Zargon Oil & Gas Ltd. Provides 2014 First Quarter Financial Results

Zargon Oil & Gas Ltd. ("Zargon" or the "Company") (TSX:ZAR)(TSX:ZAR.DB) 

FINANCIAL AND OPERATING HIGHLIGHTS (THREE MONTHS ENDED MARCH 31, 2014)



--  Funds flow from operating activities of $15.3 million were 26 percent
    higher than the $12.1 million recorded in the prior quarter, and 10
    percent higher than the $13.9 million reported in first quarter of 2013.
    Funds flow from operating activities for the 2014 first quarter included
    reductions of $2.3 million of realized hedge losses and $0.7 million of
    asset retirement expenses. 
    
--  Reflecting the prior quarter's dispositions, first quarter 2014
    production averaged 4,320 barrels of oil and liquids per day, a seven
    percent decrease from the preceding quarter and first quarter 2014
    natural gas production averaged 14.1 million cubic feet per day, a 12
    percent decrease from the preceding quarter. Total production averaged
    6,662 barrels of oil equivalent per day, an eight percent decrease from
    the preceding quarter. During the quarter, oil and liquids production
    represented 65 percent of total production based on a 6:1 equivalent
    basis. 
    
--  Monthly cash dividends of $0.06 per common share were declared in the
    first quarter of 2014 for a total of $5.4 million. These cash dividends
    were equivalent to a payout ratio of 35 percent of funds flow from
    operating activities. 
    
--  First quarter 2014 exploration and development capital expenditures
    (excluding property acquisitions and dispositions) were $16.9 million
    and included $7.5 million of expenditures related to the Little Bow ASP
    phase 1 enhanced oil recovery project. In the quarter, Zargon drilled
    7.0 gross wells (3.7 net wells) that resulted in 3.7 net oil wells. 
    
--  Zargon's March 31, 2014 debt, net of working capital (excluding
    unrealized derivative assets/liabilities) and using the full future face
    value of the convertible debenture of $57.5 million, was $121.7 million
    and is approximately 2.0 times annualized 2014 first quarter funds flow
    from operating activities. At March 31, 2014, Zargon had $100 million of
    available credit facilities remaining on its $165 million borrowing
    base. 
    

                                                                            
                                               Three Months Ended March 31, 
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                                                                    Percent 
                                                   2014      2013    Change 
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Financial Highlights                                                        
Income and Investments ($ millions)                                         
  Gross petroleum and natural gas sales           40.26     37.08         9 
  Funds flow from operating activities            15.30     13.90        10 
  Cash flows from operating activities            14.86     12.46        19 
  Cash dividends (net of Dividend Reinvestment                              
   Plan)                                           5.42      4.75        14 
  Net earnings                                     0.17      0.23       (26)
                                                                            
  Field capital and administrative asset                                    
   expenditures                                   16.94     19.28       (12)
  Net property and corporate dispositions         (1.46)    (3.09)       53 
  Net capital expenditures                        15.48     16.19        (4)
                                                                            
Per Share, Basic                                                            
  Funds flow from operating activities                                      
   ($/share)                                       0.51      0.46        11 
  Net earnings ($/share)                           0.01      0.01         - 
                                                                            
Cash Dividends ($/common share)                    0.18      0.18         - 
                                                                            
Balance Sheet at Period End ($ millions)                                    
  Property and equipment (D&P)                   414.85    399.39         4 
  Exploration and evaluation assets (E&E)         13.29     19.22       (31)
  Total assets                                   462.66    450.34         3 
  Working capital deficiency                      13.68     18.58       (26)
  Long term bank debt                             50.55     44.02        15 
  Convertible debentures at maturity              57.50     57.50         - 
  Shareholders' equity                           169.56    192.70       (12)
                                                                            
Weighted Average Shares Outstanding for the                                 
 Period (millions) - Basic                        30.10     29.91         1 
Total Common Shares Outstanding at Period End                               
 (millions)                                       30.12     29.97         1 
----------------------------------------------------------------------------
Funds flow from operating activities is an additional GAAP term that        
represents net earnings/loss and asset retirement expenditures except for   
non-cash items.                                                             
Working capital deficiency excludes derivative assets/liabilities.          
Cash dividends are net of the Dividend Reinvestment Plan in 2013. The       
Dividend Reinvestment Plan was suspended September 2013.                    
                                                                            
                                                                            
                                                                            
                                               Three Months Ended March 31, 
----------------------------------------------------------------------------
                                                                    Percent 
                                                   2014      2013    Change 
----------------------------------------------------------------------------
Operating Highlights                                                        
Average Daily Production                                                    
  Oil and liquids (bbl/d)                         4,320     5,113       (16)
  Natural gas (mmcf/d)                            14.05     15.21        (8)
  Equivalent (boe/d)                              6,662     7,648       (13)
                                                                            
Average Selling Price (before the impact of                                 
 financial risk management contracts)                                       
  Oil and liquids ($/bbl)                         86.71     71.62        21 
  Natural gas ($/mcf)                              5.18      3.01        72 
                                                                            
Netback ($/boe)                                                             
  Gross petroleum and natural gas sales           67.15     53.87        25 
  Royalties                                      (11.21)    (9.69)       16 
  Realized gain/(loss) on derivatives             (3.84)     1.86      (306)
  Operating expenses                             (17.04)   (17.27)       (1)
  Transportation expenses                         (0.85)    (0.66)       29 
  Operating netback                               34.21     28.11        22 
                                                                            
Wells Drilled, Net                                  3.7       5.1       (27)
                                                                            
Undeveloped Land at Period End (thousand net                                
 acres)                                             202       321       (37)
----------------------------------------------------------------------------
The calculation of barrels of oil equivalent ("boe") is based on the        
conversion ratio that six thousand cubic feet of natural gas is equivalent  
to one barrel of oil.                                                       



Message to Shareholders

Zargon Oil & Gas Ltd. has released financial and operating results for the first
quarter of 2014 that highlighted continued progress in its drive to become a
long term sustainable, dividend-paying energy producer. The quarter was
highlighted by the commissioning of the Little Bow Alkaline Surfactant Polymer
("ASP") enhanced oil recovery project and the commencement of ASP injection into
the reservoir.


Zargon's sustainability model implies balancing cash inflows and outflows,
generating meaningful growth in cash flow per share, while continuing the shift
toward oil and liquids over the next few years. Zargon believes that the Little
Bow ASP enhanced oil recovery production will help improve sustainability, as it
offers the best blend of low-decline, low-sustaining capital and high-netback
and long-life assets available to the company. 


The Company's focus for the remainder of 2014 will be to:



--  Deliver Little Bow phase 1 ASP operational and production targets of an
    incremental 350 barrels of oil per day by year end (increasing to a 2015
    average rate of 900 barrels of oil per day); 
    
--  Finalize the design of the Little Bow phase 2 ASP project and advance
    the Little Bow phase 3 and 4 ASP engineering studies; 
    
--  Deliver a consistent dividend of $0.06 per common share per month; 
    
--  Execute a continuing property divestiture program designed to high-grade
    and concentrate the Company's asset portfolio on our core oil
    exploitation projects; 
    
--  Direct a high-graded oil exploitation capital program focused on our
    five long-life low-decline oil exploitation properties (Williston Basin,
    Taber, Bellshill Lake, Little Bow non-ASP and Hamilton Lake); and 
    
--  Maintain (and ultimately improve) our strong balance sheet. 



Little Bow Alkaline Surfactant Polymer ("ASP") Project 

Zargon commissioned the Little Bow ASP enhanced oil recovery project and
commenced first chemical injections in March 2014. This ASP project entails the
injection of large volumes of a dilute chemical solution into a partially
depleted oil reservoir to recover incremental oil reserves. To date, the ASP
plant operations and injection well rates have met or exceeded expectations. 


The total cost to complete the project was approximately $50 million which is
roughly consistent with our November 2012 press release that forecasted a $47
million project cost and a December 2013 injection date. The total construction
capital cost of phases 1 and 2 of the Little Bow ASP project will be
approximately $62 million. The estimated total phase 1 and 2 chemical cost for
the 2014-2019 chemical injection period will be capitalized and is now estimated
at $81 million (as spent dollars), a five percent increase from prior estimates
due to a change in forecasted Canadian dollar exchange rates. Phase 2
implementation costs are expected to be $12 million and are scheduled for late
2015. 


Phase 1 of the Little Bow ASP project is expected to provide 100 barrels of oil
per day of average incremental production in 2014, which will be comprised of an
initial production response in the 2014 third quarter and a 2014 year end rate
of 350 barrels of oil per day. Incremental production is expected to exceed 900
barrels of oil per day in 2015 and then increase to 1,550 barrels of oil per day
in 2016, once phase 2 production begins.


Follow-on capital expenditures of $80 million (including chemical costs) for
phases 3 and 4 of the Little Bow ASP project are expected to yield an additional
3.6 million barrels of incremental oil and Zargon's combined Little Bow project
(phases 1 through 4) total production is expected to stabilize at 2,200 barrels
of oil per day in the 2021 through 2023 period. For further information
regarding the Little Bow ASP project, please refer to our updated corporate
presentation, which is available at www.zargon.ca.


