Zargon Oil & Gas Ltd.
TSX : ZAR

Zargon Oil & Gas Ltd.

August 10, 2011 17:02 ET

Zargon Oil & Gas Ltd. Announces 2011 Second Quarter Results

CALGARY, ALBERTA--(Marketwire - Aug. 10, 2011) - Zargon Oil & Gas Ltd. (TSX:ZAR) ("Zargon" or the "Company").

FINANCIAL & OPERATING HIGHLIGHTS (THREE MONTHS ENDED JUNE 30, 2011)


--  Second quarter 2011 production averaged 8,686 barrels of oil equivalent
    per day, nine percent lower than the preceding quarter and 14 percent
    lower than the corresponding 2010 quarter. Severe wet weather conditions
    that restricted field access in the Williston Basin core area reduced
    oil and liquids average production to 5,034 barrels per day, which is a
    decrease of 15 percent from the previous quarter and 12 percent from the
    corresponding 2010 quarter. 
--  Funds flow from operating activities of $13.76 million ($0.47 per
    diluted share) were 10 percent lower than the $15.22 million ($0.56 per
    diluted share) recorded in the prior quarter, and 25 percent lower than
    the $18.24 million ($0.70 per diluted share) reported in second quarter
    2010. The second quarter amount included reductions for $5.05 million of
    realized hedge losses, $0.94 million of prior period royalty adjustments
    and $0.74 million of asset retirement expenses. 
--  Three monthly cash dividends of $0.14 per common share were declared in
    the second quarter of 2011 for a total of $12.21 million ($10.47 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 76 percent of funds flow from operating
    activities. 
--  Exploration and development capital expenditures (excluding property
    acquisitions and dispositions) decreased 65 percent from the prior
    quarter to $7.73 million primarily due to flooded surface leases in the
    Williston Basin core area which delayed our drilling program. 
--  During the quarter, 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 were initially used to pay down debt and will subsequently be
    used to partially fund the 2011 capital program. Accordingly, debt net
    of working capital (excluding unrealized derivative assets/liabilities)
    decreased 24 percent from the prior quarter to $102.12 million at June
    30, 2011. 
--  On June 28, 2011, Zargon amended and renewed its syndicated committed
    credit facilities of $180 million. These facilities are available for
    general corporate purposes and the acquisition of oil and natural gas
    properties. 
--  Subsequent to quarter end, Zargon completed the disposition of two
    Williston Basin properties producing a total of 260 barrels of oil per
    day for total cash compensation of approximately $24.5 million.

                 Three Months Ended June 30,      Six Months Ended June 30, 
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                                     Percent                        Percent 
(unaudited)          2011       2010  Change        2011       2010  Change 
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Financial                                                                   
 Highlights                                                                 
Income and                                                                  
 Investments                                                                
 ($ millions)                                                               
 Petroleum and                                                              
  natural gas                                                               
  sales,                                                                    
  before                                                                    
  royalties         48.47      43.89      10       95.41      92.34       3 
 Funds flow                                                                 
  from                                                                      
  operating                                                                 
  activities        13.76      18.24     (25)      28.98      40.22     (28)
 Cash flows                                                                 
  from                                                                      
  operating                                                                 
  activities        13.06      12.74       3       36.54      33.48       9 
 Cash                                                                       
  dividends                                                                 
  (net of                                                                   
  Dividend                                                                  
  Reinvestment                                                              
  Plan)             10.47      11.88     (12)      20.12      24.43     (18)
 Net earnings/
  (losses)          12.67      17.86     (29)       3.56      22.21     (84)
 Net capital                                                                
  expenditures       8.02      34.37     (77)      28.38      52.61     (46)

Per Share,                                                                  
 Diluted                                                                    
 Funds flow                                                                 
  from                                                                      
  operating                                                                 
  activities                                                                
  ($/share)          0.47       0.70     (33)       1.03       1.53     (33)
 Cash flows                                                                 
  from                                                                      
  operating                                                                 
  activities                                                                
  ($/share)          0.45       0.49      (8)       1.29       1.28       1 
 Net earnings/
  (losses)                                                                  
  ($/share)          0.43       0.68     (37)       0.13       0.85     (85)

Cash Dividends                                                              
 ($/common                                                                  
 share)              0.42       0.54     (22)       0.84       1.08     (22)

Balance Sheet                                                               
 at Period End                                                              
 ($ millions)                                                               
 Property and                                                               
  equipment                                                                 
  (D&P)                                           414.97     437.46      (5)
 Exploration                                                                
  and                                                                       
  evaluation                                                                
  assets (E&E)                                     27.07      26.54       2 
 Total assets                                     472.58     495.98      (5)
 Working                                                                    
  capital                                                                   
  deficiency                                        6.33       7.55     (16)
 Bank debt                                         95.79     114.12     (16)
 Shareholders'                                                              
  equity                                          232.57     184.27      26 

