CALGARY, Alberta, Aug. 09, 2017 (GLOBE NEWSWIRE) — Zargon Oil & Gas Ltd. (“Zargon” or the “Company”) (TSX:ZAR) (TSX:ZAR.DB.A).
FINANCIAL AND OPERATING HIGHLIGHTS (THREE MONTHS ENDED JUNE 30, 2017)
- Funds flow from operating activities of $1.14 million compared to $1.50 million recorded in the prior quarter, and $3.56 million reported in the second quarter of 2016. The year over year decrease in funds flow is primarily due to the sale of properties in the third quarter of 2016.
- Second quarter 2017 production averaged 2,500 barrels of oil equivalent per day, a three percent decrease from the preceding quarter rate of 2,579 barrels of oil equivalent per day and a 38 percent decline from the second quarter 2016 production rate of 4,010 barrels of oil equivalent per day that had included our Southeast Saskatchewan and certain Alberta assets that were sold in the third quarter of 2016. During the 2017 second quarter, oil and liquids production represented 77 percent of Zargon’s total production based on a 6:1 equivalent basis.
- Second quarter 2017 field operating netbacks defined as sales (excluding hedges) less royalties and operating/transportation costs were $13.96 per barrel of oil equivalent down 10 percent from the first quarter of 2017 field operating netback of $15.44 per barrel of oil equivalent. The corresponding second quarter 2017 field operating cash flow was $3.18 million, an 11 percent decline from the prior quarter’s $3.58 million.
- For the second quarter of 2017, field revenues (unhedged) were $41.34 per barrel of oil equivalent per day ($41.74 per barrel of oil equivalent per day in Q1 2017), royalties were $4.89 per barrel of oil equivalent per day ($4.29 per barrel of oil equivalent per day in Q1 2017) and operating (including transportation) costs were $22.49 per barrel of oil equivalent per day ($22.01 per barrel of oil equivalent per day in Q1 2017). The second quarter 2017 operating costs included significant oil well reactivation costs.
- Second quarter 2017 capital expenditures were $2.13 million and were primarily allocated to oil exploitation costs relating to facility, waterflood implementation and well reactivation expenditures. These second quarter expenditures included $0.50 million of expenditures related to the Little Bow ASP project ($0.15 million exploitation and $0.35 million chemical costs). No wells were drilled in the quarter.
- For the remainder of 2017, Zargon is budgeting $3.16 million of capital expenditures that is anticipated to completely offset the impact of Zargon’s base production decline rate of less than 10 percent per year. The capital program will be focused on the Little Bow non-ASP waterflood modifications and reactivations, Truro, North Dakota waterflood modifications, Bellshill Lake pumping oil well optimizations and Little Bow ASP project polymer costs. The remaining 2017 capital program does not include the drilling of any of the 11 undeveloped oil exploitation wells recognized in our McDaniel 2016 year end reserve report, or the recommencement of Little Bow alkaline and surfactant injections. These growth capital expenditures will require additional funding, pursuant to our strategic alternatives initiative.
- Second quarter 2017 abandonment and reclamation costs totaled $0.55 million (compared to $0.14 million in the first quarter of 2017) and are forecast to total $1.50 million in 2017.
- As of April 1, 2017, changes to the Debentures (the “Amended Debentures”) took effect, which now have an annual interest rate of 8.00%, a conversion price of $1.25, and a maturity date of December 31, 2019.
- On May 30, 2017, the 2017 stock option plan, an aggregate of 1.34 million stock options to our directors, officers and certain employees at an exercise price of $0.72 per share, was approved at the 2017 Annual and Special General Meeting.
Production Guidance (1)
In a December 12, 2016 capital budget press release, Zargon provided annual 2017 guidance levels of 2,500 barrels of oil equivalent per day. First half 2017 production volumes of 2,540 barrels of oil equivalent per day exceeded guidance levels, and similarly, we anticipate to exceed the 2,500 barrels of oil equivalent per day guidance levels for the remainder of the year. These guidance levels are predicated on our unchanged $7.80 million 2017 capital program, of which the first half expenditures of $4.64 million included a disproportionate level of facility, waterflood implementation and well reactivation expenditures that will provide additional production volumes in the second half of 2017.
Strategic Alternatives Process Update (1)
In 2015, Zargon announced the formation of a Special Board Committee (the “Committee”) to examine alternatives that would maximize shareholder value in a manner that would recognize the Company’s fundamental inherent value related to Zargon’s long-life, low-decline conventional oil assets and the significant long term oil potential related to the Little Bow ASP project.
Last year’s $92.04 million of property sales and this year’s partial repayment and amendment of Zargon’s convertible debentures were a partial outcome of this process. With the bank debt elimination and debenture restructuring, the strategic alternatives process is continuing and may include a sale of the Company or a portion of the Company’s assets, a restructuring of the Company’s current capital structure, the addition of capital to further develop the potential of the assets, a merger, a farm-in or joint venture, or other such options as may be determined by the Company’s Board of Directors to be in the best interests of the Company and its stakeholders. Zargon’s Special Board Committee has engaged Macquarie Capital Markets Canada Ltd. (“Macquarie”) as its exclusive financial advisor related to this component of its strategic alternatives process.
