Livermore Partners had been pushing Calgary-based Zargon to eliminate its dividend entirely but the fund’s managing director David Neuhauser said in an email that the changes Zargon announced Monday were “consistent with what we requested” and over time, “will become very positive.”
Zargon, a light oil producer focused on Alberta and Saskatchewan, announced it was cutting its monthly dividend to one cent from three cents per share Monday – just four days after Northbrook, Illinois-based Livermore Partners delivered a letter to the company’s board demanding a re-think of its dividend policy.
“Zargon for now, must move away from its yieldco model in favour of seeking equity price appreciation,” Neuhauser wrote in his letter dated June 18.
National Bank Financial analyst Brian Milne said in a research note that investors would view Zargon’s move negatively “given the changes to liquidity, the less compelling yield and news of continued challenges with the Little Bow ASP project.”
The company’s share price dropped just under 15 per cent near closing time Monday to $2.47 per share.
Milne noted the company’s stock trades at a discount to its peers, which Zargon president and CEO Craig Hansen acknowledged in an interview.
“We have a classic problem in that the asset we have is in the wrong vehicle,” Hansen said. He noted the dividend model isn’t working for Zargon right now because the company’s main asset, called Little Bow, isn’t yet delivering consistent oil production.
Zargon is injecting a combination of water and soap-like chemicals into an oil formation in southern Alberta, a process designed to pressurize the reservoir and push consistent oil production to the surface. Hansen said that once the project is fully operational, it would produce for “many, many years” at a lower cost than drilling new wells.
“Once we’re up and running, this is going to be a perfect business as far as building a dividend and one of the reasons we wanted to keep the one penny is to demonstrate that this is what we’re trying to accomplish, but it’s been a challenge,” he said.
In a release Monday, the company said Little Bow’s “production ramp-up has been slower than anticipated,” but the project’s oil production is improving.