HIGHLIGHTS FROM THE FOURTH QUARTER AND YEAR ENDED DECEMBER 31, 2012
- Fourth quarter 2012 oil production averaged 5,065 barrels of oil and liquids per day, consistent with the preceding quarter. Fourth quarter natural gas production averaged 15.93 million cubic feet per day, a four percent increase from the prior quarter. Total fourth quarter production averaged 7,720 barrels of oil equivalent per day, a one percent increase from the prior quarter.
- Fourth quarter funds flow from operating activities of $16.42 million ($0.55 per basic share) were 14 percent higher than the $14.35 million ($0.48 per basic share) recorded in the prior quarter.
- Monthly cash dividends of $0.06 per common share were declared in the fourth quarter of 2012 for a total of $5.37 million ($4.70 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 29 percent of funds flow from operating activities.
- During the quarter, exploration and development capital expenditures (excluding property acquisitions and dispositions) were $25.64 million for field related programs and included $3.15 million of Alkaline Surfactant Polymer (“ASP”) project spending. Zargon drilled 15.0 net wells which resulted in 15.0 net oil wells. Total net capital expenditures of $25.79 million were made in the quarter which includes property acquisitions and administrative asset expenditures.
- For calendar 2012, oil and liquids production averaged 5,255 barrels of oil and liquids per day, a four percent decrease from the preceding year as production additions from our 2012 drilling and exploitation activities were offset by property dispositions. Calendar 2012 natural gas production averaged 17.17 million cubic feet per day, a 22 percent decrease from 2011 reflecting production shut-ins as well as natural declines. Total 2012 production averaged 8,117 barrels of oil equivalent per day, an 11 percent decrease from the prior year.
- Funds flow from operating activities in 2012 of $56.66 million ($1.91 per basic share) were seven percent lower than the $60.67 million ($2.11 per basic share) recorded in the prior year.
- Zargon declared cash dividends totalling $1.08 per common share during 2012 for a total of $31.95 million ($27.35 million net of the DRIP). These cash dividends (net of the DRIP) were equivalent to a payout ratio of 48 percent of funds flow from operating activities.
- Net capital expenditures for the year totalled $30.25 million; consisting of $64.69 million of exploitation and development programs and $0.06 million of administrative assets which was offset by $34.50 million of net property dispositions. The $64.69 million of exploitation and development programs include $6.48 million of ASP project costs. During the year, Zargon drilled 27.8 net wells yielding 26.8 net oil wells and 1.0 net abandonment.
- Zargon’s December 31, 2012 debt, net of working capital (excluding unrealized derivative assets/liabilities) and using the full future face value of the convertible debenture of $57.50 million, of $113.18 million, was approximately 2.0 times 2012 funds flow from operating activities, and was up three percent from the 2011 year end net debt of $109.50 million. At December 31, 2012, Zargon had approximately $128.55 million of unutilized credit facilities available.
- Zargon has sanctioned the construction of its tertiary recovery ASP oil exploitation project at the Little Bow oil property in Southern Alberta. This ASP project entails the injection of large volumes of a dilute chemical solution into a partially depleted oil reservoir to recover incremental oil reserves. The projected 2013 capital cost for the Little Bow ASP project is $38 million. For further information regarding the Little Bow ASP project, please refer to Zargon’s February 20, 2013 press release and Zargon’s updated corporate presentation, which is available on our website at www.zargon.ca.
- Zargon has continued to sell forward oil production volumes. For 2013, Zargon has entered into 2,875 barrels of oil per day of oil fixed price sales contracts at an average West Texas Intermediate (“WTI”) price of $97.94 US per barrel. For 2014, Zargon has entered into 1,100 barrels of oil per day of oil fixed price sales contracts at an average WTI price of $93.95 US per barrel. For further information regarding Zargon’s oil hedging program, please refer to Zargon’s updated corporate presentation, which is available on our website at www.zargon.ca.
