ZARGON ENERGY TRUST
TSX : ZAR.UN

ZARGON ENERGY TRUST
Zargon Oil & Gas Ltd.
TSX : ZAR

Zargon Oil & Gas Ltd.

February 24, 2009 17:33 ET

Zargon Energy Trust Provides an Operational Update and Releases 2008 Year End Reserves Information

CALGARY, ALBERTA--(Marketwire - Feb. 24, 2009) - Zargon Energy Trust ("Zargon") (TSX:ZAR.UN) (TSX:ZOG.B) is pleased to provide an operational update and release its 2008 year end reserves information. Zargon is planning on releasing its 2008 financial results on March 10, 2009, after market close.

HIGHLIGHTS:

- Fourth quarter 2008 production averaged 9,410 barrels of oil equivalent per day, a one percent gain over the preceding quarter rate of 9,340 barrels of oil equivalent per day and a seven percent increase over the prior year's fourth quarter rate of 8,790 barrels of oil equivalent per day. On a per million trust unit basis, the fourth quarter production was 446 barrels of oil equivalent per day, relatively unchanged from 445 barrels of oil equivalent per day in each of the third quarter of 2008 and the fourth quarter of 2007.

- Natural gas production for the fourth quarter of 2008 averaged 29.86 million cubic feet per day, relatively unchanged from the preceding quarter rate of 29.84 million cubic feet per day and a three percent decline over the prior year's fourth quarter rate of 30.74 million cubic feet per day.

- Fourth quarter 2008 oil and liquids production averaged 4,434 barrels per day, a two percent gain over the preceding quarter rate of 4,367 barrels per day and a 21 percent increase from the prior year's fourth quarter rate of 3,666 barrels per day.

- For calendar 2008, production averaged 9,252 barrels of oil equivalent per day, an eight percent gain over the prior year's average of 8,560 barrels of oil equivalent per day. On a per million trust unit basis, production averaged 446 barrels of oil equivalent per day in 2008, a two percent increase from the 436 barrels of oil equivalent per day reported in 2007. Over the year, production increases were primarily enabled by the Rival Energy Ltd. ("Rival") and Newpact Energy Corp. ("Newpact") corporate acquisitions.

- In 2008, Zargon drilled 35.9 net wells with a 92 percent success ratio, yielding 17.9 net oil wells, 14.5 net natural gas wells, a 0.5 water injection well and 3.0 net dry holes. Net exploration, development, corporate and net property acquisition capital expenditures (unaudited) in 2008 were $119.39 million with $66.04 million of net corporate and property acquisitions and $53.35 million for field exploration and development programs.

- Based on an independent reserves evaluation conducted by McDaniel & Associates Consultants Ltd. ("McDaniel"), effective December 31, 2008, Zargon had total proved reserves of 21.05 million barrels of oil equivalent and proved plus probable reserves of 29.72 million barrels of oil equivalent, a 12 percent and 10 percent increase, respectively, from the prior year.

- In 2008, Zargon's net exploration and development capital program and corporate and property acquisitions delivered 5.70 million barrels of oil equivalent of proved reserve additions (including revisions) and 6.20 million barrels of oil equivalent of proved and probable reserves (including revisions). These proved additions and proved and probable additions replaced approximately 168 percent and 183 percent of the year's production volumes, respectively.

- Proved year end reserves per trust unit increased five percent to 1.00 per barrel of oil equivalent per total unit compared to the prior year's amount of 0.95 per barrel of oil equivalent per total trust unit. Proved and probable year end reserves per trust unit increased three percent to 1.40 per barrel of oil equivalent per total trust unit compared to the prior year's amount of 1.36 per barrel of oil equivalent per total trust unit.

- For the total proved reserve case, Zargon's 2008 capital program delivered an all-in annual finding, development and acquisition ("FD&A") cost of $20.80 per barrel of oil equivalent including the consideration of changes in future development capital. For the proved and probable reserve case, Zargon's 2008 capital program delivered an all-in proved and probable FD&A cost of $19.76 per barrel of oil equivalent including the consideration of future development capital. The three-year average proved and probable FD&A costs (including future development costs) were $21.35 per barrel of oil equivalent. Excluding the change in future development costs, the 2008 proved and probable FD&A costs were $19.26 per barrel of oil equivalent and the three-year average was $19.81 per barrel of oil equivalent.

