Zargon Oil & Gas Ltd. ("Zargon" or the "Company") (TSX:ZAR) (TSX:ZAR.DB).
FINANCIAL & OPERATING HIGHLIGHTS (THREE MONTHS ENDED MARCH 31, 2012)
-- First quarter 2012 oil and liquids production averaged 5,496 barrels of
oil and liquids per day, a two percent decline from the preceding
quarter. First quarter 2012 natural gas production averaged 20.03
million cubic feet per day, a nine percent decline from the preceding
quarter. These production decreases were primarily due to naturally
occurring production declines and the recent shut-in of uneconomic
natural gas wells due to very low natural gas prices.
-- Funds flow from operating activities of $13.52 million ($0.46 per
diluted share) were 21 percent lower than the $17.10 million ($0.58 per
diluted share) recorded in the prior quarter, and 11 percent lower than
the $15.22 million ($0.56 per diluted share) reported in first quarter
of 2011. Funds flow from operating activities for the 2012 first quarter
included reductions of $3.09 million of realized hedge losses, $0.65
million of asset retirement expenses and $0.53 million of one-time
employee expenses.
-- Three monthly cash dividends of $0.10 per common share were declared in
the first quarter of 2012 for a total of $8.82 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 55
percent of funds flow from operating activities.
-- During the quarter, exploration and development capital expenditures
(excluding property acquisitions and dispositions) were $20.83 million
with the drilling of 11 gross wells (9.6 net wells) that resulted in 8.6
net oil wells. Zargon's March 31, 2012, debt net of working capital
(excluding unrealized derivative assets/liabilities and deferred taxes)
was $124.31 million.
-- Subsequent to quarter end, Zargon issued a five-year $57.50 million
convertible 6.0 percent subordinate debenture that provides long term
funding for Zargon's long term Little Bow Alkaline Surfactant Polymer
("ASP") and other long-life oil exploitation projects. With the issuance
of this debenture, Zargon currently has more than $100 million of
available credit on its $180 million of borrowing base.
Three Months Ended March 31,
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(unaudited) 2012 2011 Percent Change
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Financial Highlights
Income and Investments ($
millions)
Gross petroleum and natural
gas sales 44.64 46.94 (5)
Funds flow from operating
activities 13.52 15.22 (11)
Cash flows from operating
activities 11.85 23.47 (50)
Cash dividends (net of
Dividend Reinvestment Plan) 7.45 9.65 (23)
Net losses (2.01) (9.11) 78
Field capital and
administrative asset
expenditures 20.85 22.30 (7)
Net property and corporate
acquisitions (dispositions) 0.10 (1.94) 105
Net capital expenditures 20.95 20.36 3
Per Share, Diluted
Funds flow from operating
activities ($/share) 0.46 0.56 (18)
Cash flows from operating
activities ($/share) 0.40 0.86 (53)
Net losses ($/share) (0.07) (0.33) 79
Cash Dividends ($/common share) 0.30 0.42 (29)
Balance Sheet at Period End ($
millions)
Property and equipment 418.48 418.88 -
Exploration and evaluation
assets 24.17 27.56 (12)
Total assets 473.69 483.98 (2)
Working capital deficiency 16.94 13.24 28
Bank debt 107.37 121.89 (12)
Shareholders' equity 214.57 191.92 12
Weighted Average Shares
Outstanding for the Period
(millions) - Basic 29.40 27.11 8
Weighted Average Shares
Outstanding for the Period
(millions) - Diluted 29.61 27.34 8
Total Common Shares Outstanding
at Period End (millions) 29.47 27.28 8
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Funds flow from operating activities is a non-GAAP term that represents net
earnings/losses and asset retirement expenditures except for non-cash items.
Three Months Ended March 31,
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(unaudited) 2012 2011 Percent Change
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Operating Highlights
Average Daily Production
Oil and liquids (bbl/d) 5,496 5,893 (7)
Natural gas (mmcf/d) 20.03 21.92 (9)
Equivalent (boe/d) 8,834 9,546 (7)
Equivalent per million common
shares (boe/d) 299 349 (14)
Oil and liquids per million
common shares (bbl/d) 186 216 (14)
Average Selling Price (before
the impact of financial risk
management contracts)
Oil and liquids ($/bbl) 81.92 75.29 9
Natural gas ($/mcf) 2.01 3.55 (43)
Netback ($/boe)
Petroleum and natural gas
sales 55.53 54.64 2
Royalties (10.51) (8.81) (19)
Realized loss on derivatives (3.84) (3.50) (10)
Production and operating
costs (16.56) (15.31) (8)
Transportation (0.47) (0.48) 2
Operating netback 24.15 26.54 (9)
Wells Drilled, Net 9.6 7.5 28
Undeveloped Land at Period End
(thousand net acres) 411 498 (17)
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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.
