Feb 23 2017 Presentation (rev 3).ppt - Zargonzargon.ca/wp-content/uploads/2017/02/Zargon-Corporate-Presentation... · In particular, this presentation contains forward-looking ...

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Corporate PresentationFebruary 23, 2017

Forward Looking-Advisory

Forward-Looking Statements - This presentation offers our assessment of Zargon's future plans and operations as at February 23, 2017, and contains forward-looking statements. Such statements are generally identified by the use of words such as "anticipate", "continue", "estimate", "expect", "forecast", "may", "will", "project", "should", "plan", "intend", "believe" and similar expressions (including the negatives thereof). In particular, this presentation contains forward-looking information as to Zargon’s corporate strategy and business plans, Zargon’s oil exploration project inventory and development plans, Zargon’s expectations for the debenture restructuring proposal, Zargon’s dividend policy and the amount of future dividends, future commodity prices, Zargon’s expectation for uses of funds from financing, Zargon’s capital expenditure program and the allocation and the sources of funding thereof, Zargon’s cash flow and dividend model and the assumptions contained therein and the results there from, anticipated payout rates, 2017 and beyond production and other guidance and the assumptions contained therein, estimated tax pools, Zargon’s reserve estimates, Zargon’s hedging policies, Zargon’s drilling, development and exploitation plans and projects and the results there from and Zargon’s ASP project plans 2017 and beyond, strategic alternatives review process, the source of funding for our 2017 and beyond capital program including ASP, capital expenditures, costs and the results therefrom. By their nature, forward-looking statements are subject to numerous risks and uncertainties, some of which are beyond our control, including such as those relating to results of operations and financial condition, general economic conditions, industry conditions, changes in regulatory and taxation regimes, volatility of commodity prices, escalation of operating and capital costs, currency fluctuations, the availability of services, imprecision of reserve estimates, geological, technical, drilling and processing problems, environmental risks, weather, the lack of availability of qualified personnel or management, stock market volatility, the ability to access sufficient capital from internal and external sources and competition from other industry participants for, among other things, capital, services, acquisitions of reserves, undeveloped lands and skilled personnel. Risks are described in more detail in our Annual Information Form, which is available on our website. Forward-looking statements are provided to allow investors to have a greater understanding of our business.You are cautioned that the assumptions, including, among other things, future oil and natural gas prices; future capital expenditure levels; future production levels; future exchange rates; the cost of developing and expanding our assets; our ability to obtain equipment in a timely manner to carry out development activities; our ability to market our oil and natural gas successfully to current and new customers; the impact of increasing competition; our ability to obtain financing on acceptable terms; and our ability to add production and reserves through our development and acquisition activities used in the preparation of such information, although considered reasonable at the time of preparation, may prove to be imprecise and, as such, undue reliance should not be placed on forward-looking statements. Our actual results, performance, or achievement could differ materially from those expressed in, or implied by, these forward-looking statements. We can give no assurance that any of the events anticipated will transpire or occur, or if any of them do, what benefits we will derive from them. The forward-looking information contained in this presentation is expressly qualified by this cautionary statement. Our policy for updating forward-looking statements is that Zargondisclaims, except as required by law, any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.Barrels of Oil Equivalent - Natural gas is converted to a barrel of oil equivalent (“Boe”) using six thousand cubic feet of gas to one barrel of oil. In certain circumstances, natural gas liquid volumes have been converted to a thousand cubic feet equivalent (“Mcfe”) on the basis of one barrel of natural gas liquids to six thousand cubic feet of gas. Boes and Mcfes may be misleading, particularly if used in isolation. A conversion ratio of one barrel to six thousand cubic feet of natural gas is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. Given that the value ratio based on the current price of crude oil as compared to natural gas is significantly different from the energy equivalency of 6:1, utilizing a conversion ratio on a 6:1 basis may be misleading as an indication of value. The estimates of reserves and future net revenue for individual properties may not reflect the same confidence level as estimates of reserves and future net revenue for all properties, due to the effects of aggregation. Estimated reserve values disclosed in this presentation do not represent fair market value. Discovered Petroleum Initially-In-Place (“DPIIP”) is that quantity of petroleum that is estimated, as of a given date, to be contained in known accumulations prior to production. The recoverable portion of discovered petroleum initially in place includes production, reserves, and contingent resources; the remainder is unrecoverable.The aggregate of the exploration and development costs incurred in the most recent financial year and the change during that year in estimated future development costs generally will not reflect total finding and development costs related to reserves additions for that year.

