REG - Zephyr Energy PLC - Final Results
26/06/2023 07:00
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RNS Number : 8673D Zephyr Energy PLC 26 June 2023
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.
26 June 2023
Zephyr Energy plc
("Zephyr" or the "Company")
Full Year Results for the year ended 31 December 2022
Notice of AGM
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 its audited results for the year ended 31
December 2022.
Highlights
Over the 2022 financial year, and in the period since, Zephyr has continued to
make sustained progress with its primary goal of opening up the next prolific
onshore U.S. oil and gas play.
The Company's key goals for 2023 are to move its project in the Paradox Basin,
Utah, U.S. (the "Paradox project") into full commercial production while
continuing to grow its highly-profitable, cash generating non-operated asset
portfolio.
The Company's Board of Directors (the "Board") remains firmly committed to
delivering long-term value to our Shareholders, while upholding our core
values of being responsible stewards of our shareholders' capital and of the
environment in which we operate.
Financial
· Near seven-fold increase in revenues from prior year to US$41.1
million (2021: US$6 million), and a profit before tax of US$22.6 million
(2021: US$1 million), highlighting the extent of the Group's growth during the
period.
· Net profit after tax of US$19.3 million, equating to a profit of
1.26 cents per Ordinary Share for the year ended 31 December 2022 (2021:
US$0.8 million or 0.08 cents per Ordinary Share).
· At 31 December 2022, the Group had cash and cash equivalents of
US$9 million (2021: US$1.8 million).
· Total investment in the Group's exploration and evaluation assets
as at 31 December 2022 was US$38 million (2021: US$22.8 million) reflecting
the ongoing investment in the Paradox project.
· Total investment in property, plant, and equipment as at 31
December 2022 was US$51.8 million (2021: US$11.2 million) reflecting the
further acquisition of non-operated assets in the Williston Basin, recurring
capital expenditure and decommissioning obligations on the non-operated
assets.
Paradox Project, Utah, U.S. (operated asset)
· First flowing hydrocarbons from the Company's State 16-2 LN-CC
well (the "State 16-2 well") and the drilling of the State 36-2 LNW-CC well
(the "State 36-2 well"), a major milestone for the project.
· Working- interest in the project increased to 100% across
approximately 45,000 acres.
· Competent Persons Report which highlighted the scale and resource
potential of the project. Based on the Company's 100% working interest Sproule
reported:
o 2P Reserves: Maiden Paradox project Proved Reserves of 2.57 million
barrels of oil equivalent ("boe")
o 2C Contingent Resources: 34 million boe
o 2U Prospective Resources from overlying reservoirs: 270 million net
unrisked boe.
· Acquisition of assets and infrastructure during the period
including 21 miles of natural gas gathering lines, a gas processing plant (not
currently in operation), and rights of way for additional gathering lines to
help facilitate moving the project into the production phase with less upfront
cost.
Williston Basin, North Dakota, U.S. (non-operated assets)
· Zephyr now has a portfolio of interests in more than 220 wells
operated by top-tier operators in the Williston Basin, one of the most
prolific basins in the U.S.
· FY 2022 revenues from the non-operated assets of US$41.1 million
(from production of over 500,000 boe) a circa 585% increase from revenues of
US$6 million in FY 2021.
· FY 2022 sales volumes from the portfolio averaged 1,410 barrels
of oil equivalent per day ("boepd") (2021: 263 boepd).
· Portfolio has generated high margin cashflows, providing funding
for the Paradox project and further investment in the non-operated portfolio.
· Implemented inaugural hedging programme with BP Energy Company,
locking-in over US$30 million of forecasted Williston Basin revenue over a
two-year period.
Corporate
· In line with the Company's ESG objectives, Zephyr continued to
achieve Scope 1 carbon-neutrality across its operational footprint during the
period under review.
· There were no reported health or safety incidents on Zephyr
operated assets.
Rick Grant, Zephyr's Non-Executive Chairman, said:
"I am pleased to report that the 2022 financial year was a
period of excellent environmental, financial and operational performance
for the Company.
"Zephyr continues to be well positioned as a profitable, cash generating
exploration and production group and our balanced portfolio of operated and
non-operated assets is expected to continue to yield strong results for
Zephyr. Cash flows generated from our non-operated portfolio will continue
to be primarily used for the ongoing development of our flagship Paradox
project.
"Looking ahead, with a diverse portfolio of cash flowing assets, potential for
substantial future organic growth, a solid financial footing and a talented
and dedicated team of employees, we continue to be extremely optimistic about
Zephyr's future.
"Our key goals for 2023 are to move the Paradox project into full commercial
production while continuing to grow our non-operated asset portfolio.
"I would like to thank our employees and contractors for their hard work in
2022, especially those on site who worked tirelessly through historically
difficult conditions last winter. I also wish to express gratitude to our
Shareholders, lenders, advisers and other stakeholders for their ongoing
support to the Group.
"The Board is looking to the future with a high degree of confidence as we
continue in our pursuit of building a group of which all our stakeholders can
be proud."
Notice of AGM and posting of annual report
The Annual General Meeting will be held at 11 a.m. on 26 July 2023 at the
offices of Memery Crystal, 165 Fleet Street, London EC4A 2DY.
A copy of the Company's annual report and accounts, and the notice of AGM,
will shortly be available on Zephyr's website, http://www.zephyrplc.com
(http://www.zephyrplc.com) , and posted to Zephyr's Shareholders.
Contacts
Zephyr Energy plc Tel: +44 (0)20 7225 4590
Colin Harrington (CEO)
Chris Eadie (FD)
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
Celicourt Communications - Public Relations
Mark Antelme / Felicity Winkles / Ali AlQahtani Tel: +44 (0) 20 7770 6424
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.
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 lease holding located in
the Paradox Basin, Utah, 25,000 acres of which has been assessed to hold,
net to Zephyr, 2P reserves of 2.6 million barrels of oil equivalent ("mmboe"),
2C resources of 34 mmboe and 2U resources 270 mmboe.
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 220
modern horizontal wells. 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.
Glossary of terms
Reserves: Reserves are defined as those quantities of petroleum which are
anticipated to be commercially recovered from known accumulations from a given
date forward
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"
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.
1C: Low estimate of Contingent Resources
2C: Best estimate of Contingent Resources
3C: High estimate of Contingent Resources
Prospective Resources: Those quantities of petroleum which are estimated, on a
given date, to be potentially recoverable from undiscovered accumulations.
1U: Low estimate of Prospective Resources
2U: Best estimate of Prospective Resources
3U: High estimate of Prospective Resources
CHAIRMAN'S STATEMENT
OVERVIEW
"We continue to make sustained progress with our primary goal of opening up
the next prolific onshore U.S. oil and gas play"
On behalf of the Company's Board of Directors (the "Board"), I am pleased to
present the Company's financial and operational results for the 2022 financial
year which reflect the hard work, dedication and focus of the Zephyr team.
The team's execution of our strategy and focused initiatives has driven
another year of excellent environmental, financial and
operational performance. Zephyr continues to be well positioned as a
profitable, cash-generating exploration and production group focused on
responsible resource development from carbon-neutral operations in two
established oil producing basins in the Rocky Mountain region of the U.S.
The Group reports a near seven-fold increase in revenues from the prior year
to US$41.1 million (2021: US$6 million), and profit before tax of US$21.2
million (2021:US$1 million), highlighting the extent of the Group's growth
during the year.
Our balanced portfolio of operated and non-operated assets is expected to
continue to yield strong results for Zephyr in the future, with cashflows
generated from our non-operated portfolio primarily used for the continued
development of our flagship project in the Paradox Basin, Utah, U.S. (the
"Paradox project"), as we pursue our strategic objective of opening up the
next prolific onshore U.S. oil and gas play, while focusing on the delivery of
safe, reliable, and responsibly produced hydrocarbons.
