Zargon Oil & Gas Ltd.
TSX : ZAR

Zargon Oil & Gas Ltd.

July 19, 2011 08:00 ET

Zargon Oil & Gas Ltd. Reports 2011 Second Quarter Production Volumes, Announces Property Dispositions and Provides an Operational Update

CALGARY, ALBERTA--(Marketwire - July 19, 2011) - Zargon Oil & Gas Ltd. (TSX:ZAR)

Production

Due to the severe flooding conditions of Williston Basin oil leases in southeast Saskatchewan, southwest Manitoba and North Dakota properties, second quarter 2011 shut-ins are estimated to have reduced oil production by an average of 760 barrels of oil per day. As a result, Zargon's oil and liquids production averaged 5,034 barrels of oil per day in the 2011 second quarter, a 15 percent decline from the 5,893 barrels of oil per day produced in the 2011 first quarter and a 12 percent decline from the 5,741 barrels of oil per day reported in the 2010 second quarter. Currently, drier weather conditions have permitted improved surface lease access and essentially all of the shut-in volumes are anticipated to be returned to production by early August 2011.

Natural gas production averaged 21.91 million cubic feet per day in the 2011 second quarter, essentially unchanged from the 21.92 million cubic feet per day reported in the previous quarter, but 15 percent lower than the 25.86 million cubic feet per day reported in the 2010 second quarter. The ongoing declines in natural gas production reflect a continuing strategic shift to allocate capital to oil exploitation projects while permitting natural gas volumes to trend lower.

On an equivalent basis, Zargon's second quarter 2011 production averaged 8,686 barrels of oil equivalent per day, which is nine percent lower than the 9,546 barrels of oil equivalent reported in the first quarter of 2011.

Property Dispositions

Earlier in July, Zargon completed two Williston Basin property dispositions at Antler and Manor for a total cash compensation of approximately $24.5 million. In aggregate, these two southeast Saskatchewan properties were producing 260 barrels of oil per day, and had included 7.8 thousand net acres of undeveloped land. The properties had been assigned 682 thousand barrels of proved and probable oil reserves in the McDaniel & Associates Consultants Ltd. 2010 year end reserve report. Initially, proceeds from the sale of these properties has been used to strengthen the company's balance sheet in preparation for an active second half 2011 and 2012 oil exploitation focused capital program that is anticipated to include significant expenditures on the Little Bow Alkaline Surfactant Polymer ("ASP") tertiary oil recovery project.

Budget and Operations Update

During the 2011 second quarter, Zargon drilled three gross (2.1 net oil wells) taking the first half drilling program to a total of 11 gross (9.6 net) oil wells. The second quarter program included two wholly owned delineation wells drilled at the Alberta Plains North Killam property. Based on these wells, we are now planning to drill four step-out locations in the second half of this year at this developing Glauconite oil pool. Additionally in the Alberta Plains core areas, three horizontal oil exploitation wells will be drilled in Taber along with two follow-up multi-frac horizontal locations targeting the Viking formation at our Hamilton Lake property. Prior to year end, Zargon also plans to drill seven vertical oil exploitation step-out wells at the Bellshill Lake and Grand Forks properties. These Alberta Plains drilling locations are high-graded from an 80 net well inventory of oil exploitation locations.

In the Williston Basin core area, flooded surface leases have resulted in a three month delay to our drilling program and drilling operations are not anticipated to resume until the second half of August. The truncated Williston Basin drilling program anticipates that only eight horizontal oil exploitation wells (Elswick, Weyburn and Daly) will be drilled in the remainder of this year. The deferred wells will be added back to an 85 well Williston Basin oil exploitation inventory and will be rescheduled for drilling in 2012. In aggregate, Zargon's holds a 165 inventory of oil exploitation locations that will form the foundation of our field capital program over the next three years.

With these developments and delays, Zargon expects to drill approximately 35 net wells in 2011, with 12 (reduced from 20) net horizontal exploitation wells drilled for Mississippian light oil in our Williston Basin core area. In the Alberta Plains South and Alberta Plains North core areas, Zargon is planning to drill 23 net wells (increased from 17), targeting mostly Mannville aged oil reservoirs. The majority of these wells will be drilled later in the year and will not have a material impact on annual production volumes. A summary of the revised 2011 drilling program is shown in the following table.

