Zargon Oil & Gas has released its 2019 fourth quarter and full year financial results. Highlights from the fourth quarter and year ended Dec. 31, 2019 are provided below: 

Highlights for the fourth quarter and full year

• For calendar 2019, funds flow was $6.15 million ($0.28 per basic share) compared to funds flow from operating activities of a negative $0.54 million (a negative $0.35 per basic share) recorded in the prior year.
• Oil and liquids production averaged 1,530 barrels of oil and liquids per day in 2019, a 13 percent decrease from the preceding year. Natural gas production averaged 1.41 million cubic feet per day in 2019, a 26 percent decrease from 2018. The reduction in production volumes was primarily due to natural production declines, the suspension of discretionary oil exploitation capital programs, the deferral of routine maintenance operations due to cash constraints and the shut-in of uneconomic natural gas properties. Total 2019 production averaged 1,764 barrels of oil equivalent per day, a 15 percent decrease from the prior year.  
• Zargon was successful in reducing general administrative costs (inclusive of transaction, exploration and evaluation costs) through further staff adjustments and realignments to $3.03 million in 2019, compared to $3.91 million in 2018.
• Zargon’s 2019 net earnings was $22.54 million, which compares to a net loss of $35.37 million in 2018 and a net loss of $9.31 million in 2017. The net earnings/loss track the funds flow from operating activities for the respective periods modified by non-cash charges, which in 2019 were primarily related to a gain on convertible debentures, depletion and depreciation expense, accretion expense, and impairment losses. On a per basic share basis, the 2019 net earnings was $1.01 compared to a net loss of $22.91 in 2018 and a net loss of $6.06 in 2017.
• 2019 net capital expenditures for the year totalled $3.40 million. These expenditures consisted of $3.37 million of exploitation, development and facility expenditures, nil million of net property dispositions, and $0.03 million of administrative assets. The $3.37 million of exploitation, development and facility programs include $1.00 million of chemical costs for the Alkaline Surfactant Polymer (“ASP”) Little Bow project. Zargon’s 2019 capital program was primarily allocated to oil exploitation programs (waterfloods), Little Bow Polymer costs, well reactivations, and pipeline construction projects. Recent well recompletions and stimulations at the Little Bow non-ASP property have delivered good results. Consistent with the last few years, Zargon did not drill any of its proven undeveloped locations (Taber, Bellshill Lake and North Dakota) in 2019, as Zargon conserved its cash to retire debt and retire abandonment liabilities.
• 2019 abandonment and reclamation costs totaled $2.78 million, a $0.84 million increase from the $1.94 million recorded in the prior year. 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. In Alberta, Zargon has voluntarily participated in the Alberta Energy Regulator’s (“AER”) Area Based Closure (“ABC”) program which enables significant cost savings by encouraging large scale area based abandonment programs. For 2019, Zargon’s abandonment expenditure commitment for the ABC program was $1.16 million. 
• On January 11, 2019, Zargon announced the completion of a transaction to settle its $41.94 million principal amount of outstanding 8% Convertible Debentures due December 31, 2019 in exchange for common shares of Zargon. Immediately before the transaction, 30.93 million common shares were issued and outstanding. Following the completion of the transaction, 459.81 million common shares were issued and outstanding. Following closing, the Company has reduced its overall debt by $41.94 million and its annual interest burden by $3.36 million, resulting in a simplified capital structure with only $3.50 million (USD) of term debt outstanding.
• Effective May 30, 2019, the Company consolidated its issued and outstanding common shares (the “Pre-Consolidation Shares”) on the basis of one new common share (the “Post-Consolidation Shares”) for every twenty pre-consolidation shares held (the “Share Consolidation”). As a result of the Share Consolidation, the 459.81 million Pre-Consolidation Shares were consolidated to 22.99 million Post-Consolidation Shares.

Fourth quarter

• During the fourth quarter of 2019, Zargon’s petroleum and natural gas sales of $7.91 million were three percent lower than the previous quarter’s sales. Production for the 2019 fourth quarter of 1,746 barrels of oil equivalent per day was two percent higher than the 2019 third quarter’s production of 1,715 barrels of oil equivalent per day. Compared to the previous quarter, oil production was two percent higher at 1,518 barrels per day. The fourth quarter natural gas production increased one percent from the previous quarter to 1.37 million cubic feet per day. Average field prices received during the fourth quarter were $54.57 per barrel for oil and liquids, an eight percent decrease compared to the 2019 third quarter and $2.34 per thousand cubic feet for natural gas, a 208 percent increase from the prior quarter.
• Net capital expenditures were $0.65 million during the fourth quarter of 2019, compared to a prior quarter spend amount of $1.21 million. Fourth quarter conventional expenditures were $0.64 million while ASP expenditures were $0.24 million (including $0.13 million of chemical costs). In addition, Zargon acquired $0.01 million of administrative assets in the quarter. During the fourth quarter, Zargon drilled nil net wells.
• Asset retirement expenditures reflect the actual amounts incurred to abandon and reclaim wells. These asset retirement expenditures totalled $1.13 million in the 2019 fourth quarter and increased 19 percent from the prior quarter amount of $0.95 million. Zargon was very active in reducing its asset retirement obligations in the fourth quarter of 2019. In Alberta, Zargon has voluntarily participated in the Alberta Energy Regulator’s (“AER”) Area Based Closure (“ABC”) program which enables significant cost savings by encouraging large scale area based abandonment programs.

Funds flow was $1.35 million in the fourth quarter, a decrease of $0.06 million from the prior quarter. A comparative analysis of the primary factors that caused this quarter-over-quarter decrease is as follows:

• Fourth quarter 2019 petroleum and natural gas sales of $7.91 million were three percent lower than the 2019 third quarter sales of $8.19 million. This sales decrease was a result of an eight percent decrease in oil and liquids pricing, which was partially offset by a two percent increase in production and a 208 percent increase in natural gas pricing over the third quarter.
• Royalties for the fourth quarter were $1.03 million, a decrease of $0.10 million from the prior quarter as the average royalty rate for the quarter decreased to a 13.0 percent from the 2019 third quarter rate of 13.7 percent.
• Operating expenses were $4.69 million for the quarter, two percent higher than the third quarter of 2019. Transportation expenses were $0.11 million, a 16 percent decrease over the prior quarter. The quarterly increase in operating expenses was due to an increase in well repair and maintenance costs. On a per barrel of oil equivalent basis, operating expenses were essentially unchanged at $29.21 in the fourth quarter of 2019 compared to $29.27 in the prior quarter and transportation expenses decreased 17 percent to $0.67 from $0.81 in the prior quarter.
• General and administrative expenses of $0.58 million for the quarter, were eight percent lower than the third quarter of 2019. General and administrative expenses on a per barrel of oil equivalent basis were $3.59 compared to $3.95 in the prior quarter.
• Transaction costs incurred in the fourth quarter were $0.01 million compared to $0.03 million in the prior quarter. The transaction costs relate to Zargon’s ongoing strategic alternatives review.
• Interest and financing charges on debt were $0.13 million and was consistent with the prior quarter expense of $0.14 million, and relate to the $3.50 million (USD) term debt obtained in November 2018. 
• The current tax expense was $0.02 million, compared to $0.06 million of the expense in the 2019 third quarter.

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