- Zargon's "produce-out" net asset value calculation at a before tax 10 percent discount rate and using forecast prices and costs was $25.96 per diluted trust unit. This estimate reflects the McDaniel estimate of Zargon properties' future cash flow plus the appraisal of Zargon's undeveloped land less an allowance for the year end bank debt and working capital deficiencies.

OPERATIONAL UPDATE: (i)

Exploration and development fourth quarter 2008 capital expenditures were $16.17 million of which $8.07 million was allocated to a 15 gross (13.9 net) well drilling program that resulted in 12 gross (12.0 net) oil wells, two gross (0.9 net) gas wells and one gross (1.0 net) dry hole. Of the oil wells, eight were exploitation infill or step-out wells drilled in our Bellshill Lake area of the Alberta Plains core area. In West Central Alberta, we drilled a successful exploratory oil well at Highvale and a development well at St. Anne. The remaining two oil wells were drilled in the Williston Basin core area and included a horizontal well at Steelman, Saskatchewan and a vertical well at Frys (Fertile), Saskatchewan.

During the first quarter of 2009, Zargon is proceeding judiciously with a modest drilling program highlighted by three Jarrow gas exploration wells, one (0.5 net) oil well at Spirit River in West Central Alberta and one Steelman horizontal oil well plus one Frys (Fertile) vertical well in the Williston Basin (all drilled to date). In the West Central Alberta area, we expect to drill a Highvale oil step-out location and an exploratory well at Rycroft in the Peace River Arch. Production volumes in the first quarter will also be supported by the completion, equipping and tie-in of seven Bellshill Lake oil wells drilled in late 2008, new volumes from last quarter's Highvale exploratory oil discovery and strong flush oil production rates at a horizontal well at Steelman, Saskatchewan.

NET DEBT AND HEDGE UPDATE:

As at December 31, 2008, Zargon's balance sheet remained strong with a debt net of working capital of $87.71 million, a four percent increase from the balance at September 30, 2008. As at December 31, 2008, Zargon had more than $90 million of unutilized committed credit facilities remaining on the $180 million credit facilities held by three major Canadian based banking institutions.

In the fourth quarter of 2008, Zargon entered into US/Cdn. foreign currency hedges for calendar 2009 and the first half of 2010. The purpose of these foreign currency hedges is to secure future Canadian dollar cash flows on a portion of Zargon's future oil production. With these hedges, our current swap oil contracts now average Cdn. $120.79 per barrel of oil for 900 barrels of oil per day and US $100.20 per barrel of oil for 400 barrels of oil per day in 2009 plus 300 barrels of oil per day at Cdn. $155.79 per barrel of oil for the first half of 2010. In addition, Zargon currently has natural gas financial and physical swap contracts in place for 9,000 gigajoules per day for the period of January 2009 to March 2009 at an average price of $9.31 per gigajoule and 5,000 gigajoules per day for the period of April 2009 to October 2009 at an average price of $8.92 per gigajoule.

GUIDANCE: (i)

In the November 12, 2008 press release reporting third quarter results, Zargon provided preliminary production guidance for 2009 at 9,300 barrels of oil equivalent per day which was based on a 2009 exploration and development capital program of $50 million. In addition to this field capital budget, an incremental unallocated $15 million was budgeted for property or corporate acquisitions, but was not reflected in the production guidance estimate. Since November, our industry's operating environment has deteriorated significantly in terms of the commodity prices received and our industry's access to the debt and equity markets. Despite a challenging short term outlook, we continue to be encouraged about the long term viability of our industry in general and our business plan, in particular. Consequently, we view that this current difficult industry environment represents an excellent opportunity to restock our exploration, development and exploitation inventories through corporate or property acquisitions priced at historically attractive levels.

Entering 2009 with a strong balance sheet and an excellent commodity hedge position, we believe that Zargon is very well positioned to capture the substantial and attractive acquisition opportunities that are expected to become available. To maximize our participation in these acquisition opportunities, we are transferring $13 million of our 2009 field capital program to our acquisition budget to bring our unallocated 2009 acquisition budget to $28 million. In certain corporate acquisition opportunities, these funds could be augmented by the issuance of Zargon equity as partial consideration to the vendor.

The reduction of our field capital program will be entirely comprised of oil and natural gas development or acceleration programs that will be deferred until commodity prices improve over the current depressed levels. The revised $37 million field capital program is now forecast to entail the drilling of 24 net wells and will be allocated $14 million to the Alberta Plains, $9 million to West Central Alberta and $14 million to Williston Basin core areas. With the revised capital program allocation, Zargon continues to forecast our annual production guidance at 9,300 barrels of oil equivalent per day, although the actual rate will be dependent on the timing and magnitude of the property or corporate acquisitions.

