Zargon Oil & Gas Trading Below Net Asset Value

| About: Zargon Energy (ZARFF)

Zargon Oil & Gas Ltd. (OTCPK:ZARFF) engages in the exploration, development, and production of oil and natural gas in Canada and the United States. Zargon has a 19-year history of creating value and solid returns for investors, during which time Zargon has returned $315 million ($16.34 per share) through distributions and dividends to its shareholders.

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Insider buying by insider (last 30 days)

  • Craig Hansen purchased 218,000 shares on May 22 - June 20 and currently controls 1,172,701 shares or 3.9% of the company. Craig Hansen is President and Chief Executive Officer of the company.
  • James Harrison purchased 30,000 shares on May 29-30 and currently holds 113,882 shares or 0.4% of the company. James Harrison is Chairman of the Board.
  • Brian Kergan purchased 20,000 shares on June 4-7 and currently holds 48,651 shares or 0.2% of the company. Brian Kergan joined Zargon in 2007 as Vice President, Corporate Development.
  • James Peplinski purchased 30,000 shares on June 17-20 and currently holds 68,998 shares or 0.2% of the company. James Peplinski serves as a director of the company.

Insider buying by calendar month

Here is a table of Zargon's insider trading activity by calendar month.

Month Insider buying / shares Insider selling / shares
June 2013 187,500 0
May 2013 346,001 0
April 2013 68,375 1,000
March 2013 111,999 0
February 2013 2,478 0
January 2013 6,488 0
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The last two months have seen the most insider buying this year.


The company reported the first-quarter financial results on May 14 with the following highlights:

Revenue $30.4 million
Funds flow from operations $13.9 million
Net income $0.2 million
Net debt $120.1 million
Production 7,648 boe/d
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  • Oil and liquids production for the 2013 second quarter is set at 4,800 barrels of oil per day and reflects estimated reductions of 100 barrels of oil and liquids per day for spring break-up shut-ins and 40 barrels of oil and liquids per day for second quarter property dispositions. Second quarter natural gas production guidance is set at 15.0 million cubic feet per day.
  • Full-year 2013 average oil and liquids production is expected to range between 4,700 to 4,900 barrels of oil per day, with exit rates ranging from 4,400 to 4,700 barrels of oil per day. Full-year 2013 average natural gas production is expected to range between 14.8 to 15.0 million cubic feet per day, with exit rates ranging from 14.5 to 14.9 million cubic feet per day.
  • Looking forward, Zargon expects that first quarter 2014 production volumes will represent both an oil production low and a turning point for Zargon, as in subsequent quarters, significant production volumes will begin to materialize from the ASP project and from oil exploitation drilling programs that will have been reactivated once the substantial ASP phase 1 capital program is completed.

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Capital budget

Zargon's 2013 non-ASP field capital budget has been set at $40 million (before dispositions) of which approximately $26 million will be spent in the remaining three quarters. Zargon's 2013 capital budget incorporates $20 million of property dispositions, of which $7.8 million have been completed by early May. For the remainder of the year, the drilling of the 10 remaining budgeted wells will be contingent on the successful execution of this $20 million property disposition program.

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Little Bow Alkaline Surfactant Polymer [ASP] Project

Field construction is expected to commence in late May 2013, which will provide for first chemical injections in January 2014 and incremental oil production by the second quarter of 2014.

The total construction capital cost of phases 1 and 2 of the Little Bow ASP project is approximately $60 million. Of this total, $6.5 million of expenditures were incurred in 2012 and $5.0 million were spent in the first quarter of 2013. For the remainder of 2013, Zargon plans on spending $37 million. The estimated total phase 1 and 2 chemical cost for the 2014-2019 chemical injection period will be capitalized and is $66 million. The project's final $12 million, for the implementation of phase 2, is scheduled for 2015.

Zargon forecasts that the Little Bow ASP project will provide 250 barrels of oil per day of incremental production in 2014, which will be comprised of an initial production response in the 2014 second quarter and a 2014 year end rate of 500 barrels of oil per day. Without additional infill drilling, incremental production from phases 1 and 2 of the project are forecast to reach 1,600 barrels of oil per day by 2016.

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There are numerous companies in the oil and natural gas industry, who are competing with Zargon for the acquisitions of properties with longer life reserves, properties with exploitation and development opportunities and undeveloped land. As a result of such competition, it may be more difficult for Zargon to acquire reserves on beneficial terms. Many of these other organizations have significantly greater technical, financial and operational resources than Zargon.

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Zargon ranks in the top with the average annual decline rate.


There have been four different insiders buying the shares and there have not been any insiders selling the shares during the past 30 days. As of April 12, 2013, Zargon's directors and executive officers, as a group, beneficially owned, or controlled or directed, directly or indirectly, 2,351,403 shares or approximately 7.8% of Zargon's shares. The stock has a dividend yield of 11.52%. Zargon's Proved + Prob. Net Asset Value is $12.79 per basic share and the stock is currently trading at $6.25. I believe the stock could be a good pick from the current level.

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Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in OTCPK:ZARFF over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.