CALGARY, ALBERTA–(Marketwired – March 7, 2016) – Zargon Oil & Gas Ltd. (“Zargon” or the “Company”) (TSX:ZAR)(TSX:ZAR.DB) –
HIGHLIGHTS FROM THE FOURTH QUARTER AND YEAR ENDED DECEMBER 31, 2015
- For calendar 2015, funds flow from operating activities of $24.14 million ($0.80 per basic share) was 52 percent lower than the $50.67 million ($1.68 per basic share) recorded in the prior year.
- Oil and liquids production averaged 3,727 barrels of oil and liquids per day in 2015, an 11 percent decrease from the preceding year as production additions from the 2015 drilling and exploitation activities were more than offset by natural production declines and property dispositions that occurred in the second half of 2014. Natural gas production averaged 5.02 million cubic feet per day in 2015, a 57 percent decrease from 2014, primarily due to property dispositions that occurred in the second half of 2014. Total 2015 production averaged 4,564 barrels of oil equivalent per day, a 25 percent decrease from the prior year.
- Zargon’s 2015 net loss was $106.14 million, which compares to net earnings of $5.95 million in 2014 and a $5.90 million net loss in 2013. The net earnings/loss track the funds flow from operating activities for the respective periods modified by asset retirement expenditures and non-cash charges, which in 2015 were primarily related to impairment losses, depletion and depreciation, unrealized derivative losses and exploration and evaluation expense. On a per diluted share basis, the 2015 net loss was $3.50 compared to net earnings of $0.19 in 2014 and a net loss of $0.20 in 2013.
- Zargon declared cash dividends totalling $0.22 per common share during 2015 for a total of $6.66 million. These cash dividends were equivalent to a payout ratio of 28 percent of funds flow from operating activities. As previously reported, Zargon’s Board of Directors have suspended the Company’s monthly dividend until further notice.
- Net capital expenditures for the year totalled $25.88 million; consisting of $25.45 million of exploitation, development and facility programs and $0.51 million of net property acquisitions which were offset by $0.08 million of administrative assets dispositions. The $25.45 million of exploitation, development and facility programs include $19.48 million of Alkaline Surfactant Polymer (“ASP”) project costs. The ASP costs included $7.36 million of exploitation costs and $12.12 million of chemical costs. During the year, Zargon drilled 6.0 net wells yielding 6.0 net oil ASP wells.
|Three Months Ended
|Income and Investments ($ millions)|
|Gross petroleum and natural gas sales||14.40||27.35||(47||)||67.35||145.89||(54||)|
|Funds flow from operating activities||3.62||12.63||(71||)||24.14||50.67||(52||)|
|Cash flows from operating activities||(1.05||)||13.15||(108||)||20.25||50.40||(60||)|
|Net earnings/ (loss)||(56.34||)||7.70||(832||)||(106.14||)||5.95||(1,884||)|
|Field capital and administrative asset expenditures||7.72||13.71||(44||)||25.37||59.97||(58||)|
|Net property acquisitions/ (dispositions)||0.03||(22.38||)||100||0.51||(33.70||)||102|
|Net capital expenditures/ (dispositions)||7.75||(8.67||)||189||25.88||26.27||(1||)|
|Per Share, Basic|
|Funds flow from operating activities ($/share)||0.12||0.42||(71||)||0.80||1.68||(52||)|
|Net earnings/ (loss) ($/share)||(1.86||)||0.26||(815||)||(3.50||)||0.20||(1,850||)|
|Cash Dividends ($/common share)||0.01||0.18||(94||)||0.22||0.72||(69||)|
|Balance Sheet at Period End ($ millions)|
|Property and equipment (D&P)||230.54||337.45||(32||)|
|Exploration and evaluation assets (E&E)||5.71||6.61||(14||)|
|Working capital deficiency||3.32||13.16||(75||)|
|Long term bank debt||60.24||42.77||41|
|Convertible debentures at maturity||57.50||57.50||–|
|Weighted Average Shares Outstanding for the Period (millions) – Basic||30.33||30.18||–||30.29||30.14||–|
|Weighted Average Shares Outstanding for the Period (millions) – Diluted||30.33||30.70||(1||)||30.29||30.68||(1||)|
|Total Common Shares Outstanding at Period End (millions)||30.37||30.18||1|
Funds flow from operating activities is an additional GAAP term that represents net earnings/loss and asset retirement expenditures except for non-cash items.
Working capital deficiency excludes derivative assets/liabilities.
Cash dividends were suspended after the October 2015 dividend paid on November 16, 2015.
|Three Months Ended
|Percent Change||2015||2014||Percent Change|
|Average Daily Production|
|Oil and liquids (bbl/d)||3,635||4,150||(12||)||3,727||4,190||(11||)|
|Natural gas (mmcf/d)||4.23||6.43||(34||)||5.02||11.58||(57||)|
|Average Selling Price (before the impact of financial risk management contracts)|
|Oil and liquids ($/bbl)||40.19||66.96||(40||)||45.90||83.35||(45||)|
|Natural gas ($/mcf)||2.46||3.03||(19||)||2.68||4.36||(39||)|
|Gross petroleum and natural gas sales||36.05||56.93||(37||)||40.43||65.31||(38||)|
|Realized gain/(loss) on derivatives||7.94||11.47||(31||)||11.16||(1.15||)||1,070|
|Wells Drilled, Net||3.0||4.8||(38||)||6.0||18.0||(67||)|
|Undeveloped Land at Period End (thousand net acres)||75||90||(17||)|
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.
