Zargon Oil & Gas Ltd. October 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 October 7, 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 • Pressure Supported (Waterflood and Water Drive): 60+ prospective oil exploitation locations Oil Exploitation in pressure supported (low decline) properties. Oil Exploitation • Tertiary (ASP): Little Bow ASP tertiary recovery project provides years of oil production growth. • 21.0 Mmbbl of 2P oil reserves (12.4 yr. rli – based on year end 2013 McDaniel report). • 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 15%/yr.). • $355 million ($17.72/share) of dividends and distributions paid over history on total historical equity investment of $210 million. Dividend Paying Dividend Paying • $0.06 per share stable monthly dividend since October 2012. 3
Zargon: Asset Description Waterflood and Waterdrive (Pressure Supported) Oil Waterflood and Waterflood and Properties: • Properties provide 93% of total oil production (3,827 bbl/d Waterdrive Oil Waterdrive Oil in Q2 2014); very predictable with very low decline, Properties Properties • Substantial inventory of low risk oil exploitation wells, • Supports dividend through the rest of the decade. Little Bow ASP Enhanced Recovery Project: Little Bow ASP Little Bow ASP • Phase 1, now showing first production, Tertiary Oil Tertiary Oil • Phase 1 ‐ 4 ASP oil projects (average working interest of 98+%) will provide oil production growth well into Recovery Project Recovery Project the next decade, • Scalable technology that can be used for other fields. Other Non ‐ Strategic Assets: • Remaining properties were producing 269 bbl/d and 11.45 mmcf/d of lower netback production in Q2 2014, Other Non ‐ Strategic Other Non ‐ Strategic • Properties have “atrophied” in recent years, as capital was allocated to core assets, • In 2014, have disposed 50 bbl/d, 8.10 mmcf/d and 280 net wells. 4
Forecast Oil Production Trends (Indicative) 6,000 5,000 Oil Production (bbl/day) ASP Phase 1 ‐ 2 increment 4,000 Variable Conv. Cap. 3,000 2,000 Base Production declines at 15% per year 1,000 Estimate History 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2013 2014 2015 2016 • Assumes oil production base decline of 15% per year. • Commencing in Q4 2014, ASP production wedge permits oil production growth. • The 2015 conventional (non ASP) capital budget will be adjusted to match available cash flows. • Historical data identifies the impact of the property sales that were used to fund the ASP project. 5
Zargon Overview (As at October 7, 2014 unless otherwise stated) Capitalization – Toronto Stock Exchange: Symbols: ZAR; ZAR.DB – Common Shares Outstanding: 30.18 million (basic) $201 million ($6.66 per share) (1) – Market Capitalization: – Net Debt at Jun. 30, 2014: $129 million, comprised of • Convertible Debentures, $57.5 million (face value) • Bank Debt (authorized $150 million) and $56.4 million • Net Working Capital Deficit $15.1 million Dividend & Yield – Annualized Current Dividend: $0.72 per share 10.8% (1) – Yield at current share price: H1 2014 Production – Equivalent: 6,610 boe/d – Oil: 4,208 bbl/d (64% of production) – Gas: 14.41 mmcf/d H1 2014 Financial Results – Funds Flow from Operations $0.90 per basic share ($27.2 million) – Dividends Paid $0.36 per basic share ($10.8 million) – Payout ratio 40% based on H1 2014 funds flow. (1) Based on a monthly dividend rate of $0.06/share and using the October 3, 2014 closing share price of $6.66. 6
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