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 $22.66 million of net property
dispositions in the quarter which were highlighted by 260 barrels of oil
per day of dispositions at the Williston Basin Antler and Manor
properties.
Three Months Ended Nine Months Ended
September 30, September 30,
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Percent Percent
(unaudited) 2011 2010 Change 2011 2010 Change
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Financial Highlights
Income and Investments
($ millions)
Petroleum and natural
gas sales, before
royalties 44.99 44.50 1 140.40 136.84 3
Funds flow from
operating activities 14.59 18.31 (20) 43.57 58.53 (26)
Cash flows from
operating activities 13.75 19.87 (31) 50.29 53.34 (6)
Cash dividends (net
of Dividend
Reinvestment Plan) 10.75 11.92 (10) 30.87 36.35 (15)
Net earnings 30.69 1.20 2,458 34.25 23.42 46
Field capital and
administrative asset
expenditures 18.05 10.71 69 48.22 41.95 15
Net property and
corporate
acquisitions
(dispositions) (22.66) (12.16) (86) (24.45) 9.21 (365)
Net capital
expenditures (4.61) (1.45) (218) 23.77 51.16 (54)
Per Share, Diluted
Funds flow from
operating activities
($/share) 0.50 0.69 (28) 1.52 2.23 (32)
Cash flows from
operating activities
($/share) 0.47 0.75 (37) 1.76 2.03 (13)
Net earnings
($/share) 1.05 0.05 2,000 1.20 0.89 35
Cash Dividends
($/common share) 0.42 0.54 (22) 1.26 1.62 (22)
Balance Sheet at
Period End
($ millions)
Property and
equipment (D&P) 427.67 427.25 -
Exploration and
evaluation assets
(E&E) 25.74 27.65 (7)
Total assets 489.77 481.90 2
Working capital
deficiency 17.81 10.29 73
Bank debt 76.69 97.61 (21)
Shareholders' equity 254.85 179.19 42
Weighted Average
Shares Outstanding
for the Period
(millions) - Basic 29.17 23.50 24 28.41 23.42 21
Weighted Average
Shares Outstanding
for the Period
(millions) - Diluted 29.24 26.43 11 28.58 26.24 9
Total Common Shares
Outstanding at Period
End (millions) 29.24 26.81 9
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Notes:
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 Nine Months Ended
September 30, September 30,
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Percent Percent
(unaudited) 2011 2010 Change 2011 2010 Change
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Operating Highlights
Average Daily
Production
Oil and liquids
(bbl/d) 5,330 5,850 (9) 5,417 5,716 (5)
Natural gas (mmcf/d) 22.10 25.46 (13) 21.98 26.12 (16)
Equivalent (boe/d) 9,014 10,094 (11) 9,080 10,069 (10)
Equivalent per
million common
shares (boe/d) 308 381 (19) 318 382 (17)
Oil and liquids per
million common
shares (bbl/d) 182 221 (18) 190 217 (12)
Average Selling Price
(before the impact of
financial risk
management contracts)
Oil and liquids
($/bbl) 77.18 67.64 14 80.33 69.43 16
Natural gas ($/mcf) 3.51 3.45 2 3.60 4.00 (10)
Netback ($/boe)
Petroleum and natural
gas sales 54.25 47.91 13 56.64 49.78 14
Royalties (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 netback 25.25 26.55 (5) 25.63 28.74 (11)
Wells Drilled, Net 14.2 4.8 196 23.8 23.8 -
Undeveloped Land at
Period End (thousand
net acres) 448 505 (11)
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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 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 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 www.sedar.com. 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
www.zargon.ca.
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 www.zargon.ca where you will find a current shareholder presentation,
financial reports and historical news releases.
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