NEWS RELEASE TRANSMITTED BY CCNMatthews
FOR: ZARGON OIL & GAS LTD.
TSX SYMBOL: ZAR
MAY 14, 2003 - 15:58 EST
Zargon Oil & Gas Ltd.: 2003 First Quarter Report
CALGARY, ALBERTA--
CORPORATE HIGHLIGHTS
Zargon recorded an excellent first quarter of 2003 as higher
production volumes combined with outstanding oil and natural gas
prices provided exceptional financial results. Revenue of $29.19
million, cash flow of $15.23 million and earnings of $6.74
million increased 41 percent, 42 percent and 57 percent
respectively from the preceding fourth quarter of 2002 and more
than doubled the results of the corresponding first quarter of
2002. Cash flow of $15.23 million in first quarter 2003 or $0.84
per diluted share exceeded annual cash flows achieved by Zargon
in any year prior to 2000. Total equivalent production volumes
increased five percent from the preceding quarter and 16 percent
from the first quarter of 2002. Comparisons on a per diluted
share basis were similar: first quarter 2003 cash flow per share
increased 42 percent from the preceding fourth quarter and 133
percent from first quarter 2002 while first quarter 2003 earnings
per share rose 54 percent from the preceding quarter and 311
percent from first quarter 2002.
First quarter 2003 net capital expenditures totaled $6.86 million
and were weighted 36 percent to land, geological and geophysical
costs as Zargon continued to focus on advancing its natural gas
exploration initiatives. During the quarter, Zargon's undeveloped
land inventory continued to grow and reached 341,100 net acres at
quarter-end, a 38 percent gain in a 12 month period. Large cash
flows in the period reduced Zargon's debt net of working capital
to $20.12 million at quarter-end, equivalent to less than four
months of the very strong first quarter 2003 annualized cash
flows.
/T/
Percent
Three months ended March 31 (unaudited) 2003 2002 Change
-------------------------------------------------------------------
FINANCIAL
Income and Investments ($ million)
Production revenue 29.19 12.73 129
Cash flow from operations 15.23 6.19 146
Net earnings 6.74 1.58 327
Net capital expenditures 6.86 5.34 28
Per Common Share, Diluted
Cash flow from operations ($/share) 0.84 0.36 133
Net earnings ($/share) 0.37 0.09 311
Balance Sheet at Period End ($ million)
Property and equipment, net 143.89 121.25 19
Bank indebtedness 20.78 25.26 (18)
Shareholders' equity 93.61 72.21 30
Shares Outstanding at Period End
(million) 17.73 16.88 5
Percent
Three months ended March 31 (unaudited) 2003 2002 Change
-------------------------------------------------------------------
OPERATIONS
Average Daily Production
Oil and liquids (bbl/d) 3,057 2,859 7
Natural gas (mmcf/d) 24.02 19.42 24
Equivalents (boe/d) 7,060 6,097 16
Equivalents per million shares (boe/d) 399 364 10
Average Selling Price (before hedges)
Oil and liquids ($/bbl) 43.85 28.30 55
Natural gas ($/mcf) 7.92 3.12 154
Wells Drilled, Net 5.0 5.1 (2)
Undeveloped Land at Period End
(thousand net acres) 341 248 38
Note: The calculation of barrels of equivalent (boe) is based on the
conversion ratio that one barrel of oil is equivalent to six thousand
cubic feet of natural gas.
/T/
PRODUCTION
Production of oil and liquids averaged 3,057 barrels per day in
first quarter 2003, seven percent over first quarter 2002 and
approximately level with fourth quarter 2002. Over the last year,
exploitation projects on Zargon's long-life, shallow-decline
properties have allowed oil production gains despite capital
programs heavily weighted to natural gas exploration. For
example, an October 2002 enhanced waterflood program initiated at
the Haas Unit in North Dakota has shown excellent early response
with a six month production gain of more than 40 percent to 720
barrels per day. Four other properties will receive waterflood
enhancement or initiation activity in 2003. Subsequent to
quarter-end, two Southeast Saskatchewan / North Dakota
("Williston Basin") property acquisitions have provided an
additional 229 barrels per day of shallow decline Mississippian
oil production.
