Zargon Oil & Gas Ltd. ("Zargon" or the "Company") (TSX:ZAR) (TSX:ZAR.DB).
FINANCIAL & OPERATING HIGHLIGHTS (THREE MONTHS ENDED SEPTEMBER 30, 2012)
-- Third quarter 2012 production averaged 7,634 barrels of oil equivalent
as compared to 8,290 barrels of oil equivalent for the preceding
quarter. Oil and liquids production averaged 5,079 barrels per day, a
six percent decline, or 305 barrels of oil per day from the preceding
quarter of 5,384 barrels of oil per day, due in part to a six month
break in our drilling program and the full impact of the property sales
totalling 275 barrels of oil per day which occurred in the second
quarter. Third quarter 2012 natural gas production averaged 15.33
million cubic feet per day, a 12 percent decline from the preceding
quarter. The reduction in natural gas production volumes was due
primarily to the shut-in of natural gas wells caused by low natural gas
prices.
-- Funds flow from operating activities of $14.35 million were 16 percent
higher than the $12.37 million recorded in the prior quarter and two
percent lower than the $14.59 million reported in the third quarter of
2011. Funds flow from operating activities for the 2012 third quarter
included reductions of $0.71 million of asset retirement expenses. At
quarter end, Zargon had 29.78 million shares outstanding.
-- Three monthly cash dividends of $0.10 per common share were declared in
the third quarter of 2012 for a total of $8.91 million ($7.75 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 54
percent of funds flow from operating activities. Commencing in the
fourth quarter of 2012, Zargon's monthly cash dividend has been set at
$0.06 per common share.
-- Third quarter 2012 exploration and development capital expenditures
(excluding property acquisitions and dispositions) were $9.04 million
and included $1.84 million of expenditures related to the Little Bow
Alkaline Surfactant Polymer ("ASP") tertiary recovery project.
-- Including $57.50 million of convertible debentures, Zargon's September
30, 2012 debt net of working capital (excluding unrealized derivative
assets/liabilities) of $99.13 million was approximately 1.7 times
annualized 2012 third quarter funds flow from operating activities. At
September 30, 2012, Zargon had more than $120 million of available
credit facilities remaining on its $165 million borrowing base. As of
November 7, 2012, Zargon has entered into an average of 2,075 barrels of
oil per day of forward commodity hedges that represent 38 percent of the
2013 oil and liquids production guidance volumes at an average price of
$98.97 US per barrel (WTI).
-- On a unit of production basis, production and operating inclusive of
transportation costs were $15.34 per barrel of oil equivalent in the
third quarter of 2012, a decrease of 11 percent from the calendar 2011
average cost of $17.19 per barrel of oil equivalent. These improvements
have been made pursuant to a comprehensive cost containment initiative
that was implemented in response to disappointing 2011 operating cost
trends.
Three Months Ended Nine Months Ended
September 30, September 30,
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Percent Percent
(unaudited) 2012 2011 Change 2012 2011 Change
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Financial Highlights
Income and Investments ($
millions)
Gross petroleum and natural
gas sales 36.91 44.99 (18) 120.07 140.40 (14)
Funds flow from operating
activities 14.35 14.59 (2) 40.24 43.57 (8)
Cash flows from operating
activities 12.16 13.75 (12) 42.02 50.29 (16)
Cash dividends (net of
Dividend Reinvestment Plan) 7.75 10.75 (28) 22.65 30.87 (27)
Net earnings/(losses) (4.02) 30.69 (113) 4.51 34.25 (87)
Field capital and
administrative asset
expenditures 9.08 18.05 (50) 39.16 48.22 (19)
Net property and corporate
acquisitions/(dispositions) 1.27 (22.66) 106 (34.70)(24.45) (42)
Net capital
expenditures/(dispositions) 10.35 (4.61) 325 4.46 23.77 (81)
Per Share, Basic
Fund flows from operating
activities ($/share) 0.48 0.50 (4) 1.36 1.53 (11)
Net earnings/(losses)
($/share) (0.14) 1.05 (113) 0.15 1.21 (88)
Cash Dividends ($/common
share) 0.30 0.42 (29) 0.90 1.26 (29)
Balance Sheet at Period End ($
millions)
Property and equipment 386.72 427.67 (10)
Exploration and evaluation
assets 21.38 25.74 (17)
Total assets 440.77 489.77 (10)
Working capital deficiency 14.04 17.81 (21)
Bank debt 27.58 76.69 (64)
Convertible debenture at
maturity 57.50 - -
Shareholders' equity 210.35 254.85 (17)
Weighted Average Shares
Outstanding for the Period
(millions) - Basic 29.69 29.17 2 29.54 28.41 4
Weighted Average Shares
Outstanding for the Period
(millions) - Diluted 29.69 29.24 2 29.62 28.58 4
Total Common Shares
Outstanding at Period End
(millions) 29.78 29.24 2
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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 Nine Months Ended
September 30, September 30,
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Percent Percent
(unaudited) 2012 2011 Change 2012 2011 Change
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Operating Highlights
Average Daily Production
Oil and liquids (bbl/d) 5,079 5,330 (5) 5,319 5,417 (2)