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
2017 | 2016 | Percent Change |
2017 | 2016 | Percent Change |
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Financial Highlights | ||||||||||||
Income and Investments ($ millions) | ||||||||||||
Gross petroleum and natural gas sales | 9.40 | 13.53 | (31 | ) | 19.09 | 23.15 | (18 | ) | ||||
Funds flow from operating activities | 1.14 | 3.56 | (68 | ) | 2.64 | 3.17 | (17 | ) | ||||
Cash flows from/(used in) operating activities | (0.59 | ) | 1.18 | (150 | ) | 1.94 | 3.25 | (40 | ) | |||
Net loss | (1.71 | ) | (5.27 | ) | 68 | (2.25 | ) | (14.09 | ) | 84 | ||
Field capital and administrative asset expenditures | 2.09 | 1.31 | 60 | 4.47 | 3.74 | 20 | ||||||
Net property acquisitions/(dispositions) | 0.04 | (0.05 | ) | 180 | 0.17 | (0.01 | ) | 1800 | ||||
Net capital expenditures | 2.13 | 1.26 | 69 | 4.64 | 3.73 | 24 | ||||||
Per Share, Basic | ||||||||||||
Funds flow from operating activities ($/share) | 0.04 | 0.12 | (67 | ) | 0.09 | 0.10 | (10 | ) | ||||
Net loss ($/share) | (0.06 | ) | (0.17 | ) | 65 | (0.07 | ) | (0.46 | ) | 85 | ||
Balance Sheet at Period End ($ millions) | ||||||||||||
Property and equipment (D&P) | 134.17 | 224.73 | (40 | ) | ||||||||
Exploration and evaluation assets (E&E) | 2.15 | 5.49 | (61 | ) | ||||||||
Total assets | 150.11 | 253.94 | (41 | ) | ||||||||
Net debt | 36.06 | 122.26 | (71 | ) | ||||||||
Convertible debentures at maturity | 41.94 | 57.50 | (27 | ) | ||||||||
Shareholders’ equity | 29.81 | 38.18 | (22 | ) | ||||||||
Weighted Average Shares Outstanding for the Period (millions) – Basic |
30.73 | 30.47 | 1 | 30.70 | 30.46 | 1 | ||||||
Weighted Average Shares Outstanding for the Period (millions) – Diluted |
30.73 | 30.47 | 1 | 30.70 | 30.46 | 1 | ||||||
Total Common Shares Outstanding at Period End (millions) |
30.75 | 30.47 | 1 | |||||||||
Funds flow from operating activities is an additional GAAP term that represents net earnings/loss except for non-cash items. As at March 31, 2017, it has been restated and no longer includes asset retirement expenditures. |
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Net debt is a non-GAAP measure that represents bank debt (if any) plus the convertible debenture of $41.94 million or $57.50 million (prior to March 31, 2017) and any working capital excluding unrealized derivative assets/liabilities. |
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||
2017 | 2016 | Percent Change |
2017 | 2016 | Percent Change |
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Operating Highlights | |||||||||||||
Average Daily Production | |||||||||||||
Oil and liquids (bbl/d) | 1,921 | 3,413 | (44 | ) | 1,968 | 3,458 | (43 | ) | |||||
Natural gas (mmcf/d) | 3.47 | 3.58 | (3 | ) | 3.43 | 3.81 | (10 | ) | |||||
Equivalent (boe/d) | 2,500 | 4,010 | (38 | ) | 2,540 | 4,093 | (38 | ) | |||||
Average Selling Price (before the impact of financial risk management contracts) |
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Oil and liquids ($/bbl) | 49.10 | 42.36 | 16 | 49.20 | 35.22 | 40 | |||||||
Natural gas ($/mcf) | 2.59 | 1.16 | 123 | 2.52 | 1.41 | 79 | |||||||
Netback ($/boe) | |||||||||||||
Gross petroleum and natural gas sales | 41.34 | 37.09 | 11 | 41.53 | 31.07 | 34 | |||||||
Royalties | (4.89 | ) | (4.31 | ) | 13 | (4.59 | ) | (3.62 | ) | 27 | |||
Realized gain/(loss) on derivatives | (0.12 | ) | 2.35 | (105 | ) | 0.01 | 3.08 | (100 | ) | ||||
Operating expenses | (22.48 | ) | (17.00 | ) | 32 | (22.16 | ) | (17.77 | ) | 25 | |||
Transportation expenses | (0.01 | ) | (0.63 | ) | (98 | ) | (0.08 | ) | (0.42 | ) | (81 | ) | |
Operating netback | 13.84 | 17.50 | (21 | ) | 14.71 | 12.34 | 19 | ||||||
Wells Drilled, Net | – | – | – | – | – | – | |||||||
Undeveloped Land at Period End (thousand net acres) | 39 | 66 | (41 | ) | |||||||||
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. |