LITTLE BOW ASP PROJECT SANCTIONING:
OPERATIONAL UPDATE:
2013 CAPITAL AND PRODUCTION GUIDANCE:
2012 YEAR END RESERVES:
DETAILED RESERVE INFORMATION:
Reserves included herein are stated on a gross company working interest basis unless otherwise noted. All reserves information has been prepared in accordance with National Instrument 51-101 Standards of Disclosure (“NI 51-101”). In addition to the detailed information disclosed in this press release, more detailed information will be included in Zargon’s 2012 Annual Information Form to be filed on SEDAR (www.sedar.com) and posted on our website (www.zargon.ca) in March 2013.
Based on the independent reserves evaluation conducted by McDaniel effective December 31, 2012, and prepared in accordance with NI 51-101, Zargon had proved and probable reserves of 31.19 million barrels of oil equivalent. Reserve reductions from exploration and development activities (including revisions) and corporate and net property acquisitions/dispositions were negative 0.13 million barrels of oil equivalent.
Company Reserves(1) | ||||||
At December 31, 2012 | Oil and Liquids (mmbbl |
) | Natural Gas (bcf |
) | Equivalents (2) (mmboe |
) |
Proved producing | 12.74 | 26.61 | 17.18 | |||
Proved non-producing | 0.44 | 3.23 | 0.98 | |||
Proved undeveloped | 0.23 | 0.08 | 0.24 | |||
Total proved | 13.41 | 29.92 | 18.40 | |||
Probable additional producing | 4.56 | 9.14 | 6.08 | |||
Probable non-producing and undeveloped | 5.08 | 9.76 | 6.71 | |||
Total probable additional | 9.64 | 18.90 | 12.79 | |||
Total proved and probable producing | 17.30 | 35.75 | 23.26 | |||
Total proved and probable | 23.05 | 48.82 | 31.19 | |||
Proved producing reserve life index, years (3) | 6.9 | 4.6 | 6.1 | |||
Proved reserve life index, years (3) | 7.2 | 5.1 | 6.5 | |||
Proved and probable producing reserve life index, years (3) | 9.3 | 6.1 | 8.2 | |||
Proved and probable reserve life index, years (3) | 12.4 | 8.4 | 11.0 |
1. | Company working interest reserves are gross reserves before deduction of royalties, boe (6:1). |
2. | Boes may be misleading, particularly if used in isolation. A boe conversion ratio of 6 mcf:1 bbl is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. |
3. | Reserve life is calculated using annualized fourth quarter 2012 production. |
A summary reconciliation of the 2012 year end reserve assignments with the reserves reported in the 2011 year end report based on McDaniel’s forecast prices and costs is presented below:
Reserve Reconciliation (All Categories) | ||||||||||||||||||
Oil and Liquids (mmbbl | ) | Natural Gas (bcf | ) | Equivalents (mmboe | ) | |||||||||||||
Proved | Probable | Proved & Prob. |
Proved | Probable | Proved & Prob. |
Proved | Probable | Proved & Prob. |
||||||||||
December 31, 2011 | 14.60 | 9.45 | 24.05 | 39.37 | 22.06 | 61.43 | 21.16 | 13.13 | 34.29 | |||||||||
Discoveries and extensions | 0.97 | 0.45 | 1.42 | 0.43 | 0.18 | 0.61 | 1.05 | 0.48 | 1.53 | |||||||||
Revisions | 0.57 | 0.03 | 0.60 | (3.66 | ) | (3.36 | ) | (7.02 | ) | (0.04 | ) | (0.53 | ) | (0.57 | ) | |||
Acquisitions and dispositions | (0.81 | ) | (0.29 | ) | (1.10 | ) | 0.06 | 0.02 | 0.08 | (0.80 | ) | (0.29 | ) | (1.09 | ) | |||
Production | (1.92 | ) | – | (1.92 | ) | (6.28 | ) | – | (6.28 | ) | (2.97 | ) | – | (2.97 | ) | |||
December 31, 2012 | 13.41 | 9.64 | 23.05 | 29.92 | 18.90 | 48.82 | 18.40 | 12.79 | 31.19 |
On a proved and probable basis, Zargon’s oil and liquids reserves from development activities increased by 2.02 million barrels, and after net dispositions of 1.10 million barrels the net increase was 0.92 million barrels before production of 1.92 million barrels. Overall, field capital exploration and development programs provided 1.53 million barrels of oil equivalent of new additions. Net property acquisitions/dispositions for 2012 removed 1.09 million barrels of oil equivalent, and provided $34.5 million of net proceeds to Zargon. During the year, positive technical revisions pertaining to Alberta Plains Taber and Little Bow and the Williston Basin Elswick and Ralph oil exploitation properties were partially offset by negative oil reserve adjustments at Alberta Plains North St. Anne property and other minor properties. With the sharply lower natural gas prices in 2012, negative proved and probable natural gas revisions totaling 7.02 billion cubic feet were booked at Jarrow, Pembina and other selected Alberta properties. As a result, overall technical reserve revisions were a negative 0.57 million barrels of oil equivalent.
