Zargon Oil & Gas Ltd.

Zargon Oil & Gas Ltd.

January 19, 2011 17:28 ET

Zargon Oil & Gas Ltd. Provides an Update Regarding 2010 Fourth Quarter Operations, 2011 Guidance and 2011 First Quarter Dividends

CALGARY, ALBERTA--(Marketwire - Jan. 19, 2011) - On December 31, 2010, Zargon Oil & Gas Ltd. (TSX:ZAR) ("Zargon") successfully completed its conversion into a corporation committed to providing monthly cash returns while implementing a focused oil exploitation capital program. Zargon is pleased to announce that its Board of Directors has approved the current 2011 first quarter dividend policy at $0.14 per share per month. Dividends will be a very important component of our Company's sustainable return to shareholders. While previously operating in a trust format, Zargon Energy Trust was able to maintain a stable monthly distribution of $0.18 per unit for the last 62 months.

For 2011, our updated $55 million field capital program is expected to deliver continued oil production growth from our oil exploitation projects. In late 2007, we refocused our company with an oil exploitation strategy that employs our technical skills to understand the mechanics of individual reservoirs and then applies various technologies to increase oil recoveries from smaller and technically complex oil reservoirs. This refocused strategy has delivered a three-year 54 percent increase in oil production since 2007 and a 12 percent annual increase in oil production in 2010.

With this release, we are providing an operational update about Zargon's 2010 fourth quarter. Further 2010 information will be provided on or about February 16, 2011 when we release our 2010 year end oil and gas reserves and on or about March 10, 2011 when we release our full year 2010 and 2010 fourth quarter financial results.

2010 Fourth Quarter Operational Highlights

Zargon's field estimate for the 2010 fourth quarter production of 9,317 barrels of oil equivalent per day, is lower than guidance levels by approximately seven percent. For the year, Zargon will be reporting production volumes of 9,879 barrels of oil equivalent per day, which is essentially unchanged from the 2009 average volumes of 9,856 barrels of oil equivalent per day. Reflecting a continued emphasis on oil projects, Zargon's 2010 annual volumes are comprised of 5,645 barrels of oil per day, a 12 percent gain over 2009 levels, while natural gas production averaged 25.40 million cubic feet per day, a corresponding and offsetting 12 percent decline from 2009 average volumes.

The 2010 fourth quarter oil production rate of 5,437 barrels of oil per day missed targets by 350 barrels of oil per day. This shortfall was primarily due to late summer and fall wet weather and surface access challenges that delayed the on-production date for our Q3-Q4 Williston Basin horizontal drilling program into late December 2010 and early January of this year. These shortfalls were exacerbated by Williston Basin inventory builds and shut-ins due to Enbridge Inc.'s pipeline apportionment restrictions. Pursuant to expected improvements in apportionment and an active November and December "catch-up" oil exploitation horizontal drilling program, higher oil volumes are anticipated in the 2011 first quarter.

The 2010 fourth quarter's average natural gas rate of 23.28 million cubic feet per day missed production targets by 2.0 million cubic feet per day. This shortfall was due in roughly equal parts to third party processing curtailments which resulted in the shut-in of three Zargon wells located at the Peace River Arch property area, and to higher production declines and lower than anticipated production rates from the 2010 natural gas drilling program. In the first quarter of 2011, the majority of the Peace River Arch third party processing shut-ins are expected to be lifted, but with only minor capital allocated to our natural gas business, further natural gas production declines are forecasted.

Although delayed until the final two months of the quarter, Zargon delivered an active drilling program in the 2010 fourth quarter. In aggregate, a total of 17 (13.8 net) wells were drilled in the fourth quarter, a substantial increase over the third quarter 4.8 net well drilling program that had been reduced from plan due to wet weather and surface access challenges.

In the Williston Basin core area, the 2010 fourth quarter drilling program entailed 5.1 net horizontal oil exploitation wells targeting Mississippian reservoirs at the Steelman, Elswick and Truro properties and 3.0 net horizontal oil exploitation wells targeting the Bakken (Torquay) reservoirs at the Fertile and Sinclair properties. In Alberta, 2.0 net horizontal Sunburst oil exploitation wells were drilled at Taber South, 1.2 net horizontal wells were drilled for Glauconite oil targets at Killam (Jarrow), a wholly owned Banff oil vertical well was drilled at St. Anne and Zargon participated in 1.5 net non-operated oil development oil wells at Wayne (Ellerslie) and Spirit River (Gething).

2011 Guidance

For 2011, Zargon is proceeding with a $55 million capital budget (exclusive of acquisitions or dispositions) that is focused almost exclusively on its profitable oil exploitation business. This budget represents a $10 million reduction from the previously announced 2011 capital budget guidance which had included a small component of both short term and long term foundation type natural gas expenditures. In addition to a 37 net well oil exploitation drilling program, the budget includes the implementation and optimization of waterflood projects and other production optimizations to maximize oil recoveries from existing reservoirs.

Zargon's current asset base and 2011 capital program are expected to deliver average quarterly production rates varying from 9,400 to 10,000 barrels of oil equivalent per day for 2011, with an average oil production rate varying from 5,800 to 6,300 barrels of oil per day. With very little capital allocated to natural gas activities, natural gas production will continue to decline and is expected to vary from 22.8 to 19.8 million cubic feet per day during the 2011 year.