Message to Shareholders
Zargon Oil & Gas Ltd.’s financial and operating results for calendar 2015 and the fourth quarter of 2015 are provided in this press release. Previously, Zargon provided 2015 year end reserves, Little Bow ASP tertiary oil recovery project updates, conventional property updates and 2016 production/capital guidance in our January 21, 2016 press release. A brief summary/update of these materials is provided below:
Year End 2015 Reserves
Zargon’s year end 2015 proved and probable reserves total 20.90 million barrels of oil equivalent and were appraised by Zargon’s independent reserves evaluator, McDaniel & Associates Consultants. On a six-to-one equivalency basis, oil and liquids comprised 89 per cent of Zargon’s total proved and probable reserves.
Zargon’s year end 2015 proved and probable, total proved and proved developed producing oil and liquids reserves are 18.58 million barrels, 11.67 million barrels and 9.41 million barrels, respectively. Zargon’s oil properties are characterized by pressure-supported reservoirs (water flood or natural aquifers) that provide long-life, low-decline oil production. Consequently, Zargon’s proved developed producing oil and liquids reserve life index is 7.1 years, and Zargon’s proved and probable producing oil and liquids reserve life index is 9.2 years. Zargon’s total proved and probable oil and liquids reserve life index is 14.0 years.
Zargon’s year end 2015 produce-out net asset value is calculated to be $4.84 per basic share. This reflects McDaniel’s estimate of the Zargon properties’ proved and probable future cash flow using a before tax 10 percent discount rate and forecast prices and costs plus an independent appraisal of Zargon’s undeveloped land less an allowance for the year end bank debt, the full future face value of the $57.5 million convertible debentures and working capital deficiencies.
For further information regarding Zargon’s reserves and net asset values, please refer to the Company’s updated corporate presentation, which is available at www.zargon.ca.
Little Bow Alkaline Surfactant Polymer (“ASP”) Project Update
In March 2014, Zargon commenced chemical injection of large volumes of dilute chemical solution into the partially depleted Little Bow Mannville I pool to recover incremental oil reserves. To date, 7.0 million barrels of ASP solution has been injected into the first phase of the project. This injection volume is equal to about 21 percent of the targeted reservoir pore volume and represents 31 percent of the total chemical bank (ASP and polymer only) scheduled to be injected in the phase 1 operation.
Recent production trends have met expectations and are consistent with the Company’s November 2015 production forecast in which that the ASP project’s production is forecast to exceed 600 barrels of oil per day by the end of second quarter 2016 (400 barrels per day of incremental ASP production plus 200 barrels per day of base water flood production).
Although the Company is encouraged by the recent Little Bow technical performance, field oil prices have continued to deteriorate, and as a cost saving measure this February, Zargon has suspended the project’s alkaline and surfactant (“AS”) injections while continuing polymer injections in order to move the formed oil banks to the producing wells. Our technical work indicates that suspending AS injections for a few months will not materially impact ultimate oil recoveries. In the short term, due to reservoir transit time, the suspension of AS injections will not have an impact on the ASP project’s production trends, but after six months, the Company anticipates ASP production growth will subside, resulting in stable production volumes until AS injections are recommenced.
For further information regarding the Little Bow ASP project, please refer to the Company’s updated corporate presentation, which is available at www.zargon.ca.
2016 Capital Budget
Zargon’s 2016 capital budget continues to be set at $9 million and will comprise $3 million of conventional expenditures, $1 million of ASP exploitation expenditures and $5 million for ASP chemical (mostly polymer) costs, of which $2 million was spent in January-February. Due to financial constraints, the 2016 budget assumes that all conventional drilling projects will be deferred until 2017.
Zargon’s non-ASP conventional properties tend to be pressure supported by water flood injections or natural reservoir aquifers and consequently provide long-life low-decline oil volumes. Approximately half of these production volumes are produced from Mississippian (Midale, Frobisher, Alida equivalent and Tilston) horizons in the Williston basin core area. In aggregate, the conventional properties bring more than 75 horizontal locations that can be methodically drilled when oil prices improve.
For further information regarding Zargon’s conventional drilling inventory, please refer to the Company’s updated corporate presentation, which is available at www.zargon.ca.
2016 Production Guidance
Zargon’s 2016 oil and liquids production guidance remains unchanged at 3,550 barrels of oil per day. This rate incorporates the previously referenced 600 barrels of per day of Little Bow Phase 1 oil production and 2,950 barrels of oil per day of conventional production that reflects no drilling budgets (2015 and 2016) and a 13 percent base annual decline for the conventional oil properties. Significant oil production growth could be obtained in 2016 if a drilling budget was implemented.
Zargon’s 2016 natural gas volume production guidance is now set at 3.60 million cubic feet per day (down from 3.90 million cubic feet per day) to reflect economic shut-ins from selected properties. For the 2015 fourth quarter, natural gas revenues represented only seven percent of the Zargon total revenue stream.
Strategic Alternatives Process Update
Last year, 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. Scotia Waterous Inc. is the financial adviser for the Committee.
This continuing financial review might include, but is not limited to, a financing, merger or other business combination, sale of the company or a portion of the company’s business or assets, or any combination thereof, as well as the continued execution of its business plan. The ongoing review has incorporated an analysis of market trends and tone. With the 2015 year end reserves and financial reports now completed, the Board of Directors, on the recommendation of the Special Committee, has decided to proceed with a broad marketing process that will commence in April.