Zargon Oil & Gas Ltd. Announces Q4 2019 Production Volumes, Abandonment Activities in 2019 and Year End Reserves

CALGARY, Alberta, Jan. 29, 2020 (GLOBE NEWSWIRE) — Zargon Oil & Gas Ltd. (the “Company” or “Zargon”) announces fourth quarter 2019 production volumes, 2019 abandonment activities and 2019 year end reserves. Zargon intends to release its 2019 audited financial results on March 12, 2020, after market close.

2019 FOURTH QUARTER PRODUCTION VOLUMES:

Fourth quarter 2019 production averaged 1,746 barrels of oil equivalent per day, a two percent improvement from the third quarter 2019 rate of 1,715 barrels of oil equivalent per day and a two percent decline from the fourth quarter rate of 1,786 barrels of oil equivalent per day. The year over year slightly reduced volumes were primarily due to the suspension of discretionary oil exploitation capital programs and natural declines.

Fourth quarter 2019 oil and liquids production averaged 1,518 barrels per day, a two percent improvement from the third quarter 2019 rate of 1,489 barrels of oil and liquids per day and a four percent decline from the fourth quarter 2018 rate of 1,575 barrels of oil and liquids per day. Fourth quarter 2019 natural gas production averaged 1.37 million cubic feet per day, and compares to rates of 1.36 million cubic feet per day in the preceding quarter and 1.27 million cubic feet per day in the fourth quarter of 2018.

For calendar 2019, Zargon’s production averaged 1,764 barrels of oil equivalent per day, and was comprised of 1,530 barrels of oil and liquids per day and 1.41 million cubic feet per day of natural gas. Additional details regarding oil exploitation opportunities, reserves and corporate strategy are provided in our updated presentation and previous press releases that are located on our website at www.zargon.ca.

ABANDONMENT ACTIVITIES

Zargon was very active in reducing its asset retirement obligations in 2019, spending $2.78 million on abandonments and reclamations. With this program Zargon reduced its Canadian suspended well count by 16 percent during the year by effectively converting 52.1 net suspended wells into an abandoned or ultimately fully reclaimed category.

NEW AND REVISED RESERVES EVALUATION PRACTICES

For Zargon’s 2019 year-end reserves report, Zargon has included all abandonment, decommissioning and reclamation costs (“ADR”) for inactive wells and has also included inactive well operating costs (“IWC”) in order to provide greater transparency and accuracy of current values and future cash flows. This is a significant change to the prior years’ practices, when such ADR and IWC costs on inactive wells were not included in the reserves evaluation, a practice that had been consistent with many other companies in the industry. Including these future costs in the reserve report greatly improves the completeness of the valuation of Zargon’s oil and gas assets.

2019 YEAR END RESERVES:

• Zargon’s reserves have been appraised by our independent reserves evaluator McDaniel & Associates Consultants Ltd. (“McDaniel”) and are effective as of December 31, 2019. Zargon’s 2019 year end proved and probable total reserves totalled 8.28 million barrels of oil equivalent, a nine percent decrease from the 2018 year end reserves of 9.19 million barrels of oil equivalent. Total proved and probable oil and liquid reserves are 7.58 million barrels and represent 92 percent of Zargon’s total reserves.

• Zargon’s 2019 year end proved developed producing reserves decreased seven percent to 5.43 million barrels of oil equivalent and included 4.97 million barrels of oil and liquids. Zargon’s proved developed producing reserve totals represent 66 percent of the Zargon’s total proved and probable reserves.
• Zargon’s 2019 year end proved and probable developed producing reserves decreased nine percent to 6.72 million barrels of oil equivalent and included 6.14 million barrels of oil and liquids. Zargon’s proved and probable developed producing reserve totals represent 81 percent of the Zargon’s total proved and probable reserves.

• Zargon’s oil properties are characterized by pressure supported reservoirs (waterflood, tertiary schemes or natural aquifers) that provide long-life, low-decline oil production. Consequently, Zargon’s proved developed producing oil and liquids reserve life index is 8.5 years and Zargon’s proved and probable producing oil and liquids reserve life index is 10.5 years. Finally, Zargon’s total proved and probable oil and liquids reserve life index is 13.0 years. The relatively large developed producing reserve life indices are indicative of low decline oil production from relatively mature properties.
• Zargon’s year end 2019 “produce-out” proved and probable net asset value is calculated to be $2.37 per basic share. On a proved developed producing basis the “produce out” net asset value is calculated to be $1.10 per basic share. These calculations reflect McDaniel’s estimate of the Zargon properties’ future cash flow using a before tax 10 percent discount rate and forecast prices and costs less an allowance for the full face value of the $3.2 million (USD) year end term debt and working capital. These net asset value estimates include ongoing operating costs and site reclamation and abandonment costs for wells that are not assigned reserves.