OPERATIONAL ACTIVITY
Paradox project
During the period under review Zephyr continued to make material progress
towards unlocking what the Board believes to be the significant potential
value from our Paradox project. From a lease holding perspective, and due to
an opportunist acquisition, our working interest in the Paradox project has
now increased to one hundred percent ("%") and covers over 45,000 acres with
maiden reserves and a large contingent resource base - significant increases
from 2021.
Despite a number of challenges, (from historically harsh climatic conditions,
supply chain issues and operational challenges associated with the targeting
of a highly pressured reservoir), we are pleased that drilling results have
demonstrated flowing hydrocarbons in both wells that have been drilled to date
and both of which appear capable of commercial production. Of importance to
Zephyr is that drilling success to date has been achieved utilising both
hydraulic stimulation and production via natural fractures, indicating
significant optionality for the large-scale development of the project.
The updated Competent Person Report (the "CPR") for the project, which was
completed during the period, further highlighted the substantial potential
scale and profitability of the Paradox project. Following the acquisition of
the remaining 25% working interest in the project (completed in early 2023),
the CPR reports net to Zephyr, 2P reserves of 2.57 million barrels of oil
equivalent ("mmboe"), 2C contingent resources of circa 34 mmboe and 2U
unrisked prospective resources of 270 mmboe.
Our key focus for the next year involves getting our two newly-drilled wells
into full commercial production. After many years of committing significant
resources and investment to the project this is expected to be a landmark
phase for the Group and one which I hope will see the patience of the
Shareholders of the Company (the "Shareholders") rewarded.
A special word of thanks to our team for how it dealt with the well control
incident that we experienced in April 2023. It was a testament to the
experience, depth and hard work of our operations team that the incident was
managed with no injuries and minimal environmental impact.
Williston Basin
In 2021, the Group stated that one of its key objectives was to establish
production and positive cashflow via acquisition. The growth achieved since
then through the development of our non-operated asset portfolio has been
exceptional.
From a standing start in 2021, the Group has built a portfolio of interests in
more than 220 wells operated by top-tier operators in one of the most active
and prolific basins in the U.S., and these interests have generated high
margin cashflows which provided funding for our Paradox project and further
investment in the non-operated portfolio.
The growth of our non-operated asset portfolio resulted in revenues of US$41.1
million during the year ended 31 December 2022, with production of over half a
million barrels of oil equivalent ("boe"). We expect to see further growth
from our non-operated portfolio in 2023.
During the year, we also implemented an inaugural hedging programme which had
the effect of locking in over US$30 million of forecasted Williston Basin
revenue over a two-year period. This hedging programme allowed us to provide
cashflow surety related to our debt obligations, as well as to de-risk funding
requirements for our ongoing activity in the Paradox, while still allowing for
additional exposure to future price fluctuations.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE ("ESG")
Followers of Zephyr will be familiar with our commitment to stewardship of
both the natural environment and shareholder capital being at the core of all
our activities. Prudent and careful cash management and environmental focus
are central tenets of our philosophy and remained our key operating principles
during the period. The Board firmly believes this is not only the proper way
to operate the Group but an approach that will ensure our ongoing success on
behalf of all stakeholders. We believe good environmental and operational
performance, supported by the appropriate levels of governance, is the optimal
way to drive superior investor returns.
As we grow, we will continue to foster a safe working environment and be
active participants in the communities in which we operate. Sustaining our
local communities through environmental stewardship, social responsibility and
strong corporate governance is an extension of our mission and reflects our
goal to make a lasting and meaningful positive impact in these communities.
I am proud that we continue to achieve carbon-neutral status as an oil and gas
producer. This is achieved through our Verified Emission Reduction credits
("VERs") programme, which aims to offset all Scope 1 carbon emissions from
both our operated and non-operated assets and which is administrated through
the Prax Group ("Prax"), a leading UK- based energy trading company.
As the recent well-control incident demonstrated, the delivery of our near and
longer-term ambitions and strategy would not be possible without a clear focus
on mitigating and managing day-to-day risks, including costs, safety and the
wider operating environment. We have a zero-harm safety culture focused on
continuous improvement to achieve an injury-free and safe work environment.
OUTLOOK
Looking ahead, with a diverse portfolio of cash-flowing assets, potential for
substantial future organic growth, a solid financial footing and a talented
and dedicated team of employees, we continue to be extremely optimistic about
Zephyr's future.
Our key goals for 2023 are to move the Paradox project into full commercial
production while continuing to grow our non-operated asset portfolio.
We remain firmly committed to delivering long-term value to our Shareholders,
while upholding our core values of being responsible stewards of our
Shareholders' capital and responsible stewards of the environment in which we
operate.
CONCLUSION
I would like to thank our employees and contractors for their hard work in
2022, especially those on site who worked tirelessly through historically
difficult conditions last winter.
I also wish to express gratitude to our Shareholders, lenders, advisers and
other stakeholders for their ongoing support to the Group.
The Board is looking to the future with a high degree of confidence as we
continue in our pursuit of building a group of which all our stakeholders can
be proud.
RL Grant
Chairman
23 June 2023
CHIEF EXECUTIVE OFFICER'S REPORT AND OPERATING REVIEW
PRINCIPAL OBJECTIVES AND STRATEGIES
Zephyr Energy plc is an oil and gas exploration and production group operating
in the Rocky Mountain region of the U.S.
The Group's stated mission is to open up the next prolific onshore U.S. oil
and gas play through the development of its flagship Paradox project. The two
core values of the Group are to be responsible stewards of investors' capital
and responsible stewards of the environment.
To achieve this mission, the Group has prioritised:
· Constructing a team with significant experience in the U.S. oil
and gas sector, with a particular focus on operations, development,
governance, finance, merger, acquisition and turnaround experience;
· A sharpening of focus - we are wholly focused on responsible
exploration and production investment in the Rocky Mountain region and have
exited all other legacy sectors and geographies;
· The development of a non-operated asset portfolio that provides
cashflow to be reinvested in the Paradox project;
· A continued focus on meaningful ESG efforts, including corporate
governance compliance, ensuring carbon-neutrality across our operations, and
proactive engagement with the communities in which we operate;
· The leveraging of partnerships (such as the U.S. Department of
Energy, experienced operators in the basins in which we operate, and
relationships with alternative capital providers);
· The design and build of a technology-led acquisition process
which can rapidly assess opportunities of further interests through
acquisition, farm-in agreements or joint venture arrangements; and
· Tight financial control and cash conservation.
REVIEW OF OPERATIONS AND FUTURE DEVELOPMENTS
Background
The 2022 financial year, and the period since, were a time of intense
operational activity during which Zephyr continued to build on the momentum
gained in 2021. During the period under review, the Group achieved multiple
operational milestones, most notably with the first flowing hydrocarbons from
the Paradox project and with the rapid growth of our highly profitable
cash-generating non-operated portfolio.
As outlined in the Chairman's Statement, the Board remains fully committed to
the primary goal of opening up the next prolific onshore U.S. oil and gas
play through the systematic development of the Paradox project and our key
goal for the next period is to establish commercial production from the
project.
The Paradox project is located in the Paradox Basin, Utah, U.S. where Zephyr
operates a now 45,000 acre leasehold position with demonstrable scale and
impressive upside potential. The drilling success achieved during the period
was a significant appraisal milestone, and the Board are both optimistic and
excited about unlocking additional value from the project by progressing to
commercial hydrocarbon production over the coming months.
The Group's non-operated production comes from working interests in wells
across the Middle Bakken and Three Forks reservoirs in the Williston Basin (in
both North Dakota and Montana). By the end of March 2023, Zephyr had working
interests in 223 wells that were available for production. 2022 sales volumes
from the portfolio averaged 1,410 barrels of oil equivalent per day ("boepd")
(2021: 263 boepd).
The Board's strategy is to utilise the majority of the considerable cashflows
generated from the non-operated Williston Basin portfolio in the Paradox
project development programme, and this organic growth strategy will continue.