Production of natural gas increased progressively over the last
12 months and averaged 24.02 million cubic feet per day in first
quarter 2003. This represents increases of eight percent over the
preceding 2002 fourth quarter and 24 percent over the 19.42
million cubic feet per day produced in first quarter 2002. The
majority of these production gains came from the Company's West
Central Alberta gas exploration initiatives. Further growth of
two million cubic feet per day is scheduled in June 2003 from the
Pembina shallow gas program, as a Zargon operated gas gathering
and compression facility is placed on production.
On an equivalent basis, production has grown steadily for the
last three quarters. First quarter 2003 production of 7,060
barrels of equivalent per day was five percent above the
preceding fourth quarter of 2002, nine percent above third
quarter 2002 and 16 percent above the corresponding first quarter
of 2002.
EXPLORATION AND EXPLOITATION
Zargon entered 2003 with a very strong, largely natural
gas-prospective, undeveloped land base of 331,300 net acres that
supports our strategy to deliver natural gas production growth by
exploration. The fall-winter 2002 drilling program established
new natural gas finds at Highvale, Pembina and Judy Creek in West
Central Alberta, all of which required new infrastructure in
order to be placed on production. The Highvale and Judy Creek
wells were placed on production in December and January and the
new Pembina gathering system is planned to be operational by
mid-June, 2003.
After an active 17.4 net well fourth quarter 2002 drilling
program, only six gross (5.0 net) wells were drilled in first
quarter 2003. The program delivered an 80 percent success ratio
with 1.3 net Pembina and 0.7 net Jarrow natural gas wells in
Alberta, and 2.0 net oil wells at Pinto and Weyburn plus 1.0 net
Manor dry hole, in Southeast Saskatchewan. Following spring
break-up an active drilling program will be resumed with five
wells at Jarrow, five wells at Pembina, two wells on the Peace
River Arch and two wells in Southeast Saskatchewan.
Although Alberta Crown land prices have increased from their 2002
lows, Zargon has continued to be successful with an active Crown
land acquisition program buying 13,100 net acres in the quarter,
primarily Peace River Arch and Pembina natural gas exploration
acreage, for an average cost of $103 per acre.
The second component of Zargon's growth strategy is the efficient
exploitation of oil properties characterized by a large
underdeveloped volume of oil-in-place. For 2003, Zargon has
embarked on an expanded oil exploitation program including
additional water injection in the East Frys flood, the initiation
of new waterfloods at West Frys and Weyburn in Southeast
Saskatchewan, activation of a waterflood at Modeste Creek and the
addition of water injection at Taber, both in Alberta. Our
Williston Basin exploitation strategy calls for 3-D seismic
reservoir characterization followed by horizontal drilling, once
successful waterflood re-pressurization has occurred. This summer
Zargon is moving onto the next phase of development on six
separate Williston Basin properties by shooting 3-D seismic
surveys that should lead to multi-well horizontal well
development programs during the next few quarters.
ACQUISITIONS / DISPOSITIONS
Robust property prices continued throughout the 2003 first
quarter, and consequently Zargon's property acquisitions were
limited to a small, complementary, $0.48 million Jarrow
acquisition. During the quarter, consistent with our
counter-cyclical strategy, Zargon assembled and marketed a
package of small, mainly non-operated, non-core properties, most
with higher operating costs. Subsequent to quarter-end, Zargon
has entered into agreements for the sale of $5.01 million of
these natural gas weighted, minor properties. In total,
production of 178 barrels of equivalent per day and proven
reserves of 466 thousand barrels of equivalent were disposed.
Also after quarter-end, reflecting a potentially less competitive
property market for North Dakota assets, Zargon concluded a $4.95
million Cdn. acquisition of a 92.5 percent interest in the Truro
Unit of Rennville County, North Dakota. The purchase provides
Zargon 192 barrels of oil per day of shallow-decline waterflood
production with a working interest oil-in-place of nine million
barrels. Following the completion of a fall 3-D seismic program,
Zargon plans to further exploit the Unit with horizontal wells.
