TIDMZPHR
RNS Number : 3966K
Zephyr Energy PLC
21 December 2022
Prior to publication, the information contained within this
announcement was deemed by the Company to constitute inside
information as stipulated under the UK Market Abuse Regulation.
With the publication of this announcement, this information is now
considered to be in the public domain.
21 December 2022
Zephyr Energy plc
("Zephyr" or the "Company")
Acquisition of the remaining 25 per cent. working interest in
the Paradox Project;
Acquisition of further non-operated near-term production assets
in the Williston Basin;
US$8 million asset-backed bridge loan secured;
Paradox operations update;
2023 production forecasts; and
Proposed exercise of warrants by Directors
Zephyr Energy plc (AIM: ZPHR) (OTCQB: ZPHRF), the Rocky Mountain
oil and gas company focused on responsible resource development
from carbon-neutral operations, is pleased to announce the
acquisition of the remaining 25 per cent working interest across
the White Sands Unit (the "WSU") in the Paradox Basin, Utah, U.S.
(the "Paradox Basin" or "Paradox Project") (the "Paradox
Acquisition").
In addition, the Company announces that it has acquired a
working-interest in a further six wells in the Williston Basin,
North Dakota, U.S. (the " Williston Basin") (the "Williston
Acquisition"). This accretive acquisition will provide the Company
with further low-risk oil production and is expected to generate
substantial cashflows for the Company which can be reinvested into
the Paradox Project development.
To fund the Williston Acquisition and to ensure that the Company
generates additional cashflow to help fund the incremental future
capital expenditure ("CAPEX") required as a result of the Paradox
Acquisition, the Company has secured an US$8 million asset-backed
bridge loan facility on attractive commercial terms from a U.S.
based family office which has co-invested with Zephyr's management
team on other projects on multiple occasions.
The Paradox Acquisition
Zephyr has agreed to acquire the remaining 25 per cent.
working-interest in the core acreage of the Paradox Project from
Rockies Standard Oil Company LLC ("RSOC" or the "vendor").
Historically, RSOC benefitted from a carry on its working-interest
in the Paradox Project, and this carry was satisfied on completion
of the State 16-2 LN-CC well (the "State 16-2 Well") in 2022.
Following the satisfaction of the carry obligation, the vendor was
obligated to fund its 25 per cent. proportion of CAPEX, including
its share of the CAPEX for the State 36-2 LNW-CC well (the "State
36-2 Well") which is currently being drilled, and also had the
right to participate pro-rata in the infrastructure build out that
is currently taking place on the project. The total vendor CAPEX
for these two items equates to circa US$5 million.
Having been served notice to provide its share of funding for
these two items, the Company was informed that the vendor was
unable to fund its 25 per cent. interest in the State 36-2 Well
within the required timeline. This inability to fund the project
provided an opportunity for Zephyr to explore a corporate solution
with RSOC - and as the vendor wished to retain exposure to the
project, an agreement was reached for Zephyr to acquire the
vendor's stake through the issue of shares in the Company.
The terms of the Paradox Acquisition are as follows:
-- Total consideration of up to US$3 million, payable by way of
the issue of new ordinary shares of 0.1 pence each in the capital
of the Company ("Ordinary Shares"), to be issued under existing
share authorities, at a price of 6.05p per Ordinary Share,
representing a circa 11% premium to the Company's mid-market
closing share price on 20 December 2022.
o A first tranche of 13,483,095 new Ordinary Shares will be
issued to the vendor on the completion of the Paradox Acquisition
in January 2023;
o A second tranche of 26,966,189 new Ordinary Shares will be
issued to the vendor upon Zephyr's final investment decision with
respect to the contract award to a primary contractor to commence
construction activities to make the Powerline Road gas processing
plant operational; and
o All equity issued to the vendor will be subject to a lock-up
period which expires at the earlier of the date that first gas from
the State 36-2 Well is sold via the Dominion Energy Utah, LLC
("Dominion Energy") 16-inch gas export pipeline; or 15 December
2023.
-- The Paradox Acquisition provides an immediate opportunity for
Zephyr to consolidate its working-interest in the core acreage of
the Paradox Project and includes the following assets:
o the remaining 25 per cent. interest in the previously drilled
State 16-2 Well (with an estimated NPV-10 of US$3.1 million);
o the remaining 25 per cent. interest in the State 36-2 Well
currently being drilled;
o the remaining 25 per cent. interest in all reserve and
resource classes across the Paradox Project;
o Zephyr will retain its 100% ownership in the recently acquired
infrastructure asset; and,
o as 100% owner, Zephyr will subsequently be responsible for
100% of CAPEX related to the Paradox Project on a go forward basis.