2011 DRILLING PROGRAM
Core Area Property Formation Commodity and Well Type Number of Net Wells Remaining Net Wells
Williston Basin
Steelman/Manor Mississippian Oil; horizontal 2 -
Elswick/Weyburn Mississippian Oil; horizontal 8 6
Daly Mississippian Oil; horizontal 1 1
Other Non-Operated Mississippian Oil; horizontal 1 1
Alberta Plains South
Taber South Sunburst Oil; horizontal 6 3
Grand Forks Glauconite Oil; vertical 2 2
Alberta Plains North
Killam Glauconite Oil; horizontal 6 4
Bellshill Lake Mannville Oil; vertical 5 5
Hamilton Lake Viking Oil; horizontal 3 2
Other Non-Operated Various Oil; vertical 1 1
Total 35 25

In addition to the oil exploitation focused drilling program, Zargon is proceeding with waterflood enhancements and field optimizations designed to increase reservoir oil recovery factors at numerous Alberta Plains and Williston Basin projects. At Zargon's Little Bow ASP tertiary oil recovery project, the company anticipates project sanctioning later this fall, which is expected to result in approximately $35 million of 2012 capital expenditures with forecast initial chemical injection in the first quarter of 2013.

Although 2011 Williston Basin drilling has been significantly deferred due to the wet weather surface access restrictions, the majority of the deferred capital has been reallocated to fourth quarter 2011 Alberta Plains drilling programs. Consequently, Zargon's 2011 field capital budget continues to be set at $65 million, although the production gains from much of the program will not be realized until the first quarter of 2012. With approximately $25 million of property dispositions already concluded, the 2011 net capital program will be approximately $40 million, provided that no further acquisitions or dispositions are concluded this year.

Renewed Credit Facility

During the last month, Zargon also closed the renewal of its unsecured, revolving bank facility with a syndicate of Canadian banks. The facility has a total borrowing limit of $180 million, which includes the effect of the Williston Basin Antler and Manor properties. Subsequent to the closing of these dispositions, this credit facility is currently drawn at less than $75 million, which represents a considerable decrease from Zargon's $122 million of bank debt that was reported at the end of the first quarter. With more than $100 million of available credit, Zargon is well positioned to pursue an active oil directed capital program over the next 18 months that includes a steady oil exploitation drilling program in addition to the implementation of a Little Bow ASP tertiary oil recovery scheme.

Guidance

On March 10, 2011, Zargon provided a 2011 quarterly oil production guidance range of 5,600 to 6,100 barrels of oil per day for 2011. Consistent with this guidance, Zargon's first quarter 2011 production averaged 5,893 barrels of oil per day. In the second quarter, the company experienced severe Williston Basin flooding and related surface access problems that reduced second quarter production by approximately 760 barrels of oil per day. If these Williston Basin shut-in volumes are added back to the actual reported volumes produced, the second quarter's oil production volumes would have met the guidance target.

In addition to the effect of some remaining third quarter shut-ins and the impact of the deferred Williston Basin drilling programs, Zargon has recently sold 260 barrels of oil per day of production. Consequently, third and fourth quarter oil production volumes are now anticipated to average approximately 5,200 and 5,400 barrels of oil per day, respectively. Subsequent to an active fourth quarter Alberta Plains drilling program, Zargon's year end exit oil rate and first quarter 2012 production volumes are anticipated to exceed 5,600 barrels of oil per day.

With essentially no capital allocated to natural gas projects, the company's natural gas production can be expected to continue to decline from the second quarter rate of 21.91 million cubic feet per day, and is anticipated to average approximately 21.0 million and 20.2 million cubic feet per day in the third and fourth quarters, respectively.

Hedging

Further to the crude oil hedging program outlined in the May 12, 2011, press release, Zargon has entered into additional crude oil forward contracts to sell 483 barrels of oil per day at an average price of $101.71 US per barrel over the period January 1, 2012 to June 30, 2013. Zargon's commodity price risk management policy, allows for the sale for up to a 50 percent maximum of our estimated oil production for up to a 24 month period in order to meet capital program and dividend obligations in the event of significant commodity price declines.

Vice President, Operations Appointment

Zargon is pleased to announce the promotion of Randy Doetzel to Vice President, Operations. Randy has an extensive background in the oil and gas industry with over 20 years of experience working in a variety of operations, engineering and leadership positions with small and medium exploration and production organizations. Randy has been working with Zargon in the Operations department since 2009.

Forward-Looking Statements

This press release offers our assessment of Zargon's future plans and operations as at July 19, 2011, and contains 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). 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.

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 barrels of oil equivalent ("boe") using a conversion rate of six thousand cubic feet of natural gas to one barrel of oil. This ratio is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. Readers are cautioned that the term "boe" may be misleading, particularly if used in isolation.

ABOUT ZARGON

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. Zargon's securities trade on the Toronto Stock Exchange and there are currently approximately 29.130 million common shares (ZAR) outstanding.

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

    Zargon Oil & Gas Ltd.
    J.B. Dranchuk
    Vice President, Finance and Chief Financial Officer
    403-264-9992
    zargon@zargon.ca
    www.zargon.ca