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Zargon Oil & Gas: Underrated, Underappreciated And Heavily Undervalued

Summary

Additional property divestitures have further reduced Zargon's outstanding debt.

A valuation for the EOR project gives a further hint at the value of the company.

Corporate restructuring has led to the loss of several corporate officers and further trimmed the fat.

(Editor’s note: There is much greater volume on the TSE under the ticker ZAR).

The recent departure of Chief Financial Officer Jeffrey Post from Zargon Oil & Gas (OTCPK:ZARFF) weighed on the thinly-traded issue's price to some extent following the announcement, sending the issue's price down perhaps 5 percent on slightly higher-than-average trading volume.

For a microcap junior producer, even one that has survived so long in such a topsy-turvy environment over the decades as Zargon has, such a drop was just another day at the office. More important than daily technical moves is the overall outlook of the company, a company which has made definite overtures toward a 'strategic alternative' process.

So far, the 'strategic alternative' process has resulted in the sale of two properties - the entire catalog of its Southeast Saskatchewan properties, which drew proceeds of C$89.5million, and its Killam property, which netted C$4.0million.

Pro forma these sales, the company now finds itself in a much stronger position than before. Zargon's current net debt of roughly C$31million, contrasted against its previous debt of roughly C$120million, puts the company in a much stronger financial position than before the sales occurred.

As in my previous article, Zargon Oil And Gas Is Now Deeply Undervalued, Here's Why, I noted that the company's decision to divest a small portion of its assets to eliminate a large portion of its debt was an extremely wise decision on many points. Now, with additional information available, there is even more reason to believe that the company is even more undervalued than before.

Valuing The Remaining Assets

Before receiving strong evidence on how to value Zargon's Enhanced Oil Recovery Project, I had made my assumptions based on valuing this project at zero. Of course, I knew that this project was worth far more than zero. But without a firm grasp on the fundamentals, I reasoned that if the rest of the company would still return a significant profit if the EOR project was completely worthless, then any value assigned to the EOR project would just be extra icing on the cake.

As it turns out, there is finally a relative piece of information that gives insight on how to value the EOR project. Whitecap Resources' (OTC:SPGYF) (TSE: WCP) recent acquisition of a very similar EOR asset gives us good insight on what a fair return price on Zargon's well-developed EOR asset might return on the open market.

Whitecap paid C$595million for 11,600boe/d (98% oil) which is 78% operated, has an estimated 5% decline, and...


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