REG - Zephyr Energy PLC - Acquisitions and Operational Update

Zephyr EnergyAnnouncement

21/12/2022 07:00

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RNS Number : 3966K  Zephyr Energy PLC  21 December 2022

Prior to publication, the information contained within this announcement was
deemed by the Company to constitute inside information as stipulated under the
UK Market Abuse Regulation. With the publication of this announcement, this
information is now considered to be in the public domain.

 

 

21 December 2022

 

Zephyr Energy plc

 ("Zephyr" or the "Company")

 

Acquisition of the remaining 25 per cent. working interest in the Paradox
Project;

Acquisition of further non-operated near-term production assets in the
Williston Basin;

US$8 million asset-backed bridge loan secured;

Paradox operations update;

2023 production forecasts; and

Proposed exercise of warrants by Directors

 

Zephyr Energy plc (AIM: ZPHR) (OTCQB: ZPHRF), the Rocky Mountain oil and gas
company focused on responsible resource development from carbon-neutral
operations, is pleased to announce the acquisition of the remaining 25 per
cent working interest across the White Sands Unit (the "WSU") in the Paradox
Basin, Utah, U.S. (the "Paradox Basin" or "Paradox Project") (the "Paradox
Acquisition").

 

In addition, the Company announces that it has acquired a working-interest in
a further six wells in the Williston Basin, North Dakota, U.S. (the "Williston
Basin") (the "Williston Acquisition"). This accretive acquisition will provide
the Company with further low-risk oil production and is expected to generate
substantial cashflows for the Company which can be reinvested into the Paradox
Project development.

 

To fund the Williston Acquisition and to ensure that the Company generates
additional cashflow to help fund the incremental future capital expenditure
("CAPEX") required as a result of the Paradox Acquisition, the Company has
secured an US$8 million asset-backed bridge loan facility on attractive
commercial terms from a U.S. based family office which has co-invested with
Zephyr's management team on other projects on multiple occasions.

 

The Paradox Acquisition

 

Zephyr has agreed to acquire the remaining 25 per cent. working-interest in
the core acreage of the Paradox Project from Rockies Standard Oil Company LLC
("RSOC" or the "vendor").  Historically, RSOC benefitted from a carry on its
working-interest in the Paradox Project, and this carry was satisfied on
completion of the State 16-2 LN-CC well (the "State 16-2 Well") in 2022.
Following the satisfaction of the carry obligation, the vendor was obligated
to fund its 25 per cent. proportion of CAPEX, including its share of the CAPEX
for the State 36-2 LNW-CC well (the "State 36-2 Well") which is currently
being drilled, and also had the right to participate pro-rata in the
infrastructure build out that is currently taking place on the project. The
total vendor CAPEX for these two items equates to circa US$5 million.

 

Having been served notice to provide its share of funding for these two items,
the Company was informed that the vendor was unable to fund its 25 per cent.
interest in the State 36-2 Well within the required timeline.  This inability
to fund the project provided an opportunity for Zephyr to explore a corporate
solution with RSOC - and as the vendor wished to retain exposure to the
project, an agreement was reached for Zephyr to acquire the vendor's stake
through the issue of shares in the Company.

 

The terms of the Paradox Acquisition are as follows:

 

·    Total consideration of up to US$3 million, payable by way of the
issue of new ordinary shares of 0.1 pence each in the capital of the Company
("Ordinary Shares"), to be issued under existing share authorities, at a price
of 6.05p per Ordinary Share, representing a circa 11% premium to the Company's
mid-market closing share price on 20 December 2022.

o  A first tranche of 13,483,095 new Ordinary Shares will be issued to the
vendor on the completion of the Paradox Acquisition in January 2023;

o  A second tranche of 26,966,189 new Ordinary Shares will be issued to the
vendor upon Zephyr's final investment decision with respect to the contract
award to a primary contractor to commence construction activities to make the
Powerline Road gas processing plant operational; and

o  All equity issued to the vendor will be subject to a lock-up period which
expires at the earlier of the date that first gas from the State 36-2 Well is
sold via the Dominion Energy Utah, LLC ("Dominion Energy") 16-inch gas export
pipeline; or 15 December 2023.

 

·    The Paradox Acquisition provides an immediate opportunity for Zephyr
to consolidate its working-interest in the core acreage of the Paradox Project
and includes the following assets:

o  the remaining 25 per cent. interest in the previously drilled State 16-2
Well (with an estimated NPV-10 of US$3.1 million);

o  the remaining 25 per cent. interest in the State 36-2 Well currently being
drilled;

o  the remaining 25 per cent. interest in all reserve and resource classes
across the Paradox Project;

o  Zephyr will retain its 100% ownership in the recently acquired
infrastructure asset; and,

o  as 100% owner, Zephyr will subsequently be responsible for 100% of CAPEX
related to the Paradox Project on a go forward basis.  Incremental near-term
CAPEX additions as a result of the Paradox Acquisition are expected to be
circa US$5 million and will be funded by existing cash and future cash flows
from the Company's non-operated portfolio.

