Zargon Oil & Gas Ltd.

Zargon Oil & Gas Ltd.

March 08, 2012 17:01 ET

Zargon Oil & Gas Ltd. Announces 2011 Fourth Quarter and Full Year Financial Results

CALGARY, ALBERTA--(Marketwire - March 8, 2012) - Zargon Oil & Gas Ltd. ("Zargon" or the "Company") (TSX:ZAR).


  • Fourth quarter 2011 oil production averaged 5,619 barrels of oil and liquids per day, a five percent gain over the preceding quarter. This increase in oil and liquids production was due to new production coming from an active fall drilling program. Fourth quarter natural gas production averaged 21.96 million cubic feet per day, essentially unchanged from the prior quarter. Total fourth quarter production was 9,278 barrels of oil equivalent per day, a three percent increase from the prior quarter.
  • Fourth quarter funds flow from operating activities of $17.10 million ($0.58 per diluted share) were 17 percent higher than the $14.59 million ($0.50 per diluted share) recorded in the prior quarter, and 19 percent higher than the $14.40 million ($0.54 per diluted share) reported in the fourth quarter of 2010. Funds flow from operating activities for the fourth quarter of 2011 included reductions of $2.34 million of realized derivative losses and $1.81 million of asset retirement expenses.
  • Monthly cash dividends of $0.10 per common share were declared in the fourth quarter of 2011 for a total of $8.79 million ($7.27 million after accounting for the common shares issued under the Dividend Reinvestment Plan ("DRIP") in lieu of cash dividends). These cash dividends (net of the DRIP) were equivalent to a payout ratio of 43 percent of funds flow from operating activities.
  • During the quarter, exploration and development capital expenditures (excluding property acquisitions and dispositions) were a robust $23.71 million for field related programs and included the drilling of 11.5 net wells which resulted in 9.0 net oil wells and 2.5 net abandonments. In the quarter, Zargon acquired a net $1.08 million of properties and $0.09 million of administrative assets which took the total net capital expenditure to $24.88 million.
  • For calendar 2011, oil and liquids production averaged 5,468 barrels of oil and liquids per day, a three percent decrease from the preceding year. The decrease was due, in part, to spring-summer flood-related Williston Basin shut-ins and mid-year oil property dispositions. Calendar 2011 natural gas production averaged 21.97 million cubic feet per day, a 14 percent decrease from 2010, as Zargon continued to direct capital to oil exploitation programs while letting the natural gas production volumes decline naturally. Through the execution of our focused oil exploitation program, Zargon achieved an oil and liquids production weighting of 60 percent. Total 2011 production averaged 9,130 barrels of oil equivalent per day, an eight percent decrease from the prior year.
  • Funds flow from operating activities in 2011 of $60.67 million ($2.11 per diluted share) were 17 percent lower than the $72.92 million ($2.77 per diluted share) recorded in the prior year. The reduction in cash flow was primarily caused by decreased production volumes, increased realized derivative losses and increased production costs.
  • Zargon declared cash dividends totalling $1.56 per common share during 2011 for a total of $44.64 million ($38.14 million net of the DRIP). These cash dividends (net of the DRIP) were equivalent to a payout ratio of 63 percent of funds flow from operating activities.
  • Net capital expenditures for the year totalled $48.65 million; consisting of $71.66 million of exploitation and development programs, $23.37 million of net property dispositions and $0.36 million of administrative assets. During the year, Zargon drilled 35.3 net wells yielding 32.8 net oil wells and 2.5 net abandonments.
  • Zargon's December 31, 2011 debt, net of working capital (excluding unrealized derivative assets/liabilities and deferred taxes), of $109.50 million, was approximately 1.8 times 2011 funds flow from operating activities, and was down 12 percent from the 2010 year end net debt of $124.39 million. At December 31, 2011, Zargon had approximately $70.50 million of available credit facilities from its $180 million borrowing base.

