Zargon Oil & Gas Ltd. ("Zargon" or the "Company") (TSX:ZAR)(TSX:ZAR.DB)
HIGHLIGHTS FROM THE FOURTH QUARTER AND YEAR ENDED DECEMBER 31, 2013
-- Fourth quarter 2013 funds flow from operating activities of $12.15
million ($0.40 per basic share) were 26 percent lower than the $16.45
million ($0.55 per basic share) recorded in the prior quarter due
primarily to significantly lower oil field price realizations from
unfavourable Edmonton Par to West Texas Intermediate ("WTI") oil price
differentials. As a result, Zargon's fourth quarter oil field price
realizations of $73.40 per barrel were down 22 percent from the third
quarter 2013 realized oil field price of $94.10 per barrel.
-- Fourth quarter oil production averaged 4,625 barrels of oil and liquids
per day, down four percent from the preceding quarter. Fourth quarter
natural gas production averaged 15.90 million cubic feet per day, a
three percent decrease from the prior quarter. Reflecting our ongoing
property disposition program, total fourth quarter production averaged
7,276 barrels of oil equivalent per day, a four percent decrease from
the prior quarter.
-- Monthly cash dividends of $0.06 per common share were declared in the
fourth quarter of 2013 for a total of $5.42 million. These cash
dividends were equivalent to a payout ratio of 45 percent of funds flow
from operating activities.
-- During the quarter, exploration and development capital expenditures
(excluding property acquisitions and dispositions) were $24.26 million
for field related programs and included $11.65 million of Alkaline
Surfactant Polymer ("ASP") project spending. Zargon drilled 8.5 net
wells which resulted in 5.5 net oil wells and 3.0 net ASP related
service wells.
-- Property dispositions in the fourth quarter totalled $18.64 million and
included the sale of 360 barrels of oil per day, and 0.68 million cubic
feet of natural gas per day. These property sales were generally higher
cost assets that do not conform with Zargon's focused oil exploitation
strategy.
-- For calendar 2013, funds flow from operating activities of $58.48
million ($1.95 per basic share) were three percent higher than the
$56.66 million ($1.91 per basic share) recorded in the prior year.
-- Oil and liquids production averaged 4,870 barrels of oil and liquids per
day in 2013, a seven percent decrease from the preceding year as
production additions from our 2013 drilling and exploitation activities
were offset by property dispositions. Natural gas production averaged
15.59 million cubic feet per day in 2013, a nine percent decrease from
2012 reflecting natural occurring production declines and the continued
curtailment of natural gas capital programs. Total 2013 production
averaged 7,468 barrels of oil equivalent per day, an eight percent
decrease from the prior year, a level that reflected significant
property sales, a modest focused oil exploitation capital program, an
ASP facility construction project that provides for significant future
production growth and the beneficial effect of our low decline property
base.
-- Zargon declared cash dividends totalling $0.72 per common share during
2013 for a total of $21.61 million ($20.35 million net of the Dividend
Reinvestment Plan ("DRIP")). These cash dividends (net of the DRIP) were
equivalent to a payout ratio of 35 percent of funds flow from operating
activities. As previously reported, Zargon has suspended the DRIP until
further notice starting with the September 2013 dividend.
-- Net capital expenditures for the year totalled $41.74 million;
consisting of $76.16 million of exploitation, development and facility
programs and $0.03 million of administrative assets which was offset by
$34.45 million of net property dispositions. The $76.16 million of
exploitation, development and facility programs include $35.33 million
of ASP project costs, which will provide significant oil production
gains in 2015 and beyond. During the year, Zargon drilled 16.6 net wells
yielding 13.6 net oil wells and 3.0 net ASP related service wells.
Excluding the ASP project, Zargon's 2014 net capital expenditures were a
modest $6.41 million.
-- Zargon's December 31, 2013 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 $116.24
million, was approximately 1.99 times 2013 funds flow from operating
activities, and was up three percent from the 2012 year end net debt of
$113.18 million. At December 31, 2013, Zargon had approximately $125
million of unutilized credit facilities available.
