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Forward Looking-Advisory
Forward-Looking Statements - This presentation offers our assessment of Zargon's future plans and operations as at May 10, 2016, 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 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, 2016 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 2016 and beyond, strategic alternatives review process, the source of funding for our 2016 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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Corporate Summary
3
• Zargon’s assets provide exceptional torque to higher oil prices (financial, operational, and exploitation)
• Core assets (excluding Little Bow ASP) were under-capitalized during the last 3 years
• 4,176 boe/d (Q1 2016) of established, low-decline production coming from two distinct assets
– 84% Liquids-weighted, 83% Average W.I.
– 12% Base Annual Oil Decline (excluding growing ASP)
• 200,000 net WI acres, 38% undeveloped with low expiry rate
• Net operating income of $75.6 MM in 2014 and $21.7 MM in 2015– Netbacks of $33.84/boe in 2014 and $13.04/boe in 2015
– Operating cost reductions (including ASP optimization) are projected to reduce total opex by 17% in 2016
• Williston Basin assets (1,629 boe/d; 97% Liquids)– 50+ horizontal locations (19 booked by McDaniel)
• Alberta Plains assets (2,547 boe/d; 76% Liquids)– 25+ horizontal locations (14 booked by McDaniel)
• Alberta Plains includes Little Bow ASP Tertiary Flood– Significant oil exploitation upside at higher oil prices
Zargon’s assets offer low-decline, operated oil production with significant oil exploitation opportunities
Corporate Overview
5
Capitalization(1) Asset Profile
Share Price (05/06/16) $0.56 Last Quarter Production (Q1 2016) Gas (MMcf/d) % Gas Liquids (bbl/d) % Liquids Total (boe/d) % of ProductionFully Diluted Shares Outstanding 31.4Market Capitalization $18 Williston Basin 0.34 3% 1,572 97% 1,629 39%Net Debt(2) $124 Alberta Plains (excl. ASP) 3.36 28% 1,452 72% 2,012 48%Option Proceeds - Little Bow - ASP 0.34 10% 479 90% 535 13%Entity Value $142 LQ Daily Production 4.04 16% 3,503 84% 4,176 100%
52-Week High $3.59 Reserves (December 31, 2015) Gas (Bcf) Liquids (MMbbl) Total (MMboe) LQ RLI52-Week Low $0.35
Total Proved 8.5 11% 11.7 89% 13.1 8.3Net Debt Summary(2) P+P Reserves 13.9 11% 18.6 89% 20.9 13.2
Credit Facility Drawn $65 Tax Pools (as at March 31, 2016) Hedging SummaryConvertible Debentures (Due June 2017) $58Working Capital Deficiency $1 Canadian Exploration Expense $42 H1 2016 500bbl/d $79.30 C$/bbl WTINet Debt $124 Non Capital Losses $144
Canadian Development Expense $31Credit Facility Summary Canadian Oil & Gas Property Expense $1
Canadian Undepreciated Capital Costs $58Credit Facility $88 Other $3Drawn $65 Total Tax Pools $279Bank Line Available $23% Drawn 74% Corporate Profile
Other Company Details Management Position Directors
Employees 26 Office Craig Hansen President and Chief Executive Officer Craig Hansen8 Field Jeffrey Post Chief Financial Officer K. James Harrison (Chairman)
Headquarters Calgary, Alberta, Canada Leslie Burden VP, Land Kyle KitagawaPrimary Exchange Listing TSE Randolph Doetzel VP, Operations Geoffrey MerrittReserve Evaluators McDaniel Christopher Hustad VP, Alberta Plains South Jim Peplinski
Brian Kergan VP, Corporate Development Ron WighamRobert Moriyama VP, Enhanced Recovery Grant ZawalskyPete Janjua VP, Williston Basin
(1) All numbers in $MMs except per share values.(2) Net debt calculated as long term debt plus working capital deficiency at March 31, 2016.
