Zargon Oil & Gas Ltd.

TSX : ZAR
TSX : ZAR.DB


Zargon Oil & Gas Ltd.

September 03, 2014 17:01 ET

Zargon Oil & Gas Ltd. Announces Property Dispositions, Provides a Little Bow ASP Flood Project Update and Revises Production Guidance

CALGARY, ALBERTA--(Marketwired - Sept. 3, 2014) - Zargon Oil & Gas Ltd. (TSX:ZAR) (TSX:ZAR.DB) ("Zargon") reports the sale of its Jarrow natural gas property, provides a Little Bow Alkaline Surfactant Polymer ("ASP") tertiary flood project update and revises corporate production guidance.

Property Dispositions Update

Zargon has recently completed four additional property transactions, including the sale of the Company's Jarrow natural gas property in East Central Alberta. In aggregate, these four transactions have raised $6.6 million of proceeds from the sale of 5.6 million cubic feet per day of natural gas. Including the first quarter, second quarter and previously announced third quarter transactions, our 2014 non-strategic property disposition program has raised an aggregate of $12.2 million of net proceeds from the net disposition of 50 barrels of oil per day and 8.1 million cubic feet per day, which equates to 1,400 barrels of oil equivalent per day. These reported transactions conclude our 2014 initiative to consolidate our property footprint on higher netback oil exploitation assets through property dispositions and swaps, although further dispositions could be considered on an individual property basis.

Collectively, this year's property disposition transactions have removed approximately 280 active net wells (producing, shut-in or suspended) while improving our average field operating netback by more than $6 per barrel of oil equivalent. After adjustments for property trades, McDaniel & Associates Consultants Ltd ("McDaniel") had assigned the disposed properties proved and probable reserves of 0.16 million barrels of oil and 20.3 billion cubic feet of natural gas (3.54 million barrels of oil equivalent) in their 2013 year end reserve analysis. Although the corresponding McDaniel discounted cash flow (PVBT 10 percent) assignment had been $18 million, there is no change to our $150 million borrowing base (bank debt at June 30, 2014 was $56 million). With the sale of these lower margin assets, Zargon has made some administrative adjustments, which will result in a $1.6 million one time charge to general & administrative expenses in the third quarter.

Little Bow Alkaline Surfactant Polymer ("ASP") Project

Zargon continues to be encouraged by the early injection data for the Little Bow ASP enhanced oil recovery project. Commencing in March 2014, Zargon initiated the injection of large volumes of a dilute chemical solution into a partially depleted Little Bow Mannville I Pool in order to recover substantial incremental oil reserves. To date, ASP injections have totaled over five percent of the phase 1 reservoir hydrocarbon pore volume ("HCPV") and recent injection rates have exceeded 115 percent of the project's design capacity.

Encouragingly, pattern injection rates are balanced and are meeting or exceeding reservoir models, and to date we have observed no evidence of substantive ASP fluid breakthrough and the related oil production volumes. We interpret the delay in oil production volumes positively, as it provides us supporting evidence that the ASP injections are not bypassing the reservoir in a short-circuited path from injectors to producers but instead are forming oil banks that will be conformably swept to producers over the multi-year life of the project. Although there has been no sign of premature polymer breakthrough or material oil production responses, we have observed some increased produced gas-oil ratios, produced fluid alkalinity and minute produced polymer concentrations that we view as precursors to ASP oil production.

In late July 2014, the Alberta government announced a modified Enhanced Oil Recovery ("EOR") Crown royalty program, which effectively brought the Alberta conventional oil EOR royalties more in line with existing Alberta oil sands (in-situ) and Saskatchewan conventional oil EOR royalty programs. The impact of this program on our Little Bow ASP project has now been evaluated by our independent reserves evaluator, McDaniel, in a new report with an effective date of July 1, 2014. The updated report continues to assign a similar 4.48 million barrels of proved and probable oil and liquids reserves, however, the proved and probable incremental ASP discounted cash flow (PVBT 10 percent) assignment has increased to $98.6 million for phases 1 and 2 of the Little Bow project, up from the $66.3 million assigned in the McDaniel 2013 year end report.

Zargon's internal estimates continues to forecast incremental phase 1 production volumes to commence in the 2014 fourth quarter and increase to a 2014 year end rate of 150 barrels of oil per day. Incremental ASP production is expected to exceed 700 barrels of oil per day in 2015 and then increase to 1,550 barrels of oil per day in 2016, once phase 2 production begins.

Based on Zargon internal estimates, the follow-on phases 3 and 4 projects will add another 4.7 million barrels of incremental oil to Zargon's working interests taking the total project recovery to almost 10 million barrels of incremental oil. The corresponding combined Little Bow project (phases 1 through 4) production estimate is in excess of 2,300 barrels of oil per day for the 2020 through 2025 period. For further information regarding the Little Bow ASP project, please refer to our updated corporate presentation, which is available at www.zargon.ca.

Production Guidance

In the August 11, 2014 second quarter results press release, Zargon provided third quarter 2014 oil production rate guidance of 4,100 barrels of oil and liquids per day. Based on Bellshill Lake and Taber South drilling results, the third quarter guidance level is increased to 4,200 barrels of oil per day. Fourth quarter 2014 production guidance is also set at 4,200 barrels of oil per day and is expected to reflect only a minor contribution from the Little Bow ASP production volumes.

The August press release also set Zargon's third quarter 2014 natural gas production guidance at 12.0 million cubic feet per day. With the sale of the Jarrow property and other non-strategic asset sales now concluded, third quarter guidance is reduced to 10.2 million cubic feet per day and fourth quarter guidance is set at 6.4 million cubic feet per day.

Zargon's 2014 total capital budget remains at $52 million (before net dispositions) of which second half costs will be comprised of $7 million of Little Bow ASP chemical costs plus $12 million of non-ASP field capital expenditures. For 2015, Zargon's preliminary budget is set at $44 million and includes $13 million of Little Bow ASP chemical costs and $6 million of Little Bow ASP phase 2 development costs, plus $25 million of non-ASP field capital expenditures directed to existing oil exploitation projects.

Going forward, Zargon's oil weighting is expected to exceed 80 percent of total volumes and will be comprised of low decline pressure-supported oil production volumes augmented by steadily growing tertiary production volumes from the Little Bow ASP project. These high netback oil exploitation volumes (tertiary and waterflood) from existing assets will provide the cash flows required to methodically grow oil production and support our long term dividend generating objectives for many years to come.

Based in Calgary, Alberta, Zargon's securities trade on the Toronto Stock Exchange and there are currently 30.175 million common shares outstanding.

FORWARD-LOOKING STATEMENTS

This press release offers our assessment of Zargon's future plans and operations as at September 3, 2014, 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 estimates of economics, reserves, production and costs for the Little Bow ASP project;
  • our interpretation of the early operational performance of the Little Bow ASP project;
  • our plans for our Little Bow ASP project and the results therefrom;
  • our interpretation of the revised Alberta EOR royalty scheme;
  • our estimates of economics, reserves, production and costs for the non-ASP remaining conventional properties;
  • our calculation of production volumes, reserves, well counts and contracts relating to disposition properties;
  • our business plans, dividend policy and corporate strategy; and
  • our capital budgets, production guidance volumes, operating netbacks and one time g&a expenses.

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.

FURTHER INFORMATION

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 and dividends (distributions). Zargon's business is focused on oil exploitation projects that profitably increase oil production and 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.

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