Incremental near-term CAPEX additions as a result of the Paradox
Acquisition are expected to be circa US$5 million and will be
funded by existing cash and future cash flows from the Company's
non-operated portfolio.
-- The Paradox Acquisition will be immediately accretive across
all reserve and resource categories. Zephyr's technical team
currently estimate that the Paradox Acquisition adds:
o over 450,000 boe in 2P reserves;
o over 7 million boe in 2C Contingent Resources; and
o over 67 million boe of 2U unrisked Prospective Resources.
-- The Paradox Acquisition is expected to complete by the end of
January 2023, subject to, inter alia, finalisation of due
diligence, contract and regulatory consents.
Further details of the Paradox Acquisition are set out further
below.
The Williston Acquisition
-- Acquisition of non-operated working-interests in six further
wells, equivalent to a net 1.2 wells, in the Williston Basin (the
"New Williston Wells") near to Zephyr's current non-operated
working interests for total consideration of US$2.9 million. In
addition, Zephyr will pay the upcoming US$8.9 million CAPEX
associated with the working-interests to bring the wells into
production.
-- The New Williston Wells are expected to provide a near-term
production boost, having been spud in November 2022 and with first
sales volumes expected in the first quarter of 2023.
-- The operator of the New Williston Wells is Slawson
Exploration (" Slawson"), a top-tier operator and one of the
largest private companies in the Williston Basin. Slawson was an
early pioneer of horizontal development in the Williston Basin and
has excellent access to oilfield service companies and
infrastructure.
-- Zephyr's working-interest in the New Williston Wells ranges
from 11% to 32% and management currently estimates 2P Reserves
being acquired are circa 550,000 boe net to Zephyr.
-- On a pro forma basis inclusive of the Williston Acquisition
working-interests, the Company is issuing a 2023 full-year
production forecast of 1,550 to 1,750 boepd for its aggregate
Williston Basin interests (net to Zephyr).
-- The Company has secured a US$8 million bridge loan facility,
on favourable terms, to part fund the Williston Acquisition and
associated CAPEX, details of which are set out below. There is no
equity component to the US$8 million bridge loan facility.
Paradox Project Operations Update
-- State 36-2 LNW-CC well
o The well spud on 21 November 2022 and drilling was initially
estimated to take 30 days.
o During the initial stages of drilling, operations were slower
than forecasted due to rig commissioning and mechanical issues. In
addition, as announced on 9 December 2022, the Company was awarded
an additional US$1 million in grant funding from the U.S.
Department of Energy to gather detailed reservoir data from the
Cane Creek and overlying reservoirs during ongoing drilling of the
well.
o Despite the operational delays and the extra time allotted to
gather the grant-related reservoir data, it is still the Company's
expectation to deliver the well within budgeted authority f or
expenditure ("AFE") limits albeit on a slightly longer timeframe
than originally forecasted. Zephyr now expects the drilling
operation to conclude in January 2023.
-- State 16-2 LN-CC production test
o The production test of the well is underway and production
rates are stable and increasing in a measured and planned process.
Production data from the test will be released at the conclusion of
the test, which is expected in early January 2023.
2023 Production Forecasts
Zephyr production forecasts for 2023 on a pro forma basis
(including the Paradox Acquisition and the Williston Acquisition)
are now expected to be as follows:
-- Williston Basin non-operated portfolio 2023 average: 1,550 to
1,750 boepd (up from an estimated average of circa 1,400 boepd in
2022);
-- Paradox Basin year end 2023 run-rate: 3,300 boepd (assumes
WSU 100% working interest and 50% working interest in the Cane
Creek DSU production);
-- Combined year-end 2023 exit-rate: 4,800 boepd, representing a
circa 200% increase from current production rates; and
-- Both acquisitions are expected to increase total 2023 exit
production rates by 60% (from 3,000 to 4,800 boepd).
The above production estimates are based on 2P forecasts for the
Paradox and WSU and the installation of a 10mmscf/d processing
capacity at the Paradox. In addition, this assumes the start-up of
the New Williston Wells, a proposed Cane Creek DSU well and the two
WSU wells in March 2023, July 2023 and October 2023 respectively.
These are current management forecasts and expectations only, have
not been independently verified, and are subject to further
revision post-integration of the Paradox and Williston
acquisitions.
Zephyr intends to set out a full update of its investment plans
for 2023 early in the New Year .
Proposed Exercise of Warrants by Directors
-- The Company has received indications from Directors and
related parties that they soon intend to exercise warrants that
will result in incremental cash proceeds to the Company of circa
GBP445,000.
