Zargon Oil & Gas Ltd.

Zargon Oil & Gas Ltd.

August 08, 2012 17:06 ET

Zargon Oil & Gas Ltd. Provides 2012 Second Quarter Results and Announces a Reduced $0.06 Per Share Monthly Dividend to Commence in Fourth Quarter 2012

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


  • Second quarter 2012 production averaged 8,290 barrels of oil equivalent as compared to 8,834 barrels of oil equivalent for the preceding quarter. Oil and liquids production averaged 5,384 barrels per day, a two percent decline from the preceding quarter, due in part to seasonal spring access restrictions and property sales. Second quarter 2012 natural gas production averaged 17.44 million cubic feet per day, a 13 percent decline from the preceding quarter. The reduction in natural gas production volumes was primarily due to the shut-in of natural gas wells due to very low natural gas prices.

  • Funds flow from operating activities of $12.37 million were nine percent lower than the $13.52 million recorded in the prior quarter, and 10 percent lower than the $13.76 million reported in the second quarter of 2011. Funds flow from operating activities for the 2012 second quarter included reductions of $0.69 million of realized hedge losses, $0.56 million of asset retirement expenses and $0.57 million of prior period royalty adjustments.

  • Three monthly cash dividends of $0.10 per common share were declared in the second quarter of 2012 for a total of $8.86 million ($7.45 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 60 percent of funds flow from operating activities.

  • Second quarter 2012 exploration and development capital expenditures (excluding property acquisitions and dispositions) were $9.18 million and included $0.90 million of expenditures related to the Little Bow Alkaline Surfactant Polymer ("ASP") tertiary recovery project. On June 15, 2012, Zargon concluded the sale of 275 barrels of oil per day from Manitoba and selected southeast Saskatchewan properties, to realize net disposition proceeds of $36.07 million. With these dispositions, Zargon's quarter end debt net of working capital (excluding unrealized derivative assets/liabilities and deferred taxes) declined 23 percent to $95.20 million which includes the $57.50 million of convertible unsecured subordinated debentures issued during the quarter.

  • During the quarter, Zargon issued five-year convertible unsecured subordinated debentures for gross proceeds of $57.50 million that will provide support for Zargon's Little Bow ASP project and other long-life oil exploitation projects. During the quarter, committed credit facilities of $165 million were also amended and renewed. With the issuance of the convertible debenture, Zargon has more than $125 million of credit available on its $165 million of authorized bank lines.
Three Months Ended June 30, Six Months Ended June 30,
(unaudited) 2012 2011 Percent Change 2012 2011 Percent Change
Financial Highlights
Income and Investments ($ millions)
Gross petroleum and natural gas sales 38.52 48.47 (21 ) 83.16 95.41 (13 )
Funds flow from operating activities 12.37 13.76 (10 ) 25.89 28.98 (11 )
Cash flows from operating activities 18.00 13.06 38 29.86 36.54 (18 )
Cash dividends (net of Dividend Reinvestment Plan) 7.45 10.47 (29 ) 14.90 20.12 (26 )
Net earnings 10.54 12.67 (17 ) 8.53 3.56 140
Field capital and administrative asset expenditures 9.22 7.87 17 30.07 30.17 -
Net property and corporate acquisitions/ (dispositions) (36.07 ) 0.15 (35.97 ) (1.79 )
Net capital expenditures/ (dispositions) (26.85 ) 8.02 (5.90 ) 28.38
Per Share, Diluted
Cash flows from operating activities ($/share) 0.57 0.45 27 0.93 1.29 (28 )
Net earnings ($/share) 0.34 0.43 (21 ) 0.28 0.13 115
Cash Dividends ($/common share) 0.30 0.42 (29 ) 0.60 0.84 (29 )
Balance Sheet at Period End ($ millions)
Property and equipment 386.81 414.97 (7 )
Exploration and evaluation assets 23.25 27.07 (14 )
Total assets 446.41 472.58 (6 )
Working capital deficiency 13.56 6.33 114
Bank debt 24.14 95.79 (75 )
Convertible debenture at maturity 57.50 - -
Shareholders' equity 222.22 232.57 (4 )
Weighted Average Shares Outstanding for the Period (millions) - Basic 29.52 28.93 2 29.46 28.02 5
Weighted Average Shares Outstanding for the Period (millions) - Diluted 32.62 29.14 12 32.65 28.25 16
Total Common Shares Outstanding at Period End (millions) 29.64 29.13 2
Funds flow from operating activities is an additional GAAP term that represents net earnings/(losses) and asset retirement expenditures except for non-cash items.
Three Months Ended June 30, Six Months Ended June 30,
(unaudited) 2012 2011 Percent
2012 2011 Percent Change
Operating Highlights
Average Daily Production
Oil and liquids (bbl/d) 5,384 5,034 7 5,440 5,461 -
Natural gas (mmcf/d) 17.44 21.91 (20 ) 18.73 21.91 (15 )
Equivalent (boe/d) 8,290 8,686 (5 ) 8,562 9,113 (6 )
Equivalent per million common shares (boe/d) 280 298 (6 ) 289 323 (11 )
Oil and liquids per million common shares (bbl/d) 182 173 5 184 193 (5 )
Average Selling Price (before the impact of financial risk management contracts)
Oil and liquids ($/bbl) 73.17 89.55 (18 ) 77.59 81.90 (5 )
Natural gas ($/mcf) 1.68 3.74 (55 ) 1.86 3.65 (49 )
Netback ($/boe)
Petroleum and natural gas sales 51.06 61.32 (17 ) 53.37 57.85 (8 )
Royalties (9.90 ) (12.05 ) 18 (10.22 ) (10.37 ) 1
Realized loss on derivatives (0.92 ) (6.39 ) 86 (2.42 ) (4.88 ) 50
Production and operating costs (16.29 ) (17.26 ) 6 (16.43 ) (16.25 ) (1 )
Transportation (0.51 ) (0.57 ) 11 (0.49 ) (0.52 ) 6
Operating netback 23.44 25.05 (6 ) 23.81 25.83 (8 )
Wells Drilled, Net 0.2 2.1 (90 ) 9.8 9.6 2
Undeveloped Land at Period End (thousand net acres) 368 478 (23 )
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 daily production per million common shares is calculated using the diluted weighted average number of common shares outstanding during the period but excluding any dilution that could result from the redemption of the convertible debentures by the debenture holder at a conversion price of $18.80.

