Zargon Oil & Gas Ltd.
TSX : ZAR

Zargon Oil & Gas Ltd.

February 16, 2011 17:02 ET

Zargon Oil & Gas Ltd. Releases 2010 Year End Reserves and Production Information

CALGARY, ALBERTA--(Marketwire - Feb. 16, 2011) - Zargon Oil & Gas Ltd. ("Zargon") (TSX:ZAR) is pleased to release its 2010 year end reserves and production information. Zargon intends to release its 2010 financial results on March 10, 2011, after market close.

During 2010, Zargon continued its strategic shift to focus almost exclusively on oil exploitation projects, a process that has been underway for three years as the Company acquired oil focused assets and divested non-core properties. Management believes that oil exploitation is the best strategy to meet its objective of delivering a sustainable dividend to shareholders. This strategic shift was evident in 2010 with oil and liquids comprising 88 percent of the 2010 proved and probable reserve additions. For 2011, Zargon will essentially dedicate all of its capital spending to oil exploitation opportunities.

HIGHLIGHTS:



-- For calendar 2010, production averaged 9,879 barrels of oil equivalent
per day, essentially unchanged from the 2009 average of 9,856 barrels of
oil equivalent per day. On a per million share basis, production
averaged 373 barrels of oil equivalent per day, a nine percent decrease
from the 412 barrels of oil equivalent per day in 2009.

-- Reflecting Zargon's increased emphasis on oil exploitation initiatives,
Zargon's 2010 oil and liquids production averaged 5,645 barrels of oil
per day in 2010, a 12 percent increase over the 2009 rate of 5,055
barrels of oil per day and a 31 percent increase over the 2008 average
rate of 4,306 barrels of oil per day. Since 2007, when Zargon redirected
its business towards the exploitation of smaller profitable oil
exploitation projects, Zargon's oil production has increased by 54
percent. On a per million share basis, oil and liquids production
averaged 213 barrels of oil per day in 2010, essentially unchanged from
the 211 barrels of oil per day reported in 2009.

-- With an intentional de-emphasis on natural gas activities, Zargon's
natural gas production averaged 25.40 million cubic feet per day in
2010, a 12 percent decrease from the 2009 rate of 28.80 million cubic
feet per day.

-- Based on an independent reserves evaluation conducted by McDaniel &
Associates Consultants Ltd. ("McDaniel"), effective December 31, 2010,
Zargon's proved and probable reserves totalled 32.39 million barrels of
oil equivalent, which was essentially unchanged from the prior year's
total. On a 6:1 equivalency basis, oil and liquids made up 66 percent of
Zargon's total proved and probable reserves at year end 2010, up from a
62 percent weighting at the end of 2009. On a per million share basis,
Zargon's 2010 year end proved and probable reserves were 1.20 barrels of
oil equivalent, a three percent decrease from the prior year. For the
total proved case, Zargon's 2010 year end reserves totalled 22.53
million barrels of oil equivalent.

-- Reflecting Zargon's increased emphasis on oil exploitation initiatives,
Zargon's 2010 year end proved and probable oil and liquids reserves
increased six percent to total 21.30 million barrels of oil. On a per
million share basis, Zargon's 2010 year end proved and probable oil and
liquids reserves were 0.79 barrels of oil, a two percent increase over
the prior year.

-- With an intentional de-emphasis on natural gas activities, Zargon's
proved and probable natural gas reserves declined nine percent during
the year to total 66.53 billion cubic feet at the end of 2010.

-- In 2010, Zargon's net exploration and development program delivered 3.76
million barrels of oil equivalent of total proved and probable reserves
(including revisions) and 3.41 million barrels of oil equivalent of
total proved reserves additions (including revisions). The proved and
probable additions replaced approximately 104 percent of the year's
production volumes and were 88 percent oil weighted.