Paradox project - operated asset
Overview
The period under review was highlighted by the drilling of two successful
wells, the State 16-2 LN-CC well (the "State 16-2 well") and the State 36-2
LNW-CC well (the "State 36-2 well"), a production test of the State 16-2 well
and increases in both acreage and working interest percentages across our
Paradox project land position. In addition, we acquired surface assets and
infrastructure that will facilitate us in bringing the project into
production.
The Board believes that the Paradox project has substantial potential upside.
Of significance, our main geological target, the Cane Creek reservoir has two
demonstrable methods of development (via the targeting of natural fractures
and through hydraulic stimulation). Both wells drilled to date have discovered
hydrocarbons, and both appear capable of commercial production when ultimately
tied into natural gas infrastructure. In addition, eight overlying reservoirs
have been high graded as suitable for future exploration and potential
development.
The second half of 2023 is expected to be a major inflection point for the
Paradox project, one in which the project moves from its current appraisal
status into a cash-flowing development asset. The Group expects to see flush
production when the State 36-2 and State 16-2 wells come online.
The drilling of the two wells has provided the Group with a wealth of new
geological information which has in turn resulted in a far greater geological
understanding of our acreage position. This information includes strong
evidence of:
· A continuous resource play (tight oil and tight gas);
· Repeatable petrophysics across a large area;
· Geology which correlates with the seismic;
· Consistent reservoir thickness within a sub area;
· High reservoir pressures;
· High matrix permeability for a resource play;
· A reservoir which can be stimulated (with favourable rock
mechanics albeit under high stress); and
· The presence of productive natural fractures
Competent Persons Report ("CPR")
Following the successful completion of the State 16-2 well in late 2021,
Zephyr commissioned the independent reserve consulting firm Sproule
International ("Sproule") to complete a CPR to assess the Group's reserves
across both the Cane Creek reservoir and the eight overlying reservoirs.
Sproule audited the crude oil, natural gas, and field condensate reserves and
contingent resources and the associated future net revenue attributable to the
Group's White Sands Unit ("WSU") and Cane Creek Drilling Spacing Unit ("DSU")
with an effective date of 31 March 2022. Sproule also conducted an audit of
the Prospective Resources attributable to the WSU on the same date.
The Board was delighted with the conclusions drawn by Sproule, which
demonstrated the impact of Zephyr's drilling success of the State 16-2 well
and further highlighted the substantial potential scale and profitability of
the Paradox project.
The key findings from the CPR were as follows:
· Net 2P Proved Reserves: Proved Reserves of 2.1 million barrels of
oil equivalent ("mmboe") net to Zephyr, the Group's first proved reserves
booked in the Paradox project (following the Group's acquisition of the
remaining 25% non-operated interests Proved Reserves increased to 2.6 mmboe).
· Net 2C Resources: 27 mmboe net to Zephyr, more than double the
12.3 mmboe in the previous CPR prepared in 2018 (following the Group's
acquisition of the remaining 25% non-operated interests Net 2C Reserves
increased to 34 mmboe).
· Net Prospective Resources from overlying reservoirs: 203 net
unrisked mmboe net to Zephyr (68 mmboe risked with a weighted-average 33%
chance of success) (following the Group's acquisition of the remaining 25%
non-operated interests Net Prospective Resources increased to 270 mmboe).
Sproule's evaluation took place across 30,700 acres of
Zephyr's Utah assets. Zephyr now operate 45,000 gross acres in the Paradox
Basin and further evaluation is planned for the acreage not yet included in
the CPR.
Project development and consolidation
Having completed a comprehensive restructuring of the Paradox acreage position
in 2021, the Group continued with the consolidation of the project during the
period. This was spearheaded by the acquisition of additional project acreage,
the acquisition of a number of infrastructure assets and through the
acquisition of the remaining 25% working interest in the core acreage of the
project.
Acquisition of additional acreage
In October 2021, the Group announced U.S. Federal Government approval for the
formation of a new federal unit, the WSU, which enables Zephyr to proceed with
an optimal long-term development plan for the acreage. In August 2022, Zephyr
announced the acquisition of an additional 1,920 acres (the "new acreage") in
the Paradox Basin, directly adjacent to the WSU. The new acreage has been
approved for inclusion into the federal unit by removing less prospective
acreage that had yet to have 3D seismic acquisition acquired across it. The
acreage is largely covered by Zephyr's existing 3D seismic, and directly
borders the Zephyr lease on which the State 36-2 well is located.
This opportunistic new acreage acquisition was part of the Group's ongoing
portfolio management of its Paradox Basin position. This active land
management strategy has resulted in a growing portfolio of development
opportunities which the Board believes is increasingly difficult to replicate
in today's regulatory and political environment.
In February 2023, the Group completed the acquisition of the remaining 25%
working interest in the core acreage of the Paradox project. This acquisition
increased Zephyr's net acreage in the project to circa 45,000 acres, further
details of which are outlined below.
Working interest acquisition
In December 2022, Zephyr announced that it had agreed to acquire the remaining
25% working interest in the core acreage of the Paradox project from Rockies
Standard Oil Company LLC ("RSOC"). The acquisition completed in February
2023.
The total consideration payable for the working interest is 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") at a price of
6.05 pence per Ordinary Share, representing a circa 11% premium to the
Company's mid-market closing share price on the prevailing share price on 20
December 2022.
· A first tranche of 13,483,095 new Ordinary Shares was issued to
RSOC on the completion of the acquisition;
· A second tranche of 26,966,189 new Ordinary Shares will be
issued 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
· 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 acquisition provided an immediate opportunity for Zephyr to consolidate
its working interest in the core acreage of the Paradox
project and includes the following assets:
· The remaining 25% interest in the State 16-2 well (with an
estimated NPV-10 of US$3.1 million);
· The remaining 25% interest in the State 36-2 well; and
· Zephyr retains its 100% ownership in the infrastructure assets
acquired in 2022.
The acquisition was also immediately accretive across all reserve and resource
categories. Zephyr's technical team estimated that the acquisition adds:
· Over 450,000 boe in 2P Reserves;
· Over 7 million boe in 2C Contingent Resources; and
· Over 67 million boe of 2U unrisked Prospective Resources.
As of today, and following activity in the period, the tenure of the Paradox
project is strong and the land position is stable. This security and right to
operate provides the Board with the confidence to further invest in the
drilling activity on the project.
The period under review began with the drilling of the State 16-2 well and
ended with the spud of the State 36-2 well and both were successfully drilled
and demonstrated the ability to flow commercial volumes of hydrocarbons.
State 36-2 well drilling
In November 2022, the Group announced that drilling on the State 36-2 well had
commenced with the prime objective being to target potential production
from the Cane Creek reservoir.
After a complex drilling operation hampered by extreme weather conditions and,
having reached the Cane Creek reservoir at a depth of 9,598 feet true vertical
depth, the well experienced a significant influx of hydrocarbons which
consequently led to suspension of drilling operations while the well was
stabilised. The influx was caused by the well intersecting an apparent major
natural fracture network in the reservoir, and the resultant flowing
hydrocarbons were diverted safely at surface through the drilling rig flare
stack whereby they were subsequently flared. Throughout this period, Zephyr's
operations team followed appropriate well control procedures, and stabilised
the well without incident.
This influx was managed and safely controlled, which subsequently allowed for
the drilling of an additional 132 feet into the Cane Creek reservoir, at
which point the Group elected to run production casing down the total depth of
the well.
Operations to run 7-inch production casing were successful and the well was
made fully safe and the drilling rig was released. The Group then planned to
commence production testing and potential completion of the fractured Cane
Creek reservoir interval.
In addition to near-term testing, the running of the 7-inch casing string
provided the Group with the option to return to the well (should it elect to
do so) to drill an extended lateral at a later date. A subsequent lateral
would enable the Group to test for further natural fracture presence at this
location within the Cane Creek reservoir, and also enable the well to be
completed by hydraulic stimulation across a longer lateral should Zephyr seek
to increase well productivity in the future.
