The Globe and Mail

Go to the Globe and Mail homepage

Jump to main navigationJump to main content

Globe Investor

News Sources

Take control of your investments with the latest investing news and analysis

Press release from Marketwire

Zargon Oil & Gas Ltd. Announces 2011 Third Quarter Results

Wednesday, November 09, 2011

Zargon Oil & Gas Ltd. Announces 2011 Third Quarter Results17:01 EST Wednesday, November 09, 2011CALGARY, ALBERTA--(Marketwire - Nov. 9, 2011) - Zargon Oil & Gas Ltd. (TSX:ZAR) ("Zargon" or the "Company"). FINANCIAL & OPERATING HIGHLIGHTS (THREE MONTHS ENDED SEPTEMBER 30, 2011)Third quarter 2011 oil production averaged 5,330 barrels of oil and liquids per day, a six percent gain over the preceding quarter. This increase in oil and liquids production was primarily due to the reactivation of Williston Basin wells that had been shut-in due to spring and summer wet weather and surface lease flooding. This increase was partially offset by Williston Basin Antler and Manor oil property dispositions. Funds flow from operating activities of $14.59 million ($0.50 per diluted share) were six percent higher than the $13.76 million ($0.47 per diluted share) recorded in the prior quarter, and 20 percent lower than the $18.31 million ($0.69 per diluted share) reported in third quarter of 2010. Funds flow from operating activities for the 2011 third quarter included reductions of $1.43 million of realized hedge losses and $0.64 million of asset retirement expenses. Three monthly cash dividends of $0.14 per common share were declared in the third quarter of 2011 for a total of $12.25 million ($10.75 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 74 percent of funds flow from operating activities. As announced in our September 12, 2011 press release, effective for the October 2011 dividend, to be paid on November 15, 2011, Zargon will reduce its monthly dividend to $0.10 per common share. During the quarter, exploration and development capital expenditures (excluding property acquisitions and dispositions) were a robust $17.97 million as field and drilling programs were reactivated after significant spring and summer delays related to flooding and surface access problems. Zargon also closed $22.66 million of net property dispositions in the quarter which were highlighted by 260 barrels of oil per day of dispositions at the Williston Basin Antler and Manor properties. Three Months Ended September 30,Nine Months Ended September 30,(unaudited)20112010Percent Change20112010Percent ChangeFinancial HighlightsIncome and Investments ($ millions)Petroleum and natural gas sales, before royalties44.9944.501140.40136.843Funds flow from operating activities14.5918.31(20)43.5758.53(26)Cash flows from operating activities13.7519.87(31)50.2953.34(6)Cash dividends (net of Dividend Reinvestment Plan)10.7511.92(10)30.8736.35(15)Net earnings30.691.202,45834.2523.4246Field capital and administrative asset expenditures18.0510.716948.2241.9515Net property and corporate acquisitions (dispositions)(22.66)(12.16)(86)(24.45)9.21(365)Net capital expenditures(4.61)(1.45)(218)23.7751.16(54)Per Share, DilutedFunds flow from operating activities ($/share)0.500.69(28)1.522.23(32)Cash flows from operating activities ($/share)0.470.75(37)1.762.03(13)Net earnings ($/share)1.050.052,0001.200.8935Cash Dividends ($/common share)0.420.54(22)1.261.62(22)Balance Sheet at Period End ($ millions)Property and equipment (D&P)427.67427.25–Exploration and evaluation assets (E&E)25.7427.65(7)Total assets489.77481.902Working capital deficiency17.8110.2973Bank debt76.6997.61(21)Shareholders' equity254.85179.1942Weighted Average Shares Outstanding for the Period (millions) – Basic29.1723.502428.4123.4221Weighted Average Shares Outstanding for the Period (millions) – Diluted29.2426.431128.5826.249Total Common Shares Outstanding at Period End (millions)29.2426.819Notes: For the convenience of the reader, the comparative information presented in this schedule refers to common shares and cash dividends although, for the pre-corporate conversion period, these items were trust units and cash distributions. For net capital expenditures, amounts include capital expenditures acquired for cash, equity issuances and net debt assumed on corporate acquisitions. Funds flow from operating activities is a non-GAAP term that represents net earnings/losses and asset retirement expenditures except for non-cash items. Total shares outstanding for 2010 include trust units plus exchangeable shares outstanding at period end. The exchangeable shares are converted at the exchange ratio at the end of the period.Three Months Ended September 30, Nine Months Ended September 30, (unaudited)20112010Percent