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Zargon Statistical OverviewCapitalization(1) Asset Profile

Share Price (Feb 22, 2017) $0.84 Last Quarter Production (Q4 2016) Gas (MMcf/d) Liquids (bbl/d) % Liquids Total (boe/d) % of ProductionBasic Shares Outstanding 30.67 Market Capitalization $25.8 North Dakota 0.01 350 100% 351 14% Net Debt(2,3) $33.5 Alberta Plains 2.91 1,175 71% 1,662 68% Option Proceeds ‐ Little Bow ‐ ASP 0.06 427 98% 436 18% Entity Value $59.3 Last Quarter Daily Production 2.98 1,952 80% 2,449 100%

52‐Week High $1.05 52‐Week Low $0.41

Net Debt Summary(2)

Bank Debt $nil Convertible Debs (Extended to Dec. 2019) $57.5 Working Capital ($24.0) Net Debt $33.5

Other Company Details (Post SE Sask. & Killam Sales)

Employees 16 Office 6 Field

Headquarters Calgary, Alberta, Canada Primary Exchange Listing TSE Reserve Evaluators McDaniel

(1) All numbers in $millions except per share values.

(2) Net debt calculated as bank debt, convertible debentures plus net working capital as atDecember 31, 2016 (unaudited)

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Zargon Operated – Alberta & North Dakota (including Little Bow ASP)

Zargon Key Investment Highlights

4

Oil Exploitation Focus• Zargon is an oil‐weighted company focused on the exploitation of mature oil properties• Following a 2012‐16 divestment program, Zargon’s remaining operated oil reservoirs continue to be

characterized by significant oil‐in‐place, low recovery factors and low oil production declines

Low Decline Oil Production • Zargon’s current blended corporate oil decline of less than 10% per year is enabled by reservoir pressure support from natural aquifers, waterfloods and tertiary floods

Oil Exploitation Opportunities

• Zargon’s properties provide waterflood optimization opportunities plus exploitation drilling opportunities that enable improved reservoir recovery factors in existing pools

• The McDaniel reserve report books 12 P+P exploitation locations with average per well parameters of 63 Mbbl oil reserves, 47 bbl/d initial rate and $0.93 MM all‐in costs

Control of Properties &Key Infrastructure

• Very high working interest and operatorship across core operating areas, batteries and facilities.• Majority of batteries and facilities have been upgraded in the last five years• An actively managed abandonment and reclamation program

Little Bow ASP Project• At higher oil prices, the existing ASP infrastructure can be utilized to resume AS injections in high‐graded

areas and for multiple other ASP phases and Polymer only projects seeking a 10 percent incremental oil recovery on over 80 million barrels of working interest oil‐in‐place.

Other Corporate Attributes

• Zargon holds ~$187 million of high quality tax pools (September 30, 2016), including $129 million of non‐capital losses

• Zargon has retained a TSX listing, plus strong operating, accounting, land and finance capabilities, and can readily manage additional assets with minimal additional costs.

Zargon is a Canadian oil and gas producer that provides exceptional torque to higher oil prices, in addition to offering a variety of attractive oil exploitation opportunities including oil exploitation horizontal infill drills and a long term Southern Alberta tertiary recovery project.

Debenture Restructuring Proposal Approved

Pro Forma BalanceSheet

5

Zargon has received approval to amend Zargon’s $57.5 million of 6% Convertible Debentures by:

extending the maturity date of the Debentures from June 30, 2017 to December 31, 2019

increasing the interest rate of the Debentures from 6.0% per annum to 8.0% per annum

reducing the conversion price in effect for each common share of Zargon to be issued upon the conversion of the Debentures from $18.80 to $1.25

providing debenture holders a “put right” to redeem up to $19 million of Debentures at a cash price set by a “Dutch auction” with minimum and maximum prices of $890 and $1,000 per Debenture. This “put right” expires on March 31, 2017.