Other Field Activities 

In addition to the $7.5 million of ASP capital expenditures, Zargon executed a
$9.4 million capital program in the 2014 first quarter on conventional oil
exploitation assets, which included the drilling of 3.7 net horizontal drainage
wells, mostly in the Williston Basin core area. 


For the remainder of the year, Zargon is planning on drilling an additional 14
net high-graded horizontal oil exploitation wells, for Taber Sunburst (4),
Bellshill Lake Mannville (5) and Williston Basin Mississippian drainage (5)
projects. In aggregate, Zargon has identified more than 60 horizontal locations
in five conventional (non-ASP) oil exploitation projects, which will provide a
high-graded drilling inventory for many years. Each of these five oil
exploitation projects are (or will be) pressure supported by water injections or
natural reservoir aquifers and consequently provide long-life low-decline oil
volumes that will support future dividends.


Property Dispositions Update 

During the 2014 first quarter, property dispositions of $1.5 million were
concluded, which primarily related to the sale of assets in southeast
Saskatchewan. With the Little Bow ASP tertiary recovery project now
commissioned, Zargon will focus on consolidating our property footprint on
higher netback assets. To meet this objective, we will be using third party
services to market 14 non-strategic properties that, in aggregate, are producing
170 barrels of oil per day and 9.7 million cubic feet of natural gas per day
(1,790 barrels of oil equivalent per day). If acceptable bids are received,
these dispositions will enable Zargon to realize a lower cost structure through
a disciplined focus on our growing tertiary oil recovery business and the stable
production volumes coming from the measured exploitation of core, conventional
long-life low-decline oil properties. 


2014 Outlook

Zargon's 2014 non-ASP field capital budget has been set at $35 million (before
dispositions) of which approximately $26 million will be spent in the remaining
three quarters. The ASP 2014 capital budget now calls for $8 million of capital
expenditures (first quarter expenditures of $7.5 million) and $9 million of
chemical costs. 


Our 2014 capital budget also incorporated $5 million of property dispositions,
of which $1.5 million have been completed by early May. Depending on the results
of our property disposition initiative, the year's actual dispositions could be
considerably larger. Initially, disposition proceeds (if any) would be used to
retire bank debt. 


Also, Zargon has entered into a significant oil hedging program to provide a
measure of stability and predictability to cash flows as we wait for the ASP
production volumes to ramp up. For the remainder of 2014, Zargon has hedged
2,733 barrels per day at $91.54 US/bbl WTI and 267 barrels per day at $99.60
Cdn/bbl WTI, while for the first half of 2015 an average of 1,200 barrels per
day is hedged at $92.96 US/bbl WTI.


Production Guidance 

In the February 19, 2014 Little Bow and reserves press release, Zargon provided
first quarter 2014 oil production rate guidance of 4,300 barrels of oil and
liquids per day. Actual first quarter volumes were 4,320 barrels of oil and
liquids per day and met guidance. The press release also set Zargon's first
quarter 2014 natural gas production guidance of 14.0 million cubic feet per day.
First quarter actual volumes were 14.1 million cubic feet per day and met
guidance. 


Oil and liquids production for the 2014 second quarter is set at 4,200 barrels
of oil per day and includes the impact of spring break-up. Second quarter
natural gas production guidance is set at 14.0 million cubic feet per day. For
the remainder of the year, production volumes will depend on the magnitude and
timing of our property disposition programs, the timing and drilling results
from our Taber, Bellshill Lake and Williston Basin oil exploitation drilling
programs and the timing and the magnitude of the first production volumes from
our Little Bow ASP project. Based on our forecasted 2014 Little Bow ASP exit
production rate of 350 barrels of oil per day, we are forecasting 2014 year end
corporate production rates of 4,550 barrels of oil per day (excluding the effect
of property dispositions). 


Acknowledgement 

Finally, we would like to personally acknowledge Margaret McKenzie who has
decided to not stand for re-election to the Zargon Board this year. Margaret
joined our Board in January 2007 and over the past seven years has served Zargon
and its shareholders well through her thoughtful counsel and advice. We thank
Margaret for her significant contributions and wish her the very best in her
future endeavours. 


