REG - Zephyr Energy PLC - Final Results
27/06/2024 07:00
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RNS Number : 0744U Zephyr Energy PLC 27 June 2024
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.
27 June 2024
Zephyr Energy plc
("Zephyr", the "Company", or the "Group")
Full Year Results for the year ended 31 December 2023
Notice of AGM
Zephyr Energy plc (AIM: ZPHR) (OTCQB: ZPHRF), the Rocky Mountain oil and gas
company focused on responsible resource development, is pleased to announce
its audited results for the year ended 31 December 2023.
Rick Grant, Zephyr's Non-Executive Chairman, said:
"I am pleased to present the Company's financial and operational results for
the 2023 financial year, a period in which we continued to deliver as a
cash-generating oil and gas exploration and production group.
"Despite facing a significant operational challenge during the year, we
continued to make steady progress in our pursuit of unlocking the next
prolific onshore U.S. oil and gas play.
"With a balanced portfolio of non-operated assets and an operated asset with
asymmetric growth potential, our strategy is clear. Cashflows generated from
our non-operated asset portfolio in the Williston Basin, North Dakota, will be
recycled and reinvested to develop our flagship operated asset in the Paradox
Basin, Utah, to acquire and to develop further non-operated assets, and to
cover our corporate costs.
"I was delighted by the recent safe and successful drilling operation on the
State 36-2R LNW-CC well and we are looking forward to the results from the
forthcoming production test.
"I would like to extend my appreciation to the Zephyr team and our contractors
for their ongoing work, and I would also like to extend my gratitude to my
fellow Board members, leadership team, advisors and most importantly, our
Shareholders for their continued support.
"We have an exciting period ahead of us and I believe, more than ever, that we
have the pieces in place to enable us to deliver on our strategic objectives
successfully."
Notice of AGM and posting of annual report
The Annual General Meeting of the Company (the "AGM") will be held at 11 a.m.
on 31 July 2024 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 this week.
The Group's results and director statements, as extracted from the annual
report and accounts, are set out further below.
Contacts
Zephyr Energy plc Tel: +44 (0)20 7225 4590
Colin Harrington (CEO)
Chris Eadie (Group Finance Director and Company Secretary)
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
Hugh Rich/ James Sinclair-Ford
Celicourt Communications - Public Relations Tel: +44 (0) 20 7770 6424
Mark Antelme / Felicity Winkles / Ali AlQahtani
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 46,000-acre leaseholding 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. 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.
CHAIRMAN'S STATEMENT
OVERVIEW
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 2023 financial
year which reflect the ongoing efforts and commitment of the Zephyr team.
Despite facing a significant operational challenge during the 2023 financial
year, we continued to deliver as a cash-generating, exploration and production
group focused on two established oil producing basins in the Rocky Mountain
region of the U.S., and we have made steady progress in the pursuit of our key
objective of unlocking the next prolific onshore U.S. oil and gas play.
With a balanced portfolio of non-operated assets and an operated asset with
asymmetric growth potential, our strategy is clear. Cashflows generated from
non-operated asset production in the Williston Basin, North Dakota, U.S. (the
"Williston project") are recycled and reinvested to pursue development of our
flagship operated asset in the Paradox Basin, Utah, U.S. (the "Paradox
project").
We are supported and driven by our exceptional people, and have continued to
bolster our team in the U.S. by way of several key hires in operations and
finance. Led by an experienced executive leadership team with a proven track
record, I believe this will enable us to deliver on our strategy and, in-turn,
generate value and responsible growth for all our stakeholders.
As always, the health, safety and welfare of the team and contractors is of
prime importance. We have a zero-harm safety culture focused on continuous
improvement to achieve an injury-free and safe work environment. The Board is
pleased to report that during the period there were no Lost Time Injuries
("LTIs").
The Board is also committed to ensuring that the actions and investment
decisions it makes are in line with our core values of being responsible
stewards of investors' capital and of the environment. This includes our
commitment to minimising our environmental impact through positive actions and
to protect the surroundings in which we operate.
In this respect, I was incredibly proud of how we responded to the well
control issue on the State 36-2 LNW-CC well (the "State 36-2 well") in April
2023. The incident was a significant event for our team but the response, in a
difficult and fast-moving situation, was well executed despite the challenges
faced. There were several important lessons learned from the incident, but a
key takeaway for me was the professionalism and commitment of our team in
addressing the situation in a responsible manner. It is further credit to the
team that the incident was closed-off with no LTIs or long-term environmental
damage and that we managed to get our day-to-day operations back on track to
the point that drilling operations recommenced on the Paradox project within
twelve months of the incident.
After months of meticulous planning, I was delighted that we managed to
successfully drill the State 36-2R LNW-CC well (the "State 36-2R well").
Drilling operations delivered on all the key objectives, and we look forward
to the commencement of the production test which will soon allow us to
understand the full potential of the well. This will hopefully be the catalyst
for an exciting and transformational period ahead.
I am pleased to point to several examples of key stakeholders who have worked
with and supported the Company over the recent months demonstrating a strong
endorsement of the Company and the way in which we operate.
Sturdy and honest relationships, formed over the years of working with
multiple state and federal regulators, proved of great benefit during the well
control issue and subsequent permitting of the State 36-2R well. The
relationship and knowledge-sharing partnership with the U.S. Department of
Energy and the University of Utah continues to benefit all parties, and
further non-dilutive grant funding has recently been made available to the
Company. Further, the supportive relationship with a key debt provider, SGR
Investments LLC, was evidenced by the conversion of a sizeable portion of
their existing debt into Zephyr's equity at the prevailing market price. I am
proud that the Company is recognised by those with whom we work closely as a
professional and quality operator.
OPERATIONAL ACTIVITY
Paradox project
During the period under review, Zephyr saw a recalibration at the Paradox
project following the discovery of a major and productive natural fracture
network and the subsequent well-control incident on the State 36-2 well.
What followed was a period of considerable activity to address the impacts of
the well control incident. Once resolved, and after extensive due diligence,
workover operations and confirmation that our well control insurance would
cover substantially all costs associated with the redrill, the Board concluded
that redrilling the State 36-2 well was the optimal path forward to harness
the significant discovery made by the well.
Following the Board's decision, Zephyr's team commenced detailed internal
well-planning processes (supplemented by multiple high-pressure/high
temperature specialist service providers) which resulted in an augmented well
plan. Once sundry permit approvals were granted, swift progress was made by
our operational team with the award of the drilling permit and securing a rig
contract with Helmerich & Payne ("H&P"), to enable full drilling
operations to commence in April 2024.
We were delighted to recently announce that drilling operations on the State
36-2R well were completed safely and successfully and that all key objectives
had been met. During the upcoming production test, the well will be flowed and
production tested to determine reservoir pressure, fluid composition, well
flow rate, bulk reservoir permeability and to deliver an early estimate of the
overall potential recoverable resources.
The drilling successes achieved to date have given added impetus for the Group
to secure an infrastructure solution for the gas produced from the Paradox
project, and in September 2023 we noted the commissioning of the Green River
pipeline owned by Dominion Energy LLC, Utah ("Dominion"). The pipeline crosses
Zephyr's acreage position and has the potential to provide a nearby route for
gas export from our Paradox acreage.
We are continually looking at ways to increase the scale, optionality and
attractiveness of the Paradox project, and our new farm-in opportunity in the
Salt Wash helium field is another exciting development. Our team has studied
the potential to redevelop the remaining reserves of the Salt Wash Field,
which lies directly to the south of our White Sands Unit (the "WSU"), utilises
the same road network, and has similar oil and gas potential in the Paradox
Formation as the WSU. While helium is a new addition to our resource exposure,
many nearby Paradox Basin oil and gas operators are already producing
comingled helium in commercial quantities, with an active local offtake market
for produced helium. While the Group is not looking for helium to become a
primary focus, the Group is cognisant that it may offer optionality and
represent a value-added opportunity for the Paradox project. We expect to
partner with industry participants to help appraise and fund the potential of
this resource while also taking advantage of our regional knowledge, existing
operations and asset platform.
