Financial & Operating Highlights:
Zargon Energy reported its financial results for the first quarter of 2009. Funds flow from operating activities was CAD17.85 million or CAD0.84 per diluted trust unit, for the first quarter of 2009, compared with the CAD20.40 million or CAD0.97 per diluted trust unit in the 2008 fourth quarter and CAD24.75 million, or CAD1.23 per diluted trust unit in the year-ago quarter.
Highlights from the three months ended March 31, 2009 are noted below:
— First quarter 2009 production averaged 9,213 barrels of oil equivalent per day, 2% below the preceding quarter and an increase of 2% from the corresponding quarter of 2008. Lower first quarter production volumes were mainly because of natural declines and weather related outages and were partly counterbalanced by additional volumes from the tie-in of the prior quarter’s Bellshill Lake infill and step-out drilling program. For the first quarter 2009, Zargon Energy’s production averaged 432 barrels of oil equivalent per day per million trust units outstanding compared to 446 barrels of oil equivalent per day per million trust units outstanding for both the previous quarter and corresponding quarter of 2008.
— Revenue and funds flow from operating activities in the 2009 first quarter decreased 22% and 13%, respectively, from the year-ago quarter. A decline in realized oil prices of 20% and realized natural gas prices of 18% from the prior quarter were partly counterbalanced by realized risk management gains.
— The company has declared three monthly cash distributions of CAD0.18 per trust unit in the first quarter of 2009 for a total of CAD10.03 million. These cash distributions were equivalent to a payout ratio of 64% of the trust’s first quarter funds flow from operating activities on a diluted trust unit basis and, after considering the effect of the exchangeable shares not receiving distributions, the distributions amounted to 56% of funds flow from operating activities.
– The trust’s first quarter exploration and development capital expenditures (excluding property acquisitions and dispositions) declined 21% from the year-ago quarter to CAD12.78 million mainly as a result of reduced drilling, seismic and undeveloped land expenditures. In the first quarter, Zargon Energy also concluded four smaller property acquisitions for a total of CAD0.56 million.
– Debt net of working capital (excluding unrealized risk management assets/liabilities and future income taxes) increased 5% from the prior quarter to CAD91.92 million at March 31, 2009, which represents about 51% of the trust’s available credit facilities at March 31, 2009. The trust’s balance sheet remains strong with a debt net of working capital to annualized funds flow from operating activities ratio of 1.3 times.
On February 27, 2009, the trust entered into an agreement pursuant to which Zargon Energy agreed to obtain all the issued and outstanding common shares of Masters Energy Inc. (Masters). This corporate acquisition was concluded on April 29, 2009, for a total consideration of about 1.475 million Zargon Energy trust units, CAD5.70 million in cash and the assumption of about CAD13.20 million of net debt (including adjustments and transactions costs) for a total transaction value of about CAD41.40 million. This acquisition brings 1,230 barrels of oil equivalent per day of production along with a major Alkaline Surfactant Polymer (ASP) tertiary oil recovery opportunity at the Little Bow oil property in Southern Alberta.
Production:
Oil and liquids production averaged 4,560 barrels per day in the 2009 first quarter, a 3% raise from the preceding quarter and a 9% increase from the corresponding year-ago quarter. The raise in production volumes was mainly because of the completion and tie-in of Bellshill Lake infill and step-out wells drilled in the fourth quarter of 2008.
Further oil production increases are expected for the balance of 2009 with the recently concluded acquisition of 630 barrels of oil equivalent per day from the Masters acquisition being augmented by Williston basin Steelman and Alberta Plains Taber oil exploitation drilling. With these additions and for the first time in recent history, Zargon Energy’s production in the remainder of the year will be above 50% weighted to oil.
Natural gas production volumes in the first quarter of 2009 averaged 27.92 million cubic feet per day, a 6% decline from the previous quarter and a 4% decline from the corresponding period of 2008. The first quarter 2009 natural gas production decreased mainly because of natural declines, weather related outages and a redeployment of natural gas directed field capital to corporate and property acquisitions.
For the remainder of the year, Zargon Energy expects natural gas production volumes will show a moderate raise as the addition of the 3.60 million cubic feet per day from the Masters properties will more than counterbalanced the natural declines experienced in the existing Zargon Energy properties during this period of very low natural gas prices and accordingly restricted natural gas capital programs.
Capital Expenditures:
Zargon Energy first quarter field capital program totaled CAD12.78 million, a 36% raise from the 2008 first quarter field capital expenditures. During the quarter Zargon Energy drilled eight gross wells (7.4 net) that resulted in 2.9 net oil wells and 4.5 net natural gas wells for a 100% success ratio. The drilling program comprised three Jarrow natural gas exploration wells in the Alberta Plains, one Steelman horizontal and one Frys (Fertile) vertical well in the Williston basin and finally two oil wells (Spirit River and Highvale) and one gas well (Rycroft) in the West Central Alberta core area.
During the 2009 summer months, Zargon Energy will proceed with an oil exploitation focused drilling program that is now planned to comprise three Steelman oil exploitation horizontal wells in the Williston basin, two Taber oil exploitation horizontal wells. Also, in West Central Alberta a natural gas exploration well at Carrot Creek and three Alberta Plains Jarrow natural gas exploration wells are planned.
For the first quarter of 2009, the purchase of 13 thousand net acres of Crown lands at an average price of CAD38 per acre, allowed Zargon Energy to raise its quarter end undeveloped land inventory to 431 thousand net acres, up 12 thousand net acres from the balance reported at the end of 2008. For the remainder of the year, the company will carry on to be an active participant at Alberta Crown land sales during this period of low Crown land sale costs.
Recently, the company has taken advantage of the industry’s now lower property and corporate acquisition costs with the announcement and closing of the acquisition of Masters. During this period of opportunity, Zargon Energy will carry on to use its strong balance sheet and solid cash flows augmented by substantial hedge gains to pursue additional property and corporate acquisitions.