Corporate Production
6
Zargon has maintained a low conventional oil production decline despite minimal non-ASP 2015 capital expenditures
• Q1 2016 production of 4,176 boe/d (84% liquids)• Conventional oil production decline of ~12% over the last 12 months (excludes ASP production, which is growing)
– Including the Little Bow ASP project, 2016 corporate oil production is forecast to remain stable at 3,550 bbl/d with a $7.0 MM capital budget ($5.0 MM allocated to Little Bow ASP)
– 2014 and 2015 drilling programs had been minimized due to cash flow constraints with available capital allocated to the Little Bow ASP flood.
• Multiple exploitation and development opportunities have been identified throughout Zargon’s asset base including:
– Extensive development drilling opportunities in the Williston Basin
– Infill drilling and production optimization in the Alberta Plains assets
– Waterflood optimization in 16 Zargon operated waterflood Units (11 in the Williston Basin)
– At higher oil prices, the existing Little Bow ASP facilities can be used to reinitiate alkali surfactant injections in Phase 1 and proceed with Phase 2 development
• Williston Basin and Alberta Plains (including Little Bow ASP) properties are field level breakeven at US$26.50/bbland US$31.00/bbl WTI, respectively(1)
(1) Zargon 2016 forecasts, assumes USD/CAD of 0.72 and $1.50/Mcf field price
0500
1,0001,5002,0002,5003,0003,5004,0004,5005,000
2010 2011 2012 2013 2014 2015 2016
Base 2012 2013 2014 2015
Zargon Production 2012-2015 Additions to BaseWI Oil Production (bbl/d)
8
Zargon Conventional Properties Overview (Excluding Little Bow ASP)
Q4 2015 Contribution Decline Rate
Base 77% 9.8%
2012 8% 13.4%
2013 6% 16.7%
2014 9% 23.6%
2015 n/a n/a
Pipeline Repairs
McDaniel Reserves (2015 Year End)
Liquids Total PV 10%(mbbl) (mBOE) ($MM)
PDP 8,190 9,003 $ 122.4TP 9,360 10,556 $ 135.0
P+PDP 10,615 11,729 $ 155.4P+P * 12,873 14,732 $ 186.2
* includes new wells, tie-ins and reactivations
Operating Summary – Q1/2016Production 3,024 bbl/d (3,641 boe/d)Oil Prod’n Decline Rate 12% / year
Royalty Rate 11.6%
Forecast Quarterly OPEX $6.25 million ($25 million in 2016)
Reserves: McDaniel has recognized 33 gross (31.2 net) P+PUD locations and there is the potential of more than 50 additional locations
Williston Basin
9
Zargon’s Williston Basin is an under-capitalized asset with several development opportunities.
• Q1 2016 production of 1,629 boe/d– 97% liquids-weighted (26-36º API)– Average WI ~85%– ~94% operated
• Production has been maintained essentially stable in 2014-2015 without drilling
• Major producing zones include Midale, Frobisher, Alida and Tilston
• 19 booked locations with average per well parameters of 67 Mbbl oil reserves, 47 bbl/d initial rate and $1.11 MM DCET costs
• No drilling in 2015 due to capital allocation considerations– More than 50 drilling locations (all but four locations do not
require a frac) have been identified across the asset; opportunities reside in all of Zargon’s WB operating areas
– Waterflood optimization and enhancement opportunities at Weyburn, Frys, Elswick, Ralph, Truro, Steelman and Mackobee Coulee
• The asset boasts large oil-in-place volumes with low recovery factors and very shallow production declines in the Mississippian-aged targets
– Significant oil exploitation opportunities are available from waterflood optimization and infill drilling
Zargon – Williston Basin Properties
Williston Basin (Continued)
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The Williston Basin properties provide operated, low decline light oil production with significant exploitation potential
• Zargon has a diverse set of assets within the Willison Basin, each with its own characteristics and opportunity set