Reserve Reconciliation (Developed Producing) | ||||||||||||||||||
Oil and Liquids (mmbbl | ) | Natural Gas (bcf | ) | Equivalents (mmboe | ) | |||||||||||||
Proved | Probable | Proved & Prob. |
Proved | Probable | Proved & Prob. |
Proved | Probable | Proved & Prob. |
||||||||||
December 31, 2011 | 13.69 | 4.71 | 18.40 | 33.71 | 11.53 | 45.24 | 19.31 | 6.63 | 25.94 | |||||||||
Discoveries and extensions | 0.92 | 0.37 | 1.29 | 0.43 | 0.19 | 0.62 | 0.99 | 0.40 | 1.39 | |||||||||
Revisions | 0.86 | (0.26 | ) | 0.60 | (1.31 | ) | (2.60 | ) | (3.91 | ) | 0.65 | (0.70 | ) | (0.05 | ) | |||
Acquisitions and dispositions | (0.81 | ) | (0.25 | ) | (1.06 | ) | 0.06 | 0.02 | 0.08 | (0.80 | ) | (0.25 | ) | (1.05 | ) | |||
Production | (1.92 | ) | – | (1.92 | ) | (6.28 | ) | – | (6.28 | ) | (2.97 | ) | – | (2.97 | ) | |||
December 31, 2012 | 12.74 | 4.57 | 17.31 | 26.61 | 9.14 | 35.75 | 17.18 | 6.08 | 23.26 |
Zargon’s reserves are characterized by a high developed producing component. Proved developed producing reserves represent 93 percent of total proved reserves while proved and probable developed reserves account for 75 percent of total proved and probable reserves. For the Little Bow ASP project, McDaniel has assigned 4.39 million barrels of oil equivalent reserves in the probable undeveloped category, which represents 83 percent of the undeveloped reserves and 14 percent of Zargon’s total proved and probable reserves assignment.
FINDING, DEVELOPMENT AND ACQUISITION COSTS:
We have presented finding and development costs below both including and excluding acquisitions and dispositions. While NI 51-101 requires that the effects of acquisitions and dispositions be excluded, we have included these items because we believe that acquisitions and dispositions can have a significant impact on our ongoing reserve replacement costs and that excluding these amounts could result in an inaccurate portrayal of our cost structure.
For 2012, Zargon’s proved and probable finding, development and acquisition (“FD&A”) costs, taking into account reserve revisions and changes in estimated future development capital during the period were not meaningful due to net dispositions and natural gas reserve write downs. For the purposes of this calculation, the $30.2 million of 2012 net capital additions was combined with a decrease in estimated future development capital for proved and probable reserves of $5.3 million ($123.5 million at December 31, 2012 compared to $128.8 million at December 31, 2011). More than 80 percent of Zargon’s 2012 year end future capital costs are attributed to the Little Bow ASP project.
Excluding acquisitions (and dispositions), Zargon’s 2012 proved and probable finding and development (“F&D”) costs were $61.82 per barrel of oil equivalent. Considering that essentially all of Zargon’s 2012 capital program was directed to oil projects, it is insightful to calculate Zargon’s proved and probable F&D costs on an “oil only” basis ($58.2 million of conventional capital expenditures plus $6.5 million of ASP capital expenditures, less a $5.3 million change in future capital estimates with 2.02 million barrels of oil and liquid additions). Using this approach, proved and probable F&D “oil only” costs were $29.38 per barrel.