-- For the proved and probable reserve case, Zargon's 2010 capital program
delivered an all-in proved and probable finding, development and
acquisition ("FD&A") cost of $21.18 per barrel of oil equivalent
including the consideration of future development capital. Excluding the
change in future development costs, the 2010 proved and probable FD&A
costs were $18.98 per barrel of oil equivalent. For the total proved
reserve case, Zargon's 2010 capital program delivered an all-in FD&A
cost of $24.60 per barrel of oil equivalent including the consideration
of future development capital expenditures. Excluding the change in
future development costs, the 2010 total proved FD&A costs were $20.93
per barrel of oil equivalent.

-- Proved producing reserves represent 90 percent of Zargon's total proved
reserves, while proved and probable producing reserves account for 84
percent of total proved and probable reserves. The estimated future
capital expenditures required to realize the total proved and proved and
probable reserves are $20.29 million and $32.58 million, respectively.

-- Using a before tax 10 percent discount rate and forecast prices and
costs, Zargon's "produce-out" net asset value calculation is $18.34 per
diluted share. This estimate reflects McDaniel's estimate of the Zargon
properties' future cash flow plus the appraisal of Zargon's undeveloped
land less an allowance for the year end bank debt and working capital
deficiencies. The proved and probable producing reserve assignment
component of this calculation represents 86 percent of the present value
allocated to the total reserves. Much of the future value related to our
ongoing oil exploitation capital programs, including all of our tertiary
oil recovery initiatives, are not recognized in this net asset value
calculation.

-- Consistent with Zargon's increased focus on oil exploitation projects,
Zargon allocated 80 percent of its capital program to oil projects in
2010, up from a 71 percent weighting in 2009 and a 64 percent weighting
in 2008. Examined on an oil commodity basis only, these 2010 oil
directed capital expenditures delivered an all-in FD&A cost of $21.35
per barrel of oil, a level that provided a 2.0 field recycle ratio for
our oil directed capital expenditures.


2010 CAPITAL PROGRAM:

In 2010, Zargon continued its emphasis on oil exploitation projects with an expanded field capital program. A total of 37.6 net wells were drilled with a 100 percent success ratio, comprised of 33.3 net oil wells and only 4.3 net natural gas wells. This compares to the 2009 program whereby Zargon drilled 25.7 net wells, resulting in 15.9 net oil wells and 9.8 net natural gas wells.

Net exploration, development, corporate and net property acquisition capital expenditures (unaudited) in 2010 were $71.38 million, comprising of $60.42 million for field exploration and development programs and $10.96 million for net corporate and property acquisitions.

As part of the continuing Zargon initiative to focus activity and rationalize non-core properties, 2010 included an active property acquisition and disposition program. Property acquisitions totalled $32.48 million in the year, balanced with property dispositions of $30.88 million, for a combined net expenditure of $1.60 million in the property market (compared to $1.04 million of net property acquisitions in 2009). During 2010, Zargon also completed the Oakmont Energy Ltd. ("Oakmont") corporate acquisition on September 9, 2010, for a total transaction value of $9.36 million.

During the year, Zargon's undeveloped land inventory decreased by four percent to 521 thousand net acres. This net decrease was a direct result of a reduced emphasis on our natural gas business and an active 2010 disposition program.

2010 YEAR END RESERVES:

Reserves included herein are stated on a company working interest basis (before royalty burdens) unless otherwise noted. All reserves information has been prepared in accordance with National Instrument 51-101 Standards of Disclosure ("NI 51-101"). This report contains several cautionary statements that are specifically required by NI 51-101. In addition to the detailed information disclosed in this press release, more detailed information will be included in Zargon's 2010 Annual Information Form to be filed on SEDAR (www.sedar.com) in March 2011.

Based on an independent reserves evaluation conducted by McDaniel effective December 31, 2010, and prepared in accordance with NI 51-101, Zargon had proved and probable reserves of 32.39 million barrels of oil equivalent. Reserve additions from exploration and development activities (including revisions) and corporate and net property acquisitions were 3.76 million barrels of oil equivalent.