2012 Outlook

Details regarding Zargon's 2011 capital program and 2012 capital budget have been provided in a news release dated February 15, 2012. Including the Little Bow Alkaline Surfactant Polymer ("ASP") project, Zargon's 2012 capital budget has been reset at $66 million and comprises of $21 million of ASP-related expenditures and a net $45 million of field capital expenditures. Consistent with the last two years, the 2012 capital programs will be directed entirely to oil exploitation activities. In Alberta, the 2012 field capital program will focus on Hamilton Lake Viking oil exploitation, Bellshill Lake increased fluid withdrawals, Killam Glauconite oil pool development, Taber South waterflood expansion and the Little Bow ASP project development. In the Williston Basin, the capital program will focus on Midale horizontal drainage locations, Frobisher undrained targets and early derisking expenditures for waterflooding tight oil carbonates with multifrac horizontal wells.

In 2012, Zargon is projecting to spend $21 million of Phase 1 Little Bow ASP capital with 75 percent of the expenditures occurring in the second half of the year. This tertiary oil recovery project entails the injection of chemicals in a water solution into a partially depleted reservoir to recover incremental oil reserves. The project schedule anticipates first chemical injections in July, 2013, with a significant oil production response forecast to occur by January, 2014. Further information regarding this long-life oil exploitation project may be found in the February 15, 2012 press release on or on

With this capital budget, Zargon's 2012 oil and liquids production guidance is set at 5,400 barrels per day, a production level that is expected to remain relatively consistent throughout the year. Reflecting the combined impacts of essentially no natural gas related capital expenditures and temporary property shut-ins pertaining to very low natural gas prices, Zargon's 2012 natural gas production guidance is set at 18.60 million cubic feet per day.

Finally, in recent years, the company's business has been challenged by rapidly increasing operating costs as the company integrated the properties from five corporate and one large oil property acquisition. Now, with a focused business plan targeting eight clearly defined long-life oil exploitation initiatives we will work to high-grade our property footprint and concentrate on operating, capital and general and administrative cost containment initiatives. This initiative may include the sale of non-strategic assets if attractive valuations can be realized. Also, during this period of low natural gas prices, the company will complete a comprehensive review of its natural gas properties to identify well shut-ins, facility consolidation and other fixed cost saving opportunities that will permit improved returns when natural gas prices improve.

Three Months Ended Year Ended
December 31, December 31,
2011 2010 Percent Percent
(unaudited ) (unaudited ) Change 2011 2010 Change
Financial Highlights
Income and Investments ($ millions)
Petroleum and natural gas sales, before royalties 51.13 42.64 20 191.53 179.47 7
Funds flow from operating activities 17.10 14.40 19 60.67 72.92 (17 )
Cash flows from operating activities 22.97 8.34 175 73.26 61.67 19
Cash dividends (net of Dividend Reinvestment Plan) 7.27 10.99 (34 ) 38.14 47.35 (19 )
Net earnings/(losses) (23.87 ) (36.29 ) 34 10.38 (12.88 ) 181
Field capital and administrative asset expenditures 23.80 18.34 30 72.02 58.26 24
Net property and corporate acquisitions (dispositions) 1.08 1.75 (38 ) (23.37 ) 10.96 (313 )
Net capital expenditures 24.88 20.09 24 48.65 69.22 (30 )
Per Share, Diluted
Funds flow from operating activities ($/share) 0.58 0.54 7 2.11 2.77 (24 )
Cash flows from operating activities ($/share) 0.78 0.31 152 2.55 2.34 9
Net earnings/(losses) ($/share) (0.81 ) (1.35 ) 40 0.36 (0.49 ) 173
Cash Dividends ($/common share) 0.30 0.54 (44 ) 1.56 2.16 (28 )
Balance Sheet at Period End ($ millions)
Property and equipment (D&P) 410.67 412.12 -
Exploration and evaluation assets (E&E) 25.18 27.71 (9 )
Total assets 470.69 472.25 -
Working capital deficiency 16.80 9.11 84
Bank debt 92.70 115.29 (20 )
Shareholders' equity 223.81 207.70 8
Weighted Average Shares Outstanding for the Period (millions) - Basic 29.28 23.85 23 28.63 23.53 22
Weighted Average Shares Outstanding for the Period (millions) - Diluted 29.32 26.89 9 28.77 26.33 9
Total Common Shares Outstanding at Period End (millions) 29.36 27.05 9