Change20112010Percent ChangeOperating HighlightsAverage Daily ProductionOil and liquids (bbl/d)5,3305,850(9)5,4175,716(5)Natural gas (mmcf/d)22.1025.46(13)21.9826.12(16)Equivalent (boe/d)9,01410,094(11)9,08010,069(10)Equivalent per million common shares (boe/d)308381(19)318382(17)Oil and liquids per million common shares (bbl/d)182221(18)190217(12)Average Selling Price (before the impact of financial risk management contracts)Oil and liquids ($/bbl)77.1867.641480.3369.4316Natural gas ($/mcf)3.513.4523.604.00(10)Netback ($/boe)Petroleum and natural gas sales54.2547.911356.6449.7814Royalties(10.40)(8.24)(26)(10.38)(8.95)(16)Realized gain/(loss) on derivatives(1.73)(0.21)(724)(3.83)0.88(535)Production costs(16.37)(12.57)(30)(16.29)(12.65)(29)Transportation(0.50)(0.34)(47)(0.51)(0.32)(59)Operating netback25.2526.55(5)25.6328.74(11)Wells Drilled, Net14.24.819623.823.8–Undeveloped Land at Period End (thousand net acres)448505(11)Notes: 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. Average 2010 daily production per million common shares is calculated using the weighted average number of units outstanding during the period plus the weighted average number of exchangeable shares outstanding for the period converted at the average exchange ratio for the period.Production Zargon's production averaged 9,014 barrels of oil equivalent per day in the third quarter and was four percent higher than the preceding quarter and 11 percent lower than the corresponding 2010 quarter. Oil and liquids production averaged 5,330 barrels per day in the 2011 third quarter, a six percent increase from the 5,034 barrels per day produced in the prior quarter, but a nine percent decrease from the corresponding 2010 quarter. Natural gas production averaged 22.10 million cubic feet per day, a one percent increase from the previous quarter and a 13 percent decrease from the corresponding period in 2010. During the quarter, oil and liquids production represented 59 percent of total production based on a 6:1 equivalent basis. The quarter's oil and liquids production was highlighted by the July and August reactivation of the Williston Basin wells that had been shut-in due to spring and summer wet weather and surface lease flooding. Specifically during the quarter, shut-in volumes totalled 160 barrels of oil per day down from the 760 barrels of oil per day reported in the second quarter. Oil production volumes were also impacted by the early July sale of 260 barrels of oil per day coming from the Williston Basin Antler and Manor properties. Field Activities Zargon's third quarter field capital program totalled $17.97 million, an increase of 132 percent over the prior quarter and 73 percent over Zargon's 2010 third quarter. During the quarter, Zargon drilled 18 gross wells with a 100 percent success ratio that resulted in 14.2 net oil wells and took the year's drilling total to 23.8 net wells. For the fourth quarter, an additional 11 net oil locations are scheduled. The Alberta Plains North drilling program was highlighted by two Glauconite horizontal wells at Killam, three wells at Bellshill Lake and one horizontal multi-frac well at Hamilton Lake. Four horizontal oil exploitation wells were drilled in the Taber Alberta Plains South property. Operated wells in the Williston Basin core area included four horizontal wells at the Weyburn and Elswick, Saskatchewan properties. At our wholly owned 47 section Hamilton Lake Viking Unit, production from the initial 16-16-36-11 W4 multi-frac horizontal well has continued to produce for the last four months at a stable rate of approximately 50 barrels of oil per day with a 90 percent water cut. The steady production performance provides encouragement to our view that this mature waterflood can be redeveloped by horizontal multi-frac technology. A second multi-frac well has now been drilled and completed at 4-34-35-10 W4. The first week's production rates are averaging 80 barrels of oil per day with a 70 percent water cut. The third multi-frac location at 16-24-36-12 W4 has been drilled and will be completed later this month. We are now proceeding with the licensing of four additional locations that are scheduled to be drilled in the first quarter of 2012. With further de-risking, the Hamilton Lake 33 degree API oil property could be a significant oil resource opportunity that will take as many as 30 horizontal multi-frac drainage wells to optimally exploit by waterflood. Since spring break-up, Zargon has drilled four horizontal wells for Glauconite oil production at the Killam property. The wells are part of an early stage project delineation program on a Zargon wholly owned four section 27 degree API oil pool. The recently drilled fourth well