Williston project
Our non-operated assets continue to deliver strong cashflows, allowing us to
proceed with our ongoing Paradox project development, and have been of
critical importance during the period in which we managed the well control
incident.
Our robust and diverse portfolio of non-operated production and near-term
production assets were acquired for their low-risk, high-return cashflow
potential. Since 2020, we have completed 14 discrete acquisitions with a
portfolio of interests taking production from zero to a current run rate of
over 1,200 barrels of oil equivalent per day ("boepd").
At 31 March 2024, we had 230 wells in our portfolio available for production
and our net working interests now average 7.1% per well (equivalent to 16.3
total wells).
ENVIRONMENTAL, SOCIAL AND GOVERNANCE ("ESG")
As we grow and transform the Company, we continue to foster a safe working
environment and maintain active relations 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 pleased that we continue to pursue 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.
FINANCIAL
For the 2023 financial year, the Group reported revenues of US$25.2 million
(2022: US$41.1 million) and a gross profit of US$7.2 million (2022: US$22.4
million).
These results were largely in line with our expectations, reflecting the lower
oil price environment over the period, normal decline on the non-operated
portfolio wells, and delays to the six wells operated by Slawson Exploration
Company ("Slawson") coming online.
The Slawson wells are now online, albeit still not at full capacity. At the
date of this report, production information indicates that the wells remain
partially curtailed, likely due to gas infrastructure constraints.
CONCLUSION
I would like to extend my appreciation to the team and our contractors for
their work during the past year to deliver on the development of the Paradox
project and on our wider strategy. I would also like to extend my gratitude to
my fellow Board members, leadership team, advisors and most importantly our
Shareholders for their continued support.
The Board is looking to the future with a high degree of confidence as we
continue to deliver on our vision of 'opening up the next prolific onshore
U.S. oil and gas play' and delivering value for all stakeholders.
We have an exciting period ahead of us and I believe we have the pieces in
place to enable us to deliver on our strategic objectives successfully.
RL Grant
Chairman
26 June 2024
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:
· Building 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. The Group has
strengthened the operational team significantly during the 2023 financial year
with several key appointments and promotions;
· Maintaining a clear strategic direction - we are wholly focused
on responsible exploration and production assets in the Rocky Mountain region;
· 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, pursuing 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 our debt providers and Shareholders);
· 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
Overview
The 2023 financial year, and the period since, were a time of sustained
progress and activity for Zephyr despite an unwelcome operational setback with
the well-publicised State 36-2 well control issue.
The Group continues to lay the foundations to bring the Paradox project into
commercial production, and in doing so will deliver on the Board's core
mission of unlocking the next prolific onshore oil and gas play in the U.S.
Having made excellent progress in rectifying matters following the well
control incident on the State 36-2 well, we subsequently recommenced our
drilling operations, and the recent drilling of the State 36-2R well means we
have now fully resumed our Paradox project activity and the wider project
development.
In addition to our planned activity on the Paradox project, we expect to see
increased cashflows from our non-operated assets over the course of the next
financial year, particularly now that the Slawson wells are online. Planning
is underway to develop our new farm-in project in the Salt Wash natural gas
and helium field. The Salt Wash project will likely be undertaken in a
financial partnership with industry participants.
I feel that we can look forward to the next period with a degree of optimism
and excitement as we look to further unlock the value from our strong asset
portfolio for our Shareholders.
Paradox project - operated asset
Background
The Board continues to believe that the Paradox project has considerable scale
and economic potential.
The Paradox project is an operated lease holding of over 46,000 gross acres,
25,000 acres of which has been assessed, by third-party consultant Sproule
International ("Sproule"), to hold, net to Zephyr, 2P reserves of 2.6 million
barrels of oil equivalent ("mmboe"), 2C resources of 34 mmboe and net unrisked
2U resources of 270 mmboe.
The Group's land management strategy continues to be active and has resulted
in a defensible and growing land position which Zephyr's Board believes is
increasingly difficult to replicate in today's increasingly regulatory and
political environment.
To date, all three wells drilled by Zephyr at the Paradox project have
discovered hydrocarbons, and the project appears capable of being transformed
into commercial production once the wells are tied into natural gas
infrastructure.
Drilling activity to date has provided the Group with a wealth of new
reservoir 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 results;
· 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.
Based on this, the Board believes that the Paradox project contains
substantial potential upside and is fully focused on continuing the work
required to develop the acreage into a revenue generating project.
The Board is delighted that Dominion's 16-inch gas export pipeline which
extends across the Paradox project has now been completed. This off-take
solution directly crosses over Zephyr's asset base and provides the potential
for the commercial export of natural gas from our wells to the sales market.
State 36-2 well
In November 2022, the Group announced that drilling on the State 36-2 well had
commenced with the prime objective to target potential production
from the Cane Creek reservoir. Drilling operations continued into 2023.
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 Cane Creek wells drilled by other operators. 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 at a new location within Zephyr's acreage and
3D seismic coverage, and provided additional confirmation of Zephyr's model
for hydrocarbons in place across its entire 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 on
the well had been completed and that all services for the test had been
procured. A service rig was mobilised to the well-site and operations on the
ground commenced. 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 control issue despite multiple attempts to secure the well by
the rig crew. The incident was initially caused by a downhole barrier failure
and then a subsequent failure of a surface safety valve, which resulted in
hydrocarbons being released from the well.
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 completed. A third-party confirmatory environmental survey was
subsequently undertaken and the results found no evidence of any environmental
impact. The relevant authorities confirmed that the remediation satisfied
regulatory standards.
During the incident, multiple joints of the well's 2 7/8-inch production
tubing were compromised, and Zephyr's operations team worked methodically to
remove and inspect the joints while keeping the wellbore static. Operations
to retrieve the damaged tubing progressed slower than expected due to the poor
condition of the tubing, as exhibited by the multiple damaged and buckled
joints retrieved that led to the need for milling operations. Ultimately
operations did not result in sufficient recoveries to justify the continuation
of the ongoing cost of this well work versus the estimated cost to redrill the
well.
Therefore, and following consultation with our regulators and insurers, the
Board elected to proceed with a redrill of a "twinned" well, the State 36-2R
well, from an adjacent location on the same drilling pad.
The Group retains full well control insurance coverage and expects to recover
substantially all costs associated with the well control incident and the
drilling costs associated with the redrill. At the date of this report, circa
US$12 million has been recovered in respect of the incident.
State 36-2R well
Over the last few months of 2023, with the aim of ensuring an optimal drilling
outcome for the State 36-2R well, Zephyr's team commenced a detailed internal
well-planning processes (supplemented by multiple high-pressure/high
temperature specialist service providers) and continued its extensive
interaction with the Group's well control insurance providers. This process
culminated in an updated drilling plan which was then submitted to state and
federal regulators for approval.
In February 2024, the Group announced that it had received the regulatory
approvals and permits required to proceed with the redrill and in March 2024,
following a detailed selection process, Zephyr announced that it had signed a
rig contract with H&P for its Rig 257 to drill the well.
The key objectives of the State 36-2R well were:
· To successfully complete drilling operations to total depth
safely and without harm to people, the environment or equipment;
· To successfully twin the State 36-2 well and intersect the
same Cane Creek reservoir natural fracture system identified by it;
· To confirm the presence of hydrocarbons as found by the State
36-2R well, and further appraise the Cane Creek reservoir at Zephyr's
federal WSU; and
· Should the original well result be replicated, to assess the
reservoir productivity by flow testing the new well.
