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Press release from Marketwire

Zargon Oil & Gas Ltd. Provides 2012 Third Quarter Results

Wednesday, November 07, 2012

Zargon Oil & Gas Ltd. Provides 2012 Third Quarter Results17:01 EST Wednesday, November 07, 2012CALGARY, ALBERTA--(Marketwire - Nov. 7, 2012) - 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 $17.19 per barrel of oil equivalent. These improvements have been made pursuant to a comprehensive cost containment initiative that was implemented in response to disappointing 2011 operating cost trends.Three Months Ended September 30,Nine Months Ended September 30,(unaudited)20122011Percent Change20122011Percent ChangeFinancial HighlightsIncome and Investments ($ millions)Gross petroleum and natural gas sales36.9144.99(18)120.07140.40(14)Funds flow from operating activities14.3514.59(2)40.2443.57(8)Cash flows from operating activities12.1613.75(12)42.0250.29(16)Cash dividends (net of Dividend Reinvestment Plan)7.7510.75(28)22.6530.87(27)Net earnings/(losses)(4.02)30.69(113)4.5134.25(87)Field capital and administrative asset expenditures9.0818.05(50)39.1648.22(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)3254.4623.77(81)Per Share, BasicFund flows from operating activities ($/share)0.480.50(4)1.361.53(11)Net earnings/(losses) ($/share)(0.14)1.05(113)0.151.21(88)Cash Dividends ($/common share)0.300.42(29)0.901.26(29)Balance Sheet at Period End ($ millions)Property and equipment386.72427.67(10)Exploration and evaluation assets21.3825.74(17)Total assets440.77489.77(10)Working capital deficiency14.0417.81(21)Bank debt27.5876.69(64)Convertible debenture at maturity57.50--Shareholders' equity210.35254.85(17)Weighted Average Shares Outstanding for the Period (millions) - Basic29.6929.17229.5428.414Weighted Average Shares Outstanding for the Period (millions) - Diluted29.6929.24229.6228.584Total Common Shares Outstanding at Period End (millions)29.7829.242Funds 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 September 30,Nine Months Ended September 30,(unaudited)20122011Percent Change20122011Percent ChangeOperating HighlightsAverage Daily ProductionOil and liquids (bbl/d)5,0795,330(5)5,3195,417(2)Natural gas (mmcf/d)15.3322.10(31)17.5921.98(20)Equivalent (boe/d)7,6349,014(15)8,2509,080(9)Average Selling Price (before the impact of financial risk management contracts)Oil and liquids ($/bbl)72.7177.18(6)76.0380.33(5)Natural gas ($/mcf)2.083.51(41)1.923.60(47)Netback ($/boe)Petroleum and natural gas sales52.5554.25(3)53.1156.64(6)Royalties(10.19)(10.40)(2)(10.21)(10.38)(2)Realized gain/(loss) on derivatives1.44(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 netback28.4625.251325.2525.63(1)Wells Drilled, Net3.014.2(79)12.823.8(46)Undeveloped Land at Period End (thousand net acres)361448(19)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 ActivitiesField 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: ProjectFormationReservoir DriveIdentified LocationsLocations Recognized in 2011 Year End ReservesHamilton LakeVikingEventually Waterflood50+0KillamMannvilleEventually Waterflood103Bellshill LakeMannvilleStrong Aquifer50Taber SouthSunburstPartial Waterflood101Williston Basin StructuresFrobisherStrong Aquifer15+1Williston Basin DrainageMidaleMostly Waterflood40+2TotalVariedUltimately Pressure Supported130+7For further information regarding the potential and economics of these projects, please refer to our updated corporate presentation, which is available at 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 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 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 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 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 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 where you will find a current shareholder presentation, financial reports and historical news releases. FOR FURTHER INFORMATION PLEASE CONTACT: Contact Information: Zargon Oil & Gas Ltd.C.H. HansenPresident and Chief Executive Officer403-264-9992 or Toll Free: 1-855-464-9992J.B. DranchukVice President, Finance and Chief Financial Officer403-264-9992 or Toll Free: