We set out a Big Yield Hunting “field bet”–updated advice on eight picks–in our regular August issue. We also closed two positions. This special edition of BIG is brought to you by an overreaction to second-quarter earnings likely exacerbated by the crazy market action that defined the month. 

Zargon Oil & Gas Ltd (TSX: ZAR, OTC: ZARFF)–a small but generally consistent oil and gas production company–has taken a hit this month and now yields 10 percent. The main reason is weakness in oil prices, which has hit share prices of all producers. In addition, flooding shut in a significant chunk of the company’s production base in the Williston Basin in the second quarter. That makes an otherwise pretty bar graph depicting slowly, steadily rising oil production look a little ugly. But the market has overreacted to what appears to be a short-term problem.

The big economic picture is messy right now, but it’s been so for almost half a decade. Energy prices have come down along with everything else this month. But they’ve bounced along with everything else too. Despite its production challenges, Zargon still covered its second-quarter distribution by a solid 1.07-to-1 margin. First-half coverage was much better at 1.54-to-1, and should improve much in the second half of 2011 as output returns to normal.

Meanwhile, management continues to transition its production mix further in favor of oil, pursuing acquisitions that fit its business model, managing its finances in a way that allows it to fund operations, paying a generous dividend and growing its asset base. Zargon has put itself in position to continue to benefit from oil prices that will remain well above what we became accustomed to during the long-ago 20th century.

The bet is a rebound in the stock price north of USD20 while it continues to pay monthly dividends at an annualized rate of more than 10 percent. Zargon Oil & Gas is a buy up to CAD17.50 or USD18.

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