Exploration & Production | Production Rates | Forecast - Production | Capital Markets | Capital Expenditure

Zargon Deferring 2015 Budget Plan to 1Q 2015

Share Print Bookmark    |    Wednesday,November 12,2014

Zargon Oil & Gas Ltd. has provided a third quarter 2014 update.

Financial and Operating Highlights (Three Months Ended September 30, 2014)

Funds flow from operating activities of $10.9 million were eight percent lower than the $11.9 million recorded in the prior quarter due to one time general & administrative reorganization costs. Funds flow from operating activities for the 2014 third quarter included reductions of $2.1 million of realized hedge losses, $1.6 million of one-time general & administration reorganization costs, $0.4 million of transaction costs relating to completed property sales and $0.6 million of asset retirement expenses.

Third quarter 2014 production averaged 4,194 barrels of oil and liquids per day, a two percent gain from the preceding quarter due to second quarter exploitation drilling successes at Bellshill Lake and Taber. Reflecting completed property dispositions, third quarter 2014 natural gas production of 11.2 million cubic feet per day was 24 percent lower than the preceding quarter. Total production averaged 6,054 barrels of oil equivalent per day, an eight percent decrease from the preceding quarter. For the quarter oil and liquids production increased to 69 percent of total production based on a 6:1 equivalent basis, a ratio that in 2015 is forecast to increase to 80 percent of total production. Importantly, the oil volumes will be comprised of low decline (less than 15 percent annually) waterflood and waterdrive oil volumes that are augmented by increasing ASP tertiary recovery volumes.

The quarter was highlighted by four property dispositions of high cost natural gas properties that had been producing 7.1 million cubic feet per day and 21 barrels of oil per day (1,200 barrels of oil equivalent per day). Total proceeds from the sales were $6.7 million. The elimination of higher cost, lower netback assets is a key initiative for Zargon. In 2014, Zargon has successfully removed more than 275 net wells from its asset base.

Third quarter 2014 exploration and development capital expenditures (excluding property acquisitions and dispositions) were $12.8 million and included $5.1 million of expenditures related to the Little Bow ASP project ($1.5 million exploitation and $3.6 million chemical costs). In the quarter, Zargon drilled 2.0 gross (1.5 net) Williston Basin oil wells.

Zargon's September 30, 2014 debt, net of working capital (excluding unrealized derivative assets/liabilities) and using the full future face value of the convertible debenture of $57.5 million, was $129.1 million. At September 30, 2014, Zargon's bank debt was $59.4 million. Pursuant to a semi-annual review, syndicated committed credit facilities have been set at $140 million.

Little Bow Alkaline Surfactant Polymer (ASP) Project

Commencing in March 2014, Zargon initiated the injection of large volumes of a dilute chemical solution into a partially depleted Little Bow Mannville I Pool in order to recover substantial incremental oil reserves. To date, ASP injections have totaled approximately 2.3 million barrels, which is about seven percent of the phase 1 targeted reservoir pore volume and represents 11 percent of the total chemical bank (ASP and Polymer only) scheduled to be injected.

Zargon continues to be encouraged by the injection data for the Little Bow ASP enhanced oil recovery project. Increased injection pressures are being observed at seven of the eight ASP injection wells (a remedial workover has been undertaken at the eighth injector), indicating the building of a higher viscosity oil bank within the reservoir. Indicators of ASP fluid movement also continue to provide encouragement, most notably, the production of small concentrations of polymer at producers. To date, minor oil production responses have been observed at two producers.

In preparation for the ASP oil production phase, we continue to optimize producer and injector completion intervals to optimize ASP conformance and recovery. Consequently, current production volumes are slightly under the 250 barrels per day baseline rate for the pre-ASP waterflood project. Notwithstanding the challenges in predicting the initial onset of material ASP production, we are very encouraged by the facility operations, the observed injection performance and the indirect technical evidence of oil banking; all of which are necessary precursors to the highly profitable forecasted reserve recoveries. Over the next few months, a material ramp up in production is anticipated and we will provide timely updates to outline material progress, with the next report in mid-January providing 2014 exit production volumes.

Other Field Activities

In addition to the third quarter's $5.1 million of ASP project's exploitation and chemical capital expenditures, Zargon executed a $7.7 million capital program in the 2014 third quarter on conventional oil exploitation assets. This program reflected the Williston Basin locations plus facility upgrades, battery optimizations and completions for the second quarter Bellshill Lake and Taber oil exploitation drilling program. For the fourth quarter, Zargon is proceeding with a 5.0 net well oil exploitation drilling program at the Taber Sunburst (2) and Williston Basin Mississippian (3) properties prior to the higher cost winter season.

2014 & 2015 Capital Budgets

In the October 8, 2014 capital budget and ASP update press release, Zargon provided an updated 2014 capital budget of $45 million (after dispositions) and initial 2015 total capital budgets of $46 million, which will be weighted to the second half of the year.

• Recognizing the current uncertainties regarding oil prices, we will reassess the 2015 capital budget in the first quarter of 2015. At that time, if low oil prices persist, we may defer non-essential conventional capital programs, while prioritizing the funding of our ASP capital programs and dividends.

Zargon has also entered into a significant oil hedging program to provide a measure of stability and predictability to cash flows as we wait for the ASP production volumes to ramp up. For the remainder of 2014, Zargon has hedged 2,600 barrels per day at $90.92 US/bbl WTI and 400 barrels per day at $99.60 Cdn/bbl WTI, while for the first half of 2015 an average of 1,400 barrels per day is hedged at $93.68 US/bbl WTI.

Production Guidance

In the October 8, 2014 capital budget and ASP update press release, Zargon provided third quarter 2014 oil production rate guidance of 4,200 barrels of oil and liquids per day. Actual third quarter volumes were 4,194 barrels of oil and liquids per day and met guidance. The press release also set Zargon's third quarter 2014 natural gas production guidance of 10.2 million cubic feet per day. Third quarter actual volumes were 11.2 million cubic feet per day and exceeded guidance by 10 percent.

Oil and liquids production for the 2014 fourth quarter had been set at 4,200 barrels of oil per day and has now been revised to 4,100 barrels of oil per day due to regulatory and third party facility shut-ins and minor delays in commencing the fall drilling program. Year end exit production rates in excess of 4,200 barrels of oil per day are still anticipated. Fourth quarter natural gas production guidance remains set at 6.8 million cubic feet per day.

Looking forward, we expect that first quarter 2015 production volumes will see an increase in production from the ASP project. We are forecasting a 2015 oil and liquids production rate of 4,700 barrels of oil per day which is comprised of 4,000 barrels of oil per day of conventional production and 700 barrels of oil per day of ASP production. These oil and liquids production guidance levels are dependent on the 2015 capital budgets and the profile of the ASP production ramp-up; and consequently will be revisited in the 2015 first quarter when the 2015 capital program is reappraised. Natural gas volumes are forecast to average 6.4 million cubic feet per day in 2015, provided that further natural gas property dispositions are not concluded.