(i) Please see comments on "Forward-Looking Statements" on the last page of this report.

RESERVES:

Reserves included herein are stated on a company working interest basis (before royalty burdens) unless otherwise noted. All reserves information has been prepared in accordance with NI 51-101. This report contains several cautionary statements that are specifically required by NI 51-101. In addition to the detailed information disclosed in this press release, more detailed information will be included in Zargon's 2008 Annual Information Form to be filed on SEDAR (www.sedar.com) in March 2009.

Based on an independent reserves evaluation conducted by McDaniel & Associates Consultants Ltd. effective December 31, 2008, and prepared in accordance with NI 51-101, Zargon had proved and probable reserves of 29.72 million barrels of oil equivalent. Reserve additions from exploration and development activities (including revisions) and corporate and net property acquisitions were 6.20 million barrels of oil equivalent.

Proved developed producing reserves represent 66 percent of proved and probable reserves (up from 64 percent in 2007) while total proved reserves account for 71 percent of proved and probable reserves. Approximately 60 percent of the proved and probable reserves are crude oil and liquids and 40 percent are natural gas on a barrel of oil equivalent basis.



Trust Reserves (1)
Oil and Liquids Natural Gas Equivalents (2)
At December 31, 2008 (mmbbl) (bcf) (mmboe)
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Proved producing 12.37 43.13 19.56
Proved non-producing 0.34 5.02 1.17
Proved undeveloped 0.27 0.32 0.32
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Total proved 12.98 48.47 21.05

Probable additional 4.83 23.01 8.67
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Total proved and probable 17.81 71.48 29.72
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Proved producing reserve life
index, years 7.6 3.9 5.7
Proved reserve life index,
years 8.0 4.4 6.1
Proved and probable reserve
life index, years 11.0 6.5 8.6
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1. Trust working interest reserves before royalties, boe (6:1).
2. Boes may be misleading, particularly if used in isolation. A boe
conversion ratio of 6 mcf: 1 bbl is based on an energy equivalency
conversion method primarily applicable at the burner tip and does not
represent a value equivalency at the wellhead.


A reconciliation of the 2008 year end reserve assignments with the reserves
reported in the 2007 year end report is presented below:

Reserve Reconciliation
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Oil and Liquids (mmbbl) Natural Gas (bcf)
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Proved Proved
Proved Probable & Prob. Proved Probable & Prob.
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December 31, 2007 11.43 4.25 15.68 43.86 23.50 67.36
Discoveries and
extensions 0.81 0.49 1.30 4.61 2.47 7.08
Revisions 0.76 (0.37) 0.39 3.86 (5.06) (1.20)
Acquisitions and
dispositions 1.56 0.46 2.02 7.00 2.10 9.10
Production (1.58) - (1.58) (10.86) - (10.86)
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December 31, 2008 12.98 4.83 17.81 48.47 23.01 71.48
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Reserve Reconciliation
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Equivalents (mmboe)
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Proved
Proved Probable & Prob.
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December 31, 2007 18.74 8.17 26.91
Discoveries and
extensions 1.58 0.90 2.48
Revisions 1.39 (1.21) 0.18
Acquisitions and
dispositions 2.73 0.81 3.54
Production (3.39) - (3.39)
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December 31, 2008 21.05 8.67 29.72
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FINDING, DEVELOPMENT AND ACQUISTION COSTS:

For 2008, Zargon's total proved FD&A costs, taking into account reserve revisions and changes in estimated future development capital during the period, were $20.80 per barrel of oil equivalent. For calculation purposes, the $119.39 million of 2008 net capital additions was combined with a decrease in estimated future development capital for total proved reserves of $0.81 million ($10.03 million at December 31, 2008 compared to $10.84 million at December 31, 2007). If the change in future development costs is excluded, the 2008 proved and probable FD&A costs, taking into account reserve revisions, were $20.95 per barrel of oil equivalent.

For 2008, Zargon's proved and probable FD&A costs, taking into account reserve revisions and changes in estimated future development capital during the period, were $19.76 per barrel of oil equivalent. For the purposes of this calculation, the $119.39 million of 2008 net capital additions was combined with an increase in estimated future development capital for proved and probable reserves of $3.10 million ($27.52 million at December 31, 2008 compared to $24.42 million at December 31, 2007). If the change in future development costs is excluded, the 2008 proved and probable FD&A costs, taking into account reserve revisions, were $19.26 per barrel of oil equivalent.



