Zargon Oil & Gas Ltd.
TSX : ZAR

Zargon Oil & Gas Ltd.

May 12, 2011 17:01 ET

Zargon Oil & Gas Ltd. Announces 2011 First Quarter Results

CALGARY, ALBERTA--(Marketwire - May 12, 2011) - Zargon Oil & Gas Ltd. ("Zargon" or the "Company") (TSX:ZAR).

FINANCIAL & OPERATING HIGHLIGHTS (THREE MONTHS ENDED MARCH 31, 2011)

  • First quarter 2011 production averaged 9,546 barrels of oil equivalent per day, two percent higher than the preceding quarter and five percent lower than the corresponding 2010 quarter. Reflecting Zargon's continuing focus on oil exploitation, oil and liquids production increased eight percent over the previous quarter to average 5,893 barrels per day, a six percent increase over the corresponding 2010 quarter.
  • Funds flow from operating activities of $15.22 million ($0.56 per diluted share) were six percent higher than the $14.40 million ($0.55 per diluted share) recorded in the fourth quarter of 2010, and 31 percent lower than the $21.98 million ($0.84 per diluted share) reported in first quarter 2010. The first quarter 2011 amount was reduced by an allowance of $1.27 million for prior period tax contingencies, $3.01 million for realized hedge losses, $0.21 million for the cash portion of exploration and evaluation expenses and $0.66 million of asset retirement expenditures.
  • Three monthly cash dividends of $0.14 per common share were declared in the first quarter of 2011 for a total of $11.40 million ($9.65 million after accounting for the common shares issued for the Dividend Reinvestment Plan ("DRIP")). These cash dividends (net of the DRIP) were equivalent to a payout ratio of 63 percent of funds flow from operating activities.
  • Exploration and development capital expenditures (excluding property acquisitions and dispositions) increased 29 percent from the prior quarter to $22.25 million primarily due to an active winter drilling program.
  • Debt net of working capital (excluding unrealized derivative assets/liabilities) increased nine percent from the prior quarter to $135.13 million at March 31, 2011.
  • Subsequent to quarter end, Zargon closed an offering of 1.725 million common shares on a bought deal basis at $22.60 per share for total gross proceeds of $38.99 million ($36.93 million net of issue costs). The proceeds will be used to pay down debt and to partially fund the 2011 capital program.
Three Months Ended March 31,
(unaudited)20112010Percent Change
Financial Highlights
Income and Investments ($ millions)
Petroleum and natural gas sales, before royalties46.9448.46(3)
Funds flow from operating activities15.2221.98(31)
Cash flows from operating activities23.4720.7413
Cash dividends (net of Dividend Reinvestment Plan)9.6512.55(23)
Net earnings/(losses)(9.11)4.35(309)
Net capital expenditures20.3618.2412
Per Share, Diluted
Funds flow from operating activities ($/share)0.560.84(33)
Cash flows from operating activities ($/share)0.860.799
Net earnings/(losses) ($/share)(0.33)0.17(294)
Cash Dividends ($/common share)0.420.54(22)
Balance Sheet at Period End ($ millions)
Property and equipment (D&P)418.88406.273
Exploration and evaluation assets (E&E)27.5625.0410
Total assets483.98466.944
Working capital deficiency13.2411.1519
Bank debt121.8984.2345
Shareholders' equity191.92177.218
Weighted Average Shares Outstanding for the Period (millions) – Basic27.1123.1817
Weighted Average Shares Outstanding for the Period (millions) – Diluted27.3426.095
Total Common Shares Outstanding at Period End (millions)27.2826.204
Notes:
For the convenience of the reader, the comparative information presented in this schedule refers to common shares and cash dividends although, for the pre-corporate conversion period, these items were trust units and cash distributions.
For net capital expenditures, amounts include capital expenditures acquired for cash, equity issuances, acquisitions costs and net debt assumed on corporate acquisitions.
Funds flow from operating activities is a non-GAAP term that represents net earnings/losses and asset retirement expenditures except for non-cash items.
Total shares outstanding for 2010 include trust units plus exchangeable shares outstanding at period end. The exchangeable shares are converted at the exchange ratio at the end of the period.
Three Months Ended March 31,
(unaudited)20112010Percent Change
Operating Highlights
Average Daily Production
Oil and liquids (bbl/d)5,8935,5546
Natural gas (mmcf/d)21.9227.05(19)
Equivalent (boe/d)9,54610,062(5)
Equivalent per million common shares (boe/d)349385(9)
Oil and liquids per million common shares (bbl/d)2162131
Average Selling Price (before the impact of financial risk management contracts)
Oil and liquids ($/bbl)75.2973.632
Natural gas ($/mcf)3.554.79(26)
Netback ($/boe)
Petroleum and natural gas sales54.6453.512
Royalties(8.81)(9.90)(11)
Realized risk management gain/(loss)(3.50)1.30(369)
Production costs(15.31)(12.78)20
Transportation(0.48)(0.30)60
Operating netback26.5431.83(17)
Wells Drilled, Net7.512.8(41)
Undeveloped Land at Period End (thousand net acres)498516(3)
Notes:
The calculation of barrels of oil equivalent ("boe") is based on the conversion ratio that six thousand cubic feet of natural gas is equivalent to one barrel of oil. Average 2010 daily production per million common shares is calculated using the weighted average number of units outstanding during the period plus the weighted average number of exchangeable shares outstanding for the period converted at the average exchange ratio for the period.