Production
Zargon's production averaged 8,834 barrels of oil equivalent per day in the
first quarter and was five percent lower than the preceding quarter and seven
percent lower than the corresponding 2011 quarter. Oil and liquids production
averaged 5,496 barrels per day in the 2012 first quarter, a two percent decrease
from the 5,619 barrels per day produced in the prior quarter, and a seven
percent decrease from the corresponding 2011 quarter. Natural gas production
averaged 20.03 million cubic feet per day, a nine percent decrease from the
previous quarter and a nine percent decrease from the corresponding period in
2011. During the quarter, oil and liquids production represented 62 percent of
total production based on a 6:1 equivalent basis.
Field Activities
Zargon seeks to deliver superior long term financial returns working in a
partial cash flow distributing model through focused oil exploitation programs.
During the first quarter, Zargon made good progress in advancing each of
Zargon's eight long-life, low-decline oil exploitation initiatives.
In the first quarter of 2012, Zargon drilled two multi-frac horizontal oil wells
at the 47-section wholly owned Hamilton Lake property. In the last five
quarters, Zargon has drilled and completed five multi-frac wells on this
property and although results vary significantly, the wells have averaged 76 and
64 barrels of oil per producing day in their first and fourth month of
continuous production, respectively. Unlocking the potential of Hamilton Lake's
large oil-in-place resource with stimulated horizontal wells and a reactivated
waterflood remains a high priority for Zargon and two additional wells are
scheduled for this fall. Success at Hamilton Lake could lead to more than 30
additional horizontal oil locations characterized by low decline waterflood
supported production.
In the 2012 first quarter, Zargon drilled two horizontal oil wells and an
unsuccessful vertical delineation well at the Alberta Plains North Killam
property. The two horizontal wells are currently averaging 55 barrels of oil per
day per well with a 65 percent oil cut. In the last five quarters, Zargon has
completed six horizontal wells for Glauconite oil production at this Killam
property. The wells are part of an early-stage project delineation program on a
Zargon wholly owned oil pool, where we forecast significant unrealized reserve
potential to be recovered through the implementation of a single-leg
parallel-producer-injector waterflood. Later this fall, Zargon plans on
implementing the property's first pilot waterflood to confirm our reservoir
waterflood models. With further de-risking, the Killam property would require as
many as 15 additional horizontal drainage wells to exploit optimally by
waterflood to provide a low decline producing oil asset.
At the Alberta Plains North Bellshill Lake property, first quarter 2012
activities were focused on upgrading oil treating and water handling facilities.
In the second quarter, Zargon will drill a Leduc water disposal well, thereby
enabling improved oil rates by increased reservoir fluid withdrawals. Later this
year, three additional horizontal re-entries are scheduled. At the Alberta
Plains South Taber property, first quarter 2012 activities were focused on
improving water injection capabilities by improving water quality and
stimulating an existing horizontal injector. With these successful developments,
we are now proceeding with expanding the waterflood project to additional areas
in the pool. Later this year, two additional development horizontal wells and a
new analog pool Sunburst horizontal test are scheduled. Both the Bellshill Lake
and Taber oil exploitation properties promise to provide low decline oil
production for many years.
In the Williston Basin core area, Zargon drilled a first quarter 2012 Midale
horizontal well at Elswick, Saskatchewan and two Frobisher development wells at
Steelman, Saskatchewan. Additionally, a multi-frac horizontal location was
drilled at Truro, North Dakota. Production volumes from these wells will be
realized once spring break-up is completed. Williston Basin drilling operations
are scheduled to resume later this fall and are scheduled to include the
drilling of two Midale drainage locations, two Frobisher development locations
and one multi-frac location prior to the end of the year.
Zargon's Williston Basin properties provide three distinct project types. The
lower-rate but shallower-decline Midale drainage locations provide long-life
generally waterflood supported production. The Frobisher development wells
provide high rate wells which experience high decline rates until stabilized
rates are observed after a couple of years. We are currently in the de-risking
phase for the multi-frac horizontal development of selected reservoirs in our
Williston Basin core area. These "tight-oil" multi-frac horizontal projects
promise to provide long term stable production supported by water flood
operations. In aggregate, these three projects provide Zargon an 85 well
inventory of Mississippian development wells that will be methodically drilled
over the next few years.
Little Bow Alkaline Surfactant Polymer ("ASP") Project
Earlier this year, Zargon announced that it would proceed with detailed
engineering, regulatory applications and the procurement of long-lead-time
equipment for the Little Bow Upper Mannville I pool ASP project. This tertiary
oil recovery project entails the injection of chemicals in a water solution into
a partially depleted reservoir to recover incremental oil reserves. In its year
end review, McDaniel and Associates Consultants Ltd. ("McDaniel") assigned 4.15
million barrels of oil equivalent of probable undeveloped reserves to Zargon's
working interest in phases 1 and 2 of the project.
