Zargon Oil & Gas Ltd. April 2014 Corporate Presentation WWW.ZARGON.CA
Advisory – Forward-Looking Information Forward ‐ Looking Statements ‐ This presentation offers our assessment of Zargon's future plans and operations as at April 1, 2014, and contains forward ‐ looking statements. Such statements are generally identified by the use of words such as "anticipate", "continue", "estimate", "expect", "forecast", "may", "will", "project", "should", "plan", "intend", "believe" and similar expressions (including the negatives thereof). In particular, this presentation contains forward ‐ looking information as to Zargon’s corporate strategy and business plans, Zargon’s oil exploration project inventory and development plans, Zargon’s dividend policy and the amount of future dividends, future commodity prices, Zargon’s expectation for uses of funds from financing, Zargon’s capital expenditure program and the allocation and the sources of funding thereof, Zargon’s cash flow and dividend model and the assumptions contained therein and the results there from, anticipated payout rates, 2014 and beyond production and other guidance and the assumptions contained therein, estimated tax pools, Zargon’s reserve estimates, Zargon’s hedging policies, Zargon’s drilling, development and exploitation plans and projects and the results there from and Zargon’s ASP project plans 2014 and beyond, plans to sell un ‐ strategic assets, the source of funding for our 2014 and beyond capital program including ASP, capital expenditures, costs and the results therefrom. By their nature, forward ‐ looking statements are subject to numerous risks and uncertainties, some of which are beyond our control, including such as 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 our website. Forward ‐ looking statements are provided to allow investors to have a greater understanding of our business. You are cautioned that the assumptions, 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; our ability to obtain financing on acceptable terms; and our ability to add production and reserves through our development and acquisition activities used in the preparation of such information, 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 contained in this presentation 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. Barrels of Oil Equivalent ‐ Natural gas is converted to a barrel of oil equivalent (“Boe”) using six thousand cubic feet of 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. The estimates of reserves and future net revenue for individual properties may not reflect the same confidence level as estimates of reserves and future net revenue for all properties, due to the effects of aggregation. Estimated reserve values disclosed in this presentation do not represent fair market value. Discovered Petroleum Initially ‐ In ‐ Place (“DPIIP”) is that quantity of petroleum that is estimated, as of a given date, to be contained in known accumulations prior to production. The recoverable portion of discovered petroleum initially in place includes production, reserves, and contingent resources; the remainder is unrecoverable. The aggregate of the exploration and development costs incurred in the most recent financial year and the change during that year in estimated future development costs generally will not reflect total finding and development costs related to reserves additions for that year. 2
Zargon: Core Attributes • 6,630 boe/d (Q1 2014 guidance) • 4,300 bbl/d stable oil exploitation base Oil Exploitation Oil Exploitation • 75+ prospective oil exploitation locations • Exciting Little Bow ASP tertiary recovery project provides years of oil production growth • 21.0 Mmbbl of 2P oil reserves (12.4 yr. rli) • 68% of 2P oil reserves are developed Long ‐ lived Oil Assets Long ‐ lived Oil Assets producing reserves • Compared to peers, very low base oil production decline rates (less than 14%/yr.) • Payout ratio of 35% (2013 w/o DRIP) • Yield of 8.3% (based on share price of $8.65) Dividend Paying Dividend Paying • $344 million in dividends/distributions paid over history 3
Zargon: Asset Description Conventional Pressure Supported (Waterflood) Oil Conventional Conventional Properties: • Produce 4,135 bbl/d (Q4 2013) of very low decline oil, “pressure “pressure • Provide substantial inventory of low risk oil supported” oil supported” oil exploitation wells to offset low decline, • Support dividend through the rest of the decade. Little Bow ASP Enhanced Recovery Project: Little Bow ASP Little Bow ASP • Phase 1, now fully operational, Tertiary Oil Tertiary Oil • ASP oil projects (phases 1 ‐ 4) will provide oil production growth into the next decade, Recovery Project Recovery Project • Scalable technology that can be ultimately used for other fields. Other Non ‐ Strategic Assets: • Producing 330 bbl/d and 11.02 mmcf/d of lower Other Non ‐ Strategic Other Non ‐ Strategic netback production in Q4 2013, • Properties have “atrophied” in recent years, as capital was allocated to core assets, • Willing to consider the sale of these assets. 4
Forecast Oil Production Trends 7,000 6,000 Oil Production (bbl/day) 5,000 ASP Phase 1 &2 increment 4,000 Drilling Increment Base Prod. @ 14% decline 3,000 Base production and drilling increment are funded 2,000 by annual $35 million conventional (non ASP) capital budget. 1,000 History Estimate 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2013 2014 2015 2016 • Oil production base declines at less than 14% per year. McDaniel proved and probable developed producing case estimates a 15% decline (2015 versus 2014). • Drilling increment assumes an annual $35 million conventional budget (18 net oil wells in 2014). • Historical data identifies the effect of the property sales that were used to fund the ASP project. 5
Zargon Overview (As at April 1, 2014 unless otherwise stated) Capitalization – Toronto Stock Exchange: Symbols: ZAR; ZAR.DB – Common Shares Outstanding: 30.12 million (basic) $261 million ($8.65 per share) (1) – Market Capitalization: – Net Debt at Dec. 31, 2013: $116 million Historical Returns – Returns in dividends and distributions: $344 million ($17.36 per share) since inception – Total Equity Investment since inception: $210 million Dividend & Yield – Annualized Current Dividend: $0.72 per share 8.3% (1) – Yield at current share price: 2013 Production – Equivalent: 7,468 boe/d – Oil: 4,870 bbl/d (65% of production) – Gas: 15.59 mmcf/d (1) Based on a monthly dividend rate of $0.06/share and using the April 1, 2014 closing share price of $8.65. 6
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