Zargon Oil & Gas Sells Southeast Saskatchewan Assets

Zargon Oil & Gas Ltd. announced the closing of the sale of all of its Southeast Saskatchewan assets for cash consideration of $89.5 million. The effective date of the transaction is July 1, 2016.

The proceeds of this transaction have initially been used to eliminate Zargon's bank debt. As outlined below, Zargon's net debt (including debentures) will be approximately $35.5 million following the transaction:

Bank debt and net working capital - $64.8 million as of June 30, 2016.
Net sale proceeds after adjustments (transaction and severance costs) - $86.8 million.
Net post-closing cash balances - $22.0 million.
Outstanding June 2017 Convertible Debentures - $57.5 million
Net debt (including debentures) - $35.5 million

Zargon has also entered into a definitive agreement for the sale of all of its Killam, Alberta assets for cash consideration of $4.0 million, subject to normal closing adjustments. The effective date of the transaction is August 1, 2016 and the transaction is expected to close in mid-September. The Killam, Alberta assets have the following attributes:

Production: 133 barrels of oil equivalent per day - 58 percent oil and liquids (first half 2016 rates).

Proven plus probable reserves: 0.67 million barrels of oil equivalent - 64 percent oil and liquids (McDaniel & Associates Consultants Ltd. - Dec. 31, 2015)

Remaining Zargon Assets

With the completion of the Southeast Saskatchewan and Killam, Alberta sales, Zargon's remaining assets will be highlighted by the Alberta Little Bow Alkaline, Surfactant, Polymer ("ASP") tertiary recovery project, the Alberta Taber and Bellshill Lake low decline oil properties, and the remaining Williston Basin North Dakota properties. The 2015 year end reserves and first half 2016 production rates for these remaining properties are summarized below:

Production: 2,749 barrels of oil equivalent per day of low decline production - 81 percent oil and liquids.

Proven plus probable reserves: 15.09 million barrels of oil equivalent - 88 percent oil and liquids (McDaniel & Associates Consultants Ltd. - Dec. 31, 2015).

Undeveloped oil exploitation locations - 12 net locations (McDaniel & Associates Consultants Ltd. - Dec. 31, 2015).

Little Bow ASP tertiary recovery project - Currently, the ASP project is forecast to provide stable oil production for a few quarters. At higher oil prices, the existing ASP infrastructure can be utilized for multiple ASP phases and Polymer only projects seeking a 10 percent incremental oil recovery on over 80 million barrels of working interest oil-in-place.

Pro forma, upon successful completion of the sale of the Southeast Saskatchewan and Killam, Alberta properties, Zargon's remaining assets are forecast to have the following attributes in the second half of 2016.

Oil and liquids production - 2,170 barrels per day.
Total production - 2,625 barrels of oil equivalent per day.
Base oil declines - Blended corporate oil decline of 11 percent per year.
Average royalties - Alberta including ASP; 8 percent: North Dakota; 24 percent.
Operating Costs - Alberta including ASP; $17.2 million (annualized): North Dakota; $2.0 million (annualized).

2016 second half Capital Budget - ASP Polymer Injections; $1.8 million, Other Oil Exploitation Projects: $0.6 million, Abandonments and Site Reclamations; $0.3 million.

2017 Capital Budget - ASP Polymer Injections; $3.6 million, Other Oil Exploitation Projects: $1.5 million, Abandonments and Site Reclamations; $1.5 million. If oil prices improve from current levels, this budget can be increased to incorporate high-graded oil exploitation locations and the resumption of Alkaline and Surfactant injections in high-graded areas of the Little Bow ASP project.