From an oil perspective, 2011 oil production is expected to show continued growth with a 4-8 percent gain over 2010 averages. Natural gas production will continue its recent trends and is expected to decline more than 15 percent in 2011 as we direct our capital to our more profitable oil exploitation business.

During 2011, Zargon expects to drill approximately 37 net wells, which will include 20 net horizontal exploitation wells drilled for light oil in its Williston Basin core area, primarily targeting Mississippian reservoirs. Zargon is also planning to drill 17 wells targeting mostly Mannville oil reservoirs in both the Alberta Plains South and Alberta Plains North core areas. A summary of the currently budgeted 2011 drilling program is provided below:

Number of
Core Area Property Formation Commodity & Well Type Net Wells
Steelman Mississippian Oil; horizontal 3
Elswick/Weyburn Mississippian Oil; horizontal 10
North Dakota Mississippian Oil; horizontal 2
Daly/Virden/Other Mississippian Oil; horizontal 3
Fertile Torquay (Bakken) Oil; horizontal 2

Taber South Sunburst Oil; horizontal 5
Grand Forks Glauconite Oil; vertical 2

Jarrow (Killam) Glauconite Oil; mostly horizontal 5
Hamilton Lake Viking Oil; horizontal 2
Other Mostly non-op Oil; vertical 3

In addition to the oil exploitation focused drilling program, Zargon plans an active year of waterflood enhancements and field optimizations designed to increase reservoir oil recovery factors. In particular, significant capital will be directed to the implementation of the Taber South Mannville A waterflood, production optimizations at the Bellshill Lake Mannville oil property, and battery consolidations and well reactivations at the Little Bow oil property.

Following an active year of property acquisitions in 2010, Zargon has effectively doubled the size of our Alberta Plains South oil resource base at the Little Bow property, where in 2011 we expect to make significant progress in terms of the planning and approval of our Alkaline Surfactant Polymer ("ASP") tertiary oil recovery project.

To this end, we are pleased to announce that Zargon has recently appointed Rob Moriyama as Vice President, Enhanced Recovery. In his new position, Mr. Moriyama will be responsible for leading the planning, sanctioning and ultimately the implementation of Zargon's ASP tertiary recovery initiatives. Over his 25 year career, Mr. Moriyama has held positions at Legacy Oil and Gas Inc., Pengrowth Corporation and Esso Resources Ltd., where he has utilized his reservoir, business development and project management skills to implement and manage tertiary oil recovery projects.

Cash Dividends

Zargon is pleased to confirm that the monthly cash dividend for the month of January in the amount of Cdn. $0.14 per common share will be paid on February 15, 2011 to shareholders of record on January 31, 2011. The ex-dividend date is January 27, 2011.

Our dividend policy is reviewed monthly and is based on a number of factors including funds from operations, earnings, financial requirements, commodity price levels, legal requirements and other conditions existing at such future times.

Zargon's 2011 first quarter cash dividend to shareholders of $0.14 per share per month based on our 2011 guidance is as follows:

Record Date Ex-Dividend Date Dividend Payment Date Dividend Per Share
January 31, 2011 January 27, 2011 February 15, 2011 $0.14
February 28, 2011 February 24, 2011 March 15, 2011 $0.14 ((i))
March 31, 2011 March 29, 2011 April 15, 2011 $0.14 ((i))

((i)) The above reflects an anticipated dividend based on Zargon's current projected commodity prices, commodity hedge positions and production volumes. Dividends are subject to change should there be a material change in expected cash flow for the respective periods.

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 where you will find a current shareholder presentation, financial reports and historical news releases.

Forward-Looking Statements - This news release includes forward-looking statements about our future plans and operations as at January 19, 2011, including:

-- our dividend policy (including the amounts of future dividends to be
paid and the timing thereof);
-- our plans to provide a sustainable return to our shareholders;
-- our expectations regarding the timing of release of additional 2010
-- our 2011 capital budget;
-- our ongoing strategy to focus primarily on our profitable oil
exploitation business;
-- our 2011 drilling program;
-- our plans to implement and optimize waterflood projects and other
production optimizations to maximize oil recoveries from existing
-- our anticipated 2011 first quarter and 2011 average production volumes
and production mix;
-- our expected production declines;
-- our ability to deliver continued oil production growth from our oil
exploitation projects;
-- our expectations regarding third party processing shut-ins; and
-- our plans for our ASP initiative.

Forward-looking 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, 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. Forward-looking statements are provided to allow investors to have a greater understanding of our business.

You are cautioned that these forward-looking statements are based upon certain assumptions, including among other things, future oil and natural gas prices; future capital expenditure levels; future production levels; future exchange rates; future participation rates in our dividend reinvestment plan and use of cash preserved through the dividend reinvestment plan, 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 press release 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.

Barrels of Oil Equivalent - Barrels of oil equivalent (boe) may be misleading, particularly if used in isolation. A boe conversion ratio of six thousand cubic feet of natural gas to one barrel of oil is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.

Contact Information

  • Zargon Oil & Gas Ltd.
    C.H. Hansen
    President and Chief Executive Officer
    J.B. Dranchuk
    Vice President, Finance and Chief Financial Officer