• All locations are associated with upgraded central battery and water disposal/injection facilities
– Since 2010 Zargon has invested ~$13MM in facility upgrades and turnarounds
Zargon Williston Basin Historical Production(1)
Oil Production (bbl/d)
7% annual production
decline
PropertyQ1 2016
Production % Liquids API OOIPRecovery to
Date Decline (boe/d) (%) ( º ) (MMbbl) (%) (%) McDaniel Additional
Elsw ick (SK) 196 99% 26-28 60 4% 12% 1 4+
Frys (SK) 58 100% 34-35 21 8% 1% 2 3+
Huntoon (SK) 38 100% 26 40 3% 9% 4 2+
Ralph (SK) 148 100% 32 17 12% 2% 3 2+
Steelman (SK) 587 92% 30-36 46 18% 9% 1 1
Weyburn (SK) 197 100% 26-32 67 5% 10% 3 3
Carnduff (SK) 33 90% 36 3 21% 6% 1 2
Sask Other (SK) 2 100% n.a. n.a. n.a. n.a. none none
Haas (US) 207 100% 28 51 23% 3% 1 5+
Mackobee Coulee (US) 86 100% 27 17 12% 12% 3 7
Truro (US) 102 100% 27 30 4% 11% none 2
Total 1,654 97% 26-36 352 10% 7% 19 31+
Gross Undeveloped Locations
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Williston Basin Properties Overview
Q4 2015 Contribution Decline Rate
Base 80% 4.4%
2012 10% 9.0%
2013 4% 13.8%
2014 6% 24.0%
2015 n/a n/a
McDaniel Reserves (2015 Year End)
Liquids Total PV 10%(mbbl) (mBOE) ($MM)
PDP 5,029 5,176 $ 71.9TP 5,828 5,978 $ 79.0
P+PDP 6,431 6,625 $ 89.4P+P 7,659 7,860 $ 105.0
Operating Summary – Q1/2016Production 1,572 bbl/d (1,629 boe/d)Oil Prod’n Decline Rate 7% / year
Royalty Rate 14.8%
Forecast Quarterly OPEX $2.75 million ($11 million in 2016)
Reserves: McDaniel has recognized 19 gross (17.4 net) P+PUD locations and there is the potential of more than 31 additional locations
Alberta Plains (excluding ASP)
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Zargon has maintained a low production decline despite restricted capital programs
• Q1 2016 production of 2,012 boe/d
– 72% liquids-weighted (16 - 32º API)
– Average WI ~72%,
– ~98% operated• Oil production decline of ~16% over the last 12
months (moderating)
– No drilling in 2015 due to capital allocation considerations
– 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:
– 14 booked infill and exploitation drilling opportunities (McDaniel locations)
– Good 3D seismic coverage over key properties support an additional 11+ un-booked locations
Zargon Alberta Plains (excluding ASP) Historical Production(1)
Oil Production (bbl/d)
16% annual production
decline
PropertyQ1 2016
Production % Liquids API OOIPRecovery
to Date Decline (boe/d) (%) ( º ) (MMbbl) (%) (%) McDaniel Additional
Bellshill Lake 538 95% 27 16 32% 14% 5 1+
Killam 133 57% 28 19 1% 12% 5 3+
Taber 549 98% 16-24 27 15% 19% 3 5+
Little Bow (Conventional)
342 65% 21 82 25% 7% none tbd
Alberta Other 424 18% 18-32 n.a n.a. 6% 1 2+
Total 1,986 72% 16-32 144+ 21% 16% 14 11+
Gross Undeveloped Locations
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Alberta Plains Properties Overview (Excluding ASP Little Bow ASP)
Q4 2015 Contribution Decline Rate
Base 73% 12.9%
2012 6% 15.1%
2013 7% 22.6%
2014 13% 26.2%
2015 n/a n/a
Average of the past 15 months
Operating Summary – Q1/2016Production 1,452 bbl/d (2,012 boe/d)Oil Prod’n Decline Rate 16% / year
Royalty Rate 3.1%
Forecast Quarterly OPEX $3.50 million ($14 million in 2016)
Reserves: McDaniel has recognized 14 gross (13.8 net) P+PUD locations and there is the potential of more than 11 additional locations
McDaniel Reserves (2015 Year End)
Liquids Total PV 10%(mbbl) (mBOE) ($MM)
PDP 3,161 3,828 $ 50.6TP 3,532 4,577 $ 56.1
P+PDP 4,183 5,104 $ 66.0P+P * 5,214 6,873 $ 81.2
* includes new wells, tie-ins and reactivations
Little Bow ASP Project
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Zargon’s Little Bow ASP project is showing good oil banking and production gains.
