Zephyr Energy, the Rocky Mountain oil and gas company focused on responsible resource development and carbon-neutral operations, has reported its unaudited interim results for the six months ended 30 June 2024.
Overview
During H1 2024, and in the period since, Zephyr continued to invest significant capital into the development of its flagship operated project in the Paradox Basin, Utah, U.S. primarily by drilling the State 36-2R LN-CC well (the 'State 36-2R well') and conducting the subsequent successful production tests on the well. This investment activity was in line with the Company's strategy of generating and compounding cash flow from its non-operated portfolio in the Williston Basin, which fully funds all general and administrative and finance costs and allows for continued investment in its Paradox and Williston projects.
The Company's board of directors is highly encouraged by progress made on the Paradox project during the year to date and remains focused on bringing the Paradox project into commercial production while maximising potential returns for the shareholders of the Company. To accelerate this process, the Company is focused on executing asset-level and/or wellbore investment opportunities with U.S.-based institutional investors, and discussions on this front are now at an advanced stage. The Company will update the market on the progress of these discussions in the near-term.
HIGHLIGHTS
Financial
- Revenue for H1 2024 increased to US$13.6 million, net to Zephyr, and was driven by the Company's hydrocarbon production from the Williston project:
- Revenue for H1 2024 was higher than that in the six months ended 30 June 2023 ("H1 2023") of US$13.4 million. The increased revenues reflected the addition of production from the six wells operated by Slawson Exploration Company (the "Slawson wells") and was partially offset by standard production decline rates from the underlying assets.
- H1 2024 gross profit (including operating and transportation expenses, production taxes and realised gains from hedging contracts, and excluding depreciation, depletion and amortisation ("DD&A")) increased to US$10.0 million (H1 2023: US$9.4 million), demonstrating the strong cashflows and high margins generated by the non-operated production during the period, covering the entirety of the Company's G&A and finance costs and providing net cash for reinvestment.
- H1 2024 net sales volumes averaged 1,239 barrels of oil equivalent per day ("boepd"), for a total of 225,622 barrels of oil equivalent ("boe") net to Zephyr, over the period.
- Adjusted earnings before interest, tax, DD&A, unrealised foreign exchange gains, share based payments and unrealised losses on hedging contracts (together "Adjusted EBITDA") for H1 2024 were US$7.1 million.
- At 30 June 2024, the combined carrying value of the Paradox project and Williston project was US$98.0 million, demonstrating the scale of the Company's asset portfolio.
- The Company's gross borrowings at 30 June 2024 were US$29.2 million, a reduction from US$33.7 million at the end of H1 2023. By 6 September 2024, gross borrowings had been reduced further to US$27.9 million.
- During H1 2024, the Company embarked on the drilling of the State 36-2R well which was almost entirely funded by proceeds from its well control insurance policy for the State 36-2 LN-CC well (the "State 36-2 well"). The well control insurance policy requires Zephyr to make payments in advance, prior to making claims for reimbursement. As a result, cash balances during H1 2024 fluctuated considerably depending on the level of operational activity and timing of the reimbursement cycle, including at 30 June 2024 when drilling operations were particularly active. To date, US$15.3 million has been reimbursed to Zephyr in respect of the State 36-2 well control insurance policy, which relates to activity from the well control incident on the State 36-2 well and the State 36-2R well drilling programme.
- At 24 September 2024 (the most practicable date prior to this statement), the Company had cash balances of US$1.3 million. In addition, the Company expects to receive the following payments over the next few days:
- Reimbursement of circa US$3.0 million from its insurer. The invoices relating to the US$3.0 million claim have already been paid in full by the Company.
- A revenue payment of circa US$0.9 million related to a portion of its non-operated portfolio.
- Over the coming months, Zephyr expects to submit final claims under the well control insurance policy of circa US$1.3 million for which it also expects to be fully reimbursed.
Paradox project (operated asset)
- State 36-2R well drilled and all key drilling objectives met:
- Drilling operations safely and successfully completed to total depth;
- Well successfully 'twinned' to the State 36-2 well and intersected the same Cane Creek reservoir natural fracture system;
- Confirmed the presence of flowing hydrocarbons; and
- Substantially all drilling costs of the State 36-2R well to be recovered though the Company's well control insurance policy.