Proposal

With this debenture restructuring approval, Zargon’s capital structure will be (as of March 31, 2017):

Bank debt – $nil (Zargon will negotiate a First Lien Banking arrangement to support the Company's ongoing hedging, operating and development activities)

Working Capital – Positive $4.0 million (approximate; dependent on oil/gas prices and capital programs)

Outstanding amended December 2019 Convertible Debentures (dependent on “Put Right” elections)

– $38.5 million (assumes $19.0 million redeemed at a price of $1,000 per debenture)

– $35.2 million (assumes $19.0 million redeemed at a price of $890 per debenture)

2017 Outlook

2017 Projections

6

Based on the $7.8 million 2017 capital budget, Zargon projects stable production volumes throughout calendar 2017 at 2,500 boe/d (79 percent oil and liquids)

The 2017 capital budget is forecast to be fully funded from corporate funds flow at current forward strip oil prices (including calendar 2017 hedges for 650 bbl/d at $66.98 Cdn. per barrel and Feb. – Dec. 2017 hedges for 650 bbl/d at $71.50 Cdn. per barrel).

Zargon estimates that its 2017 corporate funds flow will increase approximately $1.2 million for every $5 US per barrel (WTI) increase in oil price. Without hedges, the price sensitivity increases to $4.2 million ($0.14 per share) for every $5 US per barrel (WTI) increase in oil price.

Zargon’s debenture restructuring proposal has been approved and $19 million of debentures are scheduled to be redeemed as of March 31, 2017.

Recognizing that Zargon’s assets are comparatively inexpensively priced and provide significant unrecognized oil price option value, Zargon will continue with its strategic alternatives process that may include a financing, merger or other business combination, a sale of all or part of the company, as well as the continued execution of the company's business plan.

2017 Next Steps

2017 Capital Budget

Zargon’s $7.8 million 2017 capital budget is allocated to $2.7 million for Little Bow polymer chemical purchases, $1.5 million of non discretionary land retention costs and $3.6 million to property/well reactivations, recompletions, waterflood modifications.

Contingent on oil prices and/or Zargon’s financial outlook, this budget may be expanded or modified to include undeveloped oil exploitation wells and/or the reactivation of Alkaline Surfactant injections at Little Bow.

zargon.ca

Conventional Properties

Alberta Plains (excluding Little Bow ASP)

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The Alberta Plains properties provide low decline oil volumes with the potential for further development

• Q4 2016 production of 1,662 boe/d

– 71% liquids‐weighted (16 – 32o API)

– Average WI ~72%,

– ~98% operated

– No drilling in 2015‐16 due to capital allocation decisions

– Drilling programs of prior years had been successful in managing overall production decline

• Multiple exploitation and development opportunities have been identified throughout Zargon’s asset base including:

– 8 booked infill and exploitation drilling opportunities (McDaniel locations)

– Good 3D seismic coverage over key properties support an additional 8+ un‐booked locations

Q4 2016Production

% Liquids API OOIP

Recoveryto Date

Gross UndevelopedLocations

(boe/d) (%) ( ⁰ ) (MMbbl) (%) McDaniel Additional

Bellshill Lake 431 95% 27 16 32% 5 1+

Taber 429 98% 16‐24 27 15% 3 5+

Little Bow (Conventional) 328 64% 21 82 25% ‐ tbd

Alberta Other 474 21% 18‐32 n.a. n.a. ‐ 2+

Total 1,662 71% 16‐32 125+ 24% 8 8+

T 1 W4

T 10

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T 30

T 40

R 10R 20

Bellshill Lake

Little Bow

Taber

Alberta Plains

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Alberta Plains Properties Overview (Excluding Little Bow ASP)

Operating Summary – Q4/2016Production 1,175 bbl/d (1,662 boe/d)

Forecast 2017 Op. cost $11.6 million

Reserves:McDaniel has recognized 8 gross (8.0) P+PUD locations and there is the potential of an additional 8+ locations

Liquids(Mbbl)

Total(Mboe)

PV 10%($MM)

PDP 2,889 3,541 47.6

TP 3,124 4,032 50.2

P+PDP 3,713 4,563 59.0

P+P * 4,453 5,850 70.2

McDaniel Reserve Summary (December 2016)

* Includes new wells, tie‐ins and reactivations

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Alberta Operating Cost Trend (excluding ASP)

Major R&M Base Opex Total Opex

Forecast 2017 Op. cost of $11.6 million

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Alberta Plains – Bellshill Lake