• Phase 1 of the Little Bow ASP project was implemented in March 2014 in the heart of the Mannville “I” Pool
• Q1 2016 production of 535 boe/d (90% liquids, 21º API)– Oil production in late April 2016 has climbed to 540 bbl/d, up from
210 bbl/d in October 2014 prior to response
– 600 bbl/d projected by end of Q2 2016
• Zargon conducted a $6.8 million 2015 remediation and optimization program, which included:
– 6 infill producers targeted newly formed oil banks on structural highs
– Contributing 195 bbl/d of oil production
– 2015 facility, pumps, tubing and chemical program changes are expected to significantly reduce 2016 operating costs
• North and Central regions of the scheme are responding very well and are anticipated to recover a full 12% incremental recovery of their 15 million bbl of oil-in-place
• Cumulative Phase 1 ASP injection at 22% of the pore volume which compares to a design target of 30% (8% remaining)
• To reduce costs, alkali and surfactant injections have been suspended. Model studies indicate that a one year suspension will not impact ultimate oil recovery
Little Bow ASP – Plan View
Little Bow ASP North and Central Regions - ProductionOil Production (bbl/d) | Oil Cut (%)
Little Bow ASPEOR in a mature Southern Alberta Waterflood
ASP Capital Forecast (Phase 1 Polymer Injection Only) Polymer Costs: $0.3 million per month through Q1 2019
Production Forecast (Phase 1 Polymer Injection Only) 600+ bbl/d for remainder 2016 and 2017; then decline at 11%/yr.
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Zargon W.I.(%)
W.I. OIIP(mmbbl)
Phase 1
North and Central 100 15
South 100 8
Future Potential Phases
Remaining I/P Pools 97 16
U&W Unit 97 26
G Unit 95 10
MM Unit 100 5
C8C / X8X 100 9
Total 89
2017 Considerations Resume AS injections in Phase 1 lands ($6 million of AS
chemical injections). Implement a modified Phase 2 project in Section 6 ($5
million of facilities; $9 million of chemical over six years).
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Little Bow ASP (Tertiary EOR) Overview
Q4 2015 Contribution Decline Rate
Base 73% 12.9%
2012 6% 15.1%
2013 7% 22.6%
2014 13% 26.2%
2015 n/a n/a
Operating Summary – Q1/2016Production 479 bbl/d (536 boe/d)Oil Prod’n Decline Rate n/a (increasing rates)
Royalty Rate 2.9%
Forecast Quarterly OPEX $1.25 million ($5 million in 2016)
Significant OPEX improvements are anticipated:
AS injections (incl. water softening) are now suspended.
Streamlined facility operations and improved pumping designs.
McDaniel Phase 1 Reserves (2015 Year End)
Liquids Total PV 10%(mbbl) (mBOE) ($MM)
PDP 1.099 1,268 $ 23.9TP 2,187 2,358 $ 32.9
P+PDP 1,462 1,688 $ 30.0P+P 3,463 3,734 $ 72.6
McDaniel Phase 2 Reserves (2015 Year End)
Liquids Total PV 10%(mbbl) (mBOE) ($MM)
PDP 123 166 $ 0.2TP 123 166 $ 0.2
P+PDP 139 185 $ 0.4P+P 2,247 2,433 $ 0.5
Phase 1 Response and Updated Forecast
Injection Pipeline Outage
Daily Production
Zargon Forecast
(Polymer only injection)
2016 H2 Avg: 600+ bbl/d
Base WaterfloodDaily Production to May 9, 2016
Annual Decline: 11%
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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.