Results from the drilling operations indicated that the well penetrated a
folded and naturally fractured Cane Creek reservoir, features which have
been highly productive in other Cane Creek wells. Pore pressure analysis
suggested that the well encountered very high reservoir overpressure, with
formation pressures estimated at around 9,300 pounds per square inch (which is
broadly consistent with previously drilled offset wells).
The well further delineated the presence of natural gas and condensate within
a large structural compartment, and at a new location within Zephyr's acreage
and 3D seismic coverage, which provided additional confirmation of Zephyr's
model for hydrocarbons in place across the acreage position.
State 36-2 well production test and well control incident
On 8 March 2023, the Group announced that planning for the production test
had been completed and that all services for the test had been procured. A
Zephyr-contracted service rig was mobilised to the well-site and operations on
the ground commenced. This was achieved despite the ongoing difficult winter
weather conditions encountered in Utah this year. Workover operations (which
were to include perforating the well in the productive portion of the Cane
Creek reservoir) and subsequent production testing were estimated to take
four to six weeks. As the well was expected to flow from natural fractures, no
hydraulic stimulation was expected as part of this test.
On 7 April 2023, as workover operations were being completed, the well
experienced a significant control issue despite multiple attempts to secure
the well by the rig crew. The incident was initially caused by the failure in
a safety valve, and subsequently resulted in hydrocarbons being released from
the well in an uncontrolled manner.
In keeping with safety procedures, all personnel were safely evacuated without
injury. All relevant authorities were notified and a specialist well control
team (recommended by the Group's insurers) was deployed to bring the well
under control as quickly as possible.
Ultimately, well control efforts were successful and remediation and clean-up
operations have commenced. A third-party confirmatory environmental survey was
subsequently completed and the initial results found no evidence of lingering
environmental impact.
At present, the well is static and under control, and Zephyr is in the process
of completing well work necessary to commence a production test. This work
included a methodical process to remove and inspect the 2-7/8-inch production
casing. Once that work is completed, the Group plans to undertake a final
cement squeeze and then perforate the casing across the reservoir interval
prior to production testing the well.
Timing of the well test will be dictated by operational conditions to ensure
well control is maintained and working conditions are safe for our team.
Evidence of pressures and hydrocarbons in the well remain substantial.
State 16-2 well
Following on from the successful drilling, completion and production test of
the State 16-2 well in 2021, the first phase of the extended production
testing on the well was completed within the flare consent limit set by the
regulatory bodies, and Zephyr subsequently tested the well a second time to
commission surface facilities, improve flow assurance and to gather more
production data.
Unfortunately, the second well test was hampered by severe weather and initial
surface facility commissioning issues which resulted in delays to the
programme and, at times, intermittent operational activity.
Once the start-up commissioning issues had been successfully resolved the well
was initially brought online at choked-back, moderate rates to test for flow
assurance at varying levels of production. At a controlled rate of 2 million
cubic feet of gas per day and 100 barrels of oil per day (an average of 433
boepd) the well flowed continuously and surface flow assurance efforts proved
successful.
As flow rates were increased above those levels, well performance became
limited by freshwater pumping capacity and was subsequently impacted by the
formation of down hole salt precipitate, a not uncommon issue. The
precipitate, which blocked and subsequently cleared multiple times, impacted
the well's flow capacity to achieve extended higher rates. The Group was in
early stages of testing higher rates when its mandated flaring limits were
reached.
The Group is now assessing whether the precipitate issue is a function of
continued flow back of injected completion fluids or a function of normal
flowing conditions. If it is a result of normal flowing conditions, a series
of mitigation solutions that have been successful with other wells in the
Paradox in the past can be applied, and the Group will likely test these
solutions in the coming months (subject to regulatory approvals) to fully
determine the potential of the reservoir.
Acquisition of infrastructure assets
In September 2022, Zephyr announced that it had entered into an agreement to
acquire a package of oil and gas assets located on and around the Paradox
project.
Zephyr acquired 21 miles of natural gas gathering lines, the Powerline
Road gas processing plant (not currently in operation), rights of way for
additional gathering lines, active permits, five existing wellbores and
additional acreage which is contiguous to the WSU.
The assets acquired will enable Zephyr to substantially reduce the capital
required to build the necessary gas export infrastructure for its forecast gas
production from the Paradox project. The consideration for the asset package
was US$750,000.
Next Steps
The immediate next steps on the Paradox project are as follows:
· To complete the production tests on the State 36-2 well;
· The completed production test, when combined with data from the
State 16-2 production test, will provide information related to the sizing of
the gas processing infrastructure required for commercial roll-out of the
project. The infrastructure will then be constructed and commissioned; and
· Once the infrastructure is in place, and the Dominion pipeline
take-away is completed, export of hydrocarbons from the project will commence.
Williston project - Non-operated assets
Overview
In 2021, Zephyr stated that one of its key goals was to establish production
and positive cashflow either through its existing portfolio (the Paradox
project), via acquisition, or through a combination of both. Since then, the
Group has delivered on this goal and the Board is pleased to report that,
following twelve discrete acquisitions, the Group now has a non-operated asset
portfolio that delivered sales of over 1,410 boepd, net to Zephyr, in 2022,
with corresponding revenues of US$41.1 million for the year.
As at 31 December 2022, Zephyr had working interests in 223 wells that were
available for production. The working interests are in prime locations, and
the majority of the wells are operated by Chord Energy Corporation, a
leading Williston Basin producer.
The Group's non-operated portfolio continues to perform above the Board's
expectations, in part due to the high commodity price environment in 2022. In
April 2022, in order to lock in cashflow to develop our Paradox asset and meet
the Group's funding commitments, the Group hedged just under half of its
forecast 2022 production at more than US$98 per barrel of oil. The hedging
programme was structured to provide cashflow surety related to the Group's
debt obligations, as well as to de-risk funding requirements for the Paradox
project, while allowing for additional exposure to future fluctuations in
prices. The Group announced an extension to this hedging programme in May
2023.
The Group will continue to develop and grow its non-operated portfolio through
opportunistic acquisitions.
Acquisitions
The non-operated portfolio has been carefully crafted and achieved through
twelve discrete acquisitions, the most important one being the transformative
acquisition of the Kaiser assets completed in February 2022 (the "Kaiser
acquisition") which nearly tripled the Group's non-operated production from
its four previous acquisitions. The Kaiser acquisition was the driver of the
impressive performance of the non-operated portfolio in 2022.
The Kaiser acquisition provides a stable foundation of low-decline production
and cashflows from 163 gross producing wells. In addition, 18 drilled but
uncompleted wells ("DUCs") have been brought online since and 47 additional
gross undeveloped locations are expected to provide meaningful upside for
years to come.
The key benefits of the Kaiser acquisition were as follows:
· A diversified, low-decline base of mature production with
established history and stable cashflows;
· Near term growth from DUCs currently being brought online;
· Mid to longer term infill drilling opportunities on Zephyr
acreage;
· Potential to hedge a significant portion of the existing
production at attractive prices to lock in returns and provide downside
protection; and
· Excellent complement to (and funding source for) the less mature,
higher upside Paradox Basin development.
In order to fund the acquisition, the Group undertook an equity fundraise of
US$17.4 million (£12.8 million) in February 2022 and secured a US$28 million
senior debt facility from a long-established North Dakota-based commercial
bank, First International Bank & Trust ("FIBT"). See note 22.
On 21 December 2022, Zephyr announced the acquisition of working interests in
six further wells, equivalent to a net 1.1 wells, near to Zephyr's current
non-operated working interests for a total consideration of US$2.9 million.
In addition, Zephyr is paying the US$8.9 million CAPEX associated with the
working interests to bring the wells into production.