Similarly, Zargon’s proved and probable FD&A costs on an “oil only” basis were $27.01 per barrel ($58.2 million of conventional capital expenditures plus $6.5 million of ASP capital expenditures, less $34.5 million of net dispositions and less a $5.3 million change in future capital estimates with 0.92 million barrels of oil and liquid additions). These “oil only’ costs compare with Zargon’s unaudited 2012 corporate average field oil netback (before interest, general and administrative and other costs) of more than $40 per barrel of oil (unaudited).
Proved and Probable Finding, Development and Acquisition Costs (1) | |||||||
2012 | 2011 | 2010(4) | |||||
Total net capital expenditures ($ millions) – unaudited (2) | 30.19 | 48.29 | 71.38 | ||||
Total net capital expenditures plus change in forecast future development costs ($ millions) (2) | 24.85 | 144.52 | 79.62 | ||||
Proved and probable reserves (mmboe) | |||||||
Open | 34.29 | 32.39 | 32.24 | ||||
Discoveries and extensions | 1.53 | 5.77 | 3.07 | ||||
Acquisitions and dispositions | (1.09 | ) | 0.06 | 1.53 | |||
Revisions | (0.57 | ) | (0.59 | ) | (0.84 | ) | |
Production | (2.97 | ) | (3.34 | ) | (3.61 | ) | |
Close | 31.19 | 34.29 | 32.39 | ||||
Proved and probable FD&A costs ($/boe) (3) | − | 27.58 | 21.18 | ||||
Proved and probable three-year FD&A costs ($/boe) (3) | 28.07 | 21.48 | 18.83 | ||||
Proved and probable F&D costs ($/boe) (3) | 61.82 | 32.41 | 30.79 | ||||
Proved and probable three-year F&D costs ($/boe) (3) | 35.35 | 30.06 | 24.80 |
1. | The aggregate of the exploration and development costs incurred in the most recent financial year and the change during that year in estimated future development costs generally will not reflect total finding and development costs related to reserves additions for that year. |
2. | Amounts exclude additions for administrative assets. |
3. | Amounts are calculated including the change in future development costs. |
4. | 2010 numbers do not reflect any changes to accounting rules which may have occurred. |
NET ASSET VALUE:
Zargon’s oil, liquids and natural gas reserves were evaluated using McDaniel’s price forecasts effective January 1, 2013, prior to provisions for income taxes, interest, debt service charges, transaction costs and general and administrative expenses. The estimated values of future net revenue disclosed do not represent the fair market value of the reserves.
Before Tax Present Value of Future Net Revenue | ||||
(Forecast Prices and Costs) | ||||
Discount Factor | ||||
($ millions) | 0% | 5% | 10% | 15% |
Proved producing | 491.3 | 388.8 | 323.0 | 278.1 |
Proved non-producing | 14.7 | 12.2 | 10.3 | 8.7 |
Proved undeveloped | 7.9 | 5.9 | 4.5 | 3.5 |
Total proved | 513.9 | 406.9 | 337.8 | 290.3 |
Probable additional producing | 225.9 | 130.0 | 86.2 | 62.6 |
Probable additional non-producing and undeveloped | 157.8 | 90.1 | 49.5 | 23.6 |
Total probable additional | 383.7 | 220.1 | 135.7 | 86.2 |
Total proved and probable producing | 717.2 | 518.8 | 409.2 | 340.7 |
Total proved and probable | 897.6 | 627.0 | 473.5 | 376.5 |
The following net asset value table shows what is customarily referred to as a “produce-out” net asset value calculation under which the current value of Zargon’s reserves would be produced at McDaniel’s forecast future prices and costs. The value is a snapshot in time as at December 31, 2012, and is based on various assumptions including commodity prices and foreign exchange rates that vary over time. In this analysis, the present value of the proved and probable reserves is calculated at a before tax 10 percent discount rate. In the net asset value calculation, Zargon’s 337 thousand net acres of land is valued at $21.7 million based on the independent firm of Seaton-Jordan & Associates Ltd. valuation as at December 31, 2012.