Natural gas (mmcf/d) 15.33 22.10 (31) 17.59 21.98 (20)
Equivalent (boe/d) 7,634 9,014 (15) 8,250 9,080 (9)
Average Selling Price (before
the impact of financial risk
management contracts)
Oil and liquids ($/bbl) 72.71 77.18 (6) 76.03 80.33 (5)
Natural gas ($/mcf) 2.08 3.51 (41) 1.92 3.60 (47)
Netback ($/boe)
Petroleum and natural gas
sales 52.55 54.25 (3) 53.11 56.64 (6)
Royalties (10.19)(10.40) (2) (10.21)(10.38) (2)
Realized gain/(loss) on
derivatives 1.44 (1.73) 183 (1.22) (3.83) (68)
Production and operating
costs (14.90)(16.37) (9) (15.96)(16.29) (2)
Transportation (0.44) (0.50) (12) (0.47) (0.51) (8)
Operating netback 28.46 25.25 13 25.25 25.63 (1)
Wells Drilled, Net 3.0 14.2 (79) 12.8 23.8 (46)
Undeveloped Land at Period End
(thousand net acres) 361 448 (19)
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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.
Field Activities
Field activities were limited to workovers and turnarounds for most of the third
quarter. Starting in mid-September, Zargon began its fall drilling program at
Bellshill Lake with the drilling of 2.0 net oil wells and 1.0 net water disposal
well. For the year, Zargon has drilled 12.8 net oil wells and is planning on
drilling an additional 15 net wells in the 2012 fourth quarter. This program
will entail a Hamilton Lake water disposal well and oil exploitation horizontal
locations at Bellshill Lake (three additional), Hamilton Lake (three), Taber
South (three) and Williston Basin (five). Each of these locations target
increased oil recoveries from existing oil pools. In aggregate, Zargon has
identified more than 130 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:
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Locations
Identified Recognized in 2011
Project Formation Reservoir Drive Locations Year End Reserves
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Hamilton
Lake Viking Eventually Waterflood 50+ 0
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Killam Mannville Eventually Waterflood 10 3
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Bellshill
Lake Mannville Strong Aquifer 5 0
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Taber South Sunburst Partial Waterflood 10 1
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Williston
Basin
Structures Frobisher Strong Aquifer 15+ 1
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Williston
Basin
Drainage Midale Mostly Waterflood 40+ 2
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Ultimately Pressure
Total Varied Supported 130+ 7
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For further information regarding the potential and economics of these projects,
please refer to our updated corporate presentation, which is available at
www.zargon.ca.
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 13 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 horizontal oil exploitation wells (or $50 million of
expenditures) are required annually to offset oil production declines in the
2013-2017 period. In an $85 Cdn. per barrel Edmonton par price environment, our
forecasts indicate that sufficient cash flow is generated to completely fund the
$50 million annual capital program and the current $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 $20.50
per barrel of oil equivalent, and demonstrates stable oil production volumes on
a per share basis prior to Little Bow ASP production contributions. With these
pricing and efficiency estimates for the six non-ASP projects, debt levels
remain unchanged after paying a stable $0.06 per share monthly dividend. At this
dividend level, Zargon's $120+ million of unutilized bank lines can be prudently
allocated to deliver oil production and reserve growth by partially financing
the Little Bow ASP project which is expected to provide an incremental 1,400
barrels of oil production by 2017. Including the Little Bow ASP project,
Zargon's oil production per share is projected to increase by an average of
seven percent per year in the 2013-2017 period. For further information
regarding the dividend sustainability calculation and the related input
parameters, please refer to our updated corporate presentation, which is
available at www.zargon.ca.
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 2011 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, obtained scheme approval from the Energy Resources Conservation
Board ("ERCB"), completed the majority of the detailed design and commenced the
procurement of long-lead-time equipment. Zargon has also 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. Early next year, Zargon will execute
well workovers and pipeline upgrades required for the ASP project, which will
also benefit existing waterflood operations in the near term.
For 2012, ASP development capital is now expected to total a reduced $10
million. The next step in the development of this project will be the final
sanctioning of the project's construction by mid-March 2013 in order to commence
chemical injections by year end 2013, which in turn is expected to deliver
incremental oil production by the second quarter of 2014.