In April 2024, the Group announced that full drilling operations had commenced
and the surface section of the well had been spud. By June 2024, the Group
announced that the well had been completed safely and successfully, with the
well drilled to a total depth of 10,290 feet (measured depth) where it
intersected the same Cane Creek reservoir within 15 feet of the original
wellbore and its natural fracture network. This means that the three of the
four key objectives for the well have now been met.
Zephyr has mobilised the equipment for completion and production testing of
the naturally fractured reservoir zone that was intersected during drilling
operations and production testing is expected to be underway shortly.
Initial analysis from drilling indicates that the State 36-2R well, like the
State 36-2 well, penetrated a folded and naturally fractured section of the
Cane Creek reservoir. The well encountered drilling mud gas shows of a similar
magnitude to the original well and pore pressure analysis suggest formation
pressures estimated at approximately 9,300 pounds per square inch (which is
broadly consistent with previously drilled offset wells).
The well further confirms the presence of hydrocarbons within a large
structural compartment, within Zephyr's acreage and 3D seismic coverage.
During the ongoing production test, the well will be flowed and production
tested to determine reservoir pressure, fluid composition, well flow rate,
bulk reservoir permeability and deliver an early estimate of the overall
potential recoverable resources.
State 16-2LN-CC well update
Following on from the successful drilling, completion and production test of
the State 16-2LN-CC well (the "State 16-2 well") in 2022, 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 in March 2023 to commission surface facilities, improve
flow assurance and to gather more production data.
This 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. The precipitate, which blocked and
was 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 operational team is assessing whether the precipitate issue is a function
of continued flow back of injected completion fluids or a function of normal
flowing conditions. Under either scenario, the Group has planned mitigation
solutions in place and plans to test these solutions in the coming months
(subject to regulatory approvals and gas export availability) in order to
fully determine the potential of the reservoir at this location.
Working interest acquisition, WSU restructuring and acreage acquisition
As outlined above, we continue to take a number of steps to strengthen the
Paradox project land position which will be critical for the long-term success
of the project.
In February 2023, Zephyr announced that it had completed its acquisition of
the remaining 25% working interest in the core acreage of the Paradox project
from Rockies Standard Oil Company LLC ("RSOC").
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 at a price of 6.05 pence per new
Ordinary Share, representing a circa 11% premium to the Company's mid-market
closing 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; and
· 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.
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 added:
· Over 450,000 barrels of oil equivalent ("boe") in 2P Reserves;
· Over 7 million boe in 2C Contingent Resources; and
· Over 67 million boe of 2U unrisked Prospective Resources.
In late 2022, the Group announced the acquisition of additional Paradox
Basin acreage adjacent to its WSU deemed by the Board to have immediate
development potential.
The acquired acreage was largely covered by Zephyr's existing 3D seismic, and
directly bordered the Zephyr lease on which the State 36-2 and State 36-2R
wells are located, and with access to pre-existing surface infrastructure
which Zephyr subsequently acquired.
A portion of the acquired acreage was envisioned to be added to the WSU,
subject to approval from the U.S. Bureau of Land Management (the "BLM") for
which the Group applied in early 2023. In July 2023, Zephyr announced that
this approval was granted as part of larger expansion/contraction amendment of
the WSU. As part of the approval, 5,000 high-graded acres with near-term
development potential were added to the WSU, and roughly 5,395 acres deemed by
the Group to be less suitable for future development were relinquished.
These actions are part of the Group's active and ongoing portfolio management
of its project position. The Board is pleased with its ongoing BLM
interactions which resulted in an amended federal unit with an upgraded and
manageable acreage position - a position increasingly difficult to replicate
in today's regulatory and political environment.
In August 2023, the Group announced an agreement to increase its land
position through the targeted acquisition of an additional 640 leased acres
deemed by the Group to be prospective for mid to long-term development.
The new acreage is on Utah School and Institutional Trust Lands
Administration ("SITLA") lands and was secured during a SITLA auction. The
acreage is close to the Group's existing WSU and gas export infrastructure.
Greentown wells
In July 2023, the Group announced that it had commenced an assessment of five
existing wellbores (located in the WSU) acquired as part of a larger
acquisition of infrastructure assets in 2022. Several of the existing wells
are former producers of hydrocarbons and were subsequently shut-in due to lack
of operating infrastructure. Others were deemed to have potential future use
as salt water disposal wells or as producers of salt water brine for potential
extraction of lithium resources.
As part of this assessment, Zephyr commenced production from the Greentown
Federal 28-11 well (the "28-11 well") in order to understand the well's
potential contribution to overall field production when ongoing field
infrastructure work has been completed. Hydrocarbons were produced from the
well, with condensate volumes collected for sale and natural gas volumes being
flared within mandated limits.
Historically, the 28-11 well produced over 0.36 billion cubic feet ("bcf") of
gas and 93,000 barrels of oil prior to being shut-in due to a pipeline
shut-down.
Farm-in to Salt Wash helium field
In October 2023, the Group announced that it had opted to farm-in to the Salt
Wash Field to increase the Group's oil and gas resource potential, and to
achieve exposure to the U.S. industrial helium market. The farm-in is to a
minimum 75% working interest in a 1,047-acre leasehold position in the Salt
Wash Field which lies three miles to the south of the Group's WSU. The Board
views the farm-in as a natural extension to the Paradox project.
The field has an already discovered, proven helium resource in the Leadville
Formation, with further opportunity for upside through two deeper helium
exploration targets.
The Group's management forecasts the Salt Wash project to include:
· Net helium discovered resource potential of 0.07 to 0.19 bcf
(Lower Leadville Formation only);
· Net helium un-risked, prospective resource of a further 0.04 to
0.66 bcf (including exploration targets); and
· An estimated net present value at a 10% discount rate ("NPV-10")
of circa US$58 million with the risked upside case having an NPV-10 of
circa US$120 million (using US$650 per thousand standard cubic feet
("mscf") and US$750/mscf pricing, respectively).
Under the terms of the farm-in agreement, payments totalling US$0.6 million
were made to the incumbent leaseholder and it is the Group's intention that
the dual-purpose Leadville Formation delineation well (the "Commitment Well")
will be drilled. The Commitment Well would also test the two additional
helium exploration targets and other potential hydrocarbon bearing reservoirs.
The Group expects to partner with industry participants to help finance the
Commitment Well and appraise and fund the potential of this resource while
also taking advantage of our regional knowledge, existing operations and asset
platform.
Dominion pipeline availability
In September 2023, the Group was notified by Dominion that its gas supply
pipeline from the Northwest Gas Pipeline system to the Green River area was
operational.
Williston project - non-operated asset
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. The Williston
project, following 14 discrete acquisitions, continues to deliver on this goal
with 2023 production of circa 1,040 boepd, net to Zephyr, and corresponding
revenues of circa US$25 million for the year.
At 31 March 2024, Zephyr had working interests in 230 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
initial expectations, and the cashflow from the portfolio proved to be
critical in 2023 as the Group managed the fallout from the well control issue
on the State 36-2 well.
The Group will continue to develop and grow its non-operated portfolio through
opportunistic acquisitions.
2023 summary and outlook
2023 production from the non-operated portfolio averaged circa 1,040 boepd net
to Zephyr, down from 1,410 boepd in 2022. 2023 full-year production was lower
than in the previous year due to the standard decline of the portfolio and
delays to the six Slawson wells coming online in which Zephyr has significant
working interests.
2023 revenues were US$25.2 million, compared to US$41.1 million in 2022,
impacted by the aforementioned decline as well as a substantially lower
commodity price environment. The average realised price per barrel of oil was
US$78 in 2023, with a fully blended realised price of circa US$65 per boe
(including gas and NGLs). Average operating expenditure in 2023 was US$19.93
per barrel demonstrating the high margins available on the Williston project
production in the recent pricing environment.