Also in the second quarter, Zargon successfully acquired 37
barrels per day of long-life exploitable oil production in
Southeast Saskatchewan for $1.02 million.
GUIDANCE (a)
Last November, Zargon provided 2003 mid-year production guidance
at 25 million cubic feet of natural gas per day and 3,400 barrels
of oil per day, for a combined rate of 7,570 barrels of
equivalent per day which would represent a 24 percent increase
over the 2002 second quarter average rate of 6,085 barrels of
equivalent per day. On an equivalent basis, Zargon is still on
track to meet these mid-year 2003 production guidance levels.
Forecasted natural gas production growth from the first quarter
2003 rate of 24.02 million cubic feet per day will come from the
June 2003 tie-in of about two million cubic feet per day at the
West Central Alberta Pembina shallow natural gas property, which
will be partially offset by the second quarter disposition of
selected minor non-operated gas properties. Oil production growth
from the first quarter 2003 rate of 3,057 barrels per day is
forecasted to come from Williston Basin drilling at Weyburn and
Pinto, Saskatchewan plus Williston Basin property acquisitions at
Truro, North Dakota and Weyburn, Saskatchewan.
Zargon's 2003 capital program budget continues to be set at $45
million. This budget is allocated $35 million to exploration and
development field activities and calls for the drilling of 40 net
wells of which 75 percent will be related to natural gas
projects. The majority of these locations are all-season access,
and will be drilled in the spring/summer/fall period, when field
services are projected to be less expensive than in the high cost
winter months. The 2003 field-related capital expenditures will
focus on continuing to expand our natural gas activities in West
Central Alberta (18 net wells), while maintaining steady natural
gas production rates from East Central Alberta (12 net wells).
Oil expenditures will continue to be directed to the efficient
exploitation of our very large Williston Basin (10 net wells) oil
development and waterflood project inventory. The remaining $10
million property or corporate acquisition component of the
capital budget can be substantially increased if value-added
opportunities are available. Based on this $45 million capital
program, initial year-end 2003 production guidance is set at 26.5
million cubic feet of natural gas per day and 3,600 barrels of
oil per day.
(a) Please see comments on "Forward Looking Statements" on last
page of this report.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Management's discussion and analysis (MD&A) should be read in
conjunction with the unaudited interim financial statements for
the three months ended March 31, 2003 and the audited
consolidated financial statements and MD&A for the year ended
December 31, 2002 . The calculation of barrels of equivalent
(boe) is based on the conversion ratio that one barrel of oil is
equivalent to six thousand cubic feet of natural gas.
FINANCIAL ANALYSIS
Substantial production volume gains accompanied by large
increases in commodity prices resulted in record first quarter
production revenues (before hedging) of $29.19 million, up 41
percent over fourth quarter 2002 and 129 percent over first
quarter 2002. Production in first quarter 2003 averaged 7,060
barrels of equivalent per day, five percent higher than the
preceding quarter and 16 percent higher than first quarter 2002.
This growth is a continuation of the quarterly production gains
delivered since mid-year 2002 and is primarily due to successful
natural gas exploration and development drilling at West Central
Alberta properties.
Zargon's first quarter 2003 oil and liquids price was $43.85 per
barrel, a steep increase of 23 percent over the fourth quarter
price as events in Iraq moved to a climax, and 55 percent over
first quarter 2002. The transportation and quality differential
from the FOB Edmonton posted price for the first quarter of 2003
averaged a seasonally higher $6.87 per barrel, a 16 percent
increase over the $5.90 per barrel recorded in the fourth quarter
of 2002. Reflecting a large draw-down in North American natural
gas storage inventories, Zargon's first quarter 2003 natural gas
price jumped to $7.92 per thousand cubic feet, a remarkable 52
percent and 154 percent above fourth quarter 2002 and first
quarter of 2002 prices, respectively.