Reduced Monthly Dividend of $0.06 per Share Commencing in the Fourth Quarter

In response to continuing weakness in both spot and forward commodity price markets, wider differentials for Alberta and Williston Basin crude oil, and increased uncertainty in the capital and property disposition markets, the Board of Directors of Zargon has revised Zargon's monthly dividend policy from $0.10 per share to $0.06 per share commencing in the fourth quarter of 2012. In the interim, Zargon's Board has conditionally approved a $0.10 per share dividend for August and September 2012, payable on September 17th and October 15th, respectively.

These measures are intended to safeguard Zargon's financial and balance sheet strength and provide the additional financial flexibility required to continue to capitalize on Zargon's high-quality oil exploitation initiatives.

Field Activities

Field activities in the second quarter of 2012 were mostly limited to the completion and tie-in of wells drilled last winter. Reflecting spring break-up, the second quarter of 2012 drilling program was restricted to 0.2 net oil wells with a 100 percent success rate. For the year, Zargon has drilled 9.8 net oil wells.

Following a quiet summer, an active drilling program will resume this fall. Prior to year end, oil exploitation horizontal locations will be drilled at Bellshill Lake (three), Hamilton Lake (three), Taber South (three) and for Williston Basin Frobisher targets (four). Each of these locations target increased oil recoveries from existing oil pools. In aggregate, Zargon has identified more than 115 horizontal locations in six conventional (non-ASP) oil exploitation projects, which will provide a high-graded drilling inventory for many years. Each of these six oil exploitation projects are (or will be) pressure supported by water injections or natural reservoir aquifers and consequently provide long-life low-decline oil volumes that will support future dividends. A summary of these six oil exploitation projects is provided below:

Project Formation Reservoir
Identified Locations Locations Recognized in 2011 Year End Reserves
Hamilton Lake Viking Eventually Waterflood 30+ 0
Killam Mannville Eventually Waterflood 15 3
Bellshill Lake Mannville Strong Aquifer 5 0
Taber South Sunburst Partial Waterflood 10 1
Williston Basin Structures Frobisher Strong Aquifer 15+ 1
Williston Basin Drainage Midale Mostly Waterflood 40+ 2
Total Varied Ultimately Pressure Supported 115+ 7