At 31 December 2023, 225 wells in the portfolio were available for
production, and net working interests across the Williston
Basin non-operated portfolio averaged 8% per well, equivalent to 15.1 total
wells net to Zephyr, all of which utilised horizontal drilling and modern,
hydraulically stimulated completions.
The Slawson wells are expected to give a boost to production in 2024. The
average daily production rate from the portfolio in March 2024 was 1,212
boepd (versus 1,053 boepd in the fourth quarter of 2023), reflecting the
impact from the Slawson wells being online, albeit not at full capacity. At
the date of this report, production information indicates that the wells
remain partially curtailed, likely due to gas infrastructure constraints.
Slawson wells
In December 2022, Zephyr announced the acquisition of working interests in the
six Slawson wells (equivalent to 1.1 total well) near to Zephyr's existing
non-operated working interests for a total consideration of US$2.9 million.
In addition, Zephyr paid the US$8.9 million capital expenditure ("CAPEX")
associated with the working interests to bring the wells into production.
The wells are operated by 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 estimates 2P Reserves acquired are circa 550,000 boe, net to
Zephyr.
These new wells were originally expected to provide a sizeable
production boost to the Group in the 2023 financial year (having been spud
in November 2022 and expected online in the first half of 2023). However,
delays were experienced due to issues with the completion of surface
facilities on the well pad. The wells eventually came online on 1 November
2023 with initial flow rates exceeding management expectations, with
production data adjusted for uptime showing an average flow rate of 897 boepd,
net to Zephyr during the wells initial month of production.
Production from the Slawson wells was subsequently temporarily curtailed
in mid-December 2023 due to adverse weather conditions and infrastructure
constraints, and production resumed in late January 2024. At the date of this
report, the wells are currently producing albeit not at full capacity as they
remain partially curtailed, likely due to gas infrastructure constraints.
While the delays in production from the Slawson wells has been frustrating,
management believes that performance from the wells will ultimately meet
expectations, with an increase to the Group's overall production expected in
2024 as a result of production from the wells.
Further production additions
During February 2024, ten wells in which Zephyr holds working interests and
which are operated by Continental Resources (Harms Federal and Quale
Federal) were placed in production. Early production data shows these wells
performing ahead of management expectations, adding initial production rates,
net to Zephyr, of circa 75 boepd.
Hedging
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 were increased from
94,000 barrels ("bbls") to 137,000 bbls, at an average hedged production price
of US$84.76 per barrel of oil, with BP Energy Company ("BP"), one of the
world's leading energy trading houses, continuing to serve as the
counterparty.
At 31 December 2023, the Group had hedged 27,000 barrels of oil over the first
quarter of 2024 at a weighted-average price of US$82.20 per barrel of
oil. In April 2024, a further 76,000 barrels of oil were hedged over the
remainder of 2024. 40,500 barrels of oil were hedged at a price of US$80.91,
with the remaining 35,500 barrels of oil being hedged by way of financial
collars which enable the Group to lock-in a minimum price for these barrels.
Of these, 26,500 will give the Group a minimum price of US$74 per barrel of
oil with the remaining 9,000 guaranteeing a floor price of US$69 per barrel of
oil.
Corporate
In June 2023, the Company raised gross proceeds of US$3.9 million (£3.2
million) by way of a placing of 90 million new Ordinary Shares of 0.1
pence each in the Company at a price of 3.5 pence per new Ordinary Share
which was supported by a range of existing institutional and other investors,
including Premier Miton.
During the period the Group strengthened its team in the U.S. through the
appointment or promotion of several key individuals including:
· Andy Lee - appointed Chief Financial Officer (U.S.)
· Heather Hatfield - appointed Chief Accounting Officer
· Ryan Walter - promoted to Vice President - Operations
All three officers are based in Denver, Colorado.
In April 2024, the Company issued a total of 61,503,028 share options to
Directors, certain employees and consultants of Zephyr, either to reflect
historic awards under the Company's Long-Term Incentive Plan, bonuses for
performances achieved in 2021 and 2022, to satisfy employee contractual
commitments or commitments in lieu of deferred remuneration and fees from
2020, during the COVID-19 pandemic.
In May 2024, the Company retired US$3.88 million of existing debt through
the issuance of US$3.88 million of equity comprised of 64,045,768 new
Ordinary Shares of 0.1 pence each in the Company at a price of 4.85 pence
per new Ordinary Share. The issue price of the Ordinary shares was the
undiscounted mid-market closing price of the Company's Ordinary Shares on 2
May 2024.
The Ordinary Shares were issued to SGR Investments LLC ("SGRI"), a US-based
institutional investor. In December 2022, SGRI provided debt funding
to Zephyr Williston LLC, one of the Group's subsidiaries, to enable it to
acquire the Slawson wells.
In May 2024, the Group announced that it had been awarded an additional
US$250,000 of non-dilutive grant funding from the U.S. Department of
Energy (the "DOE") for operations on the State 36-2R well. This brings the
total DOE grant funding made available to the Group to US$3.65 million in
recent years.
The grant is administered by the University of Utah's Energy &
Geoscience Institute ("EGI"). Zephyr's technical team continues to work
closely with the EGI, the Utah Geological Survey and
other Utah-based partners in utilising DOE research funds to fully
evaluate the potential overall productivity of the Paradox Basin.
In June 2024, the Group announced a new $5.6 million term loan. The new term
loan will amortise monthly over four years and has an interest rate of 10% per
annum. Proceeds from the new term loan were used to repay the 12% SGRI loan,
which has now been fully repaid.
Significant decisions made
During the period under review, the Directors made several discrete commercial
decisions to ensure the continued growth of the business and, particularly,
the advancement of the Paradox project.
The most significant decisions were the approvals required in respect of the
State 36-2R well drill, the equity fundraise in June 2023 and the debt for
equity exchange in May 2024. All key decisions were unanimously deemed by
Board members to be in the best interests of the Group. Details of these items
can be found in the relevant sections of this Annual Report.
Outlook
We are off to a strong start in the 2024 financial year with the successful
drilling operation at the 36-2R well and the increased production performance
from the Williston project now that the Slawson wells are online.
Over the last few months, we have witnessed the value and benefit of our
two-tiered operating model with our non-operated asset portfolio providing
essential funds for growth of the Group as a whole, and we look forward to the
rest of the year with confidence.
We would like to thank all Shareholders for their continued support.
On behalf of the Board,
JC Harrington
Chief Executive Officer
26 June 2024
FINANCIAL REVIEW
The 2023 financial year was characterised by further investment in both the
Paradox and the Williston projects.
Profitability and liquidity were down from the prior year primarily due to
delays in the Slawson wells coming online, the State 36-2 well drilling costs
and the associated well control issue.
With the Slawson wells now online, profitability is expected to increase again
in the 2024 financial year.
INCOME STATEMENT
During the year ended 31 December 2023, the Group generated revenue of US$25.2
million (2022: US$41.1 million), and reported a gross profit of US$7.2 million
(2022: US$22.4 million), which includes a gain of US$0.4 million (2022: US$1.8
million) in respect of the Group's hedging programme.
Administrative expenses for the year were US$6 million (2022: US$4.8 million).
The increase from the 2022 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 foreign exchange losses of US$2.8 million for the year
(2022: gain of US$6.1 million) which is predominantly in respect of unrealised
losses on the restatement of intercompany loans between the Company and its
subsidiaries. These losses arise due to the strength of sterling against the
U.S. dollar at the end of 2023.
Finance charges of US$3.5 million (2022: US$2.2 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 2023, the Group has recognised a deferred
tax credit, and a corresponding reduction in its net deferred tax liability,
of US$1.6 million relating to unrelieved tax losses and temporary timing
differences arising in the U.S. businesses (2022: US$2 million)
The Group reports a net loss after tax of US$3.5 million or a loss of 0.21
cents per Ordinary Share for the year ended 31 December 2023 (2022: net profit
US$19.3 million or a profit of 1.26 cents per Ordinary Share).
