Quarterly / Earnings Reports | Production | Second Quarter (2Q) Update | Financial Results | Capital Markets

Zargon Keeps Activity, Spending Low in Q2 as it Reviews Alternatives

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Zargon Oil & Gas Ltd. reported its second quarter 2016 results.

Highlights:

• Funds flow from operating activities of $3.5 million were higher than the $0.3 million loss recorded in the prior quarter due to a combination of higher oil prices, lower operating expenses and decreased general and administrative expenses. 
  
  
• With the continuation of restricted conventional capital investment programs, second quarter 2016 production averaged 3,413 barrels of oil and liquids per day, a three percent decrease from the preceding quarter rate of 3,503 barrels of oil and liquids per day and an eight percent decline from the second quarter 2015 production rate of 3,720 barrels of oil and liquids per day. Zargon's Little Bow Alkaline Surfactant Polymer tertiary project continues to show good oil banking with second quarter 2016 average rates of 530 barrels of oil and liquids per day, up from first quarter 2016 and second quarter 2015 rates of 479 and 288 barrels of oil and liquids per day, respectively. 
  
  
• Due to the shut-in of selected uneconomic properties, second quarter 2016 natural gas production averaged 3.58 million cubic feet per day, an 11 percent decrease from the preceding quarter and a 33 percent decline from the 2015 second quarter natural gas rate. Total production averaged 4,010 barrels of oil equivalent per day, a four percent decrease from the preceding quarter. During the quarter, oil and liquids production represented 85 percent of total production based on a 6:1 equivalent basis. 
  
  
• Second quarter 2016 operating and transportation costs totaled $6.43 million ($17.63 per barrel of oil equivalent), down 26 percent from the 2015 second quarter cost of $8.67 million ($20.68 per barrel of oil equivalent) and down 10 percent from the 2016 first quarter cost of $7.12 million ($18.75 per barrel of oil equivalent). The 2016 cost savings reflect Zargon's continued cost containment focus and in particular incorporate lower electricity costs, lower field contractor costs and reduced Little Bow ASP facility and field pumping costs due to the polymer only streamlined facility operations and improved well pumping designs. 
  
  
• Second quarter 2016 general and administrative costs totaled $1.38 million ($3.77 per barrel of oil equivalent), down 28 percent from the 2015 second quarter cost of $1.91 million ($4.55 per barrel of oil equivalent) and down 19 percent from the 2016 first quarter cost of $1.70 million ($4.48 per barrel of oil equivalent). 
  
  
• Second quarter 2016 capital expenditures were $1.26 million and included $0.90 million of expenditures related to the Little Bow ASP project ($0.16 million exploitation and $0.74 million chemical costs). No wells were drilled in the quarter. 
  
  
• On June 21, 2016, Zargon amended and renewed its syndicated committed credit facilities of $70.0 million, a reduction from the previous facilities of $88.0 million. At June 30, 2016, Zargon's outstanding bank debt and net working capital totaled $64.8 million. Including $57.5 million of convertible unsecured subordinate debentures, Zargon had $122.3 million of net debt at June 30, 2016. 
  
  
• On July 25, 2016, subsequent to quarter end, Zargon announced that it had entered into a purchase and sale agreement for the sale of all of its Southeast Saskatchewan assets for cash consideration of $89.5 million, subject to normal closing adjustments. The effective date of the transaction is July 1, 2016 and the transaction is expected to close in early September. The assets include 1,211 barrels of oil equivalent per day of low decline production - 95 percent oil and liquids (first half 2016 rates) and proven plus probable reserves of 5.14 million barrels of oil equivalent - 96 percent oil and liquids (McDaniel & Associates Consultants Ltd. - Dec. 31, 2015). Initially, the proceeds of the transaction will be used to eliminate Zargon's bank debt. Zargon's net debt (including debentures) will be approximately $35.0 million following the transaction.

Strategic Alternatives Process Update

Last year, Zargon announced the formation of a Special Board Committee to examine alternatives that would maximize stakeholder 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. Scotia Waterous Inc. is the financial adviser for the Committee.

The July 2016 announced sale of Zargon's Southeast Saskatchewan assets for $89.5 million is a significant step in this process. The strategic alternatives process is continuing and may include but is not limited to, a financing, merger or other business combination, sale of the Company or a portion of the Company's business or assets, or any combination thereof, as well as the continued execution of our business plan.