- Zargon is proceeding with a property disposition program that will be used to fund $20 million of Zargon’s 2013 capital program. In February, $3.50 million of proceeds were realized from the disposition of 1,100 net acres of undeveloped land and 10 barrels of oil equivalent per day in the Karr area of Alberta. Additionally, a combined 200 barrels of oil per day and 0.25 million cubic feet of natural gas per day of production in the Morinville, Twining, Wayne and Provost, Alberta and Workman, Saskatchewan areas will be marketed using a third party in the second quarter of 2013. Additional oil properties, as required, will be marketed in the second half of 2013, in order to meet our $20 million disposition target.
|Three Months Ended
|Income and Investments ($ millions)|
|Gross petroleum and natural gas sales||37.88||51.13||(26||)||157.95||191.53||(18||)|
|Funds flow from operating activities||16.42||17.10||(4||)||56.66||60.67||(7||)|
|Cash flows from operating activities||16.85||22.97||(27||)||58.87||73.26||(20||)|
|Cash dividends (net of Dividend Reinvestment Plan)||4.70||7.27||(35||)||27.35||38.14||(28||)|
|Field capital and administrative asset expenditures||25.59||23.80||8||64.75||72.02||(10||)|
|Net property and corporate acquisitions/(dispositions)||0.20||1.08||(81||)||(34.50||)||(23.37||)||(48||)|
|Net capital expenditures||25.79||24.88||4||30.25||48.65||(38||)|
|Per Share, Basic|
|Funds flow from operating activities ($/share)||0.55||0.58||(5||)||1.91||2.11||(9||)|
|Net earnings/(loss) ($/share)||(0.33||)||(0.82||)||60||(0.18||)||0.36||(150||)|
|Cash Dividends ($/common share)||0.18||0.30||(40||)||1.08||1.56||(31||)|
|Balance Sheet at Period End ($ millions)|
|Property and equipment (D&P)||389.97||410.67||(5||)|
|Exploration and evaluation assets (E&E)||19.97||25.18||(21||)|
|Working capital deficiency||19.94||16.80||19|
|Long term bank debt||35.74||92.70||(61||)|
|Convertible debentures at maturity||57.50||–||–|
|Weighted Average Shares Outstanding for the Period (millions) – Basic||29.81||29.28||2||29.61||28.63||3|
|Total Common Shares Outstanding at Period End (millions)||29.87||29.36||2|
Funds flow from operating activities is an additional GAAP term that represents net earnings/loss and asset retirement expenditures except for non-cash items.
|Three Months Ended
|Average Daily Production|
|Oil and liquids (bbl/d)||5,065||5,619||(10||)||5,255||5,468||(4||)|
|Natural gas (mmcf/d)||15.93||21.96||(27||)||17.17||21.97||(22||)|
|Average Selling Price (before the impact of financial risk management contracts)|
|Oil and liquids ($/bbl)||72.06||87.11||(17||)||75.07||82.09||(9||)|
|Natural gas ($/mcf)||2.93||3.02||(3||)||2.16||3.45||(37||)|
|Gross petroleum and natural gas sales||53.33||59.91||(11||)||53.16||57.47||(7||)|
|Realized gain/(loss) on derivatives||3.70||(2.74||)||235||(0.05||)||(3.55||)||99|
|Wells Drilled, Net||15.0||11.5||30||27.8||35.3||(21||)|
|Undeveloped Land at Period End (thousand net acres)||337||422||(20||)|
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.
This press release offers our assessment of Zargon’s future plans and operations as at March 12, 2013, 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: guidance as to our 2013 capital budget (including ASP), guidance as to our 2013 and 2014 fixed price sales contracts and forecasts and estimates as to our 2013 dispositions under the heading “Recent Developments”.
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 www.zargon.ca and on 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.
Additional GAAP and 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” 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 basic share is calculated using the same weighted average basic shares outstanding as is used in calculating earnings per basic share. See Zargon’s Management’s Discussion and Analysis (“MD&A”) as filed on www.zargon.ca and on www.sedar.com for the years ended December 31, 2012 and 2011 for a reconciliation of cash flows from operating activities to funds flow from operating activities.
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. 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.
Zargon has filed with Canadian securities regulatory authorities its financial statements for the year ended December 31, 2012 and the accompanying MD&A. These filings are available on www.zargon.ca and under Zargon’s SEDAR profile on www.sedar.com.
Based in Calgary, Alberta, Zargon’s securities trade on the Toronto Stock Exchange and there are currently approximately 29.908 million common shares 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 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.
President and Chief Executive Officer
Vice President, Finance and Chief Financial Officer
Zargon Oil & Gas Ltd.