Zargon Oil & Gas Ltd. (“Zargon” or the “Company”) (TSX SYMBOL: ZAR).
FINANCIAL AND OPERATING HIGHLIGHTS (THREE MONTHS ENDED SEPT 30, 2019)
- Funds flow from operating activities of $1.41 million compared to $2.17 million recorded in the prior quarter. The decrease from the prior quarter was primarily due to lower production volumes and commodity prices that were partially offset by lower general and administrative expenses.
- Third quarter 2019 production averaged 1,715 barrels of oil equivalent per day, a four percent decrease from the preceding quarter production rate of 1,790 barrels of oil equivalent per day. The reduction in production volumes from the prior quarter was primarily due to natural production declines and facility outages relating to summer electrical storms and annual facility maintenance turn-arounds. Third quarter 2019 production averaged 1,489 barrels of oil per day and 1.36 million cubic feet of natural gas per day, levels that are anticipated to be maintained through fourth quarter 2019.
- Zargon’s third quarter 2019 field oil prices averaged $59.12 per barrel, eight percent lower than the prior quarter’s price of $64.51 per barrel. The combination of lower oil prices and oil volumes resulted in an 11 percent reduction in third quarter 2019 revenues to $8.19 million, down from $9.17 million in the prior quarter. With relatively consistent operating costs and royalty rates, this reduction in revenue carried through to Zargon’s third quarter 2019 field operating cash flow of $2.32 million, a 28 percent decline from the prior quarter’s $3.23 million.
- Zargon remains committed to reducing corporate costs and was successful in reducing third quarter 2019 general administrative costs (inclusive of transaction, exploration and evaluation costs) through further staff adjustments and realignments to $0.71 million, down 13 percent from $0.82 million in second quarter 2019. After the further deduction of $0.20 million of third quarter 2019 interest, finance and US federal tax charges, Zargon’s remaining third quarter 2019 funds flow from operating activities were $1.41 million.
- Zargon also remains committed to reducing its inactive well count in order to facilitate possible business combinations with other small producers. During the 2019 third quarter, Zargon incurred $0.95 million of abandonment and reclamation costs, which takes Zargon’s year-to-date expenditures to $1.65 million. For 2019, Zargon is now planning to spend $2.60 million on abandonment and reclamations that will include the abandoning of a minimum of 25 net operated and 32 net non-operated wells, which will result in a 17 percent reduction in Zargon’s year end 2018 total inactive well count of 335 net wells. In Alberta, Zargon has voluntarily participated in the Alberta Energy Regulator’s (“AER”) Area Based Closure (“ABC”) program which enables significant cost savings by encouraging large scale area based abandonment programs. For 2019 and 2020, Zargon’s abandonment expenditure commitments for the ABC program are $1.16 million and $1.26 million, respectively.
- Zargon’s third quarter 2019 capital expenditures were $1.21 million, a $0.42 million increase from the $0.79 million recorded in the prior quarter which takes Zargon’s year-to-date expenditures to $2.75 million. Zargon’s 2019 capital program is expected to total $3.50 million and is primarily allocated to oil exploitation programs (waterfloods), Little Bow Polymer costs, well reactivations, and pipeline construction projects. Recent well recompletions and stimulations at the Little Bow non-ASP property have delivered good results that should stabilize Zargon’s total oil volumes through the upcoming winter. Consistent with the last few years, Zargon did not drill any of its proven undeveloped locations (Taber, Bellshill Lake and North Dakota) in the quarter, as Zargon conserved its cash to retire debt and retire abandonment liabilities.
- At September 30, 2019, the Company’s combined debt net of working capital was $2.09 million, which compares with Zargon’s calculated $1.34 million of debt net of working capital in the prior quarter.
With substantial fixed operating and capital costs to maintain production and meet abandonment retirement obligations, the outlook for Zargon is extremely dependent on Zargon’s field oil price, which in turn is extremely dependent on WTI prices and WTI-WCS pricing differentials. For further information regarding Zargon’s properties, opportunities and outlook, please refer to our updated corporate presentation, which is available at www.zargon.ca.
Strategic Alternatives Process Update
Zargon’s Special Committee of the Board (the “Committee”) continues to seek alternatives to maximize shareholder value. Macquarie Energy Canada Ltd. (“Macquarie”) is currently engaged as Zargon’s exclusive financial advisor to evaluate strategic alternatives available to Zargon which may include asset acquisitions, a sale of the Company or a portion of the Company’s assets, a restructuring of the Company’s current capital structure, the addition of capital to further develop the potential of the assets, a merger, a farm-in or joint venture, or other such options as may be determined by the Board of Directors to be in the best interests of the Company and its stakeholders.
|Three Months Ended Sept 30,||Nine Months Ended Sept 30,|
|Income and Investments ($ millions)|
|Gross petroleum and natural gas sales||8.19||10.17||(19||)||25.67||30.72||(16||)|
|Funds flow from operating activities||1.41||1.93||(27||)||4.81||2.21||118|
|Cash flows from operating activities||0.61||0.85||(28||)||2.46||3.63||(32||)|
|Free cash flow||(0.75||)||0.76||(199||)||0.41||(2.50||)||(116||)|
|Net capital expenditures||1.21||0.93||30||2.75||3.62||(24||)|
|Abandonment and reclamation costs||0.95||0.24||296||1.65||1.09||51|
|Per Share, Basic|
|Funds flow from operating activities ($/share)||0.06||1.25||(95||)||0.22||1.43||(85||)|
|Net earnings/(loss) ($/share)||(0.04||)||(0.41||)||90||1.07||(4.31||)||125|
|Balance Sheet at Period End ($ millions)|
|Property and equipment (D&P)||95.43||123.39||(23||)|
|Convertible debentures at maturity||–||41.94||(100||)|
|Weighted Average Shares Outstanding for the Period (millions) – Basic||22.99||1.54||1393||22.13||1.54||1337|
|Weighted Average Shares Outstanding for the Period (millions) – Diluted||22.99||1.55||1383||22.13||1.54||1337|
|Total Common Shares Outstanding at Period End (millions)||22.99||1.55||1383|
Funds flow from operating activities is an additional GAAP measure presented on the consolidated statement of cash flows, it represents cash flow from operating activities adjusted for asset retirement expenditures and changes in non-cash operating working capital.
Working capital excludes derivative assets/liabilities and short term debt.
|Three Months Ended Sept 30,||Nine Months Ended Sept 30,|
|Average Daily Production|
|Oil and liquids (bbl/d)||1,489||1,680||(11||)||1,534||1,810||(15||)|
|Natural gas (mmcf/d)||1.36||1.64||(17||)||1.42||2.12||(33||)|
|Average Selling Price (before the impact of financial risk management contracts)|
|Oil and liquids ($/bbl)||59.12||64.83||(9||)||60.05||60.48||(1||)|
|Natural gas ($/mcf)||0.76||1.00||(24||)||1.35||1.43||(6||)|
|Gross petroleum and natural gas sales||51.93||56.61||(8||)||53.11||52.00||2|
|Realized loss on derivatives||–||–||–||–||(4.07||)||100|
|Wells Drilled, Net||–||–||–||–||–||–|
|Undeveloped Land at Period End (thousand net acres)||32||33||(3||)|
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.