FINANCIAL AND OPERATING HIGHLIGHTS (THREE MONTHS ENDED MARCH 31, 2017)
- Funds flow from operating activities of $1.50 million compare to $0.92 million recorded in the prior quarter, and the negative $0.40 million reported in first quarter of 2016. The year over year increase in funds flow is primarily due to Zargon’s sharply higher first quarter 2017 field oil price of $49.30 per barrel, up 74 percent from the first quarter 2016 field oil price of $28.27 per barrel.
- First quarter 2017 production averaged 2,579 barrels of oil equivalent per day, a five percent increase from the preceding quarter rate of 2,449 barrels of oil equivalent per day, and a 38 percent decrease from the 2016 first quarter rate of 4,176 barrels of oil equivalent per day that had included our Southeast Saskatchewan and selected Alberta assets that were sold in the third quarter of 2016. During the 2017 first quarter, oil and liquids production represented 78 percent of Zargon’s total production based on a 6:1 equivalent basis.
- First quarter 2017 field operating netbacks defined as sales (excluding hedges) less royalties and operating/transportation costs were $15.44 per barrel of oil equivalent up four percent from the fourth quarter 2016 field operating netback of $14.84 per barrel of oil equivalent. The corresponding first quarter 2017 field operating cash flow was $3.58 million, a seven percent gain from the prior quarter’s $3.34 million.
- For the 2017 first quarter, field revenues (unhedged) were $41.74 per barrel of oil equivalent per day ($41.01 per barrel of equivalent per day in Q4 2016), royalties were $4.29 per barrel of oil equivalent per day ($4.54 per barrel of equivalent per day in Q4 2016) and operating (including transportation) costs were $22.01 per barrel of oil equivalent per day ($21.63 per barrel of equivalent per day in Q4 2016). The operating costs were higher than budget due to higher workover and winter related surface access costs than anticipated. We are continuing to budget operating costs of $20.96 per barrel of oil equivalent for the remainder of the year.
- First quarter 2017 capital expenditures were $2.51 million and were primarily allocated to oil exploitation costs relating to recompletions, reactivations and waterflood/ASP optimizations. These first quarter expenditures included $0.89 million of Little Bow ASP project costs ($0.35 million exploitation and $0.54 million chemical costs). No wells were drilled in the quarter.
- For the remainder of 2017, Zargon is budgeting $5.29 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 Little Bow non-ASP waterflood modifications and reactivations, Bellshill Lake pumping oil well optimizations, a Highvale Glauconite gas recompletion, Little Bow ASP project polymer costs and North Dakota Frobisher (Bluell) recompletions. 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.
- First quarter 2017 abandonment and reclamation costs totaled $0.14 million and are forecast to total $1.50 million in 2017.
- On February 14, 2017, Zargon received the approval of amendments to the convertible debentures which extended the maturity date to December 31, 2019 from June 30, 2017, increased the interest rate to eight percent from six percent, and reduced the conversion price on conversion of the debentures to $1.25 from $18.80 per share. Zargon redeemed $15.56 million face value of debentures for $14.84 million of cash on March 31, 2017, leaving a remaining $41.94 million of convertible debentures outstanding. As of March 31, 2017, Zargon had no bank debt and positive working capital (excluding the impact of unrealized derivatives) of $6.85 million, which resulted in net debt of $35.09 million
- Zargon has entered into a significant oil hedging program to improve the stability and predictability to cash flows. Zargon’s WTI hedges total 1,300 barrels of oil per day at a price of $69.24 Canadian for the period from April to December 2017. Additionally, Zargon has entered into a hedge to fix the differential between WTI and WCS (Western Canadian Select) prices at $19.50 Canadian for 1,300 barrels of oil per day for the period from April to December, 2017.
- On March 24, 2017, Zargon granted an aggregate of 1.34 million stock options to our directors, officers and certain employees at an exercise price of $0.72 per share, under a proposed plan that will be voted upon at our May 30, 2017 Annual and Special General Meeting.
|Three Months Ended March 31,|
|Income and Investments ($ millions)|
|Gross petroleum and natural gas sales||9.69||9.61||1|
|Funds flow from/(used in) operating activities||1.50||(0.40||)||475|
|Cash flows from/(used in) operating activities||(1.57||)||2.07||(176||)|
|Field capital and administrative asset expenditures||2.37||2.43||(2||)|
|Net property acquisitions||0.13||0.04||225|
|Net capital expenditures||2.51||2.47||2|
|Per Share, Basic|
|Funds flow from/(used in) operating activities ($/share)||0.05||(0.01||)||600|
|Net loss ($/share)||(0.02||)||(0.29||)||93|
|Balance Sheet at Period End ($ millions)|
|Property and equipment (D&P)||136.09||225.28||(40||)|
|Exploration and evaluation assets (E&E)||2.30||5.66||(59||)|
|Convertible debentures at maturity||41.94||57.50||(27||)|
|Weighted Average Shares Outstanding for the Period (millions) – Basic||30.67||30.44||1|
|Weighted Average Shares Outstanding for the Period (millions) – Diluted||30.81||30.44||1|
|Total Common Shares Outstanding at Period End (millions)||30.72||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.
Net debt is a non-GAAP measure that represents bank debt (if any) plus the convertible debenture of $41.94 (as at March 31, 2017) or $57.50 million (prior to March 31, 2017) and any working capital excluding unrealized derivative assets/liabilities.
|Three Months Ended March 31,|
|Average Daily Production|
|Oil and liquids (bbl/d)||2,016||3,503||(42||)|
|Natural gas (mmcf/d)||3.38||4.04||(16||)|
|Average Selling Price (before the impact of financial risk management contracts)|
|Oil and liquids ($/bbl)||49.30||28.27||74|
|Natural gas ($/mcf)||2.45||1.64||49|
|Gross petroleum and natural gas sales||41.74||25.30||65|
|Realized gain on derivatives||0.13||3.79||(97||)|
|Wells Drilled, Net||–||–||–|
|Undeveloped Land at Period End (thousand net acres)||40||71||(44||)|
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 first quarter of 2017.
In a December 12, 2016 capital budget press release, Zargon provided 2017 guidance levels of 2,500 barrels of oil equivalent per day. Actual first quarter volumes of 2,579 barrels of oil equivalent per day exceeded guidance levels by three percent, and guidance levels are maintained at 2,500 barrels of oil equivalent per day for the remainder of the year. These guidance levels are predicated on our $7.80 million 2017 capital program, of which $2.51 million was spent in the 2017 first quarter.
Strategic Alternatives Process Update
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 debenture restructuring and elimination of bank debt now completed, 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. 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.