Colin Harrington, CEO of Zephyr, commented: "I am delighted that
we are able to announce these two acquisitions which have been
secured on attractive commercial terms for the Company and which, I
believe, are substantial building-blocks for our future development
and growth.
"The acquisitions are immediately accretive to our shareholders,
given the increase in the Company's reserves and resources, and
they also provide the Company with increased flexibility and
optionality in terms of the future development.
"To be able to consolidate our working-interest in the Paradox
Project is a hugely positive step for Zephyr, and I would
particularly like to thank RSOC for its support and partnership
over the years. We look forward to welcoming them onto our share
register where we all will be in a position to participate in the
future potential value of the Paradox Project.
"The Paradox Acquisition will result in a higher CAPEX
requirement for Zephyr as it assumes a larger working-interest in
the Paradox Project, and this incremental CAPEX will be funded out
of the Company's existing cash resources, and from the cashflows
that we expect to be generated from our growing Williston
portfolio. Having announced the acquisitions today, it is our
intention to provide the market with a full update of our
investment plans for 2023 early in the New Year.
"2022 has been another year of transformation for Zephyr and the
acquisitions being announced today are a great way for us to end
this year and to set up for the next. 2023 promises to be an
exciting time for the Company as we continue with the development
of our asset portfolio.
"We would like to thank all our shareholders for their support
during this year and we wish everybody a safe and healthy holiday
season. In particular, we'd like to thank the dozens of partners
and contractors working hard at the well site, through the
holidays, to deliver a successful well result for the Company."
Further details of the Paradox Acquisition and assets being
acquired
Zephyr currently has a minimum 75 per cent. working-interest in
45,000 operated acres in the Paradox Basin, 25,000 of which are
comprised of the core acreage of the WSU (and in which Zephyr has a
75 per cent. working interest). The formation of the WSU was
announced by Zephyr on 29 October 2021. Zephyr has been active in
the Paradox Basin since 2014, working alongside its joint-venture
partner, RSOC, which currently owns the remaining 25 per cent.
working-interest in and around the WSU.
The Paradox Acquisition provides an opportunity for Zephyr to
consolidate its working-interest in and around the WSU to 100 per
cent. and will include the following assets:
-- the remaining 25 per cent. interest in the previously drilled
State 16-2 Well (with an estimated NPV-10 of US$3.1 million);
-- the remaining 25 per cent. interest in the State 36-2 LNW-CC Well currently being drilled;
-- the remaining 25 per cent. interest in all remaining reserves and resource across the WSU; and
-- in addition, Zephyr will retain 100 per cent. of the pipeline
and processing infrastructure across the WSU.
The Paradox Acquisition will be immediately accretive across all
reserve and resource categories. Zephyr's technical team estimates
that the Paradox Acquisition adds over 7 million boe of additional
2C net Contingent Resources to Zephyr's Paradox Basin position and
post the Paradox Acquisition the Company will have the
following:
-- Net attributable developed and undeveloped 1P, 2P and 3P
reserves: 0.59, 2.57 and 8.33 mmboe respectively;
-- Net attributable contingent 2C and 3C resources: 34.03 and 102.92 mmboe respectively; and
-- Net attributable unrisked prospective 1U, 2U and 3U
resources: 76.7, 240.4and 558.7 mmboe respectively.
Bridge loan
To help fund the Williston Acquisition and associated CAPEX, and
having explored multiple fundraising options including equity
financing, the Company has secured a US$8 million asset-backed
bridge loan facility ("Loan"). The facility has been provided by a
U.S. based family office which has historically co-invested with
certain members of Zephyr's management team on multiple occasions
on other projects.
The key terms of the Loan are as follows:
-- Loan secured by the New Williston Wells;
-- 1% royalty interest in the New Williston Wells;
-- Twelve-month term;
-- 1% origination fee; and
-- 12% per annum interest rate
There is no equity component attached to the Loan. It is
expected that the Loan will be repaid through cash flows generated
by the Company from the New Williston Wells or via proceeds from
the Company's existing reserve backed loan facility after its next
redetermination in the second quarter of 2023.
Proposed Exercise of Warrants
In November 2019, Origin Creek Energy LLC ("OCE") (a Company is
which Colin Harrington, CEO of Zephyr, is a controlling
shareholding and in which Rick Grant, Zephyr's Chairman is a
Director) and Chris Eadie, CFO of Zephyr, were issued warrants to
subscribe for Ordinary Shares at 2 pence per share as part of a
placing undertaken at that time.
OCE and Chris Eadie have indicated that they soon intend to
serve notice to exercise their warrants over 21,818,182 new
Ordinary Shares and 454,545 new Ordinary Shares respectively, for a
total consideration of GBP445,454.