Zargon's commodity price risk management policy is to use forward
sales, options and costless collars for, on average, 20 to 30
percent of our net oil and natural gas sales in order to
partially offset the effects of large price fluctuations. High
natural gas and oil prices in the first quarter produced a net
hedging loss of $2.22 million compared to a hedging loss of $0.71
million in the preceding fourth quarter and a hedging gain of
$0.92 million in the 2002 first quarter. The expiration of four
fixed price gas swaps and one gas collar at March 31, coupled
with lower oil and gas prices should mitigate further 2003
hedging losses.
Royalties, inclusive of Alberta Royalty Tax Credit and
Saskatchewan Resource Surcharge, were $6.24 million for the first
quarter of 2003, an increase of 70 percent from the preceding
fourth quarter and up 123 percent from the 2002 first quarter. As
a percentage of gross revenue, first quarter 2003 royalties were
21.4 percent of revenue, comparable to 22.0 percent in the 2002
period.
Production expenses were $4.23 million in the 2003 first quarter,
a seven percent decrease from the preceding fourth quarter and 22
percent higher than in the first quarter of 2002. On a unit of
production basis, the 2003 first quarter production costs were
$6.66 per barrel of equivalent compared to $6.30 per barrel of
equivalent in the 2002 first quarter, a six percent increase. The
reversal of the increasing trend in production costs is a key
focus for Zargon and gains have been made over the 2002 year
average of $6.75 per barrel of equivalent. Further per unit
production cost gains are anticipated later this year due to the
effect of the 2003 second quarter sale of selected high-cost,
non-core properties. Other field initiatives are underway to
control and improve production costs, but material improvements
in our cost structure will require the continued disposition of
the higher cost component of our property base.
Operating Netbacks
/T/
Three months ended March 31 2003 2002
-----------------------------------------------------------------
Oil and Natural Oil and Natural
Liquids Gas Liquids Gas
$/bbl $/mcf $/bbl $/mcf
----------------------------------------
Revenue 43.85 7.92 28.30 3.12
Hedging (2.82) (0.67) 1.12 0.36
Royalties (8.29) (1.83) (5.92) (0.73)
Production costs (9.97) (0.69) (9.08) (0.64)
----------------------------------------
Operating netbacks 22.77 4.73 14.42 2.11
-----------------------------------------------------------------
-----------------------------------------------------------------
/T/
General and administrative expenses of $0.89 million in the first
quarter of 2003 were 31 percent above the preceding fourth
quarter and five percent above the 2002 first quarter. The first
quarter expenses were substantially higher than the fourth
quarter 2002 charges that had been significantly reduced by
overhead recoveries associated with an intensive winter capital
program. On a unit of production basis general and administrative
costs decreased six percent to $1.40 per barrel of equivalent in
2003 as compared to last year's average annual rate of $1.49 per
barrel of equivalent. During the period, Zargon maintained its
policy of not capitalizing any portion of its general and
administrative costs.
Interest expense of $0.26 million in the first quarter compares
to $0.27 million in the first quarter of 2002, and is down from
the $0.30 million in fourth quarter 2002. Short-term interest
rates, although increasing, have been relatively low when
compared to prior years. Savings in the first quarter were
primarily attributed to the decrease in bank debt levels arising
from record cash flows.
Corporate Netbacks
/T/
Three months ended March 31 2003 2002
----------------------------------------------------------------
$/boe $/boe
Revenue 45.94 23.20
Hedging (3.50) 1.68
Royalties (9.83) (5.09)
Production costs (6.66) (6.30)
-----------------------
Operating netbacks 25.95 13.49
General and administrative (1.40) (1.54)
Financing charges (0.41) (0.48)
Capital and current income taxes (0.18) (0.19)
-----------------------
Cash flow netbacks 23.96 11.28
Depletion and depreciation (6.26) (5.63)
Site restoration (0.50) (0.56)
Foreign exchange - 0.01
Future income taxes (6.61) (2.22)
-----------------------
Net earnings 10.59 2.88
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----------------------------------------------------------------
/T/
Depletion and depreciation expense for the first quarter of 2003
of $3.98 million was three percent higher than the preceding
fourth quarter 2002 and 29 percent above first quarter 2002.