BALANCE SHEET
Total investment in the Group's exploration and evaluation assets as at 31
December 2023 was US$50 million (2022: US$38 million) reflecting the ongoing
investment in the Paradox project.
Total investment in property, plant and equipment as at 31 December 2023 was
US$50.8 million (2022: US$51.8 million) reflecting depreciation, depletion and
amortisation, decommissioning obligations and a working-interest disposal on
the non-operated asset portfolio.
At 31 December 2023, the Group has recognised US$0.3 million (2022: 1.3
million) outstanding derivative contracts in respect of its hedging programme
at fair value, of which US$ nil (2022: US$0.2 million) has been recognised in
non-current assets and US$0.3 million (2022: US$1.1 million) in current
assets.
Trade and other receivables have increased by US$3.3 million, primarily due to
a provision of US$2.9 million in respect of insurance recoveries relating to
the well incident which had not yet been recovered at 31 December 2023. These
proceeds have subsequently been received since the year end. See note 17.
Cash and cash equivalents as at 31 December 2023 were US$3.6 million (2022:
US$9 million). During the year, the Company raised gross proceeds of US$3.9
million (2022: US$17.4 million) through the placing of new Ordinary Shares in
the Company.
The Group's borrowings as at 31 December 2023 were US$35.4million (2022:
US$25.4 million). The increase in borrowings over the year reflects the CAPEX
for drilling operations on the Paradox project. The rise in borrowings was
necessitated by the delay in the Slawson wells coming online.
SUBSEQUENT DEVELOPMENTS
In April 2024, the Company issued a total of 61,503,028 share options to
Directors, certain employees and consultants of Zephyr, either to reflect
historic awards under the Company's Long-Term Incentive Plan, bonuses for
performances achieved in 2021 and 2022 (the "Bonus Scheme"), to satisfy
employee contractual commitments or commitments in lieu of deferred
remuneration and fees from 2020, during the COVID-19 pandemic.
In May 2024 the Company retired US$3.88 million of existing debt through the
issuance of US$3.88 million of equity comprised of 64,045,768 new Ordinary
Shares of 0.1 pence each in the Company at a price of 4.85 pence per new
Ordinary Share. The issue price of the Ordinary Shares was the undiscounted
mid-market closing price of the Company's Ordinary Shares on 2 May 2024.
In June 2024, the Group announced that it had fully repaid the remaining US$6
million of the loan that it had with SGRI. This was achieved largely through
utilising proceeds from a new US$5.6 million amortising term loan with First
International Bank & Trust ("FIBT").
At 18 June 2024, the Group had cash and cash equivalents of US$2.5 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 were no reported LTIs during the 2023 financial year (2022:
improvement to achieve an injury-free and safe work environment nil)
· We require employees and contractors to work in a safe and · The Group experienced a well control issue in the 2023 financial
responsible manner and provide them with the training and equipment to do so year while drilling the State 36-2 well. The incident was professionally
managed and did not result in any LTIs or long-term damage to the environment.
Adjusted EBITDA Why we measure Performance
Profit before tax adjusted for DD&A, finance costs, unrealised foreign · Indicator of the Group's cash generation to fund expenditures · 2023 Adjusted EBITDA was US$11.8 million
exchange gains / losses and unrealised hedge gains / losses and/or return capital to Shareholders
· 2022 Adjusted EBITDA was US$28.7 million
· The difference between the Adjusted EBITDA for 2023 and the prior
year was primarily the result of the standard production decline of the
non-operated asset portfolio, lower commodity prices in the year and delays to
the six Slawson wells coming online.
Net production Why we measure Performance
· Indicator of revenue generation potential · 2023 production of 407,600 boe.
· Measure of progress towards achieving production forecasts and · 21% decrease in production from 2022 production of 514,650 boe
driving profitable production growth
· Decrease primarily the result of the standard production decline
of the non-operated asset portfolio, lower commodity prices in the year and
delays to the six Slawson wells coming online.
Growth of Paradox project reserves / resources Why we measure Performance
· Indicator of economic viability and long-term production · No changes to the Paradox reserves / resources during the year
potential of projects
· It is expected that a revised Competent Persons Report on the
Paradox project will be prepared in the second half of 2024.
· At 31 December 2023, the Group had Paradox Basin 2P reserves of
2.6 mmboe, 2C resources of circa 34 mmboe and 2U resources of 270 mmboe
Carbon emissions Why we measure Performance
· Zephyr Energy is committed to sustainable and responsible oil and · Pursued Scope 1 carbon-neutrality from both operated and
gas production non-operated assets
· VERs credit partnership with Prax which aims to mitigate all
Scope 1 carbon emissions.
CJ Eadie
Group Finance Director
26 June 2024
CONSOLIDATED INCOME STATEMENT
For the year ended 31 December 2023
2023 2022
Notes US$'000 US$'000
Revenue 6 25,225 41,062
Operating and transportation expenses (6,964) (4,458)
Production taxes (1,878) (3,318)
Depreciation, depletion and amortisation 14 (9,607) (12,666)
Gain on derivative contracts 15 412 1,781
Gross profit 7,188 22,401
Administrative expenses (5,997) (4,834)
Share-based payments (6) (210)
Foreign exchange (losses)/gains 8 (2,776) 6,102
Finance income - 3
Finance costs 7 (3,472) (2,236)
(Loss)/profit on ordinary activities before taxation 8 (5,063) 21,226
Taxation credit/(charge) 11 1,560 (1,955)
(Loss)/profit for the year attributable to owners of the parent company (3,503) 19,271
(Loss)/profit per Ordinary Share
Basic, cents per share 12 (0.21) 1.26
Diluted, cents per share 12 (0.21) 1.18
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
For the year ended 31 December 2023
2023 2022
US$'000 US$'000
(Loss)/profit for the year attributable to owners of the parent company (3,503) 19,271
Other comprehensive income/(loss)
Items that may be subsequently reclassified to profit or loss
Foreign currency translation differences on foreign operations 2,772 (6,205)
Total comprehensive (loss)/income for the year attributable to owners of the
parent company
(731) 13,066
CONSOLIDATED BALANCE SHEET
As at 31 December 2023 2023 2022
Notes US$'000 US$'000
Non-current assets
Exploration and evaluation assets 13 49,941 37,986
Property and equipment 14 50,840 51,805
Derivative contracts 15 - 175
100,781 89,966
Current assets
Trade and other receivables 17 7,897 4,637
Cash and cash equivalents 18 3,611 8,996
Derivative contracts 15 278 1,133
11,786 14,766
Total assets 112,567 104,732
Current liabilities
Trade and other payables 19 (6,983) (12,520)
Borrowings 20 (28,950) (14,572)
Lease liabilities (39) -
(35,972) (27,092)
Non-current liabilities
Borrowings 20 (6,401) (10,821)
Lease liabilities (31) -
Deferred tax 21 (395) (1,955)
Provisions 22 (5,067) (4,138)
(11,894) (16,914)
Total liabilities (47,866) (44,006)
Net assets 64,701 60,726
Equity
Share capital 23 42,568 42,412
Share premium account 25 71,735 66,847
Shares to be issued 25 - 539
Warrant reserve 24 1,557 1,557
Share-based payment reserve 25 3,270 3,284
Cumulative translation reserve 25 (13,212) (15,984)
Accumulated deficit 25 (41,217) (37,929)
Equity attributable to owners of the parent company 64,701 60,726
CONSOLDIDATED STATEMENT OF CHANGES IN EQUITY
For the year ended 31 December 2023
Share premium account Share-based payment Cumulative
Shares to be issued Warrant reserve reserve translation reserve Accumulated
deficit
Share capital Total
US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000
As at 1 January 2022 42,065 52,875 - 89 3,065 (9,779) (57,721) 30,594
Transactions with owners in their capacity as owners:
Issue of equity shares 347 17,023 - - - - - 17,370
Exercise of warrants - - 539 (122) - - 122 539