Given the rapid development and multiple operational milestones
and acquisitions completed by the Company and regulatory
constraints, OCE and Mr Eadie have been unable to exercise these
warrants until now. Funds received by the Company will be put
towards general working capital and CAPEX requirements of the
Company. It is expected that the shares corresponding to the
warrants will be issued in the coming days. A further announcement
will be made by the Company as and when appropriate.
Contacts:
Zephyr Energy plc Tel: +44 (0)20 7225
Colin Harrington (CEO) 4590
Chris Eadie (CFO)
Allenby Capital Limited - AIM Nominated Tel: +44 (0)20 3328
Adviser 5656
Jeremy Porter / Vivek Bhardwaj
Turner Pope Investments - Joint-Broker Tel: +44 (0)20 3657
James Pope / Andy Thacker 0050
Panmure Gordon (UK) Limited - Joint-Broker Tel: +44 (0) 20 7886
John Prior / Hugh Rich / James Sinclair-Ford 2500
/ Freddie Twist
Celicourt Communications - PR Tel: +44 (0) 20 8434
Mark Antelme / Felicity Winkles 2643
Notes to Editors
Zephyr Energy plc (AIM: ZPHR) (OTCQB: ZPHRF) is a technology-led
oil and gas company focused on responsible resource development
from carbon-neutral operations in the Rocky Mountain region of the
United States. The Company's mission is rooted in two core values:
to be responsible stewards of its investors' capital, and to be
responsible stewards of the environment in which it works.
Zephyr's flagship asset is an operated 45,000-acre leaseholding
located in the Paradox Basin, Utah, 25,000 acres of which has been
assessed by third party consultants Sproule International to hold,
net to Zephyr, 2P reserves of 2.1 million boe ("mmboe"), 2C
resources of 27 mmboe and 2U resources 203 mmboe. Following the
successful initial production testing of the recently drilled and
completed State 16-2 Well , Zephyr has planned a three well
drilling program - commencing in 2022 with the State 36-2 LNW-CC
well - to further delineate the scale and value of the project.
Immediately upon completion of the Paradox Acquisition, all
resource and reserve categories will increase by a proportional
amount.
In addition to its operated assets, the Company owns working
interests in a broad portfolio of non-operated producing wells
across the Williston Basin in North Dakota and Montana.
The Williston portfolio currently consists of working-interests
in over 200 modern horizontal wells which are expected to provide
US$40-45 million of revenue, net to Zephyr, in 2022. Cash flow from
the Williston production will be used to fund the planned Paradox
Basin development. In addition, the Board will consider further
opportunistic value-accretive acquisitions.
Qualified person
Dr Gregor Maxwell, BSc Hons. Geology and Petroleum Geology, PhD,
Technical Adviser to the Board of Zephyr Energy plc, who meets the
criteria of a qualified person under the AIM Note for Mining and
Oil & Gas Companies - June 2009, has reviewed and approved the
technical information contained within this announcement.
Estimates of resources and reserves contained within this
announcement have been prepared according to the standards of the
Society of Petroleum Engineers. All estimates, unless otherwise
noted, are internally generated and subject to third party review
and verification.
Glossary
The following terms apply throughout this Announcement unless
the context requires otherwise:
" 1C " Low estimate of Contingent Resources;
"2C" Best estimate of Contingent Resources;
"3C" High estimate of Contingent Resources;
"1P" proven reserves (both proved developed
reserves + proved undeveloped reserves);
"2P" 1P (proven reserves) + probable reserves,
hence "proved and probable";
"3P" the sum of 2P (proven reserves + probable
reserves) + possible reserves, all
3Ps "proven and probable and possible";
"bo" barrel of oil;
"boe" barrels of oil equivalent;
"boepd" barrels of oil equivalent per day;
"Contingent Resources" Those quantities of petroleum estimated,
as of a given date, to be potentially
recoverable from known accumulations
by application of development projects,
but which are not currently considered
to be commercially recoverable due
to one or more contingencies. Contingent
Resources may include, for example,
projects for which there are currently
no viable markets, or where commercial
recovery is dependent on technology
under development, or where evaluation
of the accumulation is insufficient
to clearly assess commerciality. Contingent
Resources are further categorised in
accordance with the level of certainty
associated with the estimates and may
be sub-classified based on project
maturity and/or characterised by their
economic status;
"CAPEX" capital expenditure;
"DSU" Drilling Spacing Unit;
"mmboe" million barrels of oil equivalent;
"NPV-10" 2P net present value at a ten per cent
discount rate; and
"Reserves" Reserves are defined as those quantities
of petroleum which are anticipated
to be commercially recovered from known
accumulations from a given date forward.
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