- Following the completion of the State 36-2R well, two successful production tests were carried out on the well.
- Peak production rates achieved during testing were over 2,100 boepd, a significant production rate for an onshore U.S. well with only 130 feet of completed reservoir interval.
- The acidisation operation used on the well successfully removed near-wellbore formation damage and generated very high reservoir deliverability, with a notable improvement to near-wellbore reservoir permeability. As such, the operation not only removed formation damage caused by the State 36-2 well but also enhanced reservoir productivity.
- This was the first known example of acidisation stimulation in the Paradox Basin, and the result is highly positive for the development of the play, with the potential for substantially reduced reservoir risk and removal of the need for costly hydraulic stimulation as used in other U.S. onshore resource plays.
- Higher than expected liquid yields from the State 36-2R well and almost zero water production could also materially enhance the economics of the well and positively impact the future Paradox project development.
- Given the positive observations, Zephyr has commenced the process of discussing potential well and wider Paradox project development opportunities with U.S. based industry partners to accelerate additional appraisal and development of the Paradox project.
- The Company is evaluating the potential to lengthen the completed reservoir interval by drilling a lateral from the existing wellbore, which would serve to increase overall estimated ultimate recoveries and drain a larger portion of the reservoir. This analysis is expected to be completed shortly.
Williston project (non-operated assets)
- Zephyr continues with its strategy of building and developing a portfolio of working interest positions in value accretive, high-quality, high-margin production assets with significant near-term growth potential in the Williston Basin.
- The Company has continued to deploy capital into new drilling opportunities on its existing acreage, including two recently drilled wells operated by Continental Resources in the Harms field in North Dakota, U.S.
- H1 2024 sales volumes averaged 1,239 boepd (or 225,622 boe), net to Zephyr, over the six-month period.
- H1 2024 revenue, net to Zephyr, totalled US$13.6 million.
- H1 2024 gross profit (including operating and transportation expenses, production taxes and realised gains from hedging contracts, and excluding DD&A) increased to US$10.0 million (H1 2023: US$9.4 million), demonstrating the strong cashflows and high margins generated by the non-operated production during the period, covering the entirety of the Company's G&A and finance costs and providing net cash for reinvestment.
- At 30 June 2024, 231 wells in Zephyr's portfolio were available for production. Net working interests across the Company's portfolio now average 7.1% per well, equivalent to 16.3 gross wells in total.
Corporate
- There were no reported health or safety incidents during H1 2024.
- 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 ("Ordinary Shares") at a price of 4.85 pence per new Ordinary Share.
- In May 2024, the Group announced that it had been awarded an additional US$0.25 million of 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.
- In April 2024, during its standard semi-annual borrowing base redetermination process, Zephyr's commercial lender (First International Bank and Trust) increased the Company's overall borrowing base by US$5.6 million due to the newly added production from the Slawson wells. The addition to the borrowing base was in the form of a new term loan which will amortise monthly over four years and has an interest rate of 10% per annum. Proceeds from the new term loan were used to fully retire the Company's remaining 12% acquisition credit facility.
Colin Harrington, Chief Executive of Zephyr, said:
'H1 2024 was an active time for Zephyr, during which we invested a significant amount of capital into the Paradox project with the drilling of the State 36-2R well and the subsequent production tests. We were delighted with the results from this activity and over the coming months we will continue with the work required to transform the Paradox project into a revenue generating asset. On a related note, we are in advanced conversations with U.S.-based institutions regarding wellbore and asset-level investment opportunities, and look forward to updating the market in the near-term regarding our proposed next steps for the Paradox project.
'Our Williston project continues to perform as a robust cash flowing engine for the Company, funding our G&A and debt service costs in addition to providing capital for the Paradox project and growth in the Williston (where production has increased for four consecutive quarters). We also look forward to progressing the Salt Wash hydrocarbon and helium project located in close proximity to the Paradox project.
'I would like to extend my appreciation to the Zephyr team and our contractors on site in Utah for their intensive, safe and successful efforts. I would also like to extend my gratitude to my fellow Board members, 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.'
Source: Zephyr Energy