Expenses of issue of equity shares - (1,461) - - 408 - - (1,053)
Warrant exercise extension - (33) - 33 - - - -
Grant of warrants - (1,557) - 1,557 - - - -
Share-based payments - - - - 210 - - 210
Transfer to accumulated deficit in respect of lapsed options
- - - - (387) - 387 -
Transfer to accumulated deficit in respect of expired warrants
- - - - (12) - 12 -
Total transactions with owners in their capacity as owners
347 13,972 539 1,468 219 - 521 17,066
Profit for the year - - - - - - 19,271 19,271
Other comprehensive loss:
Currency translation differences - - - - - (6,205) - (6,205)
Total other comprehensive loss for the year
- - - - - (6,205) - (6,205)
Total comprehensive income for the year
- - - - - (6,205) 19,271 13,066
As at 31 December 2022 42,412 66,847 539 1,557 3,284 (15,984) (37,929) 60,726
Transactions with owners in their capacity as owners:
Issue of equity shares 156 5,318 - - - - - 5,474
Exercise of warrants - - (539) - - - - (539)
Expenses of issue of equity shares - (430) - - 195 - - (235)
Share-based payments - - - - 6 - - 6
Transfer to accumulated deficit in respect of expired options
- - - - (215) - 215 -
Total transactions with owners in their capacity as owners
156 4,888 (539) - (14) - 215 4,706
Loss for the year - - - - - - (3,503) (3,503)
Other comprehensive income:
Currency translation differences - - - - - 2,772 - 2,772
Total other comprehensive income for the year
- - - - - 2,772 - 2,772
Total comprehensive loss for the year
- - - - - 2,772 (3,503) (731)
As at 31 December 2023 42,568 71,735 - 1,557 3,270 (13,212) (41,217) 64,701
2023 2022
CONSOLIDATED CASH FLOW STATEMENT US$'000 US$'000
For the year ended 31 December 2023
Operating activities
(Loss)/profit for the year before taxation (5,063) 21,226
Adjustments for:
Finance income - (3)
Finance costs 3,472 2,236
Depreciation and depletion of property and equipment 9,630 12,668
Share-based payments 6 210
Unrealised foreign exchange losses/(gains) 2,772 (5,672)
Operating cash inflow before movements in working capital 10,817 30,665
Increase in trade and other receivables (403) (2,850)
Unrealised loss/(gain) on derivative contracts 1,029 (1,308)
Increase in trade and other payables 191 723
Cash generated from operations 11,634 27,230
Income tax paid - -
Net cash generated from operating activities 11,634 27,230
Investing activities
Additions to exploration and evaluations assets (21,643) (13,297)
Business combination - (37,880)
Acquisition of oil and gas properties - (3,362)
Additions to oil and gas properties (10,467) (10,482)
(Decrease)/increase in capital expenditures related payables (5,754) 9,300
Proceeds on disposal of oil and gas properties 2,262 -
Insurance proceeds received in respect of exploration and evaluation assets 7,712 -
Grant funds received in respect of exploration and evaluation assets 302 -
Interest received - 3
Net cash used in investing activities (27,588) (55,718)
Financing activities
Net proceeds from issue of shares 3,700 16,317
Exercise of warrants - 539
Proceeds from borrowings 13,260 30,500
Repayment of borrowings (4,244) (8,931)
Repayment of lease liabilities (7) -
Interest and fees paid on borrowings (2,140) (2,218)
Net cash generated from financing activities 10,569 36,207
Net (decrease)/increase in cash and cash equivalents (5,385) 7,719
Cash and cash equivalents at beginning of year 8,996 1,811
Effect of foreign exchange rate changes - (534)
Cash and cash equivalents at end of year 3,611 8,996
SELECTED NOTES TO THE FINANCIAL STATEMENTS (the full set of notes are
available in the annual report and accounts)
For the year ended 31 December 2023
2. ADOPTION OF NEW AND REVISED STANDARDS
STANDARDS ADOPTED DURING THE YEAR
The Group has adopted all of the new or amended Accounting Standards and
interpretations issued by the International Accounting Standards Board
("IASB") that are mandatory and relevant to the Group's activities for the
current reporting period.
The following new and revised Standards have been adopted but have not had any
material impact on the amounts reported in these financial statements:
· Amendments to IFRS 17 - Insurance contracts
· Amendments to IFRS 17 - Initial application of IFRS 17 and IFRS 9 -
comparative information
· Amendments to IAS 1 and IFRS practice statement 2 - Disclosure of
accounting policies
· Amendments to IAS 8 - Definition of accounting estimates
· Amendments to IAS 12 - Deferred tax related assets and liabilities
arising from a single transaction
· Amendments to IAS 12 - International tax reform - pillar two model
rules
STANDARDS ISSUED BUT NOT YET EFFECTIVE
Any new or amended Accounting Standards or interpretations that are not yet
mandatory (and in some cases, had not yet been endorsed by the UK Endorsement
Board) have not been early adopted by the Group for the year ended 31 December
2023. They are as follows:
· Amendments to IAS 1 - Classification of liabilities as current or
non-current
· Amendments to IFRS 16 - Lease liability in a sale and leaseback
· Amendments to IAS 1 - Non-current liabilities with covenants
· Amendments to IAS 7 and IFRS 7 - Supplier finance arrangements
· Amendments to IAS 21 - Lack of exchangeability
· Amendments to IFRS 10 and IAS 28 - Sale or contribution of assets
between an investor and its associate or joint venture
· IFRS S1 - General requirements for disclosure of sustainability -
related financial information
· IFRS S2 - Climate-related disclosures
The Directors do not expect that the adoption of these Standards or
Interpretations in future periods will have a material impact on the financial
statements of the Company or the Group.
3. MATERIAL 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 consolidated and the Company financial statements are presented in United
States dollars ("US$"). All amounts have been rounded to the nearest thousand
unless otherwise indicated.
The functional currency of the Company is pounds sterling ("£") and that of
the U.S. subsidiaries is US$.
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
the Directors to 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.
GOING CONCERN
The Directors have prepared cashflow forecasts for the Group and Parent
Company for the period to 31 December 2025 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 drilling of the State 36-2R well and
the expected insurance recoveries from the drilling operations. As disclosed
in note 13, a well incident happened during the year which led to the drilling
of the new State 36-2R well. The Group has comprehensive well control
insurance coverage and the Board expects to recover insurance proceeds from
the well incident for the cost of drilling the new State 36-2R well. 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.
In addition, as at 31 December 2023, the Group and the Parent Company had
existing borrowings that are payable within 12 months (current) from the end
of the reporting period. To meet this obligation, the Group and the Parent
Company will require debt refinancing of existing borrowings or raising of
additional funding.
As such, the Group and the Parent Company's ability to continue as going
concerns is dependent on securing insurance proceeds and debt refinancing of
existing borrowings or raising additional funding which are not guaranteed.
This indicates the existence of a material uncertainty which may cast
significant doubt over the Group and the Parent Company's ability to continue
as going concerns, and therefore, the Group and the Parent Company may be
unable to realise their assets and discharge their liabilities in the normal
course of business.
Following detailed discussions, the Directors are confident that the Group and
the Parent Company will be able to secure insurance recoveries as per above,
refinance their existing borrowings and raise additional funding to enable the
Group and the Parent Company to continue in operation for at least the next
twelve months from the date of approval of the financial statements. The
Directors have extensive experience in raising capital for projects and
ventures and remain confident in the Group and the Parent Company'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.
