Zargon Oil puts itself on the auction block

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Zargon Oil & Gas Ltd. has put itself on the auction block, but can investors expect a rich bid with the industry in the worst downturn in years?

Investors welcomed word from Zargon that it is studying a sale and other potential moves aimed at boosting the share price, driving the stock up 7 per cent on Friday.

The company has been targeted by activist investor Livermore Partners, which urged asset sales and cost reductions to deal with dwindling cash flow amid the collapse in oil prices and operational problems at its marquee property.

The shares had fallen by about three-quarters in the past 12 months as production at its Little Bow project, where it uses enhanced recovery technology, lagged expectations.

In June, Northbrook, Ill.-based Livermore wrote to Zargon's board to urge asset sales and a move away from its dividend-paying model.

Zargon said on Thursday that it had hired Bank of Nova Scotia to advise it on seeking strategic alternatives, such as a sale, merger, financing or other potential moves to bolster shareholder value.

With crude oil slumping to a 6-1/2-year low this week, and numerous energy companies under severe financial pressure, it's not the most opportune time to launch such an initiative.

In a research note, TD Securities analyst Aaron Bilkoski said it is positive for investors because it shows that executives realize drastic change is needed. But he cautioned that there are far more sellers than buyers in the current energy market. In addition, miserly long-term oil futures prices could "materially" hurt potential value.

"Both these factors could negatively affect valuation in a sale scenario or may result in bids below Zargon's current value," Mr. Bilkoski wrote in a research note. "Recapitalization also becomes difficult at the current share price as an equity financing would likely be a challenge while debt comes with an interest burden that would further strain the business."