Production

Oil and liquids production averaged 5,893 barrels per day, an eight percent increase from the 5,437 barrels per day produced in the 2010 fourth quarter, and was supported by an active winter oil exploitation horizontal drilling program in the Williston Basin and Alberta Plains South core areas. Oil and liquids production represented 62 percent of total production based on a 6:1 equivalent basis, up from 55 percent in the 2010 first quarter and 49 percent in the 2009 first quarter. Further oil production increases are anticipated in 2011 as Zargon is continuing to direct virtually all capital spending to oil exploitation projects, which have stronger returns available than our natural gas projects. Measured on a per million share basis, the 2011 first quarter oil and liquids production averaged 216 barrels per day, a seven percent increase from the daily average of 202 barrels per day in the fourth quarter of 2010 and a one percent increase from 213 barrels per day in the first quarter of 2010.

Natural gas production averaged 21.92 million cubic feet per day, a six percent decrease from the previous quarter and a 19 percent decrease from the corresponding period in 2010. The declining trend in natural gas production reflects the strategic shift to oil exploitation and the resulting naturally occurring production declines.

Capital Expenditures and Budgets

Reflecting an active winter 2010-11 horizontal drilling, completion and tie-in program, Zargon's first quarter field capital program totalled $22.25 million, a 29 and 53 percent increase from the respective 2010 fourth quarter and 2010 first quarter. During the quarter, Zargon drilled eight gross wells that resulted in 7.5 net oil wells for a 100 percent success ratio. The drilling program included four oil exploitation horizontal wells (Steelman, Elswick and Manor) in the Williston Basin core area, three Taber horizontal wells in the Alberta Plains South core area and one Hamilton Lake horizontal well in the Alberta Plains North core area. Zargon also completed property dispositions totalling a net $1.94 million.

The 2011 capital program has been increased by $10 million to total $65 million following Zargon's recent equity issuance. Zargon will conduct a program of continuous oil exploitation drilling in each of its core areas. Following spring breakup, a horizontal drilling rig in the Williston Basin is scheduled to drill three Elswick locations, then four wells at Weyburn before returning to Steelman later in the year. In Alberta, a second rig is scheduled to drill four Glauconite oil exploitation wells at Killam and three horizontal oil exploitation wells in Taber. The rig will then move to Hamilton Lake to follow up on our potentially significant Viking reservoir optimization project where one multi-frac horizontal well has been drilled and long term production testing will begin once surface access is available. Two additional horizontal drainage wells are planned at the Hamilton Lake property prior to year end. Also in Alberta, following spring break-up, a total of seven vertical oil exploitation step-out wells will be drilled in the Bellshill Lake and Grand Forks properties.

At Zargon's Little Bow Alkaline Surfactant Polymer ("ASP") tertiary recovery project, we anticipate project sanctioning later this summer, which should lead to preliminary fourth quarter 2011 expenditures and allow for a fall 2012 implementation date.