These new wells are expected to provide a Q4 2023 production boost, having
been spud in November 2022, and first sales volumes are expected in autumn
2023. The operator of these new wells is Slawson Exploration Company
("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 six new wells ranges from 11% to 32% and
management currently estimates 2P Reserves being acquired are circa
550,000 boe net to Zephyr.
Zephyr secured a US$8 million bridge loan facility, on favourable terms, to
part fund the acquisition and associated CAPEX. There was no equity component
to the US$8 million bridge loan facility. See note 22.
2022 Production summary
FY 2022 sales volume from the non-operated portfolio averaged circa 1,410
boepd net to Zephyr, up from 263 boepd in 2021.
FY 2022 revenues were US$41.1 million, compared to US$6 million in FY 2021.
At 31 December 2022, 223 wells in the portfolio were available for
production, including 17 wells which came online at some point during the
quarter. Net working interests across the Williston Basin non-operated
portfolio now average 6.3% per well, equivalent to 15 total wells net to
Zephyr, all of which utilised horizontal drilling and modern, hydraulically
stimulated completions.
Hedging
In April 2022, the Group hedged just under half of its forecast non-operated
production for the following two years, with an average hedged production
price of US$98 for the remainder of 2022 and US$87 thereafter.
In May 2023, the Board elected to enter into additional oil hedge agreements
given that most of the hedges acquired in 2022 had since crystallised. Volumes
hedged for the nine months ending 31 December 2023 have now been increased
from 94,000 barrels ("bbls") to 137,000 bbls, at an average hedged production
price of US$85, with BP Energy Company ("BP"), one of the world's leading
energy trading houses, continuing to serve as the counterparty.
Significant decisions made
During the year under review, the Directors approved multiple discrete
acquisitions of non-operated assets. The decisions to proceed with the
acquisitions and the corresponding debt and equity funding were logical
decisions made to ensure the continued growth of the business and the
advancement of the Paradox project. All acquisitions were unanimously deemed
by Board members to be in the best interests of the Company. Details of the
acquisitions can be found in the relevant sections of this Annual Report.
On the Paradox project, the Board approved the acquisition of further project
acreage and infrastructure assets. In addition, the Board approved the
acquisition of the remaining 25% working interest in the project and the
drilling of the State 36-2 well. These were all funded by cashflows generated
from the non-operated portfolio. In arriving at the decision to proceed with
this activity the Directors considered the cash position of the Group and the
importance of progressing the Paradox project. After due consideration, the
Directors unanimously considered the activity to be in the best interests of
the Company and its Shareholders.
We would like to thank all Shareholders for their continued support.
On behalf of the Board,
JC Harrington
Chief Executive Officer
23 June 2023
FINANCIAL REVIEW
The 2022 financial year saw a transformation in the Group's financial position
and performance from the prior year. This was primarily due to the full-year
impact of strong performance from the Group's non-operated asset portfolio and
the continued investment into both the Paradox and Williston projects.
INCOME STATEMENT
During the year ended 31 December 2022, the Group generated revenue of US$41.1
million (2021: US$6 million) from its non-operated asset portfolio, and
reported a gross profit of US$22.4 million (2021: US$3.3 million), which
includes a gain of US$1.8 million (2021: nil) in respect of the Group's
hedging programme. The revenue in the income Statement of US$41.1 million is
US$1.8 million less than the full-year revenue figure provided in the Group's
market update of 15 February 2023 of US$42.9 million. The market update
included US$1.8 million revenue from the final settlement of the Kaiser
acquisition. Under IFRS these revenues form part of the acquisition price and
therefore do not appear within the income Statement in these financial
statements.
Administrative expenses for the year were US$4.8 million (2021: US$2.7
million). The increase from the 2021 financial year highlights the expansion
of the Group's operational footprint to provide it with the capacity and
capability to develop, manage and grow its operated and non-operated asset
portfolios. The increase also reflects expenditure incurred in appraising new
opportunities and other business development costs.
The Group reports a foreign exchange gain of US$6.1 million for the year
(2021: US$0.5 million) which is predominantly in respect of unrealised gains
on the restatement of intercompany loans between the Company and its
subsidiaries. These gains arise due to the weakness of sterling against the
U.S. dollar at the end of 2022.
Finance charges of US$2.2 million (2021: US$0.1 million) have been charged in
respect of interest charges and associated costs relating to the Group's
borrowings and unwinding of discount on decommissioning. See note 7.
During the year ended 31 December 2022, the Group has recognised a deferred
tax charge and a corresponding net deferred tax liability of US$2 million
relating to unrelieved tax losses and temporary timing differences arising in
the U.S. businesses.
The Group reports a net profit after tax of US$19.3 million or a profit of
1.26 cents per Ordinary Share for the year ended 31 December 2022 (2021:
US$0.8 million or 0.08 cents per Ordinary Share).
BALANCE SHEET
Total investment in the Group's exploration and evaluation assets as at 31
December 2022 was US$38 million (2021: US$22.8 million) reflecting the ongoing
investment in the Paradox project.
Total investment in property, plant and equipment as at 31 December 2022 was
US$51.8 million (2021: US$11.2 million) reflecting the further acquisition of
non-operated assets in the Williston Basin, recurring capital expenditure and
decommissioning obligations on the non-operated assets.
At 31 December 2022, the Group has recognised US$1.3 million outstanding
derivative contracts in respect of its hedging programme at fair value, of
which US$0.2 million (2021: nil) has been recognised in non-current assets and
a further US$1.1 million (2021: nil) in current assets.
Cash and cash equivalents as at 31 December 2022 were US$9 million (2021:
US$1.8 million). During the year, the Company raised gross proceeds of US$17.4
million (2021: US$15.5 million) through the placing of new Ordinary Shares in
the Company.
In February 2022, the Group secured debt funding of US$28 million and in
December 2022 entered into a further 12-month revolving credit facility of up
to US$8 million, of which US$2.5 million had been drawn down at 31 December
2022. The proceeds from these debt instruments were used to complete the
Group's acquisition of non-operated assets in the Williston Basin.
SUBSEQUENT DEVELOPMENTS
In June 2023, the Company announced that it had raised a further US$3.9
million (before expenses) through the placing of new Ordinary Shares in the
Company.
At 16 June 2023, the Group had cash and cash equivalents of US$7.5 million.
KEY PERFORMANCE INDICATORS
As part of Zephyr's ongoing development of the Paradox project and the
build-out of the non-operated portfolio in the Williston Basin, the Board
tracks its performance against indicators that reflect the strategic,
operational and financial progress, as well as our impact on society and the
environment. These indicators allow the Board, management and stakeholders to
compare Zephyr's performance to its goals.
Safety performance Why we measure Performance
· The Group has a zero-harm safety culture focused on continuous · There we no reported LTIs during the 2022 financial year (2021:
improvement to achieve an injury-free and safe work environment nil)
· We require employees and contractors to work in a safe and
responsible manner and provide them with the training and equipment to do so
Adjusted EBITDA Why we measure Performance
(EBITDA adjusted for unrealised foreign exchange and hedge gains) · Indicator of the Group's cash generation to fund expenditures · 2022 Adjusted EBITDA was US$28.2 million
and/or return capital to Shareholders
· 2021 Adjusted EBITDA was US$2.3 million
Net production Why we measure Performance
· Indicator of revenue generation potential · FY 2022 production of 514,650 barrels of oil equivalent ("boe")
· Measure of progress towards achieving production forecasts and · 484% increase in production from FY 2021 production of 88,037 boe
driving profitable production growth from non-operated Williston Basin
Growth of Paradox project reserve resource play Why we measure Performance
· Indicator of economic viability and long-term production · During the year the Group booked its first reserves on the
potential of projects Paradox project and increased the reserve/resource base by acquiring the
remaining 25% working interest in the project post-year end
· At 31 December 2022, the Group had Paradox Basin 2P reserves of
2.57 million barrels of oil equivalent ("mmboe"), 2C resources of circa 34
mmboe and 2U resources of 270 mmboe
Carbon emissions Why we measure Performance
· Zephyr Energy is committed to sustainable and responsible oil and · Recorded Scope 1 carbon-neutrality from both operated and
gas production non-operated assets
· VER credit partnership with Prax which aims to mitigate all Scope
1 carbon emissions. The cost of the scheme was circa US$0.2 million in the
2022 financial year.
