CALGARY, ALBERTA--(Marketwire - June 18, 2012) - Zargon Oil & Gas Ltd. (TSX:ZAR)(TSX:ZAR.DB) ("Zargon") has closed its previously announced $36 million sale of 275 barrels of oil per day pertaining to all of its southwest Manitoba assets and selected properties in the Elswick area of southeast Saskatchewan. The proceeds from the transactions have been used to reduce bank indebtedness.
With the closing of these property sales, Zargon has entered into renewed committed syndicated credit facilities with a borrowing base of $165 million. The credit facilities are fully revolving for an additional 364 day period with the provision for an annual extension at the option of the lenders and upon request from Zargon.
Zargon is well positioned to manage the current period of lower commodity prices. Subsequent to the two property sales, Zargon's net debt is approximately $95 million and is comprised of $57.5 million of five year convertible debentures (ZAR.DB) and approximately $37.5 million of bank debt and working capital deficiencies. With these transactions concluded, Zargon has access to over $120 million of unutilized credit facilities. In addition, Zargon has entered into oil hedges totalling 2,500 barrels per day in the second half of 2012, 1,450 barrels per day in the first half of 2013 and 600 barrels per day in the second half of 2013 at respective West Texas Intermediate oil prices of $97.96, $101.95 and $103.30 US per barrel.
Little Bow Alkaline Surfactant Polymer ("ASP") Project
Earlier this year, Zargon announced that it was proceeding with detailed engineering, regulatory applications and the procurement of long-lead-time equipment for the Little Bow Upper Mannville I pool ASP project. This tertiary oil recovery project entails the injection of chemicals in a water solution into a partially depleted reservoir to recover incremental oil reserves. In its year end review, McDaniel and Associates Consultants Ltd. assigned 4.15 million barrels probable undeveloped oil equivalent reserves to Zargon's working interest in phases 1 and 2 of the project.
To date in 2012, Zargon has finalized the front-end engineering and design ("FEED") studies, finalized the alkaline and polymer selections and has obtained project approval from the Energy Resources Conservation Board ("ERCB"). Detailed design is being completed and the awarding of long-lead-time procurement items has commenced. Later this summer, Zargon will proceed with producer reactivations and water injector conversions, along with pipeline modifications and replacements that in part support continued waterflood operations, but are ultimately required for and are included in the ASP project costs. In aggregate, these approved 2012 activities are forecast to cost $15 million.
Later this fall, Zargon will make a sanctioning decision regarding proceeding with the construction component of the ASP project. Long-dated forward market oil prices and the status of the Alberta government tertiary royalty review will be important considerations in this decision. Assuming the sanctioning of the construction component of the project, the current project schedule anticipates first chemical injections in the third quarter of 2013, with a significant oil production response forecast by the first quarter of 2014.
Assuming that the construction phase of the project is sanctioned this fall, the total capital cost of phases 1 and 2 of the ASP project is approximately $52 million (as spent dollars), with $18 million (including $3 million of construction and other related costs) to be spent in 2012. An additional $22 million of capital expenditures is forecast to be spent in 2013, with the remaining $12 million of the capital costs relating to the project's phase 2 implementation scheduled for 2014 and 2015. The estimated total phase 1 and 2 chemical cost for the 2013-2019 chemical injection period is $47 million (as spent dollars). Phase 1 and 2 peak incremental oil production is estimated at 1,500 barrels of oil per day in 2017. Based on these rates and on an estimated field oil price of $70 per barrel, a 12 percent incremental tertiary royalty rate, and operating costs of $12 per barrel of incremental oil, the project is forecast to provide a field net back of approximately $50 per barrel of incremental oil production volumes. Follow-on capital expenditures for phases 3 and 4 of the Little Bow ASP project are expected to be completed by 2017 with forecasted total combined phase 1-4 project peak production rates expected to occur in 2020. (For further information regarding the Little Bow ASP project, please refer to our website at www.zargon.ca.)
