Zephyr Energy plc (LON:ZPHR) (OTCQB: ZPHRF), the Rocky Mountain oil and gas group focused on responsible resource development from carbon-neutral operations, has announced its unaudited interim results for the six months ended 30 June 2022.
The first six months of the 2022 financial year, and the period since, were a time of intense activity during which Zephyr continued to make substantial progress in the development of its flagship operated project in the Paradox Basin, Utah, U.S while growing its highly attractive portfolio of cash-generating non-operated assets in the Williston Basin.
· Revenues for H1 2022 were US$25.9 million, driven almost entirely by the Group’s hydrocarbon production from the Williston assets
· Adjusted earnings before interest, tax, depreciation, depletion and amortisation (“DD&A”), unrealised foreign exchange gains and unrealised losses on hedging contracts (together “Adjusted EBITDA”) for the six months was US$19 million and net profit after tax for the period was US$17.4 million
· The Group’s gross borrowings at 30 June 2022 were US$28.6 million and net borrowings (gross borrowings less cash and cash equivalents) were US$18 million. During H1 2022 the Group met all its financing obligations in respect of its outstanding borrowings
· In April 2022, in order to lock in cashflow to develop the Paradox project and meet the Group’s financing commitments, the Group hedged just under half of its forecast 2022 production at more than US$98 per barrel of oil. In total the hedging programme related to 328,000 barrels (“bbls”) of oil production from the Williston assets over the next two years. At 14 September 2022, the Group had an unrealised gain on its outstanding hedges of US$1.5 million
· At 3 September 2022, the Group had cash and cash equivalents of US$12.8 million and gross borrowings of US$24.7 million.
· During H1 2022 capital expenditure (“CAPEX”) across the Williston assets and the Paradox project totalled US$9.6 million.
Paradox project (operated asset)
· A Competent Persons Report (“CPR”), compiled by Sproule International (“Sproule”), highlighted the scale and resource potential of the Paradox project:
o Net 2P Reserves: Proved Reserves of 2.1 million barrels of oil equivalent (“boe”) net to Zephyr, the Group’s first proved reserves booked in the Paradox Basin
o Net 2C Resources: 27 million boe net to Zephyr, more than double the 12.3 million boe in the previous CPR prepared in 2018
o Net Prospective Resources from overlying reservoirs: 203 million net unrisked boe net to Zephyr (68 million boe risked with a weighted-average 33% chance of success)
o Sproule’s evaluation took place across 30,700 acres of Zephyr’s Utah assets. Inclusive of Zephyr’s recently announced acquisition, Zephyr will operate 45,000 gross acres in the Paradox Basin and further evaluation is planned for acreage not yet included in the CPR
· Preparations continue for extended production testing of the State 16-2 LN-CC well, designed to show flow potential and shape decision making for the longer-term development strategy of the asset
o Long lead items ordered and all relevant applications filed
· Liquid volumes from the initial State 16-2 LN-CC production test were successfully marketed and sold to refineries in Salt Lake City, Utah
· A fully funded, high impact, three-well drilling programme is expected to commence later this year, and is designed to further delineate the full potential of the Paradox project:
o The State 36-2 LNW-CC lateral well is set to be the first well in the upcoming drilling programme, and targets the Cane Creek reservoir in the southern portion of the Group’s operated White Sands Unit (the “WSU”)
o All State permits for the State 36-2 LNW-CC have now been received and the Federal permit is currently being processed, which, when issued, will allow for the signing of a rig contract and subsequent commencement of drilling operations
o Recently acquired contiguous acreage allows for the State 36-2 LNW-CC to be fully completed across a 10,000-foot lateral length
· Additionally, Zephyr has entered into a binding agreement to acquire a separate package of oil and gas assets located on and around the Paradox project. Assets being acquired include 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 partly contiguous to the WSU. The assets being acquired will allow Zephyr to substantially reduce the capital required to build the necessary gas export infrastructure for its forecast gas production from the Paradox project. In addition, one of the acquired lines passes immediately alongside the site of the planned State 36-2 well (the first in a series of Paradox wells to be drilled in the upcoming drilling programme).
o Once the acquisition is completed, Zephyr will operate 45,000 gross acres in the Paradox Basin, the majority in which the Group holds a 75% or greater working interest
Williston assets (non-operated assets)
· Zephyr continues to deliver on its strategy to acquire working interest positions in value accretive, high-quality, high-margin production assets with significant near-term growth potential in the Williston Basin
· H1 2022 revenues from the portfolio totalled US$25.8 million, net to Zephyr, up from US$0.9 million in the six months ended 30 June 2021 (“H1 2021”)
· H1 2022 sales volumes averaged 1,729 barrels of oil equivalent per day (“boepd”)
· H1 2022 gross profit was US$21.8 million (after taxes, lease operating expenses, and gathering and marketing fees and excluding DD&A) demonstrating the high margins realised from the produced barrels
· At the end of H1 2022, 195 wells in Zephyr’s portfolio were available for production
o An estimated 30 additional wells in which Zephyr will have working interests are forecast to be brought on production by the end of 2022, which will help to decrease standard portfolio decline rates
· Net working interests across the Williston Basin non-operated portfolio now average 7.1%, equivalent to approximately 15 gross wells
· Zephyr reiterates its previously released 2022 production and revenue guidance of an expected US$35-40 million in non-operated revenue, net to Zephyr, for FY 2022 based on a forecast production range of 500,000 to 550,000 boe for the year
· In February 2022, the Company raised US$17.4 million (before expenses) through the placing of new Ordinary Shares in the Company, and secured US$28 million of senior bank debt. The net proceeds from these debt and equity instruments were used to complete the Group’s US$36 million acquisition of non-operated assets in the Williston Basin and to fund further drilling activity across the portfolio
· Zephyr remains carbon neutral on a Scope 1 basis across its operations, through the purchase of Verified Emission Reduction credits (“VERs”)
· Panmure Gordon was appointed as Joint Broker to the Company in August 2022
Colin Harrington, Chief Executive of Zephyr Energy, said:
“The first half of 2022 and the period since have been another transformational time for the Company. We continued to make significant in-roads across both our Williston assets and the Paradox project, serving to grow the Group and deliver on our self-sustaining strategy of using our non-operated, cash generative portfolio to enable development of the Paradox and, by extension, to open up the next prolific onshore U.S. oil and gas play.
“The rest of this year promises to be an equally important time for our Shareholders as we commence the extended production test on our State 16-2LN-CC well and kick off the proposed three well drill programme on the Paradox project. In addition, we plan to complete and fully integrate the acquisition of the infrastructure asset package in order to substantially reduce the forecast expenditure needed to bring our Paradox gas production to market. A successful drilling programme will see the Group further define the project and materially increase its reserve base in the Paradox, and is expected to deliver significant cashflows once nearby infrastructure improvements are completed.
“This year started with our major acquisition in the Williston Basin, which we expect will enable Zephyr to generate revenues of between US$35-40 million over the course of 2022, with sufficient cash flow generated to fuel all envisioned upcoming development activity.
“I would like to thank our Shareholders and advisers for their ongoing support. We are excited about the multiple near-term catalysts in our investment case as we commence an active period with the drill bit, and we look forward to keeping the market updated on our progress.
“Our forthcoming activity will be carried out consistent with our core values of being responsible stewards of investors’ capital and responsible stewards of the environment.”