Proved developed producing reserves represent 63 percent of proved and probable reserves (compared to 66 percent in 2009) while total proved reserves account for 70 percent of proved and probable reserves.



Company Reserves (1)

Oil and Natural Equivalents
Liquids Gas (2)
At December 31, 2010 (mmbbl) (bcf) (mmboe)
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Proved producing 14.03 37.35 20.26
Proved non-producing 0.42 6.72 1.54
Proved undeveloped 0.70 0.19 0.73
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Total proved 15.15 44.26 22.53

Probable additional producing 4.78 12.78 6.91
Probable non-producing and undeveloped 1.37 9.49 2.95
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Total probable additional 6.15 22.27 9.86
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Total proved and probable 21.30 66.53 32.39
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Proved producing reserve life index, years 7.1 4.4 6.0
Proved reserve life index, years 7.6 5.2 6.6
Proved and probable reserve life index, years 10.7 7.8 9.5
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1. Corporate working interest reserves before royalties, boe (6:1).
2. Boes may be misleading, particularly if used in isolation. A boe
conversion ratio of 6 mcf:1 bbl is based on an energy equivalency
conversion method primarily applicable at the burner tip and does not
represent a value equivalency at the wellhead.


A reconciliation of the 2010 year end reserve assignments with the reserves reported in the 2009 year end report is presented below:



Reserve Reconciliation

----------------------------------------------------------------------------
Oil and Liquids (mmbbl) Natural Gas (bcf)
----------------------------------------------------------------------------
Proved Proved
Proved Probable & Prob. Proved Probable & Prob.
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December 31, 2009 14.69 5.38 20.07 48.24 24.78 73.02
Discoveries and
extensions 1.61 1.07 2.68 1.30 1.02 2.32
Revisions 0.24 (0.57) (0.33) 0.90 (3.96) (3.06)
Acquisitions and
dispositions 0.67 0.27 0.94 3.09 0.43 3.52
Production (2.06) - (2.06) (9.27) - (9.27)
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December 31, 2010 15.15 6.15 21.30 44.26 22.27 66.53
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----------------------------------------------------------------------------
Equivalents (mmboe)
----------------------------------------------------------------------------
Proved
Proved Probable & Prob.
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December 31, 2009 22.73 9.51 32.24
Discoveries and
extensions 1.83 1.24 3.07
Revisions 0.39 (1.23) (0.84)
Acquisitions and
dispositions 1.19 0.34 1.53
Production (3.61) - (3.61)
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December 31, 2010 22.53 9.86 32.39
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----------------------------------------------------------------------------


On a proved and probable basis, Zargon's reserves were essentially unchanged in 2010. Including revisions, Zargon replaced 104 percent of 2010 production through the addition of 3.76 million barrels of oil equivalent. Before revisions, 4.60 million barrels of oil equivalent were added, representing 127 percent of production. Oil reserves accounted for 88 percent (after revisions) of the proved and probable reserve additions. Field capital exploration and development programs provided 3.07 million barrels of oil equivalent of new additions. The corporate acquisition of Oakmont and the net property acquisitions for 2010 added 0.85 and 0.68 million barrels of oil equivalent, respectively. Overall technical reserve revisions were a negative 0.84 million barrels of oil equivalent. During the year, positive technical revisions pertaining to Alberta Plains South oil properties were offset by reserve adjustments related to negative performance and economic factors impacting gas production in Alberta, and at the Haas oil property in North Dakota.

FINDING, DEVELOPMENT AND ACQUISITION COSTS:

For 2010, Zargon's total proved FD&A costs, taking into account reserve revisions and changes in estimated future development capital during the period, were $24.60 per barrel of oil equivalent. For calculation purposes, the $71.38 million of 2010 net capital additions was combined with an increase in estimated future development capital for total proved reserves of $12.49 million ($20.29 million at December 31, 2010 compared to $7.80 million at December 31, 2009). If the change in future development costs is excluded, the 2010 proved FD&A costs, taking into account reserve revisions, were $20.93 per barrel of oil equivalent.