Bellshill Lake produces low‐decline oil with remaining infill drilling potential

− Low produc on declines− Historical capital programs have kept produc on flat since 2010 − Yearly programs have con nued to make posi ve impacts on

production given the maturity of the field • Zargon operated, high working interest − 100% Working interest in all Dina produc on

• Areally extensive Dina sand with aquifer pressure support − Addi onal ver cal wells in par ally drained localized closures,

would provide quick production gains − 27 API oil

Liquids(Mbbl)

Total(Mboe)

PV 10%($MM)

PDP 910 955 13.5

TP 910 972 13.5

P+PDP 1,185 1,246 17.4

P+P 1,382 1,489 20.9


McDaniel has recognized 5 P+PUD locations, Zargon has defined 4 additional locations

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Alberta Plains – Taber Mannville

• Sunburst development is seismically defined − 30 horizontal wells drilled since 2007 − 25 on production, 5 on injection

• South pool is seeing stabilizing rates due to waterflood (vertical well historical production was negligible due to higher density oil)

− Es mated recovery to date ~10.1% − Ul mate forecasted P+PDP recovery ~18% − Es mated OOIP of 15.5 MMbbl

• North pool receives pressure maintenance from two vertical flank water injectors

− Es mated recovery to date ~ 16% and forecast ul mate P+PDP recovery ~ 21.7% based on estimated OOIP of 6.7 MMbbl

Taber is Zargon’s largest oil producing asset outside of the ASP project, and offers low‐decline production with remaining development potential

Liquids(Mbbl)

Total(Mboe)

PV 10%($MM)

PDP 1,068 1,089 19.4

TP 1,182 1,204 20.4

P+PDP 1,416 1,442 24.0

P+P 1,634 1,663 26.9


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North Dakota Operating Cost Trend


North Dakota Properties

• Long life conventional oil properties, average of 27 API gravity oil‐ Stable production, more than 15 MMbbl oil produced to date ‐ Infrastructure and water disposal in place

• Established waterflood and unitized production − Produc on op miza on opportuni es − Includes undeveloped land with exploration opportunities

• Total 2P Reserves NPV10 ~$26.2 MM (McDaniel year end 2016)− 4 PUD loca ons

• Large OOIP with bypassed pay opportunities‐ Infill drilling potential in all of the properties ‐ Opportunities to increase drilling density, no downspacingregulations ‐ Similar properties in Saskatchewan have up to 20 wells/section

Undercapitalized area with high working interest, undeveloped land and horizontal drilling opportunities

North Dakota Williston Basin geology is directly analogous to the offsetting Southeast Saskatchewan Williston Basin geology, however activity levels are substantially lower and the properties are less developed.

Q4 2016Production OOIP

Recoveryto Date Decline

Gross UndevelopedLocations

(boe/d) (MMbbl) (%) (%) McDaniel Additional

Haas 178 51 23% 3% 1 5+Mackobee Coulee 87 17 12% 12% 3 7

Truro 86 30 4% 11% None 2Total 351 98 15% 7% 4 14+


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(High workover costs in Q4 2016)

zargon.ca

Little Bow ASP (Tertiary EOR)

Little Bow ASPEOR in a mature Southern Alberta Waterflood

Zargon constructed an Alkaline Surfactant Polymer (“ASP”) facility at Little Bow, Alberta, which enables the injection of dilute chemicals in a water solution to flush out undrained oil in existing reservoirs.

At higher oil prices, the existing ASP infrastructure can be utilized for multiple ASP and Polymer only projects seeking a 10 percent incremental oil recovery on over 80 million barrels of working interest oil‐in‐place.

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Zargon W.I.(%)

W.I. OIIP(mmbbl)

ASP Phase 1 (‘I’ Pool)North and Central 100 15

Southern Area 100 8Future Potential Phases

Remaining portions I&P Pools 97 16U&W Unit (D8D/H9H Pools) 97 26

G Unit (B8B Pool) 95 10MM Unit (E8E Pool) 100 5

C8C / X8X Pool 100 9Total 89

ASP Facility & Gas Plant

Zargon Battery site

ASP Central Facility

Future ASP Phase

Future PolymerProject

ASP Phase 1

ASP Phase 1 ConformanceRemediation & Extension

ASP Modified Phase 2 Area

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ASP ‐ Phase 1 Operating Cost Trend


Pipeline repairs

Little Bow ASP Project

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Zargon’s Little Bow ASP project has shown good oil banking, but the combination of low oil prices and Zargon’s weakened financial condition forced Zargon to “idle” the project in a manner that preserved future recoveries when reactivated.