Proved and Probable Finding, Development and Acquisition Costs (1)

2008 2007 2006
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Total net capital expenditures
($ million) 119.39 65.40 63.37
Total net capital expenditures
plus change in forecast future
development costs ($ million) 122.49 68.19 76.85
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Proved and probable reserves (mmboe)
Open 26.91 27.46 26.77
Discoveries and extensions 2.48 2.55 4.29
Acquisitions and dispositions 3.54 - (0.10)
Revisions 0.18 0.02 (0.43)
Production (3.39) (3.12) (3.07)
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Close 29.72 26.91 27.46
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Proved and probable FD&A costs
($/boe) (2) 19.76 26.53 20.44
Proved and probable three-year
FD&A costs ($/boe) (2) 21.35 19.58 15.98
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1. The aggregate of the exploration and development costs incurred in the
most recent financial year and the change during that year in estimated
future development costs generally will not reflect total finding and
development costs related to reserves additions for that year.
2. Amounts are calculated including the change in future development costs.


Zargon experienced lower FD&A costs in 2008 as capital efficiencies were improved as a result of a primary focus on oil exploitation and an emphasis on improving operational execution on tie-ins, completions and other related operating issues. These gains coming from the improved field activities were augmented by the strong metrics for the Rival and Newpact corporate acquisitions that collectively provided a total of 3.04 million barrels of oil equivalent proved and probable reserve additions at an average cost of $20.01 per barrel of equivalent (inclusive of future capital).



Capital Program Performance
Three-Year
Average
2008 2007 2006 (2006-2008)
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Total Capital Program (excluding future
development costs)
Proved and probable FD&A costs ($/boe) (1) 19.26 25.45 16.85 19.81

Total Capital Program (including future
development costs)
Proved and probable FD&A costs ($/boe) (1) 19.76 26.53 20.44 21.35
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1. FD&A costs taking into account reserve revisions during the year on a
barrel of oil equivalent basis (6:1).


NET ASSET VALUE:

Zargon's oil, liquids and natural gas reserves were evaluated using McDaniel product price forecasts effective January 1, 2009, prior to provisions for income taxes, interest, debt service charges and general and administrative expenses. It should not be assumed that the following discounted future net property cash flows estimated by McDaniel represents the fair market value of the reserves:



Before Tax Present Value of Future Net Revenue
(Forecast Price Case)
Discount Factor
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($ millions) 0% 5% 10% 15%
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Proved producing 659.9 496.7 401.4 339.8
Proved non-producing 29.7 24.3 20.5 17.6
Proved undeveloped 9.3 6.1 4.3 3.1
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Total proved 698.9 527.1 426.2 360.5

Probable 359.5 207.8 140.8 104.3
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Total proved and probable 1,058.4 734.9 567.0 464.8
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The above discounted future net property cash flows are based on the
McDaniel price assumptions that are contained in the following table:


McDaniel Report Pricing Assumptions
(Forecast Price Case)

West Texas Edmonton Alberta Bow Saskatchewan
Intermediate Light River Hardisty Cromer
Crude Oil Crude Oil Crude Oil Medium Crude
($US/bbl) ($Cdn/bbl) ($Cdn/bbl) Oil ($Cdn/bbl)
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2009 60.00 69.60 54.80 61.80
2010 71.40 83.00 65.30 73.70
2011 83.20 91.40 72.00 81.20
2012 90.20 93.90 73.90 83.40
2013 97.40 96.30 75.90 85.60
2014 99.40 98.30 77.40 87.40
2015 101.40 100.30 79.00 89.10
2016 103.40 102.30 80.50 90.90
2017 105.40 104.20 82.10 92.60
2018 107.60 106.40 83.80 94.60
2019 109.70 108.50 85.40 96.40
2020 111.90 110.70 87.20 98.30
2021 114.10 112.80 88.90 100.30
2022 116.40 115.10 90.70 102.30
2023 118.80 117.50 92.50 104.40
Thereafter Escalate at Escalate at Escalate at Escalate at
2.0%/year 2.0%/year 2.0%/year 2.0%/year
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Alberta
AECO Spot
Natural Gas Inflation
Price Exchange Rate Rate
($Cdn/mmbtu) ($US/$Cdn) (percent)
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2009 7.40 0.85 2.0
2010 8.00 0.85 2.0
2011 8.45 0.90 2.0
2012 8.80 0.95 2.0
2013 9.05 1.00 2.0
2014 9.25 1.00 2.0
2015 9.45 1.00 2.0
2016 9.60 1.00 2.0
2017 9.80 1.00 2.0
2018 10.00 1.00 2.0
2019 10.20 1.00 2.0
2020 10.40 1.00 2.0
2021 10.60 1.00 2.0
2022 10.80 1.00 2.0
2023 11.05 1.00 2.0
Thereafter Escalate at
2.0%/year 1.00 2.0
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The following net asset value table shows what is customarily referred to as a "produce-out" net asset value calculation under which the current value of Zargon's reserves would be produced at McDaniel forecast future prices and costs. The value is a snapshot in time as of December 31, 2008 and is based on various assumptions including commodity prices and foreign exchange rates that vary over time. In this analysis, the present value of the proved and probable reserves is calculated at a before tax 10 percent discount rate. In the net asset value calculation, Zargon's 419 thousand net acres of land is valued at $70.45 million (based on the independent firm of Seaton-Jordan & Associates Ltd. valuation of Canadian undeveloped lands at $70.18 million and United States undeveloped land at U.S.$0.22 million converted at the year end exchange rate of 1.2246).