Although our Little Bow production response was slower than anticipated, 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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Little Bow ASP Project Analog
Taber Mannville “B” ASP Analog
Most mature Canadian ASP project; Husky Operated Same geological setting, oil quality, reservoir size and pre-
ASP depletion state as Zargon’s Little Bow pool; ASP injection since 2006
Incremental recovery greater than 12% is projected
Little Bow Mannville “I” and “P” Pools (Zargon)
Taber Mannville “B” Pool (Husky)21
Taber Production HistoryM
ay-1
4
May
-13
May
-12
May
-11
May
-10
May
-09
May
-08
May
-07
May
-06
8% RF 10% RF 12% RF 14% RF 16% RF
8% RF 10% RF 12% RF 14% RF 16% RF10
100
1,000
10,000
15,000 16,000 17,000 18,000 19,000 20,000 21,000 22,000 23,000 24,000 25,000
Cumulative Oil Production (mbbl)
Oil P
rodu
ctio
n (b
bl/d
)
1
10
100
1,000
Oil C
ut (%
)
Data to December 2014
Oil Cut (%)
First ASP InjectionMay, 2006
AER DPIIP = 43.1 mmbblASP Recovery Pool Rec*
Percent mmbbl Mmbbl8% 3.4 20.5
10% 4.3 21.312% 5.2 22.214% 6.0 23.016% 6.9 23.9
* Recovery where ASP flood returns to pre-ASP levels
Cost Reductions - Progress Made
Capital Costs
G&A Costs
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Operating Costs
Conventional Oil Exploitation Capital (defer all non-discretionary costs): $38.1 million (2014), $6.0 million (2015), $2 million (2016 updated budget).
ASP Capital (defer Little Bow Phase 2; conclude 2015 optimization costs): $10.2 million (2014), $7.4 million (2015), $0.5 million (2016 updated budget).
ASP Chemical Costs: $11.6 million (2014), $12.1 million (2015), $4.5 million (2016 updated budget).
Reduce operating costs through lower margin property sales (now completed), comprehensive cost reviews, closed Stettler field office, lower Alberta electricity costs, lower contract operator fees, reduced Williston Basin turnaround and facility upgrade costs, reduced ASP facility and workover costs and lower pipeline spill and repair costs.
Resulting cost performance: $42.9 million (2014), $36.0 million (2015), $30.0 million (2016 updated budget).
Reduce G&A costs through office staff and consultant reductions, comprehensive cost reviews, salary roll backs, consultant rate reductions and office space adjustments.
Resulting cost performance (including one-time costs): $13.4 million (2014), $8.4 million (2015), $6.5 million (2016 budget).
Williston Basin – 2016 Cash Flow Parameters(No Drilling Case)
Conv. Oil 1,530 bbl/d in 2016; compares to Q1 2016 rate of 1,572 bbl/d.
Gas 0.40 mmcf/d; compares to Q1 2016 rate of 0.34 mmcf/d.
Equiv. 1,600 boe/d in 2016; compares to Q1 2016 rate of 1,629 boe/d.
Oil Prices WTI to Zargon average Williston Basin field differential; $12.0 Cdn./bbl.
Gas Prices $1.75/mcf field price (Williston Basin price before processing).
Royalties Averaging 17.0 percent.
Production
Costs
Pricing Parameters
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Operating $11.0 million – down from $12.6 million in 2015Improvements due to completed facility upgrades and lower contractor costs.
Abd. & Reclam. $0.6 million.
Capital $0.8 million maintenance capital (minor exploitation and facility costs).