To date in 2012, Zargon has finalized the front-end engineering and design
("FEED") studies, finalized the alkaline and polymer selections and has obtained
project approval from the Energy Resources Conservation Board ("ERCB"). Detailed
design is ongoing with the awarding of long-lead-time procurement items
scheduled for early summer. Later this summer, we will proceed with the producer
reactivations, water injector conversions and pipeline modifications and
replacements that are ultimately required for the ASP project. The current
project schedule anticipates first chemical injections in July 2013 with a
significant oil production response forecast by January 2014.
2012 Outlook
Consistent with Zargon's February 15, 2012 press release, Zargon's 2012 non-ASP
field capital budget has been set at $55 million. Similar to 2011, this field
capital program is expected to be partially financed by non-strategic property
dispositions, as the Company improves its property focus and footprint. The
Company's current budget calls for $10 million of net property dispositions and
results in net $45 million of non-ASP capital expenditures.
Currently, in addition to the $45 million of non-ASP capital expenditures,
Zargon is projecting to spend $21 million of phase 1 Little Bow ASP capital in
2012 with the majority of the spending to occur towards the end of the year.
Recognizing that the Little Bow ASP project requires a significant current
capital investment to provide stable mid and late decade oil production volumes,
Zargon issued a five-year $57.50 million convertible 6.0 percent subordinate
debenture that provides long term funding for Zargon's long term Little Bow
Alkaline Surfactant Polymer ("ASP") and other long-life oil exploitation
projects.
During 2012, Zargon is working to improve its operating and general and
administrative cost structure by high grading its activities to focus on eight
clearly defined long-life oil exploitation initiatives. In particular, we are
proceeding with a comprehensive natural gas property review 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, up
to three million cubic feet of natural gas production per day is anticipated to
be shut-in this summer pursuant to this initiative.
The current industry environment of volatile oil prices, larger than expected
field oil price discounts to WTI pricing makers and exceptionally low natural
gas prices have resulted in reduced cash flow estimates below previous
estimates. In recognition of this uncertain environment, Zargon will proceed
with a quiet summer capital program that will focus on capital, operating and
organizational efficiencies. In aggregate, the 2012 drilling program has been
reduced to 24 net oil exploitation wells as funds are redirected to facility
modifications and build-outs that will advance our long term oil exploitation
projects. Over the year, we will consistently review our financial position to
determine if cash flows and property sales are meeting our funding objectives or
if further capital reallocations or deferrals may be appropriate.
Production Guidance
On February 16, 2012, Zargon provided updated 2012 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. The press
release also reaffirmed Zargon's 2012 natural gas production guidance of 18.60
million cubic feet per day. First quarter actual volumes were 20.03 million
cubic feet per day which exceeded guidance levels.
Based on $45 million of net (non-ASP) capital expenditures in 2012, Zargon's
average oil and liquids production in 2012 remains set at 5,400 barrels per day.
Reflecting the combined impacts of essentially no natural-gas-related capital
expenditures and temporary property shut-ins due to very low natural gas prices,
Zargon's 2012 natural gas production guidance is currently maintained at 18.6
million cubic feet per day, although temporary shut-ins are expected to push
second and third quarter production volumes to less than 18 million cubic feet
per day.
Forward-Looking Statements
This press release offers our assessment of Zargon's future plans and operations
as at May 14, 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 operations, completions
and other operational forecasts and the results therefrom under the heading
"Field Activities"; 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 and other operational forecasts and plans under the
heading "2012 Outlook"; our plans with respect to our Little Bow ASP project and
the results therefrom under the heading "Little Bow Alkaline Surfactant Polymer
("ASP") Project"; our use of funds from financing under "Financial & Operating
Highlights" and "2012 Outlook", and all matters, including guidance as to our
estimated 2012 production 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 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 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.
Non-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", "funds flow from operating
activities per shares" 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. Funds flow from
operating activities per diluted share is calculated using the same weighted
average diluted shares outstanding as is used in calculating earnings per
diluted share. See the MD&A for the three months ended March 31, 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.
Filings
Zargon has filed with Canadian securities regulatory authorities its unaudited
financial statements for the three months ended March 31, 2012 and the
accompanying Managements' Discussion and Analysis ("MD&A"). These filings are
available under Zargon's SEDAR profile at www.sedar.com. Full pdf versions of
our three months ended March 31, 2012 unaudited financial statements and the
accompanying MD&A are available on our website at www.zargon.ca.
About Zargon
Based in Calgary, Alberta, Zargon's securities trade on the Toronto Stock
Exchange and there are currently approximately 29.474 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 www.zargon.ca where you will find a current shareholder presentation,
financial reports and historical news releases.
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