Weighted                                                                    
 Average                                                                    
 Shares                                                                     
 Outstanding                                                                
 for the                                                                    
 Period                                                                     
 (millions) -                                                               
 Basic              28.93      23.38      24       28.02      23.38      20 
Weighted                                                                    
 Average                                                                    
 Shares                                                                     
 Outstanding                                                                
 for the                                                                    
 Period                                                                     
 (millions) -                                                               
 Diluted            29.14      26.24      11       28.25      26.22       8 
Total Common                                                                
 Shares                                                                     
 Outstanding                                                                
 at Period End                                                              
 (millions)                                        29.13      26.33      11 
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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 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 June 30,      Six Months Ended June 30, 
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                                     Percent                        Percent 
(unaudited)         2011       2010   Change       2011       2010   Change 
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Operating                                                                   
 Highlights                                                                 
Average Daily                                                               
 Production                                                                 
 Oil and                                                                    
  liquids                                                                   
  (bbl/d)          5,034      5,740      (12)     5,461      5,647       (3)
 Natural gas                                                                
  (mmcf/d)         21.91      25.86      (15)     21.91      26.45      (17)
 Equivalent                                                                 
  (boe/d)          8,686     10,050      (14)     9,113     10,056       (9)
 Equivalent                                                                 
  per million                                                               
  common                                                                    
  shares                                                                    
  (boe/d)            298        382      (22)       323        382      (15)
 Oil and                                                                    
  liquids per                                                               
  million                                                                   
  common                                                                    
  shares                                                                    
  (bbl/d)            173        218      (21)       193        215      (10)

Average                                                                     
 Selling Price                                                              
 (before the                                                                
 impact of                                                                  
 financial                                                                  
 risk                                                                       
 management                                                                 
 contracts)                                                                 
 Oil and                                                                    
  liquids                                                                   
  ($/bbl)          89.55      67.27       33      81.90      70.38       16 
 Natural gas                                                                
  ($/mcf)           3.74       3.72        1       3.65       4.26      (14)

Netback                                                                     
 ($/boe)                                                                    
 Petroleum and                                                              
  natural gas                                                               
  sales            61.32      47.99       28      57.85      50.73       14 
 Royalties        (12.05)     (8.74)      38     (10.37)     (9.32)      11 
 Realized                                                                   
  gain/(loss)                                                               
  on                                                                        
  derivatives      (6.39)      1.55     (512)     (4.88)      1.43     (441)
 Production                                                                 
  costs           (17.26)    (12.59)      37     (16.25)    (12.69)      28 
 Transportation    (0.57)     (0.32)      78      (0.52)     (0.31)      68 
 Operating                                                                  
  netback          25.05      27.89      (10)     25.83      29.84      (13)

Wells Drilled,                                                              
 Net                 2.1        6.3      (67)       9.6       19.1      (50)

Undeveloped                                                                 
 Land at                                                                    
 Period End                                                                 
 (thousand net                                                              
 acres)                                             478        521       (8)
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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 5,034 barrels per day in the 2011 second quarter, a 15 percent decrease from the 5,893 barrels per day produced in the prior quarter, and was impacted by severe wet weather conditions in the Williston Basin core area, which resulted in the shut-in of approximately 760 barrels per day. Oil and liquids production represented 58 percent of total production based on a 6:1 equivalent basis. Natural gas production averaged 21.91 million cubic feet per day, a nominal decrease from the previous quarter and a 15 percent decrease from the corresponding period in 2010.

Early in the third quarter, as conditions within Zargon's operating areas began to dry out, field activities resumed and production that had been shut-in due to surface access conditions has largely been restored, resulting in early August production of over 8,700 barrels of oil equivalent per day comprised of approximately 5,150 barrels of oil per day and 21.3 million cubic feet per day of natural gas. The remaining 150 barrels of oil per day of shut-ins in the Williston Basin core area are anticipated to be returned to production by the end of August.

Drilling activity has commenced and, currently, Zargon has two rigs operating; one each in southeast Saskatchewan and eastern Alberta. For the second half of 2011, Zargon expects to drill 25 net wells, which includes eight net horizontal Mississippian oil wells in the Williston Basin core area and 17 net horizontal and vertical oil exploitation wells in the Alberta Plains core areas.

Capital Expenditures and Budgets

Reflecting the flooded leases and road bans in the Williston Basin core area, Zargon's muted second quarter field capital program totalled $7.73 million, a 65 and 53 percent decrease from the respective 2011 first quarter and 2010 second quarter. During the quarter, Zargon drilled three gross wells that resulted in 2.1 net oil wells for a 100 percent success ratio. The drilling program included two Glauconite horizontal wells at Killam and one non-operated Viking horizontal well at Harmattan in the Alberta Plains North core area.

Subsequent to quarter end, Zargon disposed of its Williston Basin core area Antler and Manor properties for net proceeds of approximately $24.5 million. These properties were producing 260 barrels of oil per day. With this disposition, and assuming no further acquisitions or dispositions, Zargon's 2011 net capital program is now budgeted at $40 million with the $65 million field capital program being partially funded by net dispositions of $25 million. For further discussion regarding capital programs and current production guidance levels, please refer to our July 19, 2011 press release and our August 10, 2011 corporate presentation available on our web site at www.zargon.ca.

Further to the Williston Basin property dispositions, Zargon's debt net of working capital is currently less than $80 million and represents only 45 percent of Zargon's recently renewed $180 million syndicated loan facility. Furthermore, Zargon has entered into the following forward oil sale contracts as a risk management tool to assist in the funding of dividends and capital programs in the event of significant oil commodity price declines.


                        Rate  Weighted Average Price          Range of Terms
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Oil Swaps        2,750 bbl/d           $84.50 US/bbl  Jul. 1/11 - Dec. 31/11
                 2,500 bbl/d           $89.91 US/bbl  Jan. 1/12 - Jun. 30/12
                 1,667 bbl/d           $95.96 US/bbl  Jul. 1/12 - Dec. 31/12
                   450 bbl/d          $101.89 US/bbl  Jan. 1/13 - Jun. 30/13
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Forward-Looking Statements

This press release offers our assessment of Zargon's future plans and operations as at August 10, 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 and six months ended June 30, 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 three and six months ended June 30, 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 29.130 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

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