For 2010, Zargon's proved and probable FD&A costs, taking into account reserve revisions and changes in estimated future development capital during the period, were $21.18 per barrel of oil equivalent. For the purposes of this calculation, the $71.38 million of 2010 net capital additions was combined with an increase in estimated future development capital for proved and probable reserves of $8.24 million ($32.58 million at December 31, 2010 compared to $24.34 million at December 31, 2009). If the change in future development costs is excluded, the 2010 proved and probable FD&A costs, taking into account reserve revisions, were $18.98 per barrel of oil equivalent.



Proved and Probable Finding, Development and Acquisition Costs (1)

2010 2009 2008
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Total net capital expenditures ($ millions) -
unaudited 71.38 103.83 119.39
Total net capital expenditures plus change
in forecast future development costs
($ millions) 79.62 100.65 122.49
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Proved and probable reserves (mmboe)
Open 32.24 29.72 26.91
Discoveries and extensions 3.07 1.78 2.48
Acquisitions and dispositions 1.53 4.22 3.54
Revisions (0.84) 0.12 0.18
Production (3.61) (3.60) (3.39)
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Close 32.39 32.24 29.72
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Proved and probable FD&A costs ($/boe) (2) 21.18 16.45 19.76
Proved and probable three-year FD&A costs
($/boe) (2) 18.83 19.57 21.35
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1. The aggregate of the exploration and development costs incurred in the
most recent financial year and the change during that year in estimated
future development costs generally will not reflect total finding and
development costs related to reserves additions for that year.
2. Amounts are calculated including the change in future development costs.


Zargon's FD&A results for 2010 incorporate an active property and corporate acquisition program combined with a divestiture program of non-core minor properties. These activities collectively added 1.53 million barrels of oil equivalent proved and probable reserves at an average cost of $7.16 per barrel of oil equivalent (inclusive of future capital, but excluding future Alberta drilling credits).



Capital Program Performance

Three-Year
Average
(2008-
2010 2009 2008 2010)
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Total Capital Program
(including future
development costs)

Total proved FD&A costs
($/boe) (1) 24.60 19.24 20.80 21.13
Oil weighting of reserve
additions (%) 74 67 55 64

Proved and probable FD&A costs
($/boe) (1) 21.18 16.45 19.76 18.83
Oil weighting of reserve
additions (%) 88 67 60 69
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1. FD&A costs taking into account reserve revisions during the year on a
barrel of oil equivalent basis (6:1).


NET ASSET VALUE:

Zargon's oil, liquids and natural gas reserves were evaluated using McDaniel product price forecasts effective January 1, 2011, prior to provisions for income taxes, interest, debt service charges, transaction costs and general and administrative expenses. The estimated values of future net revenue disclosed do not represent fair market value of the reserves.




Before Tax Present Value of Future Net Revenue
(Forecast Price Case)

Discount Factor
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($ millions) 0% 5% 10% 15%
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Proved producing 629.3 480.4 391.0 332.6
Proved non-producing 26.0 21.3 17.8 15.2
Proved undeveloped 23.7 18.4 14.5 11.6
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Total proved 679.0 520.1 423.3 359.4

Probable additional producing 277.5 152.9 100.0 72.6
Probable additional non-
producing and undeveloped 83.1 61.2 47.4 38.1

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Total probable additional 360.6 214.1 147.4 110.7
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Total proved and probable 1,039.6 734.2 570.7 470.1
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The following net asset value table shows what is customarily referred to as a "produce-out" net asset value calculation under which the current value of Zargon's reserves would be produced at McDaniel's forecast future prices and costs. The value is a snapshot in time as at December 31, 2010, and is based on various assumptions including commodity prices and foreign exchange rates that vary over time. In this analysis, the present value of the proved and probable reserves is calculated at a before tax 10 percent discount rate. In the net asset value calculation, Zargon's 521 thousand net acres of land is valued at $44.51 million based on the independent firm of Seaton-Jordan & Associates Ltd. valuation as at December 31, 2010.




