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Press release from Marketwire

Zargon Oil & Gas Ltd. Announces 2012 First Quarter Results

Tuesday, May 15, 2012

Zargon Oil & Gas Ltd. Announces 2012 First Quarter Results07:00 EDT Tuesday, May 15, 2012CALGARY, ALBERTA--(Marketwire - May 15, 2012) - 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 $180 million of borrowing base.Three Months Ended March 31,(unaudited)20122011Percent ChangeFinancial HighlightsIncome and Investments ($ millions)Gross petroleum and natural gas sales44.6446.94(5)Funds flow from operating activities13.5215.22(11)Cash flows from operating activities11.8523.47(50)Cash dividends (net of Dividend Reinvestment Plan)7.459.65(23)Net losses(2.01)(9.11)78Field capital and administrative asset expenditures20.8522.30(7)Net property and corporate acquisitions (dispositions)0.10(1.94)105Net capital expenditures20.9520.363Per Share, DilutedFunds flow from operating activities ($/share)0.460.56(18)Cash flows from operating activities ($/share)0.400.86(53)Net losses ($/share)(0.07)(0.33)79Cash Dividends ($/common share)0.300.42(29)Balance Sheet at Period End ($ millions)Property and equipment418.48418.88-Exploration and evaluation assets24.1727.56(12)Total assets473.69483.98(2)Working capital deficiency16.9413.2428Bank debt107.37121.89(12)Shareholders' equity214.57191.9212Weighted Average Shares Outstanding for the Period (millions) - Basic29.4027.118Weighted Average Shares Outstanding for the Period (millions) - Diluted29.6127.348Total Common Shares Outstanding at Period End (millions)29.4727.288Funds 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,(unaudited)20122011Percent ChangeOperating HighlightsAverage Daily ProductionOil and liquids (bbl/d)5,4965,893(7)Natural gas (mmcf/d)20.0321.92(9)Equivalent (boe/d)8,8349,546(7)Equivalent per million common shares (boe/d)299349(14)Oil and liquids per million common shares (bbl/d)186216(14)Average Selling Price (before the impact of financial risk management contracts)Oil and liquids ($/bbl)81.9275.299Natural gas ($/mcf)2.013.55(43)Netback ($/boe)Petroleum and natural gas sales55.5354.642Royalties(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)2Operating netback24.1526.54(9)Wells Drilled, Net9.67.528Undeveloped Land at Period End (thousand net acres)411498(17)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 StatementsThis 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 MeasuresZargon 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 AdvisoryIn 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. FilingsZargon 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 ZargonBased 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. FOR FURTHER INFORMATION PLEASE CONTACT: C.H. HansenZargon Oil & Gas Ltd.President and Chief Executive Officer403-264-9992 or Toll Free: 1-855-464-9992ORVice President, Finance and Chief Financial OfficerJ.B. Dranchuk403-264-9992 or Toll Free: 1-855-464-9992zargon@zargon.cawww.zargon.ca