0
5
10
15
20
25
30 40 50 60 70
Cas
h F
low
($m
illi
on
)
WTI Oil Price ($US/bbl)
2016 Williston Basin Cash Flow
Field Cash Flow
Free Cash Flow
Williston Basin – 2016 Cash Flow Estimates(No Drilling Case – 1,600 boe/d)
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WTI Pricing FX (US/Cdn.) Field Pricing Field Cash Flow Free Cash Flow After All Capital, Abandonments & Reclamations
$35 US/bbl $0.72 $36.61 Cdn./bbl $ 6.2 million $ 4.8 million
$45 US/bbl $0.75 $48.00 Cdn./bbl $11.5 million $10.1 million
$55 US/bbl $0.78 $58.51 Cdn./bbl $16.3 million $14.9 million
$65 US/bbl $0.81 $68.25 Cdn./bbl $20.8 million $19.4 million
The existing Williston Basin properties provide free cash flow at levels down to about $26.50 US/bbl (WTI).
At higher prices, the strong Williston Basin cash flows can be used to retire debt.
Alternatively, the cash flows can be used to grow production by drilling high-graded locations, selected from a 50+ Williston Basin well inventory.
Alberta Plains – 2016 Cash Flow ParametersIncludes ASP, Alberta Plains North & South (No Drilling Case)
Conv. Oil 1,420 bbl/d in 2016. ASP Oil (Phase 1) 600 bbl/d; 400 bbl/d incremental to waterflood. Total Oil 2,020 bbl/d compares to Q1 2016 rate of 1,931 bbl/d. Gas 3.2 mmcf/d; compares to Q1 2016 rate of 3.70 mmcf/d. Equiv. 2,550 boe/d in 2016; compares to Q1 2016 rate of 2,547 boe/d.
Oil Prices WTI to Zargon average Alberta Plains field differential; $16.5 Cdn./bbl. Gas Prices $1.75/mcf field price. Royalties Averaging 9 percent.
Production
Costs
Pricing Parameters
26
Operating $19.0 million – reduced from $23.4 million in 2015 due to lower electricity costs, lower contractor costs, field office closure and significantly improved base ASP operations.
Abd. & Reclam. $0.9 million. ASP Capital $0.5 million minor exploitation; $4.5 million chemical costs ($2.7 million
remaining in Q2-Q4). Conv. Capital $1.2 million maintenance capital (minor exploitation and facility costs).
Alberta Plains – 2016 Cash Flow EstimatesIncludes ASP (No Drilling or AS Injections Case – 2,550 boe/d)
No Drilling Case)
27
WTI Pricing FX (US/Cdn.) Field Pricing Field Cash Flow Free Cash Flow After All Capital, Abandonments & Reclamations
$35 US/bbl $0.72 $32.11 Cdn./bbl $ 4.5 million ($ 2.6 million)
$45 US/bbl $0.75 $45.50 Cdn./bbl $12.1 million $ 5.0 million
$55 US/bbl $0.78 $54.01 Cdn./bbl $19.2 million $ 12.1 million
$65 US/bbl $0.81 $66.10 Cdn./bbl $25.7 million $ 18.6 million
-5
0
5
10
15
20
25
30
30 40 50 60 70
Cas
h F
low
($ m
illi
on
s)
WTI Oil Price ($US/bbl)
2016 Alberta Plains Cash Flow
Field Cash Flow
Free Cash Flow
Alkaline and Surfactant (“AS”) injections were suspended in March 2016 at the Little Bow ASP project. Polymer injects have been maintained. The alkali and surfactant injections can be reinitiated once oil prices improve, but are not assumed to be restarted until after year-end 2016.
Remaining Q1-Q3 2016 Alberta Plains capital expenditures are $2.7 million for polymer and $0.9 million for oil exploitation.
Corporate – 2016 Cash Flow Parameters(No Drilling Case – 3,550 bbl/d and 3.6 mmcf/d)
Conv. Oil 2,950 bbl/d in 2016 compares to 3,024 bbl/d in Q1 2016. ASP Oil 600 bbl/d compares to 479 bbl/d in Q1 2016 Total Oil 3,550 bbl/d compares to 3,503 bbl/d in Q1 2016. Gas 3.60 mmcf/d; compares to Q1 2016 rate of 4.04 mmcf/d. Equiv. 4,150 boe/d in 2016; compares to Q1 2016 rate of 4,176 boe/d.