Production volumes have increased 16 percent when comparing the
first quarter of 2003 to the same 2002 period. On a unit of
production basis, depletion and depreciation charges have risen
11 percent to $6.26 per barrel of equivalent in the first three
months of 2003 from $5.63 in the same period of 2002. The fourth
quarter 2002 depletion and depreciation charge was $6.22 per
barrel of equivalent. The increase in unit charges arose mainly
from the ongoing industry-wide trend, also experienced by Zargon,
to higher finding and development costs.
Cash flow in first quarter 2003 showed a dramatic increase to
$15.23 million, 42 percent above the preceding fourth quarter,
which was itself very strong, and 146 percent over first quarter
2002. Very high oil and natural gas prices in conjunction with
continued production gains provided record quarterly cash flow
levels on both a corporate and per share basis. Earnings are by
definition leveraged to cash flow and at $6.74 million for first
quarter 2003 were 57 percent above the preceding quarter and were
a remarkable 327 percent above the corresponding first quarter of
2002.
Capital Expenditures
/T/
Three months ended March 31 ($ million) 2003 2002
----------------------------------------------------------------
Undeveloped land 1.39 0.78
Geological and geophysical (seismic) 1.09 0.43
Drilling and completion of wells 2.78 1.69
Well equipment and facilities 1.14 0.69
-----------------------
Exploration and development 6.40 3.59
-----------------------
Property acquisitions 0.48 1.81
Property dispositions (0.02) (0.06)
-----------------------
Net property acquisitions 0.46 1.75
-----------------------
Total capital expenditures (net) 6.86 5.34
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----------------------------------------------------------------
/T/
LIQUIDITY AND CAPITAL RESOURCES
During the first quarter of 2003, Zargon's net capital
expenditures were $6.86 million with $6.40 million assigned to
exploration and development plus a minor net property acquisition
of $0.46 million. Total net capital expenditures for the quarter
were 28 percent above first quarter 2002 while the exploration
and development expenditures showed a larger gain of 78 percent.
First quarter undeveloped land purchases of $1.39 million and
geological and geophysical expenditures of $1.09 million were
strong as Zargon continued to build its exploration base. With
$15.23 million of cash flow in the quarter, the $6.86 million of
net capital expenditures were readily exceeded and the surplus
funds were applied to the reduction of bank debt. Zargon's
banking arrangements are now in process of review and it is
expected that the current credit facilities of $50.0 million Cdn.
plus $4.3 million US will be expanded significantly. At
quarter-end, Zargon's net debt has declined to $20.12 million,
which is equivalent to less than four months of the cycle-high
first quarter 2003 cash flows. Zargon continues to be in a strong
financial position to deal with opportunities that may arise.
As at May 14, 2003, Zargon has issued 17.76 million common shares
and has granted stock options to acquire an additional 1.49
million shares.
Capital Sources
/T/
Three months ended March 31 ($ million) 2003 2002
----------------------------------------------------------------
Cash flow from operations 15.23 6.19
Changes in working capital and other (4.15) (2.61)
Change in bank indebtedness (4.50) 1.12
Issuance of common shares 0.28 0.64
-----------------------
Total capital sources 6.86 5.34
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----------------------------------------------------------------
/T/
OUTLOOK
The exceptional financial results achieved in first quarter 2003
have provided the Company with an $8.62 million reduction in debt
net of working capital. This provides an excellent beginning for
2003 and has enabled us to continue to focus on expanding our
natural gas exploration base of opportunities while preparing for
an active natural gas exploration and oil exploitation summer and
fall drilling season. Although commodity prices have receded from
the first quarter record highs, both oil and natural gas prices
remain at very strong levels. Our East Central natural gas
properties are providing a stable natural gas production base
while the newer West Central Alberta exploration areas are
providing substantial production growth. Our Williston Basin oil
exploitation activities continue to generate profitable low-risk
production gains. With a very strong balance sheet fueling our
twin growth strategies of exploring for natural gas and
exploiting oil properties, we continue to be confident about our
Company's outlook.