CJ Eadie
Finance Director
23 June 2023
Going Concern
The Directors have prepared cashflow forecasts for the Group and Parent
Company for the period to 31 December 2024 based on their assessment of both
the discretionary and the non-discretionary cash requirements of the Group
during this period and based on a range of sensitivities and scenarios.
These cashflow forecasts include the forecast revenues from, and the operating
costs of, the Group's operations, together with all committed development
expenditure and cashflows related to the well control incident on the State
36-2 well. The Board has also incorporated its best current estimates on the
timing of first cashflows from the six Slawson operated wells that were
acquired in December 2022. The wells are currently expected to come online in
autumn 2023 with first cashflows received by the Group in January 2024.
The cashflows reflect the Board's current best estimates on quantum and
timings in respect of expected insurance recoveries in relation to the well
control incident. While the Board expect the insurance proceeds to be received
in accordance with the forecast, these proceeds have not been received at the
date of this report. Should the insurance proceeds be delayed or lower than
expected, the Group could require further funding to meet its commitments
within the going concern assessment period.
Following detailed discussions, the Directors are confident that the Group and
the Parent Company have, or will be able to secure insurance recoveries as per
above, or additional funding to enable it to continue in operation for at
least the next twelve months, however, the Group and Parent Company's ability
to secure such proceeds or funding cannot be guaranteed, which leads to
material uncertainty which may cast significant doubt over the Group and
Parent Company's ability to continue as a going concern, and that it may be
unable to realise its assets and discharge its liabilities in the normal
course of business.
The Directors have extensive experience in raising capital for projects and
ventures and remain confident in the Group's ability to raise the capital
needed to maintain and deliver on its commitments and continue as a going
concern.
The Directors continue to adopt the going concern basis in preparing the
consolidated financial statements. The financial statements do not include any
adjustments that would be required should the going concern basis of
preparation no longer be appropriate.
CONSOLIDATED INCOME STATEMENT
For the year ended 31 December 2022
2022 2021
Notes US$'000 US$'000
Revenue 6 41,062 6,005
Operating and transportation expenses (4,458) (396)
Production taxes (3,318) (543)
Depreciation, depletion and amortisation (12,666) (1,755)
Gains on derivative contracts 16 1,781 -
Gross profit 22,401 3,311
Administrative expenses (4,834) (2,687)
Share-based payments (210) (93)
Foreign exchange gains 8 6,102 461
Finance income 3 -
Finance costs 7 (2,236) (144)
Profit on ordinary activities before taxation 8 21,226 848
Taxation charge 11 (1,955) -
Profit for the year attributable to owners of the parent company 19,271 848
Profit per Ordinary Share
Basic, cents per share 12 1.26 0.08
Diluted, cents per share 12 1.18 0.07
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
For the year ended 31 December 2022
2022 2021
US$'000 US$'000
Profit for the year attributable to owners of the parent company 19,271 848
Other comprehensive income
Items that may be subsequently reclassified to profit or loss
Foreign currency translation differences on foreign operations (6,205) (554)
Total comprehensive profit for the year attributable to owners of the parent
company
13,066 294
CONSOLIDATED BALANCE SHEET
As at 31 December 2022
2022 2021
Notes US$'000 US$'000
Non-current assets
Exploration and evaluation assets 13 37,986 22,773
Property, plant and equipment 14 51,805 11,156
Derivative contracts 16 175 -
89,966 33,929
Current assets
Trade and other receivables 18 4,290 1,263
Prepayments and deposits 19 347 3,573
Cash and cash equivalents 20 8,996 1,811
Derivative contracts 16 1,133 -
14,766 6,647
Total assets 104,732 40,576
Current liabilities
Trade and other payables 21 (12,520) (5,414)
Borrowings 22 (14,572) (4,060)
(27,092) (9,474)
Non-current liabilities
Borrowings 22 (10,821) -
Deferred tax 23 (1,955) -
Provisions 24 (4,138) (508)
(16,914) (508)
Total liabilities (44,006) (9,982)
Net assets 60,726 30,594
Equity
Share capital 25 42,412 42,065
Share premium account 27 66,847 52,875
Shares to be issued 27 539 -
Warrant reserve 26 1,557 89
Share-based payment reserve 27 3,284 3,065
Cumulative translation reserve 27 (15,984) (9,779)
Retained deficit 27 (37,929) (57,721)
Equity attributable to owners of the parent company 60,726 30,594
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
For the year ended 31 December 2022
Share premium account Share-based payment Cumulative
Shares to be issued Warrant reserve reserve translation reserve Retained
deficit
Share capital Total
US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000
As at 1 January 2021 41,221 39,638 - 227 3,762 (9,225) (60,085) 15,538
Transactions with owners in their capacity as owners:
Issue of equity shares 816 14,679 - - - - - 15,495
Expenses of issue of equity shares - (1,442) - - 616 - - (826)
Transfer to retained deficit in respect of exercised warrants
- - - (138) (629) - 767 -
Share-based payments 28 - - - 65 - - 93
Transfer to retained deficit in respect of expired options
- - - - (749) - 749 -
Total transactions with owners in their capacity as owner
844 13,237 - (138) (697) - 1,516 14,762
Profit for the year - - - - - - 848 848
Other comprehensive income:
Currency translation differences - - - - - (554) - (554)
Total other comprehensive income for the year
- - - - - (554) - (554)
Total comprehensive income for the year
- - - - - (554) 848 294
As at 31 December 2021 42,065 52,875 - 89 3,065 (9,779) (57,721) 30,594
Transactions with owners in their capacity as owners:
Issue of equity shares 347 17,023 - - - - - 17,370
Exercise of warrants - - 539 (122) - - 122 539
Expenses of issue of equity shares - (1,461) - - 408 - - (1,053)
Warrant exercise extension - (33) - 33 - - - -
Grant of warrants - (1,557) - 1,557 - - - -
Share-based payments - - - - 210 - - 210
Transfer to retained deficit in respect of lapsed options
- - - - (387) - 387 -
Transfer to retained deficit in respect of expired warrants
- - - - (12) - 12 -
Total transactions with owners in their capacity as owner
347 13,972 539 1,468 219 - 521 17,066
Profit for the year - - - - - - 19,271 19,271
Other comprehensive income:
Currency translation differences - - - - - (6,205) - (6,205)
Total other comprehensive income for the year
- - - - - (6,205) - (6,205)
Total comprehensive income for the year
- - - - - (6,205) 19,271 13,066
As at 31 December 2022 42,412 66,847 539 1,557 3,284 (15,984) (37,929) 60,726
CONSOLIDATED CASH FLOW STATEMENT
For the year ended 31 December 2022
2022 2021
US$'000 US$'000
Operating activities
Profit for the year from continuing operations 21,226 848
Adjustments for:
Finance income (3) -
Finance costs 2,236 144
Unrealised gain on derivative contracts (1,308) -
Depreciation and depletion of property, plant and equipment 12,668 1,778
Share-based payments 210 93
Unrealised foreign exchange gain (5,672) (451)
Operating cash inflow before movements in working capital 29,357 2,412
Increase in trade and other receivables (3,028) (1,079)
Decrease/(increase) in prepayments and deposits 178 (572)
Increase in trade and other payables 723 172
Cash generated from operations 27,230 933
Income tax paid - -
Net cash generated from operating activities 27,230 933
Investing activities
Additions to exploration and evaluations assets (13,297) (9,083)
Business combination (37,880) -
Acquisition of oil and gas properties (3,362) (5,443)
Additions to oil and gas properties (10,482) (7,031)
Deposits paid - (3,000)
Increase in capital expenditures related payables 9,300 2,773
Additions to plant and machinery - (4)
Grant funds received - 290
Interest received 3 -
Net cash used in investing activities (55,718) (21,498)
Financing activities
Net proceeds from issue of shares 16,317 14,669
Exercise of warrants 539 -
Repayment of lease liabilities - (8)
Proceeds from borrowings 30,500 4,060
Repayment of borrowings (8,931) -
Interest and fees paid on borrowings (2,218) (124)
Increase in prepayments and deposits - (50)
Net cash generated from financing activities 36,207 18,547
Net increase/ (decrease) in cash and cash equivalents 7,719 (2,018)
Cash and cash equivalents at beginning of year 1,811 3,940
Effect of foreign exchange rate changes (534) (111)
Cash and cash equivalents at end of year 8,996 1,811
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2022
The following notes are extracted from the audited accounts of the Company for
the year ended 31 December 2022:
3. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PREPARATION
The financial statements have been prepared in accordance with UK-adopted
International Accounting Standards and with the requirements of the Companies
Act 2006 as applicable to companies reporting under those standards.