Oil Prices WTI to Zargon average field differential; $14.50 Cdn./bbl Gas Prices $1.75/mcf average field price Avg. Royalties Averaging 12.5 percent Hedges H1 2016: 500 bbl/d at $79.30 Cdn/bbl (WTI)
Production
Costs
Pricing Parameters
28
Operating $30.0 million – down from $36.0 million in 2015 Abd. & Reclam. $1.5 million. US Taxes varies with oil price up to $0.2 million. ASP Capital $0.5 million minor exploitation; $4.5 million chemical costs. Conv. Capital $2.0 million maintenance capital (minor exploitation and facility costs).
Corporate – 2016 Cash Flow Estimates(No drilling Case – 3,550 bbl/d and 3.6 mmcf/d)
No Drilling Case)
29
WTI PricingAverage Oil Production
Field Cash Flow (excl. hedges)
G&A, Hedges, Abd. & Interest
CostsCorporate Cash
Flow
$35 US/bbl 3,550 bbl/d $10.7 million ($12.3 million) ($1.6 million)
$45 US/bbl 3,550 bbl/d $23.6 million ($13.1 million) $10.5 million
$55 US/bbl 3,550 bbl/d $35.5 million ($13.9 million) $21.6 million
$65 US/bbl 3,550 bbl/d $44.6 million ($14.5 million) $30.1 million
-10
0
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30
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30 35 40 45 50 55 60 65 70
Cash
Flo
w ($
mill
ions
)
WTI Oil Price ($US/bbl)
2016 Corporate Cash Flow
Field Cash Flow
Corp. Cash Flow
Zargon’s assets provide positive corporate cash flow down to a $35 US/bbl WTI price.
2016 capital expenditures of $7.0 million ($4.5 million remaining in Q2-Q4) are sufficient to maintain stable oil production volumes.
At higher prices, Zargon’s assets provide significant free cash flow that can be used to retire debt, reinstate/expand the Little Bow ASP floods or drill high-graded horizontal oil exploitation wells from our 75 oil well inventory.
Valuation based on 2016 Cash Flow Estimates(No Drilling Case – 3,550 bbl/d and 3.6 mmcf/d)
No Drilling Case)
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WTI Pricing
Field Cash Flow (excl. hedges)
Six Times Field Cash Flow
Zargon Q1 2016 Net Debt
Attributed to Zargon Shares
Calculated Zargon Share
Value
$35 US/bbl $10.7 million $64 million $124 million $ nil $ nil
$45 US/bbl $23.6 million $142 million $124 million $18 million $0.59/share
$55 US/bbl $35.5 million $213 million $124 million $89 million $2.92/share
$65 US/bbl $44.6 million $268 million $124 million $144 million $4.72/share
Zargon’s long-life oil reserves provide investor’s exceptional torque (both operational and financial leverage) to future increases in oil prices.
Assuming a corporate valuation based on a six times property multiple suggests that significantly higher share prices may be realizable when WTI oil prices rebound to higher levels.