/T/
($ million, except per share amounts)
Cash
Earnings/ Flow/
Net Diluted Cash Diluted Production Total Bank
Quarter Earnings Share Flow Share Revenue Assets Debt
---------------------------------------------------------------------
2003 Q1 $6.74 $0.37 $15.23 $0.84 $29.19 $159.34 $20.78
2002 Q4 $4.28 $0.24 $10.71 $0.59 $20.67 $153.66 $25.28
2002 Q3 $2.27 $0.13 $7.75 $0.43 $16.65 $146.00 $28.71
2002 Q2 $2.55 $0.14 $7.47 $0.42 $15.50 $137.76 $28.00
2002 Q1 $1.58 $0.09 $6.19 $0.36 $12.73 $128.97 $25.26
2001 Q4 $1.77 $0.10 $5.81 $0.34 $11.18 $127.93 $24.14
2001 Q3 $2.60 $0.15 $7.66 $0.44 $14.67 $119.06 $19.27
2001 Q2 $3.49 $0.22 $8.59 $0.57 $16.90 $108.27 $13.19
2001 Q1 $5.28 $0.36 $10.61 $0.71 $21.04 $90.91 $10.09
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"Signed"
C.H. Hansen, President and Chief Executive Officer
Calgary, Alberta
May 14, 2003
ZARGON OIL & GAS LTD. CONSOLIDATED BALANCE SHEETS
March 31, December 31,
($ thousand) 2003 2002
-------------------------
(unaudited)
ASSETS
Current
Accounts receivable 14,792 11,942
Prepaid expenses and deposits 665 712
-------------------------
15,457 12,654
Property and equipment, net 143,885 141,006
-------------------------
159,342 153,660
-------------------------
-------------------------
LIABILITIES
Current
Bank indebtedness 20,777 25,279
Accounts payable and accrued liabilities 14,801 16,118
-------------------------
35,578 41,397
Future site restoration 5,034 4,746
Future income taxes 25,121 20,922
-------------------------
65,733 67,065
-------------------------
SHAREHOLDERS' EQUITY
Share capital 41,274 40,997
Retained earnings 52,335 45,598
-------------------------
93,609 86,595
-------------------------
159,342 153,660
-------------------------
-------------------------
See accompanying selected notes.
ZARGON OIL & GAS LTD. CONSOLIDATED
STATEMENTS OF INCOME AND RETAINED EARNINGS
Three months ended March 31 (unaudited)
($ thousand, except per share amounts) 2003 2002
-------------------------------------------------------------------
Income
Oil and gas sales 29,193 12,728
Hedging (2,223) 924
Royalties (6,244) (2,794)
-------------------------
20,726 10,858
-------------------------
Expenses
Production 4,230 3,456
General and administrative 888 844
Interest 262 267
Foreign exchange - (4)
Site restoration 318 307
Depletion and depreciation 3,978 3,084
-------------------------
9,676 7,954
-------------------------
Income before income taxes 11,050 2,904
-------------------------
Income taxes
Future 4,199 1,220
Current 114 102
-------------------------
4,313 1,322
-------------------------
Net income for the period 6,737 1,582
Retained earnings, beginning of period 45,598 34,919
-------------------------
Retained earnings, end of period 52,335 36,501
-------------------------
-------------------------
Earnings per common share
Basic 0.38 0.09
Diluted 0.37 0.09
-------------------------
-------------------------
See accompanying selected notes.
ZARGON OIL & GAS LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended March 31 (unaudited)
($ thousand) 2003 2002
-------------------------------------------------------------------
Operating activities
Net income for the period 6,737 1,582
Add non-cash items:
Depletion and depreciation 3,978 3,084
Site restoration 318 307
Foreign exchange - (4)
Future income taxes 4,199 1,220
-------------------------
Cash flow from operations 15,232 6,189
Changes in non-cash working capital (1,898) (126)
-------------------------
13,334 6,063
-------------------------
Financing activities
Bank indebtedness (4,502) 1,123
Exercise of stock options 277 639
-------------------------
(4,225) 1,762
-------------------------
Investing activities
Acquisition of property and equipment (6,882) (5,402)
Disposal of property and equipment 25 60
Site restoration expenditures (30) (13)
Changes in non-cash working capital (2,222) (2,671)
-------------------------
(9,109) (8,026)
-------------------------
Decrease in cash - (201)
Cash, beginning of period - 201
-------------------------
Cash, end of period - -
-------------------------
-------------------------
Cash interest paid 242 392
Cash taxes paid 114 102
See accompanying selected notes.