Net Asset Value

As at December 31 ($ millions) 2008 2007 2006
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Proved and probable reserves
(PVBT 10%) (1) (2) 567.0 470.1 448.8
Undeveloped land 70.4 43.2 43.6
Working capital (excluding
unrealized risk management
assets and liabilities) (10.1) (6.9) (9.8)
Bank debt (77.6) (56.9) (30.0)
Proceeds from the exercise of
all trust unit rights 42.3 39.3 31.8
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Net asset value (including
trust unit rights dilution) 592.0 488.8 484.4
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Net asset value per unit
Total ($/unit) 25.99 22.75 23.30
With full dilution ($/unit) (3) 25.96 23.00 23.48
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1. McDaniel's estimate of future before tax cash flow discounted at PV 10
percent.
2. PVBT represents present value before taxes.
3. Full dilution of units represents the year end units outstanding plus
the presumed exercise of all trust unit rights and the conversion of
exchangeable shares converted at the exchange ratio at the end of the
year. At December 31, 2008, Zargon had 18.479 million trust units, 1.862
million exchangeable shares outstanding and 1.654 million trust unit
incentive rights issued and outstanding. Assuming conversion of
exchangeable shares at the effective exchange ratio at year end of
1.43643 and the exercise of all trust unit incentive rights, there would
be 22.808 million trust units outstanding at this date.


Forward-Looking Statements - This document offers our assessment of Zargon's future plans and operations as at February 24, 2009, and contains forward-looking statements including:

- our expectations for drilling activity referred to under "OPERATIONAL UPDATE";

- our expectations for production referred to under the heading "GUIDANCE";

- our expectations for capital spending and acquisitions activity referred to under the heading "GUIDANCE";

Such statements are generally identified by the use of words such as "anticipate", "continue", "estimate", "expect", "forecast", "may", "will", "project", "should", "plan", "intend", "believe" and similar expressions (including the negatives thereof). By their nature, forward-looking statements are subject to numerous risks and uncertainties, some of which are beyond our control, 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. Risks are described in more detail in our Annual Information Form, which is available on our website. Forward-looking statements are provided to allow investors to have a greater understanding of our business.

You are cautioned that the assumptions, including among other things, future oil and natural gas prices; future capital expenditure levels; future production levels; future exchange rates; the cost of developing and expanding our assets; our ability to obtain equipment in a timely manner to carry out development activities; our ability to market our oil and natural gas successfully to current and new customers; the impact of increasing competition; our ability to obtain financing on acceptable terms; and our ability to add production and reserves through our development and acquisition activities 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. Our actual results, performance, or achievement could differ materially from those expressed in, or implied by, these forward-looking statements. We can give no assurance that any of the events anticipated will transpire or occur, or if any of them do, what benefits we will derive from them. The forward-looking information contained in this document is expressly qualified by this cautionary statement. Our policy for updating forward-looking statements is that 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 - 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 is a sustainable energy trust with oil and natural gas operations in Alberta, Saskatchewan, Manitoba and North Dakota. Zargon's securities trade on the Toronto Stock Exchange.

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

Contact Information

  • Zargon Energy Trust
    C.H. Hansen
    President and Chief Executive Officer
    (403) 264-9992
    or
    B.C. Heagy
    Executive Vice President and Chief Financial Officer
    (403) 264-9992
    Email: zargon@zargon.ca
    Website: www.zargon.ca