 

·    The Paradox Acquisition will be immediately accretive across all
reserve and resource categories. Zephyr's technical team currently estimate
that the Paradox Acquisition adds:

o  over 450,000 boe in 2P reserves;

o  over 7 million boe in 2C Contingent Resources; and

o  over 67 million boe of 2U unrisked Prospective Resources.

 

·    The Paradox Acquisition is expected to complete by the end of January
2023, subject to, inter alia, finalisation of due diligence, contract and
regulatory consents.

 

Further details of the Paradox Acquisition are set out further below.

 

The Williston Acquisition

 

·    Acquisition of non-operated working-interests in six further wells,
equivalent to a net 1.2 wells, in the Williston Basin (the "New
Williston Wells") near to Zephyr's current non-operated working interests for
total consideration of US$2.9 million. In addition, Zephyr will pay the
upcoming US$8.9 million CAPEX associated with the working-interests to bring
the wells into production.

·    The New Williston Wells are expected to provide a near-term
production boost, having been spud in November 2022 and with first sales
volumes expected in the first quarter of 2023.

·    The operator of the New Williston Wells is Slawson Exploration
("Slawson"), a top-tier operator and one of the largest private companies in
the Williston Basin.  Slawson was an early pioneer of horizontal development
in the Williston Basin and has excellent access to oilfield service
companies and infrastructure.

·    Zephyr's working-interest in the New Williston Wells ranges from
11% to 32% and management currently estimates 2P Reserves being acquired are
circa 550,000 boe net to Zephyr.

·    On a pro forma basis inclusive of the Williston Acquisition
working-interests, the Company is issuing a 2023 full-year production
forecast of 1,550 to 1,750 boepd for its aggregate Williston Basin
interests (net to Zephyr).

·    The Company has secured a US$8 million bridge loan facility, on
favourable terms, to part fund the Williston Acquisition and associated CAPEX,
details of which are set out below. There is no equity component to the US$8
million bridge loan facility.

 

Paradox Project Operations Update

 

·    State 36-2 LNW-CC well

o  The well spud on 21 November 2022 and drilling was initially estimated to
take 30 days.

o  During the initial stages of drilling, operations were slower than
forecasted due to rig commissioning and mechanical issues.  In addition, as
announced on 9 December 2022, the Company was awarded an additional US$1
million in grant funding from the U.S. Department of Energy to gather detailed
reservoir data from the Cane Creek and overlying reservoirs during ongoing
drilling of the well.

o  Despite the operational delays and the extra time allotted to gather the
grant-related reservoir data, it is still the Company's expectation to deliver
the well within budgeted authority for expenditure ("AFE") limits albeit on a
slightly longer timeframe than originally forecasted.  Zephyr now expects the
drilling operation to conclude in January 2023.

 

·    State 16-2 LN-CC production test

o  The production test of the well is underway and production rates are
stable and increasing in a measured and planned process.  Production data
from the test will be released at the conclusion of the test, which is
expected in early January 2023.

 

2023 Production Forecasts

 

Zephyr production forecasts for 2023 on a pro forma basis (including the
Paradox Acquisition and the Williston Acquisition) are now expected to be as
follows:

 

·    Williston Basin non-operated portfolio 2023 average: 1,550 to 1,750
boepd (up from an estimated average of circa 1,400 boepd in 2022);

·    Paradox Basin year end 2023 run-rate: 3,300 boepd (assumes WSU 100%
working interest and 50% working interest in the Cane Creek DSU production);

·    Combined year-end 2023 exit-rate: 4,800 boepd, representing a circa
200% increase from current production rates; and

·    Both acquisitions are expected to increase total 2023 exit production
rates by 60% (from 3,000 to 4,800 boepd).

 

The above production estimates are based on 2P forecasts for the Paradox and
WSU and the installation of a 10mmscf/d processing capacity at the Paradox. In
addition, this assumes the start-up of the New Williston Wells, a proposed
Cane Creek DSU well and the two WSU wells in March 2023, July 2023 and October
2023 respectively. These are current management forecasts and expectations
only, have not been independently verified, and are subject to further
revision post-integration of the Paradox and Williston acquisitions.

 

Zephyr intends to set out a full update of its investment plans for 2023 early
in the New Year.

 

Proposed Exercise of Warrants by Directors

 

·    The Company has received indications from Directors and related
parties that they soon intend to exercise warrants that will result in
incremental cash proceeds to the Company of circa £445,000.