/T/
ZARGON OIL & GAS LTD.
SELECTED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended March 31, 2003 and 2002 (unaudited)
1. BASIS OF PRESENTATION
The interim consolidated financial statements of Zargon Oil & Gas
Ltd. (the "Corporation") have been prepared by management in
accordance with Canadian generally accepted accounting
principles. The interim consolidated financial statements have
been prepared following the same accounting policies and methods
in computation as the consolidated financial statements for the
fiscal year ended December 31, 2002. The interim consolidated
financial statements should be read in conjunction with the
consolidated financial statements and notes thereto in the
Corporation's annual report for the year ended December 31, 2002.
2. SHARE CAPITAL
The Corporation is authorized to issue an unlimited number of
common shares with no par value and an unlimited number of first
preferred shares and second preferred shares.
/T/
Common Shares
(thousand)
March 31, 2003 March 31, 2002
------------------- -------------------
Number of Amount Number of Amount
Shares $ Shares $
------------------- -------------------
Shares issued
Balance, beginning of
year 17,637 40,997 16,666 35,066
Stock options exercised 91 277 215 639
------------------- -------------------
Balance, end of period 17,728 41,274 16,881 35,705
------------------- -------------------
------------------- -------------------
/T/
A summary of the status of the Corporation's stock option plans
as at March 31, 2003 and 2002, and changes during the three
months ended on those dates is presented below:
/T/
Stock Options
March 31, 2003 March 31, 2002
------------------- -------------------
Weighted Weighted
Average Average
Number of Exercise Number of Exercise
Shares Price Shares Price
(thousand) $ (thousand) $
------------------- -------------------
Outstanding at
beginning of year 1,215 5.10 1,199 3.36
Granted 405 9.30 383 7.42
Exercised (91) 3.06 (215) 2.96
------------------- -------------------
Outstanding at end of
period 1,529 6.33 1,367 4.56
------------------- -------------------
------------------- -------------------
Options exercisable
at period end 1,106 5.20 701 2.82
------------------- -------------------
------------------- -------------------
/T/
Stock Based Compensation
The Corporation recognizes no compensation expense when stock
options are granted to employees and directors. Pro forma
information regarding net income is required and has been
determined as if the Corporation had accounted for its stock
options granted after December 31, 2001 under the fair value
method. The fair value for these options was estimated at the
date of grant using a Black-Scholes Option Pricing Model with the
following assumptions:
/T/
Three months ended March 31 2003 2002
--------- ---------
Volatility factor of expected market
price (%) 21.7 18.7
Weighted average risk-free interest rate (%) 3.92 5.28
Dividend yield (%) - -
Weighted average expected life of
options (years) 4 4
--------- ---------
--------- ---------
/T/
For purposes of pro forma disclosures, the estimated fair value
of options is amortized to expense over the options' vesting
periods. The Corporation's net income would be reduced by
$254,000 for the three months ended March 31, 2003 and $138,000
for the three months ended March 31, 2002. Basic and diluted
earnings per share figures would have been reduced by $0.01 and
$0.01 respectively for the 2003 quarter and by $0.01 and $0.01
for the same 2002 quarter.