• Phase 1 Alkali and Surfactant (“AS”) injections were suspended in Q1 2016, to reduce capital outflows during a very low oil price period. In September 2016, high water cut Phase 1 producers in AS under‐treated areas South (Phase 1) were suspended, thereby bypassing the untreated reservoir and permitting full AS recoveries upon reactivation.

• With higher oil prices, AS injections will initially be resumed in high‐graded Phase 1 areas and then a modified (truncated) Phase 2 area.

• With these operating adjustments, polymer and operating costs have been significantly reduced to $0.7 million and $1.0 million per quarter, respectively.

High water cut producers suspended, reducing fluid and oil production, but preserving ASP recovery opportunity for higher prices

Forecast Q4 2016 Op. cost of $1.0 million

Upper Mannville P Pool

North Extension

North

CentralN.E. Spur

South (Phase 1)

South (Phase 2)


ASP Enhanced Oil Recovery Process

Dilute concentrations of chemicals (Alkali, Surfactant and Polymer) in water are injected into an existing oil pool to “scrub” out oil that waterflooding alone will not recover.

Surfactants: Detergent; mobilizes trapped oil.

Alkali: Increases surfactant effectiveness.

Polymer (Thickener): Thickened water helps sweep oil from the reservoir.

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1) ASP InjectionA blend of Alkali,

Surfactant & Polymer mobilizes trapped oil

2) Polymer “Push”Polymer displaces

mobilized oil to producing wells

3) Terminal WaterfloodReturn to waterflood to

complete oil displacement

OIL BANK ASP POLYMER WATER

Husky Taber Mannville “B” ASP Husky Gull Lake ASP

Analog ASP Performance (The Prize)

The Taber Mannville B and Gull Lake ASP projects are good analogs to our Little Bow ASP project. Successful ASP projects provide stable production volumes for many years after the first three years

of cost intensive AS injections are completed. With higher oil prices, and the reactivation of AS injections in phase 1 and subsequent phases, we

continue to foresee many years of production growth followed by many years of free cash generating stable production for our Little Bow property.

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zargon.ca

2016 Year End Reserves Information

McDaniel Reserves ReviewFuture Oil & Gas Production

TeamPDP

RLI (yrs)PDP

DeclineP+PDPRLI (yrs)

P+PDPDecline

Alberta (excl ASP) 6.7 12 % 8.7 10 %

Little Bow ASP 11.0 n/a 15.7 n/a

W.B. (ND) 12.9 9 % 16.8 7 %

Zargon 8.8 8 % 11.7 5 %

McDaniel Oil Reserves & Production CharacteristicsRLI (yrs) & 2017 Decline Rate (%/yr)

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Gas Production Forecast (PDP & P+PDP)

PDP from Base PDP from ASP PADP from Base PADP from ASP

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PDP from Base PDP from ASP PADP from Base PADP from ASP

‐ The McDaniel report predicts a first year proved developed producing oil and liquids annual decline of 8 percent.

‐ The corresponding proved developed producing oil and liquids reserve life is 8.8 years.

‐ Zargon’s mature, pressure supported reservoirs are characterized by low declines and long life indices for developed producing reserves

2016 Year End Reserves Summary

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Reserve Category Oil & Liquids (mbbl)

Sales Gas (mmcf)

Total(mboe)

B.Tax PV 10% ($ million)

PDP 6,284 4,753 7,076 $ 84.3

Total Proved 7,152 6,381 8,215 $ 93.2

P+PDP 8,360 6,184 9,391 $ 111.4

Proved & Probable 11,180 10,366 12,908 $ 132.3

‐ Proved developed producing (PDP) reserves comprise 55% of the total reserves and proved and probable developed producing (P+PDP) reserves comprise 73 % of the total reserves

‐ On a total proved and probable basis, the Zargon reserve base is weighted 87% to oil and liquids

‐ Strong operational performance resulted in net positive revisions of 1.17 and 1.36 mmboe in the PDP and P+PDP categories respectively