Zargon Share Value - Six times Property Cash Flow
0.00
1.00
2.00
3.00
4.00
5.00
30 40 50 60 70
WTI Oil Price ($US/bbl)
Shar
e P
rice
($
per
sha
re)
McDaniel Net Asset Value
NAV Calculation (Dec 31, 2015)Proved + Prob. McDaniel Est. (BT DCF 10%) $ 259 million
Undeveloped Land (Seaton Jordan evaluation) $ 9 millionDeduct Net Working Capital & Bank Debt - $ 121 millionNet Asset Value $ 147 million
Zargon Proved + Prob. Net Asset Value $4.84 per share
Reserve Category
Oil Reserves (mmbbl)
Equiv. Reserves (mmboe)
McDaniel PVBT 10%
($ million)
Net Asset Value
($ million)
Net Asset Value
($/share)
PDP 9.41 10.44 147 35 1.15
Total Proved 11.67 13.08 168 56 1.84
P+PDP 12.22 13.60 186 74 2.44Proved & Prob. 18.58 20.90 259 147 4.84
(30.37 million shares at Dec 31, 2015)
320.00
20.00
40.00
60.00
80.00
100.00
120.00
140.00
2008 2011 2014 2017 2020 2023 2026 2029
WTI
Pric
e ($
US/b
bl)
McDaniel WTI Price Forecast
Reserves Summary
33
Reserve Summary(1)
Gross Reserves (as at December 31, 2015) Light and
Medium CrudeHeavy Crude
Oil Natural GasNatural Gas
Liquids Total % LiquidsMbbl Mbbl MMcf Mbbl Mbbl %
ProvedDeveloped Producing 6,366 2,950 6,139 97 10,436 90%Developed Non-Producing 26 160 2,005 5 525 36%Undeveloped 877 1,188 307 1 2,117 98%Total Proved 7,269 4,298 8,451 103 13,079 89%
Probable 2,683 4,179 5,447 51 7,821 88%
Total Proved Plus Probable 9,952 8,477 13,898 154 20,899 89%
Total 2PDP Reserves Total 2P Reserves
Liquids Gas Total % Liquids Liquids Gas Total % LiquidsMMbbl MMcf MMboe % MMbbl MMcf MMboe %
Alberta Plains (Excl. ASP) 4.2 5.5 5.1 82% 5.2 10.0 6.9 76%Little Bow ASP 1.6 1.6 1.9 85% 5.7 2.7 6.2 93%Williston Basin 6.4 1.2 6.6 97% 7.7 1.2 7.9 97%Total 12.2 8.3 13.6 90% 18.6 13.9 21.0 89%
(1) Zargon 2015 Annual Information Form
Enterprise Value (May 6 trading price)
Zargon Valuation with Discounted Debentures (May 6 pricing)Common Shares (30.5 million @$0.56 @ May 6, 2016) $ 17 millionDebentures (0.575 million @$35 @ May 6, 2016) $ 20 millionAdd Net Working Capital & Bank Debt (@ Mar. 31, 2016) $ 67 million
Total Enterprise Value $ 104 million
Q1 2016 Production Enterprise Value (4,176 boe/d) $ 24,900 per boe/d2015 YE Reserves PDP (10.44 mmboe – 90% oil/liquids) $ 9.96 per boe2015 YE Reserves TP (13.08 mmboe – 89% oil/liquids) $ 7.95 per boe2015 YE Reserves 2P (20.90 mmboe – 89% oil/liquids) $ 4.98 per boe
34
Zargon Valuation with Debentures at Face ValueCommon Shares (30.5 million @$0.56 @ May 6, 2016) $ 17 millionDebentures (0.575 million @$100 face value) $ 58 million
Add Net Working Capital & Bank Debt (@ Mar. 31, 2016) $ 67 million Total Enterprise Value $ 142 million
Q1 2016 Production Enterprise Value (4,176 boe/d) $ 34,000 per boe/d2015 YE Reserves PDP (10.44 mmboe – 90% oil/liquids) $ 13.60 per boe2015 YE Reserves TP (13.08 mmboe – 89% oil/liquids) $ 10.86 per boe2015 YE Reserves 2P (20.90 mmboe – 89% oil/liquids) $ 6.79 per boe
With or without discounting the convertible debentures, Zargon’s oil assets are currently valued at low levels that could be highly accretive to potential acquirers on both a production or reserves basis.
Key Takeaways
Zargon’s Board and management believe that Zargon’s share price has not been reflective of the fundamental value inherent in the Company.
Zargon’s conventional oil Williston Basin locations and follow-up Little Bow ASP phases hold significant potential that could be accelerated by a better capitalized entity.
Scotia’s broad marketing process has commenced.
Strategic Process Initiated
Deep Discount to NAV
35
Investors buy Zargon at a large discount to the proved and probable (or proved developed producing) net asset value when evaluated at prices above current strip.
Despite recent encouraging production and oil cut trends, little or no value is attributed to the Little Bow ASP project.
Zargon’s long-life oil reserves provide investor’s exceptional torque (operational, financial and oil exploitation leverage) to future increases in oil prices.