DETAILED RESERVE INFORMATION:

Reserves included herein are stated on a gross company working interest basis unless otherwise noted. All reserves information has been prepared in accordance with National Instrument 51-101 Standards of Disclosure (“NI 51-101”). In addition to the detailed information disclosed in this press release, more detailed information will be included in Zargon’s 2019 Annual Information Form to be filed on SEDAR (www.sedar.com) and posted on our website (www.zargon.ca) in March 2020.

Based on the independent reserves evaluation conducted by McDaniel effective December 31, 2019, and prepared in accordance with NI 51-101, Zargon had proved and probable reserves of 8.28 million barrels of oil equivalent.

1. Company working interest reserves are gross reserves before deduction of royalties, boe (6:1).
2. Boes may be misleading, particularly if used in isolation. A boe conversion ratio of 6 mcf: 1 bbl is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.
3. Reserve life is calculated using annualized fourth quarter 2019 production.

1. Company working interest reserves are gross reserves before deduction of royalties, boe (6:1).
2. Boes may be misleading, particularly if used in isolation. A boe conversion ratio of 6 mcf: 1 bbl is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.
3. Reserve life is calculated using annualized fourth quarter 2019 Canadian production.

1. Company working interest reserves are gross reserves before deduction of royalties, boe (6:1).
2. Boes may be misleading, particularly if used in isolation. A boe conversion ratio of 6 mcf: 1 bbl is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.
3. Reserve life is calculated using annualized fourth quarter 2019 United States production.

Zargon’s reserves are characterized by long-life, low-decline oil production with a high producing developed component that generally provide a corresponding high confidence level. In 2019, reserves revisions (barrels of oil equivalent) of positive 0.19 million barrels proved developed producing and negative 0.05 million barrels of proved plus probable developed producing were recorded in the reserves report. These minor revisions were +3.3% of the total proved developed producing reserves and -0.7% of the total proved plus probable developed producing reserves. The changes resulted from the reactivation of wells in Little Bow and Bellshill Lake, previously classified as proved non-producing, which offset negative revisions relating to production performance decreases in the same areas. Positive revisions related to performance were also realized for oil properties in North Dakota and Taber, which were offset by negative revisions for uneconomic natural gas properties in Alberta.

In 2019, reserves revisions (barrels of oil equivalent) of negative 0.04 million barrels total proved and negative 0.26 million barrels total proved plus probable were recorded in the reserves report. These small revisions were -0.6% of the total proved reserves and -2.8% of total proved plus probable reserves. The changes resulted from production performance decreases in various areas as well as reductions for uneconomic natural gas properties in Alberta.

NET ASSET VALUE:

Zargon’s oil, liquids and natural gas reserves were evaluated using the three consultant price forecasts effective January 1, 2020, prior to provisions for income taxes, interest, debt service charges, transaction costs and general and administrative expenses. The estimated values of future net revenue disclosed do not represent the fair market value of the reserves. Zargon has included all abandonment, decommissioning and reclamation costs and inactive well costs, including the costs to abandon suspended wells, into Zargon’s 2019 year-end reserves report in order to provide greater transparency and accuracy of current values and future cash flows.

The following net asset value table shows what is customarily referred to as a “produce-out” net asset value calculation under which the current value of Zargon’s reserves would be produced at the three consultant forecast future prices and costs. The value is a snapshot in time as at December 31, 2019, and is based on various assumptions including commodity prices and foreign exchange rates that vary over time. In this analysis, the present value of the proved and probable reserves is calculated at a before tax 10 percent discount rate. Net asset values shown include all future ADR costs of $88.6 million on proved developed producing reserves and $90.1 million on proved plus probable reserves, discounted at 10% to $23.3 million on proved developed producing reserves and to $23.5 million on proved plus probable reserves.

1. McDaniel’s estimate of future before tax cash flow discounted at PV 10 percent.   
2. Calculated using basic total shares outstanding at January 20, 2019 of 22.994 million shares.

Three Consultant (average of McDaniel & Associates Consultants Ltd., GLJ Petroleum Consultants and Sproule) Price Forecast (effective January 1, 2020)