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 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 Year Ended
December 31, December 31,
2011 2010 Percent Percent
(unaudited ) (unaudited ) Change 2011 2010 Change
Operating Highlights
Average Daily Production
Oil and liquids (bbl/d) 5,619 5,437 3 5,468 5,645 (3 )
Natural gas (mmcf/d) 21.96 23.28 (6 ) 21.97 25.40 (14 )
Equivalent (boe/d) 9,278 9,317 - 9,130 9,879 (8 )
Equivalent per million common shares (boe/d) 316 346 (9 ) 317 373 (15 )
Oil and liquids per million common shares (bbl/d) 192 202 (5 ) 190 213 (11 )
Average Selling Price (before the impact of financial risk
management contracts)
Oil and liquids ($/bbl) 87.11 70.49 24 82.09 69.69 18
Natural gas ($/mcf) 3.02 3.44 (12 ) 3.45 3.87 (11 )
Netback ($/boe)
Petroleum and natural gas sales 59.91 49.74 20 57.47 49.77 15
Royalties (9.66 ) (8.55 ) (13 ) (10.19 ) (8.86 ) (15 )
Realized gain/(loss) on derivatives (2.74 ) (2.26 ) (21 ) (3.55 ) 0.13 (2,831 )
Production and operating expenses (17.82 ) (13.14 ) (36 ) (16.68 ) (12.77 ) (31 )
Transportation expenses (0.50 ) (0.33 ) (52 ) (0.51 ) (0.32 ) (59 )
Operating netback 29.19 25.46 15 26.54 27.95 (5 )
Wells Drilled, Net 11.5 13.8 (17 ) 35.3 37.6 (6 )
Undeveloped Land at Period End (thousand net acres) 422 521 (19 )


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.

Forward-Looking Statements

This press release offers our assessment of Zargon's future plans and operations as at March 8, 2012, and contains certain forward-looking information and statements within the meaning of applicable securities laws. The use of any of the words "anticipate", "continue", "estimate", "expect", "forecast", "may", "will", "project", "should", "plan", "intend", "believe" and similar expressions (including the negatives thereof) are intended to identify forward- looking information or statements. In particular, but without limiting the foregoing, this news release contains forward-looking information and statements pertaining to the following: guidance as to our 2012 capital budget, (including ASP), forecasts and estimates as to drilling operations, production volumes and production and operating expenses under the heading "2012 Outlook".

The forward-looking information and statements included in this news release are not guarantees of future performance and should not be unduly relied upon. Such information and statements involve known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from those anticipated in such forward-looking information or statements including, without limitation: 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 and on Forward-looking statements are provided to allow investors to have a greater understanding of our business.

You are cautioned that the assumptions used in the preparation of such information and statements, 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; the availability of adequate and acceptable debt and equity financing and funds from operations to fund our planned expenditures; and our ability to add production and reserves through our development and acquisition activities, 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 and statements 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. 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. 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. See Zargon's Management's Discussion and Analysis ("MD&A") as filed on and on for the years ended December 31, 2011 and 2010 for a reconciliation of cash flows from operating activities to funds flow from operating activities.

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.


Zargon has filed with Canadian securities regulatory authorities its financial statements for the year ended December 31, 2011 and the accompanying MD&A. These filings are available on and under Zargon's SEDAR profile on

About Zargon

Based in Calgary, Alberta, Zargon's securities trade on the Toronto Stock Exchange and there are currently approximately 29.395 million common shares outstanding.

Zargon Oil & Gas Ltd. is a Calgary based oil and natural gas company working in the Western Canadian and Williston sedimentary basins that has delivered a long history of returns, dividends (distributions) and value creation. Zargon's business is focused on oil exploitation projects where we employ a careful reservoir engineering inspired technical approach to profitably increase oil recovery factors from existing oil reservoirs.

In order to learn more about Zargon, we encourage you to visit Zargon's website at 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 or Toll Free: 1-855-464-9992

    J.B. Dranchuk
    Vice President, Finance and Chief Financial Officer
    403-264-9992 or Toll Free: 1-855-464-9992