StockWatch energy summary ..Zargon Down toward the bottom, Alberta- and North Dakota-focused Zargon Oil & Gas Ltd. (ZAR) had a rough day, dropping 4.5 cents to seven cents on 680,900 shares. It has proposed a shares-for-debt deal to settle its $41.9-million of outstanding debentures due Dec. 31, 2019. A total of 428.8 million shares will be issued at 10 cents, sending Zargon's share count ballooning toward 460 million from the current level of just 30.8 million. The debentureholders will own the vast majority of the resulting company, with current shareholders left holding just 6 per cent.
The debentures were issued in the happier days of May, 2012, when Zargon was trading at around $13 (or 185 times today's price) and was even paying a dividend (long since cancelled). At the time, Zargon was promoting an intriguing new project called Little Bow; the debenture offering was intended to raise money to help build the project. Little Bow came on production in 2014. Unfortunately, it never did produce as hyped, and its problems were exacerbated by the oil price crash. By August, 2015, Zargon's stock had slumped to just $2. That month, Zargon started a "strategic alternatives" review, code for putting itself up for sale. Nearly 40 months have passed since the review started.
Zargon seems hopeful that removing the debenture overhang will inject new life into the review. It will doubtless attempt to put the focus back on its operations. The company produced 1,953 barrels of oil equivalent a day in the third quarter of 2018, with 410 of that coming from oil assets in North Dakota, unaffected by the recent record-high WTI-WCS differentials. The Alberta assets are, of course, affected by those differentials, but Zargon spins that as a positive -- just imagine how wonderful it will be as those differentials shrink! A presentation on Zargon's website invites readers no fewer than three times to appreciate the company's "exceptional torque" to oil prices. It also touts the company's tax pools and TSX listing. If that sounds like talk intended to attract a suitor, that is because Zargon is still hoping to do so. It plans to continue with its strategic alternatives process even after closing the shares-for-debt deal. The deal is expected to close in January, shortly after a special meeting to seek debentureholders' approval. If debentureholders reject the deal, Zargon will simply convert the debentures to shares upon maturity, so the shares-for-debt exchange is happening either way. The advantage of accepting the deal proposed by Zargon is that it will save the company about $4.2-million in interest costs, money that can be spent on the company's assets instead.