5. SEGMENTAL INFORMATION
When considering the requirements of IFRS 8 Operating segments, the Board of
Directors have determined that the Group has one main operating segment, the
exploration, development and production of oil and gas resources based in the
U.S. As a result, no segmental information is presented.
6. REVENUE
Petroleum and natural gas revenue earned by the Group in the U.S. is
disaggregated by commodity, as follows:
2023 2022
US$'000 US$'000
Crude oil 22,609 35,257
Natural gas liquids 1,657 3,040
Natural gas 959 2,765
25,225 41,062
7. FINANCE COSTS
2023 2022
US$'000 US$'000
Loan interest and fees 2,888 1,880
Amortisation of debt costs 215 236
Unwinding of discount on decommissioning 369 120
3,472 2,236
8. (LOSS)/PROFIT ON ORDINARY ACTIVITIES BEFORE TAXATION
The (loss)/profit before taxation for the year has been arrived at after
charging/(crediting):
2023 2022
US$'000 US$'000
Gains on derivative contracts (412) (1,781)
Depreciation and depletion of property and equipment
9,630 12,668
Staff costs excluding share-based payments 2,664 1,830
Share-based payments 6 210
Expense relating to short-term leases 30 31
Foreign exchange losses/(gains)(1) 2,776 (6,102)
(1) Foreign exchange losses/(gains )include a loss of US$2.7 million (2022: gain US$5.6 million) in respect of the translation of GBP designated loans between the Company and its U.S. subsidiary entities at 31 December 2023. See note 16.
12. (LOSS)/PROFIT PER ORDINARY SHARE
Basic (loss)/profit per Ordinary Share is calculated by dividing the net
(loss)/profit for the year by the weighted average number of Ordinary Shares
in issue during the year. Diluted (loss)/profit per Ordinary Share is
calculated by dividing the net (loss)/profit for the year by the weighted
average number of Ordinary Shares in issue during the year adjusted for the
dilutive effect of potential Ordinary Shares arising from the Company's share
options and warrants.
At 31 December 2022, 2.4 million share options and 89.6 million warrants were
excluded from the diluted number of shares based on their market share price
and exercise price.
The calculation of the basic and diluted (loss)/profit per Ordinary Share is
based on the following data:
2023 2022
US$'000 US$'000
(Losses)/profits
(Losses)/profits for the purpose of basic and diluted (loss)/profit per
Ordinary Share being net (loss)/profit for the year
(3,503) 19,271
2023 2022
Number Number
'000 '000
Number of shares
Weighted average number of shares for the purpose of basic (loss)/profit per
Ordinary Share
1,644,490 1,533,110
Weighted average number of shares for the purpose of basic (loss)/profit per
Ordinary Share
1,644,490 1,533,110
Dilutive share options - 42,526
Dilutive warrants - 55,721
Weighted average number of shares for the purpose of diluted (loss)/profit per
Ordinary Share
1,644,490 1,631,357
(Loss)/profit per Ordinary Share
Basic, cents per share (0.21) 1.26
Diluted, cents per share (0.21) 1.18
Due to the losses incurred from continuing operations in the year ended 31
December 2023, there is no dilutive effect from the existing share options or
warrants.
13. EXPLORATION AND EVALUATION ASSETS
US$'000
Cost
At 1 January 2022 22,773
Additions 15,213
At 1 January 2023 37,986
Additions 22,643
Decommissioning - change in estimates 177
Insurance proceeds (10,563)
Funds received in lieu of grants (302)
At 31 December 2023 49,941
PARADOX ACQUISITION
On 21 December 2022, the Group announced that it would acquire the remaining
25% working interest in the WSU in the Paradox Basin, Utah from Rockies
Standard Oil Company LLC ("RSOC"). As a result, the Group now holds a 100%
working interest in the WSU.
Under the term of the acquisition agreement, total consideration of up to US$3
million is payable by the issue of up to 40,449,284 new Ordinary Shares of 0.1
pence each in Zephyr Energy plc, at a price of 6.05 pence per new Ordinary
Share.
The new Ordinary Shares would be issued in two tranches:
· A first tranche of 13,483,095 new Ordinary Shares to be issued in
settlement of loan notes of US$1 million, on completion of the acquisition.
· A second tranche of 26,966,189 new Ordinary Shares to be issued
in settlement of loan notes of US$2 million, upon Zephyr's final investment
decision with respect to the commencement of operations at the Powerline Road
gas processing plant which was acquired in August 2022. If the final
investment decision is not made by 1 January 2029 the Group has no further
obligation to issue the second tranche.
On 10 February 2023, the Group announced that it had completed the acquisition
and issued 13,483,095 new Ordinary Shares of 0.1 pence each in Zephyr Energy
plc, at a price of 6.05 pence per new Ordinary Share, in respect of the first
tranche. See notes 23 and 26.
STATE 36-2 WELL CONTROL INCIDENT
On 7 April 2023, as workover operations were being completed on State 36-2,
the well experienced a significant control issue. 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.
Well control efforts were successful and remediation and clean-up operations
were completed. A third-party confirmatory environmental survey found no
evidence of lingering environmental impact. The Group also received
confirmation from the State of Utah's Division of Oil, Gas and Mining that the
remediation work performed on the well site was completed in accordance with
the State's requirements.
The Group has comprehensive well control insurance coverage and the Board
expects to recover substantially all costs associated with the incident. The
Group's policy covers expenses up to the policy limit of US$20 million for
clean-up, remediation, plugging and abandonment of the original well, and the
cost of a new well of similar design up to the point at which the incident
occurred.
At 31 December 2023, a total of US$7.7 million had been recovered from the
Group's insurer. A receivable of US$2.9 million has been recognised in respect
of expenditure not yet recovered at 31 December 2023, which has been recovered
in full since the year end. See note 17.
ACQUISITION OF ADDITIONAL ACREAGE
On 15 August 2023, the Group announced that it had acquired an additional 640
leased acres in the Paradox Basin at a cost of US$7,230. Following the
acquisition, the Group now operates a total of over 46,000 gross acres in the
Paradox Basin, the majority of which it holds as operator with a 100%
interest.
SALT WASH PROJECT
On 18 October 2023, the Group announced a proposed farm-in to a minimum 75%
working interest in a 1,047-acre leasehold position in the Salt Wash Field, a
previously producing asset with proven oil, gas and helium reserves, located
three miles to the south of the Group's WSU.
The key terms of the farm-in which completed on 6 September 2023, were as
follows:
· An initial payment of US$0.3 million due within 30 days of the
transaction completing.
· A second payment of US$0.3 million due within 60 days of the
transaction completing.
· The Group is committed to drill, log and case one vertical
delineation well, with spudding prior to 30 June 2024 to obtain a 100% share
in the leasehold.
· The seller has the option to back-in to the lease holding at a
25% working interest, with no historic cost exposure, once the delineation
well is drilled and a field development plan has been proposed by Zephyr.
Thereafter, the seller would become a fully paying 25% working interest
partner.
The total consideration of US$0.6 million has been treated as an acquisition
of assets at 31 December 2023.
In June 2024, the Group announced that the drilling deadline had been extended
to 1 September 2024.
U.S. DEPARTMENT OF ENERGY FUNDING
On 9 December 2022, the Group announced that it had secured additional US$1
million research grant funding from the University of Utah's Energy and
Geoscience Institute ("EGI"), to be utilised for data gathering during the
drilling of the State 36-2 LN-CC well. The grant was not concluded during the
year ended 31 December 2023 and the Group received US$0.3 million for
historical expenditure in lieu of this award. The carrying value of the
Group's exploration and evaluation assets have been presented net of the funds
received.
IMPAIRMENT
The Directors assessed the indicators of impairment as set out in IFRS 6 and
no indicators or impairment were identified. On this basis the Directors have
satisfied themselves that there was no requirement to perform an impairment
test at 31 December 2023 and, as a result, no provision for impairment has
been made in respect of these assets at 31 December 2023 (2022: nil). See note
4.
