FINANCIAL & OPERATING HIGHLIGHTS (THREE MONTHS ENDED SEPTEMBER 30, 2016)
- Pursuant to Zargon’s strategic alternatives process, Zargon closed the sale of all its Southeast Saskatchewan and its Killam, Alberta properties in the third quarter. Total cash proceeds from the dispositions (after adjustments) was $92.04 million.
- Funds flow from operating activities of a negative $0.61 million compare to the positive $3.53 million recorded in the prior quarter, and the positive $3.29 million reported in the third quarter of 2015. The reduction in funds flow is primarily due to one-time employee severance costs of $1.72 million and transaction costs of $0.92 million relating to the sale of Zargon’s Southeast Saskatchewan and Killam, Alberta properties.
- As a result of previously announced third quarter property sales, third quarter 2016 oil and liquids production averaged 2,915 barrels per day, a 15 percent decrease from the preceding quarter rate of 3,413 barrels of oil and liquids per day. Third quarter 2016 natural gas production averaged 3.39 million cubic feet per day, a five percent decrease from the preceding quarter. Total production averaged 3,480 barrels of oil equivalent per day, a 13 percent decrease from the preceding quarter. During the quarter, oil and liquids production represented 84 percent of total production based on a 6:1 equivalent basis.
- Third quarter 2016 operating and transportation costs totaled $5.87 million ($18.33 per barrel of oil equivalent), down 36 percent from the 2015 third quarter cost of $9.11 million ($21.95 per barrel of oil equivalent) and down nine percent from the 2016 second quarter cost of $6.43 million ($17.63 per barrel of oil equivalent).
- Third quarter 2016 general and administrative (“G&A”) costs totaled $3.22 million up 81 percent from the 2015 third quarter cost of $1.78 million ($4.28 per barrel of oil equivalent) and up 133 percent from the 2016 second quarter cost of $1.38 million ($3.77 per barrel of oil equivalent). Excluding one-time employee severance costs, third quarter 2016 G&A costs were $1.50 million ($4.67 per barrel of oil equivalent).
- Third quarter 2016 capital expenditures (excluding property dispositions) were $1.90 million and included $1.36 million of expenditures related to the Little Bow ASP project ($0.08 million exploitation and $1.28 million chemical costs). No wells were drilled in the quarter.
- At the end of the third quarter, Zargon had $32.99 million in net debt, net of working capital. This total includes $24.51 million in net cash balances offset by $57.50 million of convertible debentures. The convertible debentures (TSX: ZAR.DB) bear interest at a rate of six percent per annum, and mature on June 30, 2017, at which time Zargon may redeem the debentures with cash or through the issuance of Zargon common shares priced at 95 percent of the then current Zargon share price.
|Three Months Ended
|Nine Months Ended
|2016||2015||Percent Change||2016||2015||Percent Change|
|Income and Investments ($ millions)|
|Gross petroleum and natural gas sales||12.33||16.23||(24||)||35.47||52.96||(33||)|
|Funds flow from/(used in) operating activities||(0.61||)||3.29||(119||)||2.64||20.52||(87||)|
|Cash flows from operating activities||3.19||7.65||(58||)||6.44||21.30||(70||)|
|Field capital and administrative asset expenditures||1.76||6.85||(74||)||5.50||17.65||(69||)|
|Net property acquisitions/
|Net capital expenditures/
|Per Share, Basic|
|Funds flow from/(used in) operating activities ($/share)||(0.02||)||0.11||(118||)||0.09||0.68||(87||)|
|Net earnings/(loss) ($/share)||0.45||(1.36||)||133||(0.01||)||(1.65||)||99|
|Cash Dividends ($/common share)||–||0.03||(100||)||–||0.21||(100||)|
|Balance Sheet at Period End ($ millions)|
|Property and equipment (D&P)||151.98||277.76||(45||)|
|Exploration and evaluation assets (E&E)||3.12||6.33||(51||)|
|Weighted Average Shares Outstanding for the Period (millions) – Basic||30.50||30.29||1||30.47||30.27||1|
|Total Common Shares Outstanding at Period End (millions)||30.56||30.30||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.|
|Net debt is a non-GAAP measure that represents bank debt plus the convertible debenture of $57.50 million and any working capital excluding unrealized derivative assets/liabilities.|
|Cash dividends were suspended after the October 2015 dividend paid on November 16, 2015.|
|Three Months Ended
|Nine Months Ended
|2016||2015||Percent Change||2016||2015||Percent Change|
|Average Daily Production|
|Oil and liquids (bbl/d)||2,915||3,633||(20||)||3,275||3,760||(13||)|
|Natural gas (mmcf/d)||3.39||5.28||(36||)||3.67||5.28||(30||)|
|Average Selling Price (before the impact of financial risk management contracts)|
|Oil and liquids ($/bbl)||43.41||44.67||(3||)||37.76||47.76||(21||)|
|Natural gas ($/mcf)||2.20||2.66||(17||)||1.66||2.73||(39||)|
|Gross petroleum and natural gas sales||38.50||39.08||(1||)||33.31||41.81||(20||)|
|Realized gain/(loss) on derivatives||(0.13||)||5.60||(102||)||2.12||12.16||(83||)|
|Wells Drilled, Net||–||3.0||(100||)||–||3.0||(100||)|
|Undeveloped Land at Period End (thousand net acres)||48||78||(38||)|
|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. has released its financial and operating results for the third quarter of 2016.
