ZARGON OIL & GAS $8.99 - Toronto symbol ZAR

ZARGON OIL & GAS $8.99 (Toronto symbol ZAR; TSINetwork Rating: Speculative) (403-264-9992; www.zargon.ca; Shares outstanding: 29.6 million; Market cap: $266.1 million; Dividend yield: 8.0%) produces natural gas and oil in Alberta, Manitoba, Saskatchewan and North Dakota. Its production is 65% oil and 35% gas.

In the three months ended June 30, 2012, Zargon produced 8,290 barrels of oil equivalent per day, down 4.6% from 8,686 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 12.5%, to $0.42 from $0.48 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 has cut its monthly dividend by 40%, from $0.10 a share to $0.06, for an 8.0% yield. The company expects to report cash flow of $1.90 a share in 2012. The shares trade at 4.7 times that estimate.

Zargon Oil and Gas is a buy.

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