Net Asset Value

As at December 31 ($ millions) 2010 2009 2008
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Proved and probable reserves (PVBT 10%) (1) (2) 570.7 592.4 567.0
Undeveloped land 44.5 58.8 70.4
Working capital (excluding unrealized risk
management assets/liabilities and
future income taxes) - unaudited (9.1) (11.4) (10.1)
Bank debt - unaudited (115.3) (76.6) (77.6)
Proceeds from the exercise of all common
share rights 31.7 41.0 42.3
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Net asset value (including common share
rights dilution) 522.5 604.2 592.0
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Net asset value per share
Total ($/share) 18.15 21.65 25.99
With full dilution ($/share) (3) 18.34 21.77 25.96
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1. McDaniel's estimate of future before tax cash flow discounted at PV 10
percent.
2. PVBT 10 percent represents present value before taxes discounted at 10
Percent.
3. Full dilution of shares represents the year end common shares
outstanding plus the presumed exercise of all common share rights. At
December 31, 2010, Zargon had 27.046 million common shares outstanding
and 1.446 million common share incentive rights issued and outstanding.
Assuming the exercise of all common share incentive rights, there would
be 28.492 million common shares outstanding at this date.


The following table sets out the prior three year trend in Zargon's FD&A costs, field netbacks and field recycle ratios calculated on a commodity basis:



TRENDS IN PROFITABILITY MEASURES - PRODUCT ANALYSIS

Change in
Future
Program Proved &
Capital Probable "All-In"
Primary ($ millions) Capital Capital
Product (1) ($ millions) ($ millions)
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2008 Natural gas 42.39 1.65 44.04
Oil & liquids 77.00 1.45 78.45
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Total 119.39 3.10 122.49
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2009 Natural gas 30.11 0.58 30.69
Oil & liquids 73.72 (3.76) 69.96
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Total 103.83 (3.18) 100.65
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2010 Natural gas 14.16 (4.77) 9.39
Oil & liquids 57.22 13.01 70.23
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Total 71.38 8.24 79.62
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Change in
Reserves Proved &
(excluding Probable Field Field
Primary production) FD&A Netback Recycle
Product (mmboe) ($/boe) ($/boe) (2) Ratio
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2008 Natural gas 2.49 17.69 29.82 1.69
Oil & liquids 3.71 21.15 56.43 2.67
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Total 6.20 19.76 42.21 2.14
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2009 Natural gas 2.01 15.27 10.38 0.68
Oil & liquids 4.11 17.02 34.06 2.00
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Total 6.12 16.45 22.52 1.37
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2010 Natural gas 0.47 19.98 7.62 0.38
Oil & liquids 3.29 21.35 42.95 2.01
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Total 3.76 21.18 27.82 1.31
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1. Program Capital includes field programs and net property & corporate
acquisitions (unaudited).
2. The netback used in this calculation is at the field level and does not
include adjustments such as realized risk management gains/(losses) that
would normally be included in a corporate operating netback calculation
(unaudited).


Forward-Looking Statements - This press release contains forward-looking statements relating to our plans and operations as at February 16, 2011. Forward-looking statements typically use 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 relating, but not limited to: our business strategy, plans and management focus; and the timing of release of our 2010 financial results and the filing of our 2010 Annual Information Form. In addition, all statements relating to reserves in this press release are deemed to be forward-looking as they involve an implied assessment, based on certain assumptions and estimates, that the reserves described can be properly produced in the future.

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 will be available on our website. 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.

Other Advisories - Boe's may be misleading, particularly if used in isolation. A boe conversion ratio of 6 Mcf: 1 bbl is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. The estimates of reserves and future net revenue for individual properties may not reflect the same confidence level as estimates of reserves and future net revenue for all properties, due to the effects of aggregation.

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