Specifically, Newpact brings the following assets and opportunities to Zargon:

- Current production of approximately 350 barrels of oil equivalent per day, consisting of 100 barrels per day of oil and 1.50 million cubic feet per day of natural gas.

- Estimated proved and probable reserves of 0.89 million barrels of oil equivalent which is comprised of 3.11 billion cubic feet of natural gas and 0.37 million barrels of oil and natural gas liquids (based on a Zargon internal December 31, 2007 reserve estimate). Total proved reserves are estimated at 0.77 million barrels of oil equivalent.

- Significant oil and solution gas exploitation potential in the wholly owned West Central Alberta St. Anne property. This property produces 20-degree API oil and solution gas from the carbonate Nordegg and Banff formations that contain a large oil-in-place carrying estimated oil recovery factors of less than 10 percent.

- 21,200 net acres of undeveloped land.

- Tax pools of approximately $11.00 million as of December 31, 2007.

The Newpact acquisition is accretive to Zargon on a reserves, production and cash flow basis. The following are the acquisition metrics, without assigning any value to undeveloped land:

- Production - $40,000 per producing barrel of oil equivalent per day based on current rates of approximately 350 barrels of oil equivalent per day.

- Reserves - $15.73 per proved and probable barrels of oil equivalent and $18.18 per total proved barrels of oil equivalent.

- Property operating cash flow multiple - a 4.2 year property operating cash flow multiple based on Newpact's 2008 operating cash flow estimate of $3.36 million using third-party engineering price forecasts.


In the February 28, 2008 press release, Zargon provided 2008 production guidance in the range of 9,500 to 9,800 barrels of oil equivalent per day which was premised on a 2008 exploration and development capital program of $50 million that included the drilling of 45 net wells and a property acquisitions budget of $15 million. With this Newpact acquisition press release, we are providing additional information regarding our 2008 production guidance.

During late January and early February of 2008, Zargon experienced severe operational freeze-ups due to cold weather conditions. As a result, for a few days, more than 1,000 barrels of oil equivalent per day of Zargon's production was shut-in. Also, during the first quarter we have experienced unexpected production losses coming from early water encroachment at four wells located at the Alberta Plains Jarrow, and the West Central Alberta Highvale and Progress properties. On the positive side, Zargon closed the previously announced acquisition of Rival Energy Ltd. on January 23, 2008. After allowing for the effects of these offsetting events, we are now anticipating that first quarter production will average approximately 9,100 barrels of oil equivalent per day. Furthermore, assuming the Newpact acquisition will be completed in late April, we anticipate that second quarter production will average approximately 9,500 barrels of oil equivalent per day.

In the second half of 2008, Zargon's production is expected to average in the 9,600 to 9,900 barrels of oil equivalent per day range with the variance being largely dependent on the timing of the tie-ins of the recently drilled Peace River Arch natural gas exploration successes at Hamelin Creek, Saddle Hills (Webster) and Kakut and on incremental production volumes that may be added through further acquisitions. This 2008 guidance estimate continues to be based on a $65 million capital budget ($50 million for field capital and $15 million for property and corporate acquisitions) that excludes the now completed $47.1 million Rival corporate acquisition and the proposed $14.0 million Newpact corporate acquisition.


With the recent increase in hydrocarbon prices, Zargon has added to its price risk management position. As of the date of this press release, Zargon has the following price risk management contracts in place for crude oil and natural gas:

West Texas Intermediate Crude Oil swaps:

January 2008 - March 2008 1,700 barrels per day at an average
price of US$73.67 per barrel
April 2008 - June 2008 1,700 barrels per day at an average
price of US$73.95 per barrel
July 2008 - December 2008 1,700 barrels per day at an average
price of US$75.34 per barrel
January 2009 - March 2009 1,200 barrels per day at an average
price of US$82.43 per barrel
April 2009 - June 2009 700 barrels per day at an average
price of US$89.34 per barrel
July 2009 - September 2009 700 barrels per day at an average
price of US$87.71 per barrel
October 2009 - December 2009 500 barrels per day at an average
price of US$85.30 per barrel

AECO Natural Gas swaps:

January 2008 - March 2008 6,000 gigajoules per day at an average
price of $8.41 per gigajoule
April 2008 - October 2008 10,000 gigajoules per day at an average
price of $7.42 per gigajoule
November 2008 - March 2009 5,000 gigajoules per day at an average
price of $8.57 per gigajoule


This document contains statements that are forward-looking, such as those relating to results of operations and financial condition, general economic conditions, industry conditions, changes in regulatory and taxation regimes, volatility of commodity prices, escalation of operating and capital costs, currency fluctuations, the availability of services, imprecision of reserve estimates, geological, technical, drilling and processing problems, environmental risks, weather, the lack of availability of qualified personnel or management, stock market volatility, the ability to access sufficient capital from internal and external sources and competition from other industry participants for, among other things, capital, services, acquisitions of reserves, undeveloped lands and skilled personnel. By their nature, forward-looking statements are subject to numerous risks and uncertainties that could significantly affect anticipated results in the future and, accordingly actual results may differ materially from those predicted. The forward-looking statements contained in this document are as of March 12, 2008 and are subject to change after this date. Readers are cautioned that the assumptions used in the preparation of such information, although considered reasonable at the time of preparation, may prove to be imprecise and, as such, undue reliance should not be placed on forward-looking statements. Zargon disclaims, except as required by law, any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.


Barrels of oil equivalent ("boe") may be misleading, particularly if used in isolation. A boe conversion ratio of six thousand cubic feet of natural gas to one barrel of oil is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.


Based in Calgary, Alberta, Zargon's securities trade on the Toronto Stock Exchange and there are currently 17.676 million trust units (ZAR.UN) and 2.060 million exchangeable shares (ZOG.B) outstanding. After giving effect to the conversion privilege of the exchangeable shares and the March 17, 2008 revised exchange ratio there would be a total of 20.411 million trust units outstanding.

In order to learn more about Zargon, we encourage you to visit Zargon's website at where you will find a current unitholder presentation, financial reports and historical news releases.

Contact Information

  • Zargon Energy Trust
    Mr. C.H. Hansen
    President and Chief Executive Officer
    (403) 264-9992
    Mr. B.C. Heagy
    Executive Vice President and Chief Financial Officer
    (403) 264-9992