ZARGON OIL & GAS $7.76 (Toronto symbol ZAR; TSINetwork Rating: Speculative) (403-264-9992; www.zargon.ca; Shares outstanding: 29.8 million; Market cap: $231.2 million; Dividend yield: 9.3%) produces natural gas and oil in Alberta, Manitoba, Saskatchewan and North Dakota. Its production is 67% oil and 33% gas.
In the three months ended September 30, 2012, Zargon produced 7,634 barrels of oil equivalent per day, down 15.3% from 9,014 barrels a year earlier. That’s because the company sold some less important properties and cut back on natural gas drilling in light of low gas prices. The production drop pushed down Zargon’s cash flow per share by 4.0%, to $0.48 from $0.50 a year earlier.
The company continues to successfully drill horizontal wells in the Alberta Plains North area. Horizontal drilling involves drilling development wells sideways or at an angle to reach isolated pockets of gas or to follow a reservoir spread out in a narrow layer. Horizontal drilling can work well in places where conventional drilling is impossible or too expensive.
Zargon is also moving ahead with its alkaline surfactant polymer (ASP) enhanced oil recovery project at Little Bow, Alberta. The company acquired Little Bow from Masters Energy in 2009. ASP is a new process that floods oil wells with a chemical mixture when water is no longer effective. The alkali in the mixture penetrates into rock formations and frees trapped oil.
The company’s debt is $78.5 million, or a reasonable 34.0% of its market cap. Zargon cut its monthly dividend by 40% with the October 2012 payment, from $0.10 a share to $0.06, for a 9.3% yield.
The company expects cash flow of $2.25 a share in 2013. It trades at just 3.4 times that estimate.
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