2012 Capital Programs
Zargon seeks to deliver superior long term financial returns working in a partial cash flow distributing model through focused oil exploitation programs designed to increase oil recovery factors in existing reservoirs. By concentrating on a long-life, low-decline oil property portfolio, Zargon is building a stable asset base that can maintain a steady stream of dividends during periods of stable commodity prices. With the sale of our Manitoba assets, Zargon is now focused on seven long-life, low-decline oil exploitation initiatives, that typically entail the implementation and modification of secondary (waterflood) and tertiary (chemical) enhanced recovery projects.
Consistent with prior guidance, Zargon's 2012 non-ASP field capital budget is set at $55 million, of which $21 million was spent in the first quarter with the drilling of 9.6 net oil wells. The 2012 capital program is focused on oil exploitation drilling and oil production optimization projects relating to battery modifications, water injection conversions, well workovers and facility consolidations. For the remainder of the year we anticipate drilling 16 net oil exploitation wells. In Alberta, the summer-fall capital program includes three Taber South Sunburst horizontal drainage locations and three horizontal re-entries plus a water disposal well at Bellshill Lake. At Killam, we will proceed with implementing the first Glauconite pilot waterflood that could lead to full scale waterflood implementation in subsequent years.
At Hamilton Lake three shorter mono-bore horizontal locations will be drilled this fall in a northwest-southeast orientation to attempt to improve well costs and the predictability of the production results. In the last 18 months, we have drilled five multi-frac horizontal oil wells that in aggregate are producing approximately 200 barrels of oil per day. These wells have been drilled on our 47 section wholly owned Viking Unit which has previously produced 16 million barrels of oil. Our technical work, suggests that significant additional reserves could be recoverable through a combination of potentially dozens of fracture stimulated horizontal wells and a re-initiated waterflood.
In the Williston Basin, we are planning on drilling six locations in the fourth quarter, which will be allocated between our high rate, higher initial decline Frobisher locations and our lower rate but lower decline Midale drainage locations.
With the now concluded sale of $36 million of assets, we have exceeded this year's property disposition target and we will not be actively pursuing additional property sales. In specific cases relating to our exploitation projects, we may consider smaller "tuck-in" acquisitions that complement our now reduced seven focused oil exploitation projects.
In our February 15, 2012 press release, Zargon provided updated 2012 average oil production guidance of 5,400 barrels of oil and liquids per day. First quarter actual volumes were 5,496 barrels of oil and liquids per day and exceeded guidance levels. Prior to the now concluded property sale, second quarter production volumes had been running at levels roughly consistent with guidance levels. Reflecting the 275 barrels of property sales, we are now forecasting that the second half 2012 production to average 5,200 barrels of oil per day, with the fourth quarter volumes exceeding the third quarter levels, as new wells from the fall oil exploitation drilling programs are placed on production.
In the same February press release, 2012 average natural gas production rate guidance was set at 18.6 million cubic feet per day. First quarter actual volumes were 20.0 million cubic feet per day which exceeded guidance levels, but we have subsequently aggressively shut-in uneconomic natural gas production during this period of very low natural gas prices, with the view that the current price regime provides an opportunity to shed operated property fixed costs, which in turn will permit improved profitability when natural gas prices ultimately improve. With these shut-ins, our current natural gas production rates have declined to approximately 16.5 million cubic feet per day, a restricted level that may not be exceeded during the third and possibly the fourth quarter of 2012.
Based in Calgary, Alberta, Zargon's securities trade on the Toronto Stock Exchange and there are currently 29.569 million common shares outstanding.
This press release offers our assessment of Zargon's future plans and operations as at June 18, 2012, and contains forward-looking statements. All statements other than statements of historical fact may be 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). In particular, this press release contains forward-looking statements pertaining to the following:
- our business plans and strategy;
- our ability to manage our business in a lower commodity price environment;
- the resulting debt levels after the concluded property sales;
- future banking syndicate borrowing base levels;
- reserve estimates;
- our expectation of future capital expenditures (including the ASP project);
- our expectation for the sanctioning of the ASP project construction phase, and the timing of the construction and project start-up;
- our expectations of the ASP costs;
- our expectations for production volumes;
- our expectation for netbacks;
- our expectations for drilling activities.
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.
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 www.zargon.ca where you will find a current shareholder presentation, financial reports and historical news releases.