The financial statements have been prepared on the historical cost basis,
other than certain financial assets and liabilities, which are stated at fair
value. Historical cost is generally based on the fair value of the
consideration given in exchange for assets.
The financial statements are presented in United States dollars ("US$"). All
amounts have been rounded to the nearest thousand, unless otherwise indicated.
As described below, the Directors continue to adopt the going concern basis in
preparing the consolidated and the Company financial statements.
The accounting policies set out below have, unless otherwise stated, been
applied consistently to all periods presented in these financial statements.
The preparation of the financial statements in compliance with UK-adopted
international accounting standards requires management to make estimates and
exercise judgement in applying the Group's accounting policies. The
significant judgments made by the Directors in the application of these
accounting policies that have significant impact on the financial statements
and the key sources of estimation uncertainty are disclosed in note 4.
6. REVENUE
Petroleum and natural gas revenue earned by the Group in the U.S. is
disaggregated by commodity, as follows:
2022 2021
US$'000 US$'000
Crude oil 35,257 5,359
Natural gas liquids 3,040 391
Natural gas 2,765 255
41,062 6,005
7. FINANCE COSTS
2022 2021
US$'000 US$'000
Loan interest and fees 1,880 137
Amortisation of debt costs 236 -
Unwinding of discount on decommissioning 120 7
2,236 144
8. PROFIT ON ORDINARY ACTIVITIES BEFORE TAXATION
The profit before taxation for the year has been arrived at after
charging/(crediting):
2022 2021
US$'000 US$'000
Gains on derivative contracts (1,781) -
Depreciation and depletion of property, plant and equipment
12,668 1,778
Staff costs excluding share-based payments 1,830 892
Share-based payments 210 93
Expense relating to short-term leases 31 7
Foreign exchange gains(1) (6,102) (461)
(1) Foreign exchange gains include a gain of US$5.6 million in respect of the translation of GBP designated loans between the Company and its U.S. subsidiary entities at 31 December 2022. See note 17.
11. TAXATION
2022 2021
US$'000 US$'000
Current tax:
Current year - -
Deferred tax:
Deferred tax 1,955 -
Tax charge on profit for the year 1,955 -
The charge for the year can be reconciled to the profit per the income
statement as follows:
2022 2021
US$'000 US$'000
Profit before tax 21,226 848
Profit multiplied by applicable tax rate - 25% U.S. (2021: 25% U.S.)
5,307 212
Effects of:
Share-based payments 52 22
Prior year U.S. tax losses now recognised (3,400) (455)
Profits not deductible for tax purposes (85) -
Unrelieved tax losses carried forward 81 221
Tax charge on profit for the year 1,955 -
12. PROFIT PER ORDINARY SHARE
Basic profit per Ordinary Share is calculated by dividing the net profit for
the year by the weighted average number of Ordinary Shares in issue during the
year. Diluted profit per Ordinary Share is calculated by dividing the net
profit for the year by the weighted average number of Ordinary Shares in issue
during the year adjusted for the dilutive effect of potential Ordinary Shares
arising from the Company's share options and warrants.
At 31 December 2022, 2.4 million share options and 89.6 million warrants were
excluded from the diluted number of shares based on their market share price
and exercise price.
The calculation of the basic and diluted profit per Ordinary Share is based on
the following data:
2022 2021
US$'000 US$'000
Profits
Profits for the purpose of basic and diluted profit per Ordinary Share being
net profit for the year
19,271 848
2022 2021
Number Number
'000 '000
Number of shares
Weighted average number of shares for the purpose of basic profit per Ordinary
Share
1,533,110 1,116,414
Weighted average number of shares for the purpose of basic profit per Ordinary
Share
1,533,110 1,116,414
Dilutive share options 42,526 42,510
Dilutive warrants 55,721 100,033
Weighted average number of shares for the purpose of diluted profit per
Ordinary Share
1,631,357 1,258,957
Profit per Ordinary Share
Basic, cents per share 1.26 0.08
Diluted, cents per share 1.18 0.07
14. PROPERTY, PLANT AND EQUIPMENT
Group Company
Oil and gas properties Plant and machinery Right-of-use Plant and machinery Right-of-use
US$'000 US$'000 assets Total US$'000 assets Total
US$'000 US$'000 US$'000 US$'00
Cost
At 1 January 2021 - 129 57 186 23 57 80
Acquisitions 5,443 - - 5,443 - - -
Additions 7,459 4 - 7,459 4 - 4
De-recognition - (106) (57) (163) - (57) (57)
At 1 January 2022 12,902 27 - 12,929 27 - 27
Business combination (see note 15)
40,199 - - 40,199 - - -
Acquisitions 3,362 - - 3,362 - - -
Additions 9,757 - - 9,757 - - -
Exchange differences
- (3) - (3) (3) - (3)
At 31 December 2022
66,220 24 - 66,244 24 - 24
Accumulated depreciation
At 1 January 2021 - 117 41 158 11 41 52
Charge for the year
1,755 7 16 1,778 7 16 23
De-recognition - (106) (57) (163) - (57) (57)
At 1 January 2022 1,755 18 - 1,773 18 - 18
Charge for the year
12,666 2 - 12,668 2 - 2
Exchange differences
- (2) - (2) (2) - (2)
At 31 December 2022
14,421 18 - 14,439 18 - 18
Carrying amount
At 31 December 2022
51,799 6 - 51,805 6 - 6
At 31 December 2021
11,147 9 - 11,156 9 - 9
At 1 January 2021 - 12 16 28 12 16 28
The Group depreciation and depletion charge has been allocated to the income
statement as follows:
2022 2021
US$'000 US$'000
Cost of sales 12,666 1,755
Administrative expenses 2 23
12,668 1,778
During the year ended 31 December 2022, the Group acquired non-operated
working interests in a number of projects located in the Williston Basin,
North Dakota, U.S.
SLAWSON ACQUISITION
In December 2022, the Group completed the acquisition of non-operated working
interests, ranging from 11% to 32%, in a further 6 proved not producing wells
("PNP") in the Williston Basin, North Dakota. The wells are operated by
Slawson Exploration.
The cost of the acquisition was US$2.9 million and the Group will contribute
approximately US$8.9 million CAPEX to bring the wells into production.
On 19 December 2022, the Group entered into a facility agreement with an
experienced U.S. based institutional investor from which the Group received a
12-month revolving credit facility of up to US$8 million. At 31 December 2022,
US$2.5 million had been drawn and used to finance the Slawson acquisition. See
note 22.
No revenues were received from the Slawson acquisition during the year ended
31 December 2022.
The Group applied the requirements of IFRS 3 Business combinations to the
acquisition and concluded that it meets the requirements of the initial
concentration test and it has, therefore, been classified as an asset
acquisition. See note 4.
