Corporate Presentation November 21, 2018 zargon.ca
Forward Looking-Advisory Forward-Looking Statements - This presentation offers our assessment of Zargon's future plans and operations as at November 21, 2018, 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: the benefits of the proposal and the impact of the proposal on the Company; Zargon's common share interests assuming the completion of the proposal; Zargon's ability to implement its plans relating to the proposal; anticipated dates and information relating to the Debentureholder meeting and the closing of the proposal; Zargon’s corporate strategy and business plans; Zargon’s oil exploration project inventory and development plans; 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 model and the assumptions contained therein and the results there from; 2018 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 2018 and beyond; strategic alternatives review process; the source of funding for our 2018 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 are 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 Zargon disclaims, 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. 2
Debenture Restructuring Proposal (November 21, 2018) Recently, lower WTI oil prices and significantly expanded WTI – WCS differentials have severely reduced the field price that Zargon receives for its oil production, which has resulted in severely reduced Zargon cash flows. The Company intends to make a proposal to Zargon’s 8% Convertible Debentureholders, whereby the Debenture principal and accrued interest would be converted into Zargon common shares. The terms of the proposal are summarized below: The outstanding $41.94 million of 8.00% convertible unsecured subordinated debentures due December 31, 2019 and all outstanding accrued and unpaid interest, will be settled in exchange for Proposal Zargon common shares. Zargon expects to hold a meeting of the Debentureholders to consider this proposal in January 2019. At this meeting, the proposed resolution must be passed by 66 2/3% of the votes cast, subject to a quorum of 25%. The rules of the Toronto Stock Exchange require the proposed exchange price to be at market. The proposed price of $0.10 per Zargon share represents the volume weighted average trading price ("VWAP") for the Zargon common shares on the TSX for the 5 trading days ending November 20, 2018. Assuming a January 10, 2019 closing date, Zargon will issue approximately 428.8 million Zargon common shares to settle the debentures, representing approximately 93.28% of the pro forma common shares outstanding. The proposal is subject to the approval of the Toronto Stock Exchange. Rationale 3
Debenture Restructuring Proposal (Cont.) (November 21, 2018) Management and the Board of Directors of Zargon believe that the proposed debenture restructuring is in the best interests of all stakeholders, and provides a number of benefits including the following: Zargon’s overall debt will be reduced by $41.94 million; leaving a small net positive working capital of $1.16 million (as at September 30, 2018). Rationale Zargon’s debenture interest cash payments for the 15 month period ending December 31, 2019 of approximately $4.20 million will be eliminated. Reduces Zargon’s financial risk, in a difficult economic environment. Simplifies Zargon’s capital structure and removes the uncertainty surrounding the settlement of the debentures at the end of 2019. Positions Zargon to continue with a strategic alternatives initiative that may include a corporate merger, sale or reorganization. Allows Debentureholders to receive full face value of the Debentures even though they are trading at a substantial discount in the market. 4
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