Zargon Oil & Gas Ltd.

Zargon Oil & Gas Ltd.
Masters Energy Inc.

Masters Energy Inc.

March 02, 2009 06:00 ET

Zargon Energy Trust to Acquire Masters Energy Inc.

CALGARY, ALBERTA--(Marketwire - March 2, 2009) - Zargon Energy Trust ("Zargon") (TSX:ZAR.UN) (TSX:ZOG.B) and Masters Energy Inc. ("Masters") (TSX:MSY) are pleased to announce that they have entered into an Arrangement Agreement pursuant to which Zargon will acquire all of the outstanding common shares of Masters. Pursuant to the agreement, Masters shareholders will receive $1.83 in value for each Masters common share, comprising, at the election of each shareholder, cash or trust units of Zargon or a combination thereof, subject to proration such that 20 percent of the total consideration will be paid in cash and 80 percent of the total consideration will be paid in Zargon trust units. The proposed transaction is valued at approximately $41.4 million, including the assumption of approximately $13.2 million of net debt (inclusive of adjustments and transaction costs).

Masters is currently producing approximately 1,275 barrels of oil equivalent per day of which approximately 55 percent is from the operated Little Bow oil property in Southern Alberta.


Masters shareholders may elect to receive either 0.120 Zargon trust units or $1.83 cash for each Masters common share, subject to a maximum of 1.49 million Zargon trust units and a maximum of $5.7 million of cash, which represents a 51 percent premium over the ten day weighted average trading price of the Masters common shares. The transaction will be completed pursuant to a Plan of Arrangement (the "Arrangement") which requires the approval of at least two-thirds of Masters shareholders along with customary regulatory, court and other approvals. An Information Circular outlining the Arrangement is expected to be mailed to Masters shareholders in late March 2009 for a shareholders meeting to take place on April 28, 2009. If the Arrangement is completed on April 29, 2009, as currently anticipated, the first post-Arrangement distribution by Zargon will be paid on May 15, 2009 to Zargon unitholders (including former Masters shareholders who have elected to receive and continue to hold Zargon trust units) of record on April 30, 2009.

The Boards of Directors of both Zargon and Masters have unanimously approved the Arrangement. The Board of Directors of Masters has concluded that the Arrangement is in the best interests of its shareholders and has resolved to recommend that Masters shareholders vote their Masters shares in favour of the Arrangement.

The directors, officers and a significant shareholder of Masters, beneficially owning approximately 21.4 percent of the shares of Masters, have agreed to vote their shares in favour of the Arrangement. The Arrangement prohibits Masters from soliciting or initiating discussion regarding any other business combination or sale of material assets, contains provisions for Zargon to match competing, unsolicited proposals and, subject to certain conditions, provides for a $1.23 million termination fee.

FirstEnergy Capital Corp. acted as exclusive financial advisor to Masters with respect to the transaction and has provided the Masters Board of Directors with a verbal opinion that, subject to reviewing final documentation, the consideration to be received by the Masters shareholders is fair, from a financial point of view.


Over its history, Zargon has followed a value-seeking business strategy with the specific objectives of providing long-term, per unit production and reserve growth in a partial cash flow distribution business model. The acquisition of Masters supports these objectives and provides a significant Alkaline Surfactant Polymer (ASP) tertiary oil recovery opportunity at the Masters operated Little Bow property in Southern Alberta. Specifically, Masters brings the following assets and opportunities to Zargon:

- Current production of 1,275 barrels of oil equivalent per day, consisting of 615 barrels of oil per day and 3.95 million cubic feet per day of natural gas.

- Based on Zargon's internal evaluation effective December 31, 2008, Zargon plans on booking 2.60 million barrels of oil equivalent of proved and probable reserves consisting of 1.55 million barrels of oil and 6.3 billion cubic feet of natural gas for the Masters acquisition. These Zargon internal reserve estimates do not include any recognition for the probable and possible reserves relating to the Masters proposed ASP flood at the Little Bow property.

- Estimated tax pools of approximately $38 million as at December 31, 2008.

- Masters' most important asset is the Little Bow property which is currently producing approximately 700 barrels of oil equivalent per day, consisting of 545 barrels per day of 21 degree API oil and 0.95 million cubic feet per day of natural gas. The production comes from the mature Little Bow Upper Mannville I oil pool, which has already produced 36 percent of the pool's original oil-in-place through waterflood operations and is anticipated by Zargon to recover an additional 1.19 million barrels of oil reserves for the Masters interest through the existing waterflood to reach an ultimate waterflood pool recovery factor of approximately 40 percent.

- In addition to the Little Bow property, Masters brings approximately 320 barrels of oil equivalent per day, consisting of 15 barrels per day of oil and 1.83 million cubic feet per day of natural gas in the North Peace River Arch area. These mostly non-operated assets which are centered around the Dixonville, Whitelaw and Firebird properties, include 72,000 net acres of undeveloped acres (68 percent of Masters' total undeveloped land of 106,000 net acres) and are relatively proximal to Zargon's West Central Alberta Peace River Arch core area.