WILLISTON BASIN ACCRETIVE ACQUISITIONS
In June 2022, the Group completed the acquisition of non-operated working
interests in a further 14 wells, the majority of which had already been
drilled and were awaiting completion. The working interest across the assets
averaged approximately 1.4% per well and the operators in the newly acquired
wells include Kraken Oil and Gas LLC and Bowline Energy LLC.
The cost of the acquisitions was US$0.4 million.
The Group applied the requirements of IFRS 3 Business combinations to the
acquisition and concluded that it meets the requirements of the initial
concentration test and it has, therefore, been classified as an asset
acquisition. See note 4.
IMPAIRMENT
At 31 December 2022, the Directors considered the requirements of IAS 36
Impairment of assets in respect of its production and development assets. They
have satisfied themselves that there were no indicators of impairment and,
therefore, there was no requirement to perform an impairment test. As a
result, no provision for impairment has been made in respect of these assets
at 31 December 2022 (2021: nil). See note 4.
15. BUSINESS COMBINATION
KAISER ACQUISITION
In February 2022, the Group completed the acquisition of non-operated working
interests in 163 producing wells ("PDP"), 18 PNP and DUCs and 47 proved but
undeveloped ("PUD") locations for future drilling. The working interest across
the assets averaged approximately 4%.
The assets were spread across 22 separate drilling pads in Mountrail County,
North Dakota and are operated by Whiting Petroleum Corporation.
The initial cost of the acquisition, which was subject to post completion
closing adjustments, was US$36 million, of which US$3 million was paid in
2021. See note 19. The closing adjustments included US$3.9 million in respect
of CAPEX and net income of US$2 million in respect of income generated and
expenditure arising in the period between the effective date of the agreement
and subsequent completion on 16 February 2022. The total consideration paid in
respect of the acquisition including post-closing adjustments was US$37.9
million.
On 16 February 2022, the Group entered into a credit facility agreement with
FIBT in respect of a term loan of US$18 million, and a 12-month revolving
credit facility of US$10 million which was used towards financing the
acquisition. Under the terms of the facility FIBT has a lien on the assets
acquired. See note 22.
The Group applied the requirements of IFRS 3 Business combinations to the
acquisition and concluded that it meets the criteria to be classified as a
business combination.
The fair value of the identifiable assets and liabilities acquired in respect
of the acquisition are as follows:
US$'000
Assets
Oil and gas assets 40,199
Liabilities
Decommissioning obligation (2,319)
Identifiable net assets at fair value 37,880
Consideration
Cash paid at date of completion 39,543
Receivables outstanding at date of completion (1,663)
37,880
The fair value of the net assets acquired is deemed to be equal to the fair
value of the consideration transferred and, therefore, the Group has not
recognised goodwill or a bargain purchase on the acquisitions.
All outstanding receivables had been received at 31 December 2022.
Since the date of acquisition, the non-operated working interests acquired
contributed US$26.6 million to revenue and US$22.1 million of operating
profit. If the acquisition had taken place at the beginning of the year,
revenue from continuing operations would have been US$42.4 million and the
profit before tax from continuing operations would have been US$23.8 million.
In determining these amounts, management has assumed that the fair value
adjustments arising on the date of acquisition would have been the same had
the acquisition taken place on 1 January 2022.
16. DERIVATIVE CONTRACTS
During the year ended 31 December 2022, the Group entered into the following
derivative contracts to mitigate its exposure to fluctuations in commodity
prices.
Fair value
Strike price 31 December
Oil Volume per bbl 2022
Contracts Bbl Pricing point US$ Term US$'000
Swap 64,000 WTI NYMEX 100.80 1 April 2022 to 30 June 2022 Settled
Swap 57,000 WTI NYMEX 98.00 1 July 2022 to 30 September 2022 Settled
Swap 50,000 WTI NYMEX 94.55 1 October 2022 to 31 December 2022 Settled
Swap 69,000 WTI NYMEX 90.05 1 January 2023 to 30 June 2023 677
Swap 61,000 WTI NYMEX 85.40 1 July 2023 to 31 December 2023 456
Swap 27,000 WTI NYMEX 82.20 1 January 2024 to 31 March 2024 175
1,308
The fair value of the outstanding contracts at 31 December 2022 has been
recognised as follows:
2022 2021
US$'000 US$'000
Current assets 1,133 -
Non-current assets 175 -
1,308 -
The fair value measurement of derivative contracts has been categorised as
Level 1 in the fair value hierarchy as the measurement inputs are quoted
prices in active markets for identical assets at the measurement date.
The recognised gain on derivative contracts was as follows:
2022 2021
US$'000 US$'000
Realised gains 473 -
Unrealised gains 1,308 -
1,781 -
22. BORROWINGS
Group Company
2022 2021 2022 2021
US$'000 US$'000 US$'000 US$'000
Bridge loan - 4,060 - 4,060
Term loan 15,129 - - -
Revolving credit 8,000 - - -
Less: amortised debt costs (239) - - -
FIBT facility 22,890 - - -
Revolving credit 2,580 - - -
Less: amortised debt costs (77) - - -
Slawson asset bridge facility 2,503 - - -
Total borrowings 25,393 4,060 - 4,060
Current borrowings 14,572 4,060 - 4,060
Non-current borrowings 10,821 - - -
25,393 4,060 - 4,060
Group Company
2022 2021 2022 2021
US$'000 US$'000 US$'000 US$'000
Maturity analysis
Less than 6 months 1,964 4,060 - 4,060
6 months to 1 year 12,607 - - -
1 year to 2 years 4,471 - - -
2 years to 5 years 6,351 - - -
25,393 4,060 - 4,060
BRIDGE LOAN FACILITY
On 22 November 2021, the Group announced that it had drawn down a bridge loan
facility of US$4 million (£3 million) provided by a number of sources,
including certain Directors and Shareholders, which were primarily to fund
payment of the non-refundable deposit due in respect of an agreement with
Kaiser Acquisition and Development to acquire a portfolio of non-operated
working interest in wells located in the Williston Basin. See note 19.
The terms of these loan agreements include payment of a 2% arrangement fee and
interest payable at the rate of 1% per month payable monthly in arrears. These
loans were due for repayment on 22 May 2022 but this was subsequently extended
to 21 November 2022 and the rate of interest was increased to 1.25% per month.
The loans were repaid in full during the year ended 31 December 2022.
FIRST INTERNATIONAL BANK AND TRUST ("FIBT")
On 16 February 2022, the Group entered into a facility agreement with FIBT
through its U.S. subsidiaries. Under the terms of the agreement the Group
received a term loan of US$18 million, repayable by 48 monthly instalments,
and a 12-month revolving credit facility of US$10 million. The term loan and
revolving credit facility both incur interest at a rate of 6.74% and were
subject to an arrangement fee of US$180,000 and US$100,000 respectively. A
non-refundable fee of US$50,000 was paid prior to the completion of the
agreement.
The revolving credit facility has a standard redetermination every six months
and was increased to a facility of up to US$13 million in October 2022, which
will next be redetermined in October 2023, and incurs interest at a rate of
9.74%. The loan was subject to an arrangement fee of US$60,000. At 31 December
2022, the Group had drawn US$8 million in respect of the facility.
FIBT has a lien on the assets of the Group's U.S. subsidiaries, Zephyr Bakken
LLC and Rose Petroleum (Utah) LLC.
SLAWSON ASSET BRIDGE FACILITY
On 19 December 2022, the Group entered into a facility agreement with an
experienced U.S. based institutional investor through its U.S. subsidiary
Zephyr Williston LLC. Under the terms of the agreement the Group received a
12-month revolving credit facility of up to US$8 million, of which US$2.5
million had been drawn at 31 December 2022. The facility incurs interest at a
rate 12% and was subject to an arrangement fee of US$80,000 which was rolled
up into the loan facility.
The movement in total borrowings during the year was:
2022 2021
US$'000 US$'000
At 1 January 4,060 -
Cashflows - financing activities 21,569 4,060
Amortised debt costs (236) -
At 31 December 25,393 4,060
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