For further information regarding the potential and economics of these projects, please refer to our updated corporate presentation, which is available at

Dividend Sustainability Calculation

Zargon's six non-ASP oil exploitation projects provide a quality drilling inventory that is expected to deliver stable per share oil production for the foreseeable future. Using assumptions of a 15 percent DRIP participation rate, an average corporate oil production decline of 21 percent per year with historical oil production addition efficiencies of $40,000 per barrel per day, we estimate that 25 net "multi-well program type" wells (or $50 million of expenditures) are required annually to offset oil production declines in the 2013-2015 period. With this capital requirement set, the free cash flow available for dividends in an $85 Cdn. per barrel (FOB Edm.) price environment has been estimated to support a $0.06 per share per month dividend. The calculation is based on current forward natural gas prices, total operating, transportation and general and administrative ("G&A") costs of $21 per barrel of oil equivalent, and demonstrates stable oil production volumes on a per share basis. With these pricing and efficiency estimates, debt levels remain unchanged after paying a stable $0.06 per share monthly dividend. At this dividend level, Zargon's $125+ million of unutilized bank lines remain available to provide oil production and reserve growth by financing of the Little Bow ASP project or possibly through property acquisitions. For further information regarding the dividend sustainability calculation and the related input parameters, please refer to our updated corporate presentation, which is available at

Little Bow Alkaline Surfactant Polymer ("ASP") Project

In addition to the above mentioned six conventional oil exploitation projects, Zargon is developing a tertiary recovery ASP oil exploitation project at Little Bow, Alberta. This ASP project entails the injection of a dilute chemical 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 of probable undeveloped oil equivalent reserves to Zargon's working interest in phases 1 and 2 of the project.

To date in 2012, Zargon has completed the front-end engineering and design ("FEED") studies, finalized the selection of key alkaline and polymer components, and has obtained scheme approval from the Energy Resources Conservation Board ("ERCB"). Detailed design is being completed and the procurement of long-lead-time equipment has commenced. Subsequent to quarter end, Zargon acquired operatorship and majority ownership of the Travers Gas Plant which is directly adjacent to our Little Bow oil facilities and is expected to provide solution gas processing facilities for the life of the ASP project.

Later this fall, Zargon will execute well workovers and pipeline upgrades required for the ASP project, but which also benefit existing waterflood operations in the near term. These 2012 ASP development activities, totalling $15 million in expenditures will provide a "shovel-ready" project which can be fully operational within one year of being awarded the final construction contracts.

In order to avoid a winter construction season and to gain a better understanding of the effect of the recent volatile oil prices and increased Alberta oil price differentials will have on mid-decade oil pricing expectations, we have delayed the awarding of the ASP facility construction contracts until the end of the year. This deferral will also allow us to monitor the status of the Alberta government tertiary royalty review and to incorporate the ASP facility design into the now acquired existing Travers Gas Plant facility site footprint. We will also continue to evaluate alternative financing options for this project, which may include: forward hedges, facility leasing or third party participation in the project through partial farmouts, sell-downs or joint ventures, and non-core property dispositions. With year end construction contracts, initial chemical injections are projected in the fourth quarter 2013 and a significant oil production response is expected in the second quarter of 2014.

The total capital cost of phases 1 and 2 of the Little Bow ASP project is approximately $52 million (as spent dollars). This is comprised of $15 million of expenditures in 2012, $25 million in 2013, and 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 will be capitalized and is $47 million (as spent dollars).

Based on this capital program, phase 1 and 2 peak incremental oil production is estimated at 1,500 barrels of oil per day in 2017. Using these rates with 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 netback 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 our updated corporate presentation, which is available at

2012 Outlook

Further to Zargon's February 15, 2012 press release, Zargon's 2012 non-ASP field capital budget provides for 23 net oil exploitation wells and remains set at $55 million, of which $28.55 million has been spent in the first two quarters of the year. Consistent with the prior two years, the budget reflects essentially no natural gas related expenditures. With a more than budgeted $35.97 million of net property dispositions now concluded in the first half of 2012, further property dispositions are not anticipated in 2012.