- At the Little Bow property, Masters has identified that the Upper Mannville I pool is an excellent candidate for a tertiary recovery project utilizing ASP injections and has obtained the necessary chemical flood tests and scoping studies to evaluate the feasibility of implementing an ASP tertiary recovery project. Zargon's interpretation of this data suggests that an incremental 12 percent reservoir recovery factor might be recovered from this pool at a cost ranging from $20 to $30 per barrel of the incremental ASP oil reserves recovered. This cost is roughly divided one third for the capital required for water treating facilities, chemical mixing and reservoir optimization costs and two thirds for the cost of the injected chemicals over a six year life of chemical injections. Based on the 12 percent reservoir recovery factor of the conformable original oil-in-place, Zargon estimates that the Masters interest in the Little Bow property would yield an incremental 2.7 million barrels of possible ASP oil reserves, as at December 31, 2008. In a report dated February 23, 2009, McDaniel & Associates Consultants Ltd. ("McDaniel"), an independent qualified reservoir evaluator, has assigned the Masters Little Bow ASP interest 3.5 million barrels of probable additional oil reserves. Possible reserves are those additional reserves that are less certain to be recovered than probable reserves. There is a 10% probability that the quantities actually recovered will equal or exceed the sum of proved plus probable plus possible reserves.

"We believe that this transaction is strategically compelling for the benefit of both Masters and Zargon" said Craig Hansen, Zargon's President and Chief Executive Officer. "Specifically, we believe that the Masters organization has successfully advanced the Little Bow ASP tertiary flood through the chemical core flood, reservoir modeling and scoping engineering stages. With the completion of this transaction, the Masters shareholders will have selected a technically-strong, reservoir-focused and well-financed organization that is committed to proceeding with this Little Bow ASP project. Although at current commodity prices the project economics are insufficient to justify project initiation, we will continue with detailed project engineering and reservoir modeling in order that we will be prepared to proceed with the project when we are assured that the forward commodity pricing and anticipated capital and chemical costs permit acceptable rates of return."


In the February 24, 2009 press release which provided an operational update and 2008 year end reserves information, Zargon reaffirmed its 2009 production estimate of 9,300 barrels of oil equivalent per day, but reallocated its 2009 capital budget by announcing a reduced 2009 field capital program of $37 million that included the drilling of 24 net wells. The press release also referenced an increased unallocated $28 million 2009 acquisitions budget of which the cash component of this transaction will consume approximately $18.9 million.

For the remainder of the year after the expected late-April 2009 closing of this acquisition, Zargon anticipates that corporate production will average 10,200 barrels of oil equivalent per day. This estimate assumes that an unchanged $37 million of field capital programs will offset the majority of the natural production declines relating to both the Zargon and Masters base production. Prior to the closing of this acquisition, Zargon's production guidance remains at 9,300 barrels of oil equivalent per day and as a result Zargon's guidance for calendar 2009 is now set at 9,900 barrels of oil equivalent per day.

As of December 31, 2008, Zargon's debt net of working capital (excluding unrealized risk management assets/liabilities and future taxes) was $87.7 million or slightly more than a 0.8 times multiple of Zargon's 2008 annual funds flow from operating activities. Pursuant to this transaction, Zargon will increase its borrowings by approximately $18.9 million, which will be funded from Zargon's syndicated $180 million credit facilities.


Forward-Looking Statements - This document offers our assessment of Zargon's future plans and operations as at March 2, 2009, and contains forward-looking statements including:

- The timing of the mailing of the information circular, the holding of the shareholders meeting and the effective date of the Arrangement referred to under the heading "PLAN OF ARRANGEMENT";

- The payment and timing of payments of distributions referred to under the heading "PLAN OF ARRANGEMENT";

- Our future plans, costs and additional recovery of reserves at the Little Bow property referred to under the heading "STRATEGIC RATIONALE";

- Our expectations for capital expenditures, drilling activity and production referred to under the heading "REVISION TO ZARGON'S 2009 GUIDANCE".

In addition, information and statements relating to "reserves" are deemed to be forward-looking information and statements, as they involve the implied assessment, based on certain estimates and assumptions, that the reserves described exist in the quantities predicted or estimated, and that the reserves can be profitably produced in the future. 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; the inability to obtain the required consents, permits or approvals (including court, lender and shareholder) to the Arrangement; and the failure to realize the anticipated benefits of the Arrangement. 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 ("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 18.59 million trust units (TSX:ZAR.UN) and 1.85 million exchangeable shares (TSX:ZOG.B) outstanding. After giving effect to the conversion privilege of the exchangeable shares at the current 1.46953 exchange ratio there would be a total of 21.31 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.


Based in Calgary, Alberta, Masters securities trade on the Toronto Stock Exchange and there are currently 15.41 million shares (TSX:MSY) outstanding. Information applicable to Canadian securities regulations has been filed on the SEDAR system at and the Masters website at

Contact Information

  • Zargon Energy Trust
    C.H. Hansen
    President and Chief Executive Officer
    (403) 261-7300
    B.C. Heagy
    Executive Vice President and Chief Financial Officer
    (403) 515-5690
    Masters Energy Inc.
    Mr. Geoff Merritt
    President and Chief Executive Officerq
    (403) 290-1785
    Masters Energy Inc.
    Mr. Randall Boyd
    Chief Financial Officer
    (403) 290-1785