provides another supporting data point for our reservoir development model that predicts initial production rates of 40 barrels of oil per day and significant unrealized reserve potential to be recovered through the implementation of a single leg parallel producer-injector waterflood. We are now proceeding with the licensing of four additional locations that are scheduled to be drilled in the first quarter of 2012. With further de-risking, the Killam property is expected to be a significant oil exploitation project that could take as many as 20 horizontal drainage wells to optimally exploit by waterflood. In the 2011 third quarter, Zargon drilled four horizontal wells at Taber South for Sunburst 19 degree API oil production. These field development wells have met expectations and, in aggregate, are currently producing in excess of 250 barrels of oil per day. On the southern block, last winter's waterflood implementation has successfully stabilized oil production rates and we are moving forward to make the next round of injector conversions by mid-2012. In the Williston Basin core area, this spring and summer's wet conditions and flooded surface leases delayed the resumption of drilling operations until mid-August. During the quarter, four horizontal drainage wells were drilled at Weyburn and Elswick, Saskatchewan that mostly targeted lower rate but shallower decline Midale formations. These wells come from our 85 well inventory of Mississippian development wells that will be methodically drilled over the next three years. Dispositions and Acquisitions During the quarter, Zargon completed numerous property transactions focused on maximizing returns from non-core properties and on the consolidation of our core properties. In particular, the key transactions included a July 7, 2011 sale of the Williston Basin Antler and Manor properties for $24.65 million, an August 23, 2011 purchase of a partner's interest in our operated Alberta Plains North Jarrow property for $6.27 million and a September 6, 2011 sale of undeveloped Whitecourt Alberta lands for $5.00 million. In aggregate, Zargon realized net cash proceeds of $22.66 million from third quarter property acquisition and disposition transaction activities. With these transactions, Zargon sold 260 barrels of oil per day and 11,000 net acres of undeveloped land. These sales were offset by purchases of 1.30 million cubic feet per day of natural gas production, and all remaining interests in two Jarrow Units and the related compression and gathering facilities. For the first nine months of 2011, Zargon has concluded a total of $24.45 million of net property dispositions. Updated 2011 and First Look 2012 Capital Budgets Reflecting a very active and successful fall oil exploitation drilling program, Zargon's 2011 field capital budget has been increased by $5 million to $70 million. These expenditures are offset by a budgeted net $25 million of property dispositions that are mostly completed. The resulting 2011 net capital expenditures are now forecasted at $45 million. Zargon's 2012 net capital budget has been set at $55 million, which is comprised of $65 million of field capital expenditures that are offset by $10 million of net property dispositions. This capital budget does not include an additional $25 million of capital that will be spent in 2012 if the Little Bow Alkaline Surfactant Polymer project is sanctioned. Similar to the 2011 capital budget, field programs are focused entirely on oil exploitation activities and do not include any natural gas drilling. The 2012 net capital program includes 32 net oil exploitation wells and is forecast to be funded from funds flow from operating activities and bank debt. As at the end of the 2011 third quarter, Zargon's debt net of working capital is $94.49 million, a level that represents 52 percent of Zargon's reaffirmed $180 million syndicated loan facility. Little Bow Alkaline Surfactant Polymer ("ASP") Project Capital expenditures related to our Little Bow ASP project are not included in the 2012 budgeted capital projections. Zargon is currently finalizing laboratory studies, front-end engineering and design ("FEED") studies and preliminary detailed engineering for the Little Bow ASP project that entails the injection of chemicals in a water solution into the Little Bow Upper Mannville I pool reservoir to recover incremental oil reserves. The current project schedule anticipates first chemical injections in July 2013 with a significant oil production response forecast by January 2014. Third party reserves and design engineering are anticipated to be finalized by the end of the year, thereby permitting the Little Bow ASP project to be presented to Zargon's