Three Months Ended Year Ended
December 31, December 31,
---------------------------------------------------------------------------
2013 2012 Percent Percent
(unaudited) (unaudited) Change 2013 2012 Change
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Financial Highlights
Income and
Investments ($
millions)
Gross petroleum and
natural gas sales 35.84 37.88 (5) 158.65 157.95 -
Funds flow from
operating
activities 12.15 16.42 (26) 58.48 56.66 3
Cash flows from
operating
activities 13.56 16.85 (20) 57.00 58.87 (3)
Cash dividends (net
of Dividend
Reinvestment Plan) 5.42 4.70 15 20.35 27.35 (26)
Net loss (4.91) (9.88) 50 (5.90) (5.38) (10)
Field capital and
administrative
asset expenditures 24.27 25.59 (5) 76.19 64.75 18
Net property and
corporate
acquisitions/
(dispositions) (18.68) 0.20 (9,440) (34.45) (34.50) -
Net capital
expenditures 5.59 25.79 (78) 41.74 30.25 38
Per Share, Basic
Funds flow from
operating
activities
($/share) 0.40 0.55 (27) 1.95 1.91 2
Net loss ($/share) (0.16) (0.33) 52 (0.20) (0.18) (11)
Cash Dividends
($/common share) 0.18 0.18 - 0.72 1.08 (33)
Balance Sheet at
Period End ($
millions)
Property and
equipment (D&P) 408.72 389.97 5
Exploration and
evaluation assets
(E&E) 13.33 19.97 (33)
Total assets 452.98 445.11 2
Working capital
deficiency 18.77 19.94 (6)
Long term bank debt 39.97 35.74 12
Convertible
debentures at
maturity 57.50 57.50 -
Shareholders'
equity 173.55 196.58 (12)
Weighted Average
Shares Outstanding
for the
Period(millions) -
Basic 30.09 29.81 1 30.02 29.61 1
Weighted Average
Shares Outstanding
for the
Period(millions) -
Diluted 30.09 29.81 1 30.02 29.61 1
Total Common Shares
Outstanding at
Period End
(millions) 30.09 29.87 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.
Three Months Ended Year Ended
December 31, December 31,
---------------------------------------------------------------------------
2013 2012 Percent Percent
(unaudited) (unaudited) Change 2013 2012 Change
---------------------------------------------------------------------------
Operating Highlights
Average Daily
Production
Oil and liquids
(bbl/d) 4,625 5,065 (9) 4,870 5,255 (7)
Natural gas
(mmcf/d) 15.90 15.93 - 15.59 17.17 (9)
Equivalent (boe/d) 7,276 7,720 (6) 7,468 8,117 (8)
Average Selling
Price (before the
impact of
financial risk
management
contracts)
Oil and liquids
($/bbl) 73.40 72.06 2 79.88 75.07 6
Natural gas ($/mcf) 3.15 2.93 8 2.93 2.16 36
Netback ($/boe)
Gross petroleum and
natural gas sales 53.55 53.33 - 58.20 53.16 9
Royalties (10.14) (9.94) 2 (10.76) (10.14) 6
Realized
gain/(loss) on
derivatives (0.22) 3.70 (106) (0.16) (0.05) (220)
Operating expenses (15.93) (15.79) 1 (16.96) (15.92) 7
Transportation
expenses (0.57) (0.70) (19) (0.65) (0.52) 25
Operating netback 26.69 30.60 (13) 29.67 26.53 12
Wells Drilled, Net 8.5 15.0 (43) 16.6 27.8 (40)
Undeveloped Land at
Period End
(thousand net
acres) 230 337 (32)
---------------------------------------------------------------------------
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 financial and operating results for the
fourth quarter of 2013 that have demonstrated significant progress in the
company's drive to become a long-term sustainable, dividend-paying energy
producer. The quarter was highlighted by a continuing successful property
disposition program and by the ongoing field construction of the company's
Little Bow ASP tertiary oil recovery project in Southern Alberta.
Zargon's sustainability model entails the balancing of cash inflows and
outflows, the maintenance of a stable dividend, the eventual generation of
meaningful free cash flow per share growth, while continuing the shift toward
oil and liquids production. Zargon believes that the Little Bow ASP tertiary oil
recovery production provides the foundation for these sustainability objectives
by delivering a substantial low-decline, low-sustaining-capital, high-netback
and long-life project to the Company.