Net Asset Value ComparisonMcDaniel Year End Pricing

(30.37 million shares at Dec 31, 2015)

NAV Calculation (Dec 31, 2016 Reserves)Proved + Prob. McDaniel Est. (BT DCF 10%) $ 132 million

Undeveloped Land (Seaton Jordan evaluation) $ 2 millionDeduct Net Working Capital & Conv. Deb. (unaudited) ‐ $ 34 millionNet Asset Value $ 100 million

Zargon Proved + Prob. Net Asset Value $3.27 per share

Reserve Category McDaniel PVBT 10% ($ million)

Net Asset Value ($ million)

Net Asset Value ($/share)

PDP 84 52 1.70

Total Proved 93 61 1.99

P+PDP 111 79 2.58Proved & Prob. 132 100 3.27

(30.61 million shares at Dec 31, 2016)

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NAV Calculation (Dec 31, 2015 Reserves)Proved + Prob. McDaniel Est. (BT DCF 10%) $ 259 million

Undeveloped Land (Seaton Jordan evaluation) $ 9 millionDeduct Net Working Capital, Bank Debt & Conv. Deb ‐ $ 121 millionNet Asset Value $ 147 million


Reserve Category McDaniel PVBT 10% ($ million)



PDP 147 35 1.15


P+PDP 186 74 2.44Proved & Prob. 259 147 4.84

zargon.ca

Cash Flow Projections & Valuations

Calendar 2017 Cash Flow Parameters

Oil 1,980 bbl/d Gas 3.10 mmcf/d Equiv. 2,500 boe/d (79% oil and liquids). Royalties 9% Alberta, 24% North Dakota (includes state and severance taxes)

Oil Prices WTI – WCS diff.: $15.0 US/bbl; Zargon Field – WCS diff.: $0.36 US/bbl premium Gas Prices $2.45/mcf Alberta average field price Exchange 0.75 $US/$Cdn G&A Costs $4.7 million – after 2016 reorganization and severance Interest $3.0 million – debenture cost, no interest on cash balances

Production

Costs & Capital

Other Parameters

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Operating $18.8 million Abd. & Reclam. $1.5 million US Taxes $ nil ASP Capital $2.7 million chemical costs Main. Capital $1.5 million non‐discretionary land and other costs Conv. Capital $3.6 million (reactivations, recompletion and facility upgrades)

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WTI Pricing(US/bbl)

Field Pricing (Cdn./bbl)

Field Cash Flow (million)

Corporate Cash Flow (million)

Free Cash Flow After All Capital

(million)

$45 $40.58 $ 9.9 $ 0.7 ($7.1)

$50 $47.28 $14.2 $ 4.9 ($2.9)

$55 $53.99 $18.5 $ 9.2 $ 1.4

$60 $60.69 $22.7 $13.5 $ 5.7

$65 $67.39 $27.0 $17.8 $10.0

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Corporate Cash Flow

Zargon’s cash flows are exceptionally sensitive to oil prices.

Excluding hedges, Zargon’s assets provide a positive corporate cash flow down to less than $45 US/bbl WTI.

At higher prices, Zargon’s assets provide significant free cash flow that can be used to retire debt, reactivation and facility modification projects, drill high‐graded horizontal oil exploitation wells and reinstate/initiate Little Bow ASP/Polymer floods.

Calendar 2017 Projected Cash Flows(excluding hedges)

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WTI Pricing (US/bbl)

Field Cash Flow (million)

4.5 Times Field Cash Flow

(million)

Zargon Pro Forma Net Debt

(million)

Attributed to Zargon Shares

(million)

Calculated Zargon Value

(per share)

$45 $ 9.9 $ 44.6 $ 34.5 $ 10.1 $0.33

$50 $14.2 $ 63.9 $ 34.5 $ 29.4 $0.96

$55 $18.5 $ 83.2 ($ 4.0) $ 87.2 $1.42

$60 $22.7 $102.1 ($ 4.0) $106.1 $1.73

$65 $27.0 $121.5 ($ 4.0) $125.5 $2.04

Calculations assume: • $4.0 million of positive working capital as of March 31, 2017,after

$19.0 million redemptions at an assumed price of $1,000 per debenture (the most conservative case).