3. WEIGHTED AVERAGE NUMBER OF COMMON SHARES
/T/
Three months ended March 31
(thousand) 2003 2002
--------- ---------
Basic 17,708 16,756
Diluted 18,240 17,338
--------- ---------
--------- ---------
4. SEGMENTED INFORMATION
Three months ended March 31 2003
------------------------------
($ thousand) United
Canada States Combined
------------------------------
Oil and gas sales 26,372 2,821 29,193
Total assets 154,033 5,309 159,342
Net capital expenditures 6,805 52 6,857
------------------------------
------------------------------
Three months ended March 31 2002
------------------------------
($ thousand) United
Canada States Combined
------------------------------
Oil and gas sales 11,335 1,393 12,728
Total assets 124,171 4,797 128,968
Net capital expenditures 5,332 10 5,342
------------------------------
------------------------------
/T/
5. FINANCIAL INSTRUMENTS
The Corporation is a party to certain off-balance sheet
derivative financial instruments which have fixed the price of a
portion of its oil and natural gas production. The Corporation
enters into these contracts for hedging purposes only, in order
to protect a portion of its future Canadian cash flow from the
volatility of crude oil and natural gas commodity prices.
The Corporation enters into currency contracts for hedging
purposes because the price received for its products varies in
close relationship to the US dollar currency exchange rate.
The Corporation has outstanding contracts at March 31, 2003 as
follows:
/T/
Volume Rate Price Range of Terms
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Oil swaps 192,500 bbl 700 bbl/d $24.79 US/bbl Apr. 1/03 -
Dec. 31/03
Natural
gas swaps 428,000 gj 2,000 gj/d $4.85/gj Apr. 1/03 -
Oct. 31/03
Natural
gas put 456,000 gj 3,000 gj/d $5.00/gj Nov. 1/03 -
Mar. 31/04
Natural
gas
collars 428,000 gj 2,000 gj/d $4.00/gj Put Apr. 1/03 -
$6.10/gj Call Oct. 31/03
152,000 gj 1,000 gj/d $5.50/gj Put Nov. 1/03 -
$7.90/gj Call Mar. 31/04
Currency
collar $1,000,000 $1.56 Put Apr. 1/03 -
Cdn. / month - $1.62 Call Dec. 31/03
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ZARGON OIL AND GAS LTD.
Corporate Information
---------------------------------------------------------------------
Board of Directors Officers Stock Exchange Listing
Craig H. Hansen John O. McCutcheon Toronto Stock Exchange
Calgary, Alberta Chairman Trading Symbol: ZAR
K. James Harrison Craig H. Hansen
Oakville, Ontario President and Head Office
Chief Executive
Officer
H. Earl Joudrie 700, 333 - 5th Avenue S.W.
Toronto, Ontario Mark I. Lake Calgary, Alberta T2P 3B6
Vice President, Phone: (403) 264-9992
Exploration Fax: (403) 265-3026
Kyle D. Kitagawa Email: zargon@zargon.ca
Calgary, Alberta Daniel A. Roulston
Vice President,
John O. McCutcheon Operations
Vancouver,
British Columbia Sheila A. Wares Website
Vice President,
Accounting www.zargon.ca
James D. Peplinski
Calgary, Alberta Kenneth W. Young
Vice President, Land
Byron J. Seaman
Calgary, Alberta
William J. Whelan
Calgary, Alberta
Grant A. Zawalsky
Calgary, Alberta
/T/
Forward Looking Statements - Certain information regarding Zargon
set forth in this document, including management's assessment of
Zargon's future plans and operations, contains forward-looking
statements that involve substantial known and unknown risks and
uncertainties. These forward-looking statements are subject to
numerous risks and uncertainties, certain of which are beyond
Zargon's control, including the impact of general economic
conditions, industry conditions, volatility of commodity prices,
currency fluctuations, imprecision of reserve estimates,
environmental risks, competition from other producers, the lack
of availability of qualified personnel or management, stock
market volatility and ability to access sufficient capital from
internal and external sources. Zargon's actual results,
performance or achievement could differ materially from those
expressed in, or implied by, these forward-looking statements and
accordingly, no assurance can be given that any of the events
anticipated by the forward-looking statements will transpire or
occur, or if any of them do so, what benefits that Zargon will
derive there from.
-30-
FOR FURTHER INFORMATION PLEASE CONTACT:
Zargon Oil & Gas Ltd.
C.H. Hansen
President and Chief Executive Officer
(403) 264-9992
(403) 265-3026 (FAX)
Email: zargon@zargon.ca
Website: www.zargon.ca
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