 

Colin Harrington, CEO of Zephyr, commented: "I am delighted that we are able
to announce these two acquisitions which have been secured on attractive
commercial terms for the Company and which, I believe, are substantial
building-blocks for our future development and growth.

 

"The acquisitions are immediately accretive to our shareholders, given the
increase in the Company's reserves and resources, and they also provide the
Company with increased flexibility and optionality in terms of the future
development.

 

"To be able to consolidate our working-interest in the Paradox Project is a
hugely positive step for Zephyr, and I would particularly like to thank RSOC
for its support and partnership over the years.  We look forward to welcoming
them onto our share register where we all will be in a position to participate
in the future potential value of the Paradox Project.

 

"The Paradox Acquisition will result in a higher CAPEX requirement for Zephyr
as it assumes a larger working-interest in the Paradox Project, and this
incremental CAPEX will be funded out of the Company's existing cash resources,
and from the cashflows that we expect to be generated from our growing
Williston portfolio.  Having announced the acquisitions today, it is our
intention to provide the market with a full update of our investment plans for
2023 early in the New Year.

 

"2022 has been another year of transformation for Zephyr and the acquisitions
being announced today are a great way for us to end this year and to set up
for the next. 2023 promises to be an exciting time for the Company as we
continue with the development of our asset portfolio.

 

"We would like to thank all our shareholders for their support during this
year and we wish everybody a safe and healthy holiday season.  In particular,
we'd like to thank the dozens of partners and contractors working hard at the
well site, through the holidays, to deliver a successful well result for the
Company."

 

Further details of the Paradox Acquisition and assets being acquired

 

Zephyr currently has a minimum 75 per cent. working-interest in 45,000
operated acres in the Paradox Basin, 25,000 of which are comprised of the core
acreage of the WSU (and in which Zephyr has a 75 per cent. working interest).
The formation of the WSU was announced by Zephyr on 29 October 2021. Zephyr
has been active in the Paradox Basin since 2014, working alongside its
joint-venture partner, RSOC, which currently owns the remaining 25 per cent.
working-interest in and around the WSU.

 

The Paradox Acquisition provides an opportunity for Zephyr to consolidate its
working-interest in and around the WSU to 100 per cent. and will include the
following assets:

·   the remaining 25 per cent. interest in the previously drilled State
16-2 Well (with an estimated NPV-10 of US$3.1 million);

·   the remaining 25 per cent. interest in the State 36-2 LNW-CC Well
currently being drilled;

·   the remaining 25 per cent. interest in all remaining reserves and
resource across the WSU; and

·   in addition, Zephyr will retain 100 per cent. of the pipeline and
processing infrastructure across the WSU.

 

The Paradox Acquisition will be immediately accretive across all reserve and
resource categories. Zephyr's technical team estimates that the Paradox
Acquisition adds over 7 million boe of additional 2C net Contingent Resources
to Zephyr's Paradox Basin position and post the Paradox Acquisition the
Company will have the following:

·    Net attributable developed and undeveloped 1P, 2P and 3P reserves:
0.59, 2.57 and 8.33 mmboe respectively;

·    Net attributable contingent 2C and 3C resources: 34.03 and 102.92
mmboe respectively; and

·    Net attributable unrisked prospective 1U, 2U and 3U resources: 76.7,
240.4and 558.7 mmboe respectively.

 

Bridge loan

 

To help fund the Williston Acquisition and associated CAPEX, and having
explored multiple fundraising options including equity financing, the Company
has secured a US$8 million asset-backed bridge loan facility ("Loan"). The
facility has been provided by a U.S. based family office which has
historically co-invested with certain members of Zephyr's management team on
multiple occasions on other projects.

 

The key terms of the Loan are as follows:

·    Loan secured by the New Williston Wells;

·    1% royalty interest in the New Williston Wells;

·    Twelve-month term;

·    1% origination fee; and

·    12% per annum interest rate

 

There is no equity component attached to the Loan.  It is expected that the
Loan will be repaid through cash flows generated by the Company from the New
Williston Wells or via proceeds from the Company's existing reserve backed
loan facility after its next redetermination in the second quarter of 2023.

 

Proposed Exercise of Warrants

 

In November 2019, Origin Creek Energy LLC ("OCE") (a Company is which Colin
Harrington, CEO of Zephyr, is a controlling shareholding and in which Rick
Grant, Zephyr's Chairman is a Director) and Chris Eadie, CFO of Zephyr, were
issued warrants to subscribe for Ordinary Shares at 2 pence per share as part
of a placing undertaken at that time.

 

OCE and Chris Eadie have indicated that they soon intend to serve notice to
exercise their warrants over 21,818,182 new Ordinary Shares and 454,545 new
Ordinary Shares respectively, for a total consideration of £445,454.

