Zephyr Energy Regulatory News (ZPHR)

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 for 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 £445,000.

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 £445,454.

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:

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: