RE: RNS OUT18 Dec 2024 13:39
Boring Boy, since you asked...
You need to have a look at the numbers. The company is a little opaque but it looks to me that it has incurred direct costs of about $19.6mil on this well: 36-2R. With indirect costs, maybe $22mil ish.
It is giving up 50% WI for circa $7.5mil. So the funder is in effect getting the benefit of the $19.6mil x 50% for its $7.5mil plus 50% whatever results from the $7.5mil spend.
If the lateral extension goes wrong, they should be able to plug it off and just produce the vertical and whatever bit of the lateral is good. The two biggest issues on big laterals are lost tools and going out of bounds.
If you look at the numbers given for the vertical it looks as though that can be produced, though the numbers given are very imprecise. They probably can't produce at the moment because they need more surface kit.
NB the WI is not the NI: I can't see it in the figures they give but lets suppose 20% goes to the mineral rights owner. Lets suppose they can produce at 1,000 boepd from the vertical. Oil price gross say $70 per barrel, with margin of $30 per barrel. So 30,000 barrels pm x $30 is $900,000 pm. Net of the Mineral Rights Royalty $720,000. So the funder will take 21 months to get back to even.
The lateral working is the upside for them. The production should be higher and the EUR a lot higher, if the lateral works.
So having done the DD the funder has taken a higher WI because the difference between the base case and the upper case is so extreme.
So if it works out: the funder has 50% of assets costing circa $28m for a cost of $7.5m. Base case gets it back to even in 21 months and it has a maybe 10x upside, if it works.
The terms are not generous. The funder has taken Zephyr's trousers down. The upside for Zephyr is that it has 50% WI/40% NI of a successful lateral and it proves up the rest of the acreage.
The funder could have taken a less risky way of funding it and taken a lower WI. A typical model would be 75%/25% revenue split; 9% on cash outstanding; 25% WI and back to pro-rata after full cash recovery. In the short term it crushes the borrowers cash flow but eventually gives them a higher WI/NI.
Short term loss for long term gain is probably how Zephyr sees it.
The warrants issue is a nonsense. In the scheme of things it makes no difference except the warrant holders got something for nothing.
DYOR
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