Guidance

On March 10, 2011, Zargon provided a 2011 quarterly oil production guidance range of 5,600 to 6,100 barrels of oil per day for 2011. Consistent with this guidance, Zargon's first quarter 2011 production averaged 5,893 barrels of oil per day. In the second quarter, we have experienced severe flooding and related surface access problems with many of our Williston Basin producers due to heavy winter snows and a wet spring that has shut-in up to 1,000 barrels per day for more than a month. Consequently, we do not expect to meet the oil production guidance range in the second quarter, but, with the expected resolution of our surface access challenges and the June resumption of an active summer-fall oil exploitation horizontal drilling program, we anticipate that third and fourth quarter oil production volumes will return to the 5,600 to 6,100 barrels of oil per day guidance range.

With essentially no capital allocated to natural gas projects, our natural gas production can be expected to continue to decline from the first quarter rate of 21.92 million cubic feet per day, although we anticipate that our previously announced guidance range of 20.4 to 22.8 million cubic feet per day will be met in each of the next three quarters.

Forward-Looking Statements

This press release offers our assessment of Zargon's future plans and operations as at May 12, 2011, and contains forward-looking statements. 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, including 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 and at www.sedar.com. 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.

Non-GAAP Financial Measures

Zargon uses the following terms for measurement within this press release that do not have a standardized prescribed meaning under Canadian generally accepted accounting principles ("GAAP") and these measurements may not be comparable with the calculation of similar measurements of other entities.

The terms "funds flow from operating activities", "funds flow from operating activities per shares" and "operating netback per boe" in this press release are not recognized measures under GAAP. Management of Zargon believes that in addition to net earnings and cash flows from operating activities as defined by GAAP, these terms are useful supplemental measures to evaluate operating performance and assess leverage. Funds flow from operating activities per diluted share is calculated using the same weighted average diluted shares outstanding as is used in calculating earnings per diluted share. Users are cautioned; however, that these measures should not be construed as an alternative to net earnings or cash flows from operating activities determined in accordance with GAAP as an indication of Zargon's performance.

Zargon considers funds flow from operating activities to be an important measure of Zargon's ability to generate the funds necessary to finance capital expenditures, pay dividends and repay debt. All references to funds flow from operating activities throughout this press release are based on cash provided by operating activities before the change in non-cash working capital since Zargon believes the timing of collection, payment or incurrence of these items involves a high degree of discretion and, as such, may not be useful for evaluating Zargon's operating performance. Zargon's method of calculating funds flow from operating activities may differ from that of other companies and, accordingly, may not be comparable to measures used by other companies.

51-101 Advisory

In conformity with National Instrument 51-101, Standards for Disclosure of Oil and Gas Activities ("NI 51-101"), natural gas volumes have been converted to barrels of oil equivalent ("boe") using a conversion rate of six thousand cubic feet of natural gas to one barrel of oil. This ratio is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. Readers are cautioned that the term "boe" may be misleading, particularly if used in isolation.

Filings

Zargon has filed with Canadian securities regulatory authorities its unaudited financial statements for the three months ended March 31, 2011 and the accompanying Managements' Discussion and Analysis ("MD&A"). These filings are available under Zargon's SEDAR profile at www.sedar.com. Full pdf versions of our first three months ended March 31, 2011 unaudited financial statements and the accompanying MD&A are available on our website at www.zargon.ca.

About Zargon

Based in Calgary, Alberta, Zargon's securities trade on the Toronto Stock Exchange and there are currently approximately 29.029 million common shares (ZAR) outstanding.

Zargon Oil & Gas Ltd. is a Calgary based oil and natural gas company working in the Western Canadian and Williston sedimentary basins with a long history of earnings and distributions/dividends. Zargon's smaller size and technical focus provides a unique opportunity to deliver profitable oil exploitation results from smaller oil projects that may be overlooked by larger competitors.

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 shareholder presentation, financial reports and historical news releases.

Contact Information

  • Zargon Oil & Gas Ltd.
    C.H. Hansen
    President and Chief Executive Officer
    403-264-9992

    Zargon Oil & Gas Ltd.
    J.B. Dranchuk
    Vice President, Finance and Chief Financial Officer
    403-264-9992
    zargon@zargon.ca
    www.zargon.ca