The total capital cost of phases 1 and 2 of the Little Bow ASP project is
approximately $59 million (as spent dollars). The scheduling of these
expenditures is comprised of $10 million of expenditures in 2012, $37 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 $50 million (as spent dollars).
Based on this capital program, phase 1 and 2 peak incremental oil production is
estimated at 1,400 barrels of oil per day in 2016-2019. Using these rates with
an estimated field oil price of $68 per barrel ($85 Cdn. per barrel Edmonton par
price), 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 $48 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 to 4
project peak production rates expected to occur in 2020. For further information
regarding the Little Bow ASP project, please refer to our updated corporate
presentation, which is available at www.zargon.ca.
Updated 2012 Outlook and First Look 2013 Capital Budgets
Zargon's 2012 non-ASP field capital budget provides for 28 net oil exploitation
wells (an increase from the 25 wells previously forecasted) and consequently,
capital expenditures have increased by $3 million to $58 million, of which
$35.72 million has been spent in the first nine months of the year. Consistent
with the prior two years, the budget reflects essentially no natural gas related
expenditures.
In addition to the $58 million of non-ASP capital expenditures, Zargon is
projecting to spend $10 million (down from the previously forecasted $15
million) on the Little Bow ASP project capital in 2012 of which $3.33 million
has already been spent in the first nine months of 2012.
During 2012, Zargon has worked to improve its operating and G&A cost structure
by high-grading its activities to six conventional (non-ASP) clearly defined
long-life low-decline 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. These operating cost
initiatives have been successful and the combined 2012 third quarter operating
and transportation costs declined to $15.34 per barrel of oil equivalent, down
11 percent from the $17.19 per barrel of oil equivalent that was reported in
calendar 2011. Looking forward, we are comfortable that combined operating and
transportation costs can be maintained at $16.00 per barrel of oil equivalent or
less.
Zargon's 2013 capital budget has been set at $50 million for conventional
projects with the drilling of 25 net oil exploitation wells, plus an additional
$37 million for the Little Bow ASP project which is conditional on the
sanctioning of the construction phase of the tertiary recovery project. This $87
million capital program is forecasted to be funded by cash flows, bank debt and
the sale of $20 million of minor non-strategic oil properties that are not
related to Zargon's six core conventional oil projects.
Production Guidance
In the August 8, 2012 press release, guidance for the second half 2012
production was provided at 5,200 barrels of oil and liquids per day with 5,050
and 5,350 barrels of oil and liquids per day in the third and fourth quarters,
respectively. Third quarter actual volumes were 5,079 barrels of oil and liquids
per day and exceeded guidance levels. With a late start to the active fall 2012
drilling program, fourth quarter production guidance levels are now estimated at
5,100 barrels of oil and liquids per day, with year end exit rates projected to
exceed 5,400 barrels of oil per day.
During this spring and summer, Zargon shut-in three million cubic feet per day
of natural gas volumes for economic reasons, and consequently, third quarter
production volumes declined to 15.33 million cubic feet per day, a 12 percent
decrease from second quarter levels. With the recently improved natural gas
prices, shut-in wells are being returned to production with the expectation that
year end production will exceed 16.50 million cubic feet per day.
Zargon has set forward-looking production guidance estimates using a "top-down"
approach based on corporate declines and capital program production addition
efficiencies. Specifically, the calculation is based on an average 21 percent
decline annual corporate oil production decline and field capital program
production addition efficiencies of $40,000 per barrel of oil per day. These
guidance levels are then adjusted for acquisitions or dispositions that may
occur.
Based on a budget of $50 million of (non-ASP) capital expenditures in 2013 and
before allowance for the forecasted $20 million of non-strategic oil property
dispositions, Zargon's average oil and liquids production in 2013 is estimated
to exceed 5,400 barrels per day. When specific property dispositions are
concluded, we will adjust the oil production guidance accordingly. With
essentially no natural gas related capital expenditures in 2013, natural gas
production volumes are forecast to average 15.50 million cubic feet per day in
2013, which reflects an annualized 12 percent production decline from the
estimated year end 2012 production rates of 16.50 million per cubic feet per
day.
Forward-Looking Statements
This press release offers our assessment of Zargon's future plans and operations
as at November 7, 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 "Dividend
Sustainability Calculation", 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 and 2013 capital budgets, 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 "Updated 2012 Outlook and First Look 2013
Capital Budgets"; 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 "Dividend
Sustainability Calculation" and "Updated 2012 Outlook and First Look 2013
Capital Budgets", and all matters, including guidance as to our estimated 2012
and 2013 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 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.
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.
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 and nine months ended September 30, 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 and nine months ended September 30, 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 29.780 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.
FOR FURTHER INFORMATION PLEASE CONTACT:
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
zargon@zargon.ca
www.zargon.ca
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