In addition to the $55 million of non-ASP capital expenditures, Zargon is projecting to spend $15 million on the Little Bow ASP project capital in 2012 of which $1.46 million has already been spent in the first six months of 2012.

During 2012, Zargon is working to improve its operating and G&A cost structure by high-grading its activities to focus on six conventional (non-ASP) clearly defined long-life oil exploitation initiatives. In addition, a comprehensive natural gas property review has been concluded to identify well shut-ins, facility consolidation and other fixed-cost saving opportunities that will permit improved returns when natural gas prices improve. In aggregate, three million cubic feet of natural gas production per day has been shut-in for the summer months until higher natural gas prices are realized. Early indications suggest that cost improvements are being made and that a combined operating, transportation and G&A cost of $21 per barrel of oil equivalent can be realized.

Production Guidance

On February 15, 2012, Zargon provided updated 2012 annual oil production rate 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. Second quarter actual volumes were 5,384 barrels of oil per day and exceeded guidance levels, after providing for the mid-June property dispositions of 275 barrels of oil per day. In the June 18, 2012 press release announcing the Williston Basin property disposition, updated guidance for the second half 2012 production was provided at 5,200 barrels of oil and liquids per day. These production guidance levels are reconfirmed with fourth quarter volumes climbing to an estimated 5,350 barrels of oil and liquids per day, up from 5,050 barrels of oil per day in the third quarter, as new wells from the fall oil exploitation drilling programs are placed on production.

With this summer's shut-in of three million cubic feet per day of natural gas volumes, the second quarter production volumes of 17.44 million cubic feet per day did not meet the original February 15, 2012 natural gas production guidance volumes of 18.60 million cubic feet per day. Currently, the timing for the return of the shut-in production volumes is price sensitive and remains uncertain, although we do anticipate that the average second half 2012 natural gas production volumes will exceed the most recent production guidance levels of 16.50 million cubic feet per day.

Forward-Looking Statements

This press release offers our assessment of Zargon's future plans and operations as at August 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: our dividend policy and the amount of future dividends; various plans, forecasts and estimates as to drilling locations, operations, completions and other operational forecasts referred to under "Reduced Monthly Dividend of $0.06 per Share Commencing in the Fourth Quarter", and the results therefrom under the heading "Field Activities"; anticipated future oil production and decline rates, various pricing efficiency estimates and other factors relating to our dividend policy, amount of future dividend, future debt levels and financing sources and use of funds referred to under "Dividend Sustainability Calculation"; guidance as to our 2012 capital budget, including the allocation thereof and the sources of funding and various plans, forecasts and estimates as to drilling cost reduction initiatives, and other operational forecasts and plans and results therefrom under the heading "2012 Outlook"; our plans with respect to our Little Bow ASP project and the results therefrom referred to under the heading "Little Bow Alkaline Surfactant Polymer ("ASP") Project"; our use of funds from the issuance of convertible unsecured subordinated debentures and bank line referred to under "Financial & Operating Highlights" and "2012 Outlook", and all matters, including guidance as to our estimated 2012 production and production mix, and anticipated decline rates, under the heading "Production Guidance".

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 our website and at 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.

Additional 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" 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. See the MD&A for the three and six months ended June 30, 2012 and 2011 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 a barrel of oil equivalent ("boe") using six thousand cubic feet of gas to one barrel of oil. In certain circumstances, natural gas liquid volumes have been converted to a thousand cubic feet equivalent ("mcfe") on the basis of one barrel of natural gas liquids to six thousand cubic feet of gas. Boes and mcfes may be misleading, particularly if used in isolation. A conversion ratio of one barrel to six thousand cubic feet of natural gas is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. Given that the value ratio based on the current price of crude oil as compared to natural gas is significantly different from the energy equivalency of 6:1, utilizing a conversion ratio on a 6:1 basis may be misleading as an indication of value.


Zargon has filed with Canadian securities regulatory authorities its unaudited financial statements for the three and six months ended June 30, 2012 and the accompanying Managements' Discussion and Analysis ("MD&A"). These filings are available under Zargon's SEDAR profile at Full pdf versions of our three and six months ended June 30, 2012 unaudited financial statements and the accompanying MD&A are available on our website at

About Zargon

Based in Calgary, Alberta, Zargon's securities trade on the Toronto Stock Exchange and there are currently approximately 29.638 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 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