Last week, we examined Precision Drilling (Toronto symbol PD) which, in the wake of the long slump in natural gas prices, has 84% of its rigs drilling for oil (view the article here). Today we look at an oil and gas producer that has also cut back on natural gas, although it still has a third of its production in gas.
ZARGON OIL & GAS (Toronto symbol ZAR; www.zargon.ca ) 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.
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Energy stocks: Zargon employs new technique in enhanced oil recovery project
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 expects cash flow of $2.25 a share in 2013. It trades at just 3.4 times that estimate. The monthly dividend of $0.06 a share yields 9.3%.
In the latest edition of Stock Pickers Digest, we look at the 40% cut Zargon made in its monthly dividend in October 2012 and assess whether the company is carrying a sustainable level of debt. We conclude with our clear buy-hold-sell advice on the stock.
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“Fracking” and other innovative techniques have helped put a glut of natural gas on the market, pushing supply ahead of demand. Do you avoid stocks with a substantial portion of their production in natural gas, or do you believe rising demand and higher gas prices will push these stocks up? Let us know what you think.
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I believe North America wants to become energy self-sufficient and will use new and proven methods to reach that goal. I don’t avoid natural gas stocks because eventually demand for natural gas will return. I feel this an excellent opportunity for investor’s to buy some great producers at less than 50% book value.
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I believe North America wants to become energy self-sufficient and will use new and proven methods to reach that goal. I don’t avoid natural gas stocks because eventually demand for natural gas will return. I feel this an excellent opportunity for investor’s to buy some great producers at less than 50% book value.