Forward-Looking Statements 

This press release offers our assessment of Zargon's future plans and operations
as at May 14, 2014, and contains certain forward-looking information and
statements within the meaning of applicable securities laws. The use of any of
the words "anticipate", "continue", "estimate", "expect", "forecast", "may",
"will", "project", "should", "plan", "intend", "believe" and similar expressions
(including the negatives thereof) are intended to identify forward-looking
information or statements. In particular, but without limiting the foregoing,
this news release contains forward-looking information and statements pertaining
to the following: guidance as to our 2014 capital budgets, including the
allocation thereof and the sources of funding and various plans, forecasts and
estimates as to drilling cost reduction initiatives, and other operational
forecasts and plans and results therefrom under the heading "Little Bow Alkaline
Surfactant Polymer ("ASP") Project", "Other Field Activities", "Property
Dispositions Update" and "2014 Outlook"; our plans with respect to our Little
Bow ASP project and the results therefrom referred to under the headings
"Message to Shareholders", "Little Bow Alkaline Surfactant Polymer ("ASP")
Project" and "Production Guidance"; our plans for our hedges under the heading
"2014 Outlook"; and all matters, including guidance as to our estimated 2014 and
beyond production and production mix, under the heading "Production Guidance".


The forward-looking information and statements included in this news release are
not guarantees of future performance and should not be unduly relied upon. Such
information and statements involve known and unknown risks, uncertainties and
other factors that may cause actual results or events to differ materially from
those anticipated in such forward-looking information or statements including,
without limitation: 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
www.zargon.ca and on www.sedar.com. Forward-looking statements are provided to
allow investors to have a greater understanding of our business.


You are cautioned that the assumptions used in the preparation of such
information and statements, 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; the
availability of adequate and acceptable debt and equity financing and funds from
operations to fund our planned expenditures; and our ability to add production
and reserves through our development and acquisition activities, 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 and statements contained in this document 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.


Additional GAAP and Non-GAAP Financial Measures

Zargon uses the following terms for measurement within this press release that
do not have a standardized prescribed meaning under Canadian generally accepted
accounting principles ("GAAP") and these measurements may not be comparable with
the calculation of similar measurements of other entities.


The terms "funds flow from operating activities" and "operating netback per boe"
in this press release are not recognized measures under GAAP. Management of
Zargon believes that in addition to net earnings and cash flows from operating
activities as defined by GAAP, these terms are useful supplemental measures to
evaluate operating performance and assess leverage. Users are cautioned;
however, that these measures should not be construed as an alternative to net
earnings or cash flows from operating activities determined in accordance with
GAAP as an indication of Zargon's performance.


Zargon considers funds flow from operating activities to be an important measure
of Zargon's ability to generate the funds necessary to finance capital
expenditures, pay dividends and repay debt. All references to funds flow from
operating activities throughout this press release are based on cash provided by
operating activities before the change in non-cash working capital since Zargon
believes the timing of collection, payment or incurrence of these items involves
a high degree of discretion and, as such, may not be useful for evaluating
Zargon's operating performance. Zargon's method of calculating funds flow from
operating activities may differ from that of other companies and, accordingly,
may not be comparable to measures used by other companies. Funds flow from
operating activities per basic share is calculated using the same weighted
average basic shares outstanding as is used in calculating earnings per basic
share. See Zargon's Management's Discussion and Analysis ("MD&A") as filed on
www.zargon.ca and on www.sedar.com for the periods ended March 31, 2014 and 2013
for a discussion of cash flows from operating activities and funds flow from
operating activities.


51-101 Advisory

In conformity with National Instrument 51-101, Standards for Disclosure of Oil
and Gas Activities ("NI 51-101"), natural gas volumes have been converted to
barrels of oil equivalent ("boe") using a conversion rate of six thousand cubic
feet of natural 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.


Filings

Zargon has filed with Canadian securities regulatory authorities its unaudited
financial statements for the three months ended March 31, 2014 and the
accompanying MD&A. These filings are available on www.zargon.ca and under
Zargon's SEDAR profile on www.sedar.com.


About Zargon

Based in Calgary, Alberta, Zargon's securities trade on the Toronto Stock
Exchange and there are currently approximately 30.127 million common shares
outstanding.


Zargon Oil & Gas Ltd. is a Calgary based oil and natural gas company working in
the Western Canadian and Williston sedimentary basins that has delivered a long
history of returns and dividends (distributions). Zargon's business is focused
on oil exploitation projects that profitably increase oil production and
recovery factors from existing oil reservoirs. 


In order to learn more about Zargon, we encourage you to visit Zargon's website
at www.zargon.ca where you will find a current shareholder presentation,
financial reports and historical news releases.


FOR FURTHER INFORMATION PLEASE CONTACT: 
Zargon Oil & Gas Ltd.
C.H. Hansen
President and Chief Executive Officer
403-264-9992


J.B. Dranchuk
Vice President, Finance and Chief Financial Officer
403-264-9992
[e-mail]
www.zargon.ca