14. PROPERTY AND EQUIPMENT
Group Company
Oil and gas properties Office equipment Right-of-use Office equipment Right-of-use
US$'000 US$'000 assets Total US$'000 assets Total
US$'000 US$'000 US$'000 US$'00
Cost
At 1 January 2022 12,902 27 - 12,929 27 - 27
Business combination 40,199 - - 40,199 - - -
Acquisitions 3,362 - - 3,362 - - -
Additions 9,757 - - 9,757 - - -
Exchange differences - (3) - (3) (3) - (3)
At 1 January 2023 66,220 24 - 66,244 24 - 24
Additions 10,468 - 77 10,545 - 77 77
Disposals (2,792) - - (2,792) - - -
Decommissioning - change in estimates
463 - - 463 - - -
Exchange differences - 1 - 1 1 - 1
At 31 December 2023 74,359 25 77 74,461 25 77 102
Accumulated depreciation
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 1 January 2023 14,421 18 - 14,439 18 - 18
Charge for the year 9,607 2 21 9,630 2 21 23
Disposals (449) - - (449) - - -
Exchange differences - 1 - 1 1 - 1
At 31 December 2023 23,579 21 21 23,621 21 21 42
Carrying amount
At 31 December 2023 50,780 4 56 50,840 4 56 60
At 31 December 2022 51,799 6 - 51,805 6 - 6
At 1 January 2022 11,147 9 - 11,156 9 - 9
The Group depreciation and depletion charge has been allocated to the income
statement as follows:
2023 2022
US$'000 US$'000
Depreciation, depletion and amortisation 9,607 12,666
Administrative expenses 23 2
9,630 12,668
IMPAIRMENT
At 31 December 2023, the Directors considered the requirements of IAS 36
Impairment of assets in respect of its oil and gas properties. 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 2023 (2022: nil). See note 4.
15. DERIVATIVE CONTRACTS
During the year ended 31 December 2023, the Group entered into the following
derivative contracts to mitigate its exposure to fluctuations in commodity
prices.
Fair value
Strike price 31 December
2023
Oil Volume per bbl
US$'000
Contracts Bbl Pricing point US$ Term
Swap 7,000 WTI NYMEX 81.50 1 April 2022 to 30 April 2023 Settled
Swap 7,000 WTI NYMEX 81.33 1 May 2023 to 31 May 2023 Settled
Swap 5,000 WTI NYMEX 80.81 1 June 2023 to 30 June 2023 Settled
Swap 5,000 WTI NYMEX 80.17 1 July 2023 to 31 July 2023 Settled
Swap 5,000 WTI NYMEX 79.49 1 August 2023 to 31 August 2023 Settled
Swap 4,000 WTI NYMEX 78.72 1 September 2023 to 30 September 2023 Settled
Swap 4,000 WTI NYMEX 78.05 1 October 2023 to 31 October 2023 Settled
Swap 3,000 WTI NYMEX 77.40 1 November 2023 to 30 November 2023 Settled
Swap 3,000 WTI NYMEX 76.74 1 December 2023 to 31 December 2023 Settled
At 31 December 2023, the Group had the following outstanding derivative
contract:
Fair value
Strike price 31 December
Oil Volume per bbl 2023
Contracts Bbl Pricing point US$ Term US$'000
Swap 27,000 WTI NYMEX 82.20 1 January 2024 to 31 March 2024 278
The fair value of the outstanding contracts at 31 December 2023 has been
recognised as follows:
2023 2022
US$'000 US$'000
Non-current assets - 175
Current assets 278 1,133
278 1,308
The fair value measurement of derivative contracts has been categorised as
Level 1 in the fair value hierarchy as the measurement inputs are quoted
prices in active markets for identical assets at the measurement date.
The recognised gain on derivative contracts was as follows:
2023 2022
US$'000 US$'000
Realised gain 1,441 473
Change in fair value (1,029) 1,308
412 1,781
20. BORROWINGS
Group
2023 2022
US$'000 US$'000
FIBT facility
Term loan 10,943 15,129
Revolving credit 15,000 8,000
Capitalised debt issue costs (119) (239)
25,824 22,890
SGRI
Revolving credit 9,494 2,580
Capitalised debt issue costs (56) (77)
9,438 2,503
Promissory note
Loan 89 -
Total borrowings 35,351 25,393
Group
2023 2022
US$'000 US$'000
Current borrowings 28,950 14,572
Non-current borrowings 6,401 10,821
35,351 25,393
REMAINING CONTRACTUAL MATURITY ANALYSIS
The following table details the Group's remaining maturity for its borrowings.
The table has been drawn up based on the undiscounted cash flows based on the
earliest date on which the borrowings are required to be paid. The table
includes both principal and interest cash flows.
Group
2023 2022
US$'000 US$'000
Maturity analysis
Less than 6 months 13,109 2,543
6 months to 1 year 18,103 14,037
1 year to 2 years 5,086 5,086
2 years to 5 years 1,699 6,782
37,997 28,448
FIRST INTERNATIONAL BANK & TRUST ("FIBT")
On 16 February 2022, the Group entered into credit facility agreements with
FIBT through its U.S. subsidiaries. Under the terms of the agreements 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, both
of which incurred interest at a rate of 6.74%.
The revolving credit facility has a standard redetermination every six months
and was increased to a commitment of up to US$13 million in October 2022,
incurring interest at a rate of 9.74%.
In October 2023, the repayment term of the revolving credit facility was
extended to 16 October 2024, and the interest charge was adjusted to a
variable rate equal to the Wall Street Prime Rate plus 2.5% subject to a
minimum rate of 6.74%.
On 21 December 2023, the revolving credit facility was increased to a
commitment of up to US$15.2 million with the same repayment and interest
terms.
At 31 December 2023, the Group had drawn US$15 million in respect of the
facility.
In June 2024, the Group completed its semi-annual redetermination of the
existing revolving credit facility and entered into a new facility agreement
with FIBT. Under the terms of the agreement, the Group received a new term
loan of US$5.6 million. The new term loan will amortise monthly over four
years and has an interest rate of 10% per annum.
The revolving credit is subject to a covenant which is measured on an annual
basis. The Group was in full compliance with the terms of the covenant in the
periods reported.
FIBT has a lien on the assets of the Group's U.S. subsidiaries, Zephyr Bakken
LLC and Rose Petroleum (Utah) LLC.
SGRI
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 incurring interest at
a rate 12%.
On 13 October 2023, the revolving credit facility was increased to US$8.6
million and the repayment term was extended to 19 March 2024.
Interest and fees have been added to the loan and are due for repayment on the
same terms as the facility.
On 30 April 2024, the repayment term of the revolving credit facility was
further extended to 31 May 2024, on which date, it was further extended to 30
June 2024.
On 3 May 2024, the Group announced that it had retired US$3.88 million of the
facility through the issuance of US$3.88 million of equity comprised of
64,045,768 new Ordinary Shares of 0.1 pence each in Zephyr Energy plc at a
price of 4.85 pence per new Ordinary Share. See note 29.
In June 2024, the Group announced that it had fully repaid the remaining US$6
million of the facility.
PROMISSORY NOTE
On 1 August 2023, the Group entered into an agreement for a principal sum of
US$160,000 repayable in six monthly instalments of US$16,500 and a final
payment of US$75,000 due in February 2024. The note was related to oilfield
equipment and the lender held collateral over that equipment until the
principal was repaid.
The movement in total borrowings during the year was:
2023 2022
US$'000 US$'000
At 1 January 25,393 4,060
Net cashflows - financing activities - net additions to borrowings 9,016 21,569
Non-cash movements - movement in capitalised interest and loan costs 942 (236)
At 31 December 35,351 25,393
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