The Company's focus for 2014 will be to:
-- Finish the commissioning of the Little Bow ASP project on budget, with
first chemical injections occurring by the end of the 2014 first
quarter. Deliver Little Bow Phase 1 ASP operational and production
targets of an incremental 350 barrels of oil per day by year end
(increasing to a 2015 average rate of 900 barrels of oil per day);
-- Finalize the design of the Little Bow Phase 2 ASP project and advance
the Little Bow Phase 3 and 4 ASP engineering studies;
-- Deliver a consistent dividend of $0.06 per common share per month;
-- Execute a continuing property divestiture program designed to high-grade
and concentrate the Company's asset portfolio on our core oil
exploitation projects;
-- Direct a high-graded oil exploitation program focused on our five long-
life low-decline oil exploitation properties (Williston Basin, Taber,
Bellshill Lake, Little Bow non-ASP and Hamilton Lake); and
-- Maintain a strong balance sheet.
Recent Developments
-- Construction of the Little Bow ASP tertiary oil recovery project is
essentially complete and facility commissioning continues. Water
softening and selected chemical mixing operations have commenced and
first chemical injections are expected to occur by the end of this month
(March 2014). This Little Bow ASP project entails the injection of large
volumes of a dilute chemical solution into a partially depleted oil
reservoir to recover incremental oil reserves. For further information
regarding the Little Bow ASP project, please refer to Zargon's February
19, 2014 press release and Zargon's updated corporate presentation,
which is available on our website at www.zargon.ca.
-- In order to protect our balance sheet during the Little Bow ASP Phase 1
construction phase, Zargon sold a significant component of forward oil
and natural gas production volumes. For 2014 oil, Zargon has entered
into 2,600 barrels of oil per day of oil fixed price sales contracts at
an average WTI price of $91.90 US per barrel and for 2015, Zargon has
entered into 100 barrels of oil per day of oil fixed price sales
contracts at an average WTI price of $91.73 US per barrel. For 2014
natural gas, Zargon has entered into 7,750 gigajoules of natural gas per
day of natural gas fixed price sales contracts at an average AECO price
of $3.69 Cdn per gigajoule and for 2015, Zargon has entered into 1,500
gigajoules of natural gas per day of natural gas fixed price sales
contracts at an average AECO price of $4.25 Cdn per gigajoule. For
further information regarding Zargon's oil and natural gas hedging
program, please refer to Zargon's updated corporate presentation, which
is available on our website at www.zargon.ca.
Operational Update and Production/Capital Guidance
-- Zargon Oil & Gas Ltd. has recently provided a Little Bow alkaline
surfactant polymer tertiary oil recovery project update, an operational
update, and 2014 production/capital guidance in a February 19, 2014
press release, which is available on our website at www.zargon.ca.
Forward-Looking Statements
This press release offers our assessment of Zargon's future plans and operations
as at March 11, 2014, 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: operational forecasts and plans and results therefrom under
the heading "Message to Shareholders"; our plans with respect to our Little Bow
ASP project and the results therefrom referred to under the heading "Message to
Shareholders"; our plans for our hedges under the heading "Recent Developments";
and all matters, including guidance as to our production capital under the
heading "Operational Update and Production/Capital Guidance".
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 periods ended December 31, 2013 and
2012 for a discussion of cash flows from operating activities and funds flow
from operating activities.
51-101 Advisory
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.
Filings
Zargon has filed with Canadian securities regulatory authorities its financial
statements for the year ended December 31, 2013 and the accompanying MD&A. These
filings are available on www.zargon.ca and under Zargon's SEDAR profile on
www.sedar.com.
About Zargon
Based in Calgary, Alberta, Zargon's securities trade on the Toronto Stock
Exchange and there are currently approximately 30.095 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.
FOR FURTHER INFORMATION PLEASE CONTACT:
Zargon Oil & Gas Ltd.
C.H. Hansen
President and Chief Executive Officer
403-264-9992
J.B. Dranchuk
Vice President, Finance and Chief Financial Officer
403-264-9992
zargon@zargon.ca
www.zargon.ca
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