Net Asset Value | ||
As at December 31 ($ millions) | 2012 | |
Proved and probable reserves (PVBT 10%) (1) | 473.5 | |
Undeveloped land | 21.7 | |
Working capital (excluding unrealized derivative assets/ liabilities) – unaudited | (19.9 | ) |
Bank debt – unaudited | (35.7 | ) |
Convertible debenture – unaudited | (57.5 | ) |
Net asset value | 382.1 | |
Net asset value per share ($/basic share) (2) | 12.79 |
1. | McDaniel’s estimate of future before tax cash flow discounted at PV 10 percent. |
2. | Calculated using basic total shares outstanding at December 31, 2012 of 29.868 million shares. |
The following table provides net asset value estimates at December 31, 2012 for all four reserve categories.
Reserves Category | McDaniel PVBT 10% ($ million)(1 |
) | Net Asset Value ($ million)(2 |
) | Net Asset Value ($/basic share)(3 |
) |
Proved, developed, producing reserves | 323.0 | 231.6 | 7.75 | |||
Total proved reserves | 337.8 | 246.3 | 8.25 | |||
Proved and probable, developed producing reserves | 409.2 | 317.8 | 10.64 | |||
Proved and probable reserves | 473.5 | 382.1 | 12.79 |
1. | McDaniel’s estimate of future before tax cash flow discounted at PV 10 percent. |
2. | McDaniel’s estimated value, adjusted for the following unaudited items at December 31, 2012: |
– Undeveloped land value as assessed by Seaton Jordan of $21.7 million; and | |
– Net debt of $113.2 million, which includes full value of the convertible debenture of $57.5 million. | |
3. | Calculating using basic total shares outstanding at December 31, 2012 of 29.868 million shares. |
Forward-Looking Statements – This press release contains forward-looking statements relating to our plans and operations as at February 20, 2013. Forward-looking statements typically use words such as “anticipate”, “continue”, “estimate”, “expect”, “forecast”, “may”, “will”, “project”, “should”, “plan”, “intend”, “believe” and similar expressions (including the negatives thereof). In particular, this press release contains forward-looking statements relating, but not limited to: our business strategy, plans and management focus; the timing of release of our 2012 financial results, our 2013 and beyond capital expenditure program, the source of funding of our 2013 and beyond capital program, anticipated 2013 and beyond production guidance and product mix, drilling, completion, development and exploitation plans and the results therefrom, future drilling locations, plans to sell non-strategic assets and to review and implement cost saving opportunities, plans with respect to our Little Bow ASP project, anticipated netbacks, capital expenditures and other costs associated with the ASP project and the anticipated results from this project, and sources of funding for our capital expenditure program. In addition, all statements relating to reserves in this press release are deemed to be forward-looking as they involve an implied assessment, based on certain assumptions and estimates, that the reserves described, can be properly produced in the future.
By their nature, forward-looking statements are subject to numerous risks and uncertainties, some of which are beyond our control, such as 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 will be available on sedar and our website. Forward-looking statements are provided to allow investors to have a greater understanding of our business.
You are cautioned that the assumptions, 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; our ability to obtain financing on acceptable terms; and our ability to add production and reserves through our development and acquisition activities used in the preparation of such information, 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 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.
Other Advisories – Boe’s may be misleading, particularly if used in isolation. A boe conversion ratio of 6 Mcf: 1 bbl is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. In addition, 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. The estimates of reserves and future net revenue for individual properties may not reflect the same confidence level as estimates of reserves and future net revenue for all properties, due to the effects of aggregation.
FURTHER INFORMATION:
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 and dividends (distributions). Zargon’s business is focused on oil exploitation projects that profitably increase oil production and 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.
C.H. Hansen
President and Chief Executive Officer
403-264-9992
J.B. Dranchuk
Vice President, Finance and Chief Financial Officer
403-264-9992
Zargon Oil & Gas Ltd.
zargon@zargon.ca
www.zargon.ca