• for $55+ cases, $38.5 million of remaining debentures are assumed to convert into Zargon shares at a $1.25 conversion price (30.8 million shares) taking the total outstanding shares to 61.4 million.

Zargon’s long‐life oil reserves provide investor’s with exceptional torque (both operational and financial leverage) to future increases in oil prices.

A corporate valuation based on a 4.5 times property cash flow multiple suggests that significantly higher share prices may be realized if/when WTI oil prices move to higher levels.

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Zargon Share Value - 4.5 Times Property Cash Flow

Valuation Using Forecast 2017 Field Cash Flows

Enterprise Value under Strip PricingComparison to Feb 22, 2017 Market Prices

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Zargon Valuation with Debentures at Face ValueCommon Shares (30.61 million @$0.84 @ Feb. 22, 2017) $ 25.7 millionDebentures (57.5 thousand @$1,000 face value) $ 57.5 millionSubtract Positive Working Capital (Dec 31 2016) (unaudited) ( $ 24.0 million)

Total Enterprise Value $59.2 million

2017 Prod. Guidance (2,500 boe/d – 79% oil/liquids) $23,700 per boe/d2016 YE Reserves PDP (7.08 mmboe – 89% oil/liquids) $ 8.38 per boe2016 YE Reserves TP (8.22 mmboe – 87% oil/liquids) $ 7.21 per boe2016 YE Reserves 2PDP (9.39 mmboe – 89% oil/liquids) $ 6.31 per boe2016 YE Reserves 2P (12.91 mmboe – 87% oil/liquids) $ 4.59 per boe

Zargon’s current market valuation of $59.2 million is less than a proved developed producing analysis with strip prices (Zargon analysis ‐ costs not escalated).

Reserve Category Strip PVBT 10% ($ million)



PDP 67 35 1.14


P+PDP 90 58 1.89Proved & Prob. 100 68 2.22

NAV Calculation (Dec 31, 2016 Reserves) Feb 3, 2017 STRIP PRICING (NO COST INFLATION)Proved + Prob. Strip Pricing (BT DCF 10%) $ 100 million

Undeveloped Land (Seaton Jordan evaluation) $ 2 millionDeduct Net Working Capital & Bank Debt (unaudited) ‐ $ 34 millionNet Asset Value $ 68 million


Key Considerations

Zargon’s Board and management believe that Zargon’s share price has not been reflective of the fundamental value inherent in the Company.

With the Q3 2016 sale of Zargon’s Williston Basin Saskatchewan and Killam Alberta assets, Zargon was able to eliminate all bank debt. With the Q1 2017 restructuring of Zargon’s convertible debentures, Zargon has deferred the debenture maturity until December 31, 2019, thereby permitting additional time to realize Zargon’s unrealized oil exploitation value.

Zargon continues to seek a strategic alternatives solution that will enable Zargon stakeholders to participate in Zargon’s exceptional torque to higher oil prices.

Strategic Process Ongoing

Deep Discount to NAV

27

Based on current commodity strip prices, Zargon expects to deliver 2017 stable production volumes with all capital funded by cash flow. This forecast is based on $7.8 million of 2017 capital, which includes $3.6 million of reactivations, recompletions and facility upgrades that were not pursued in the prior two years due to financial constraints.

With a sustainable 2017 business plan, investor’s are able to wait for materially higher oil prices (and the substantial upside to Zargon share price) without any erosion of the underlying asset base.

Exceptional Torque to Higher oil Prices

Sustainable 2017 Corporate Model

Investors buy Zargon at a discount to the proved developed producing net asset value when evaluated at prices at (or above) current strip.

Zargon’s long‐life oil reserves provide investor’s exceptional torque to higher oil prices: Financial – Although improved, Zargon’s balance sheet remains over‐levered where small changes in

underlying corporate value result in large inferred changes in share price. Operational – Zargon’s production tends to be from mature low‐decline, low‐rate wells with

relatively higher operating costs. Small improvements in oil prices result in significantly improved cash flows.

Exploitation – Zargon’s exploitation opportunities are significant, but generally require higher prices.

zargon.ca

Corporate PresentationFebruary 23, 2017

Feb 23 2017 Presentation (rev 3).ppt - Zargonzargon.ca/wp-content/uploads/2017/02/Zargon-Corporate-Presentation... · In particular, this presentation contains forward-looking ...

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