Board of Directors for sanctioning approval. The total capital cost of phases 1 and 2 of the ASP project is approximately $37 million (constant 2011 dollars) with $25 million to be spent in 2012, of which the majority of the expenditures occur in the second half of the year. Prior to proceeding with the significant capital expenditures in the second half of 2012, Zargon will carefully examine all available financing options for this project, which may include forward hedges, if commodity pricing is supportive, sales of non-related properties or third party participation in the project through partial farm-outs, sell-downs or joint ventures. Production Guidance On July 19, 2011, Zargon provided an updated 2011 third quarter, fourth quarter and exit rate oil production rate guidance of 5,200, 5,400 and 5,600 barrels of oil and liquids per day, respectively. Third quarter actual volumes were 5,330 barrels of oil and liquids per day and exceeded guidance levels. On September 12, 2011, Zargon provided an updated 2011 natural gas production guidance to incorporate a Jarrow property partner interest acquisition. The revised guidance provided third and fourth quarter 2011 estimates of 22.00 and 21.60 million cubic feet per day, respectively. Third quarter actual volumes were 22.10 million cubic feet per day and exceeded guidance levels. Fourth quarter guidance levels of 5,400 barrels of oil and liquids per day and 21.60 million cubic feet per day are reaffirmed. Commencing in July of this year, 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 annual corporate oil production decline and field capital program production addition efficiencies of $30,000 per barrel of oil per day (mid-year rates). The production additions are calculated after the annual deduction of $10 million of capital related to maintenance or future opportunities. These guidance estimates are then adjusted for acquisitions or dispositions that may occur. Based on $55 million of net (non-ASP) capital expenditures in 2012, Zargon's average oil and liquids production in 2012 is estimated at 5,650 barrels per day. On a quarterly basis, we are guiding production volumes of 5,600, 5,400 (spring break-up), 5,700 and 5,900 barrels per day in the 2012 first, second, third and fourth quarters, respectively. Reflecting essentially no natural gas related capital expenditures in 2012, natural gas production volumes are forecast to track the corporate 15 percent annual natural gas decline rate and average 18.60 million cubic feet per day in 2012. Forward-Looking Statements This press release offers our assessment of Zargon's future plans and operations as at November 9, 2011, 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"; our acquisition and disposition strategy under the heading "Dispositions and Acquisitions"; guidance as to our 2011 and 2012 capital budgets, 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 "Updated 2011 and First Look 2012 Capital Budgets"; our plans with respect to our Little Bow ASP project and the results therefrom under the heading "Little Bow Alkaline Surfactant Polymer ("ASP") Project", and all matters, including guidance as to our estimated 2011 and 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 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 and nine months ended September 30, 2011 and 2010 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 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. Filings Zargon has filed with Canadian securities regulatory authorities its unaudited financial statements for the three and nine months ended September 30, 2011 and the accompanying Managements' Discussion and Analysis ("MD&A"). These filings are available under Zargon's SEDAR profile at Full pdf versions of our three and nine months ended September 30, 2011 unaudited financial statements and the accompanying MD&A are available on our website at About Zargon Based in Calgary, Alberta, Zargon's securities trade on the Toronto Stock Exchange and there are currently approximately 29.241 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 with a long history of earnings and distributions/dividends. Zargon's smaller size and technical focus provides a unique opportunity to deliver profitable oil exploitation results from smaller oil projects that may be overlooked by larger competitors. In order to learn more about Zargon, we encourage you to visit Zargon's website at where you will find a current shareholder presentation, financial reports and historical news releases. FOR FURTHER INFORMATION PLEASE CONTACT: C.H. HansenZargon Oil & Gas Ltd.President and Chief Executive Officer403-264-9992ORVice President, Finance and Chief Financial OfficerJ.B.