 

Given the rapid development and multiple operational milestones and
acquisitions completed by the Company and regulatory constraints, OCE and Mr
Eadie have been unable to exercise these warrants until now. Funds received by
the Company will be put towards general working capital and CAPEX requirements
of the Company. It is expected that the shares corresponding to the warrants
will be issued in the coming days. A further announcement will be made by the
Company as and when appropriate.

 

 

Contacts:

 

 Zephyr Energy plc                                              Tel: +44 (0)20 7225 4590

 Colin Harrington (CEO)

 Chris Eadie (CFO)

 Allenby Capital Limited - AIM Nominated Adviser                Tel: +44 (0)20 3328 5656

 Jeremy Porter / Vivek Bhardwaj

 Turner Pope Investments - Joint-Broker                         Tel: +44 (0)20 3657 0050

 James Pope / Andy Thacker

 Panmure Gordon (UK) Limited - Joint-Broker                     Tel: +44 (0) 20 7886 2500

 John Prior / Hugh Rich / James Sinclair-Ford / Freddie Twist

 Celicourt Communications - PR                                  Tel: +44 (0) 20 8434 2643

 Mark Antelme / Felicity Winkles

 

Notes to Editors

 

Zephyr Energy plc (AIM: ZPHR) (OTCQB: ZPHRF) is a technology-led oil and gas
company focused on responsible resource development from carbon-neutral
operations in the Rocky Mountain region of the United States. The Company's
mission is rooted in two core values: to be responsible stewards of its
investors' capital, and to be responsible stewards of the environment in which
it works.

 

Zephyr's flagship asset is an operated 45,000-acre leaseholding located in the
Paradox Basin, Utah, 25,000 acres of which has been assessed by third party
consultants Sproule International to hold, net to Zephyr, 2P reserves of 2.1
million boe ("mmboe"), 2C resources of 27 mmboe and 2U resources 203 mmboe.
Following the successful initial production testing of the recently drilled
and completed State 16-2 Well, Zephyr has planned a three well drilling
program - commencing in 2022 with the State 36-2 LNW-CC well - to further
delineate the scale and value of the project.  Immediately upon completion of
the Paradox Acquisition, all resource and reserve categories will increase by
a proportional amount.

 

In addition to its operated assets, the Company owns working interests in a
broad portfolio of non-operated producing wells across the Williston Basin in
North Dakota and Montana.

 

The Williston portfolio currently consists of working-interests in over 200
modern horizontal wells which are expected to provide US$40-45 million of
revenue, net to Zephyr, in 2022. Cash flow from the Williston production will
be used to fund the planned Paradox Basin development. In addition, the Board
will consider further opportunistic value-accretive acquisitions.

 

Qualified person

 

Dr Gregor Maxwell, BSc Hons. Geology and Petroleum Geology, PhD, Technical
Adviser to the Board of Zephyr Energy plc, who meets the criteria of a
qualified person under the AIM Note for Mining and Oil & Gas Companies -
June 2009, has reviewed and approved the technical information contained
within this announcement.

 

Estimates of resources and reserves contained within this announcement have
been prepared according to the standards of the Society of Petroleum
Engineers. All estimates, unless otherwise noted, are internally generated and
subject to third party review and verification.

 

 
Glossary

 

The following terms apply throughout this Announcement unless the context
requires otherwise:

 

 "1C"                    Low estimate of Contingent Resources;

 "2C"                    Best estimate of Contingent Resources;

 "3C"                    High estimate of Contingent Resources;

 "1P"                    proven reserves (both proved developed reserves + proved undeveloped
                         reserves);

 "2P"                    1P (proven reserves) + probable reserves, hence "proved and probable";

 "3P"                    the sum of 2P (proven reserves + probable reserves) + possible reserves, all
                         3Ps "proven and probable and possible";

 "bo"                    barrel of oil;

 "boe"                   barrels of oil equivalent;

 "boepd"                 barrels of oil equivalent per day;

 "Contingent Resources"  Those quantities of petroleum estimated, as of a given date, to be potentially
                         recoverable from known accumulations by application of development projects,
                         but which are not currently considered to be commercially recoverable due to
                         one or more contingencies. Contingent Resources may include, for example,
                         projects for which there are currently no viable markets, or where commercial
                         recovery is dependent on technology under development, or where evaluation of
                         the accumulation is insufficient to clearly assess commerciality. Contingent
                         Resources are further categorised in accordance with the level of certainty
                         associated with the estimates and may be sub-classified based on project
                         maturity and/or characterised by their economic status;

 "CAPEX"                 capital expenditure;

 "DSU"                   Drilling Spacing Unit;

 "mmboe"                 million barrels of oil equivalent;

 "NPV-10"                2P net present value at a ten per cent discount rate; and

 "Reserves"              Reserves are defined as those quantities of petroleum which are anticipated to
                         be commercially recovered from known accumulations from a given date forward.

 

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