Remaining Zargon Assets
With the completion of the Q3 2016 property sales, Zargon’s remaining assets are highlighted by the Alberta Little Bow Alkaline Surfactant Polymer (“ASP”) tertiary recovery project, the Alberta Taber and Bellshill Lake low decline oil properties and the remaining Williston Basin North Dakota properties, which are characterized by the following attributes:
- Proven developed producing reserves: 6.87 million barrels of oil equivalent – 89 percent oil and liquids (McDaniel & Associates Consultants Ltd. – Dec. 31, 2015).
- Proven plus probable reserves: 15.09 million barrels of oil equivalent – 88 percent oil and liquids (McDaniel & Associates Consultants Ltd. – Dec. 31, 2015).
- Undeveloped oil exploitation locations – 12 net locations (McDaniel & Associates Consultants Ltd. – Dec. 31, 2015).
- Little Bow ASP tertiary recovery project – In the third quarter, Zargon modified the ASP project’s depletion strategy by shutting in higher water cut producers in under treated areas in order to reduce the polymer costs required to treat the re-injected water volumes. More importantly, by placing under treated areas of the ASP project on idle, Zargon can indefinitely defer the restart date for recommencing the Alkaline Surfactant injections in the Phase 1 area until Zargon’s improved financial conditions can support the additional chemical capital expenditures. With these adjustments, the project’s annual polymer chemical costs are reduced by approximately 25 percent from $3.60 million to $2.70 million per year. At higher oil prices, the existing ASP infrastructure can be utilized for multiple ASP phases and/or Polymer only projects that will target incremental oil recovery of approximately 10 percent on over 80 million barrels of working interest oil-in-place.
Q4 2016 Guidance
Fourth quarter 2016 production and cost guidance for Zargon’s remaining assets are provided below:
- Oil and liquids production – 2,050 barrels per day, including 460 barrels of oil per day from the Little Bow ASP project and 380 barrels per day from the Williston Basin North Dakota properties.
- Total production – 2,500 barrels of oil equivalent per day.
- Base oil declines – Little Bow ASP: 10 percent, Other Alberta: 13 percent, North Dakota: 10 percent.
- Average royalties – Alberta including ASP: 8 percent, North Dakota: 24 percent.
- Operating Costs – $19.20 million (annualized).
- G&A Budget – $4.80 million (annualized).
- 2016 Q4 Capital Budget – ASP Polymer Injections: $0.70 million, Other Oil Exploitation Projects: $0.60 million, Abandonment and Site Reclamations: $0.30 million.
We intend to set our 2017 capital budget in early January 2017 in the context of the business environment at that time. Our inventory of opportunities include reactivations, recompletions and facility upgrades that are projected to provide low cost production additions.
Additional information regarding Zargon’s low decline, oil exploitation properties are available on our website at www.zargon.ca.
Strategic Alternatives Process Update
Last year, Zargon announced the formation of a Special Board 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.
The realization of $92.04 million of cash proceeds from the Q3 2016 property sales was a partial outcome of this process. With the elimination of the Company’s bank debt, the strategic alternatives process is continuing, but has been refocused to include, among other alternatives, a restructuring of the Company’s current capital structure, the addition of capital to further develop the potential of the assets, the sale of the Company or a portion of the Company’s 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. The Company has not set a definitive schedule to complete its evaluation and no decision on any particular alternative has been reached at this time. Zargon does not intend to disclose developments with respect to this process unless and until the Board of Directors has approved a definitive transaction or other course of action or otherwise deems disclosure of developments is appropriate or otherwise required by law. There are no guarantees that the process will result in a transaction of any form or, if a transaction is entered into, as to its terms or timing.