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.

7 June 2021

Zephyr Energy plc

(the "Company" or "Zephyr")

Final Results and notice of AGM

Zephyr Energy plc (AIM: ZPHR), the Rocky Mountain oil and gas company focused on responsible resource development, announces its audited results for the year ended 31 December 2020.

Overview

During the 2020 financial year and in the period since, Zephyr underwent a wholesale transformation as it evolved from a single project exploration company to a self-sustaining oil producing group with a diverse portfolio of assets in two established oil producing basins in the United States of America (the "U.S.").

The Company expects to accumulate substantial cash flows over the next twelve months from its recently acquired non-operated assets in the Williston Basin, North Dakota, U.S. In addition, Zephyr is poised for significant near-term organic growth as it plans to drill and target first production from its flagship appraisal project in the Paradox Basin, Utah, U.S (the ''Paradox project"). The Company also expects to complete its initial analysis of the geologic data acquired from the recently drilled State 16-2 "dual-use" well shortly, in both the Cane Creek and the multiple overlying reservoirs.

Rick Grant, Zephyr's Non-Executive Chairman, said "The period under review was one of remarkable progress for Zephyr, and I'm confident that in the coming months we will continue to see a flurry of corporate activity. Upcoming operational milestones are expected to occur across our asset portfolio - we expect all of our acquired wells in the Williston Basin to be online and generating significant near-term cash flow soon, and our upcoming drilling and ongoing geologic evaluation activity has the potential to generate considerable value from our Paradox project.

"I am gratified by the growth achieved and I'm proud that we are executing successfully on our twin core values: to be responsible stewards of our investors' capital, and to be responsible stewards of the environment in which we work.

"The extent of the Company's recent progress is even more extraordinary when one considers that it was achieved against the turmoil, economic uncertainty and restrictive environment stemming from the COVID-19 pandemic, and I'd like to thank the Zephyr team and our partners and advisers who demonstrated great loyalty, professionalism, tenacity and skill while navigating us successfully through the challenging global environment. Most of all, I would also like to thank our Shareholders for their ongoing support.

"These are exciting times for Zephyr, and we look forward to keeping our stakeholders updated on our continued progress over the coming period."

Annual report and notice of Annual General Meeting

The Company's Annual General Meeting ("AGM") will be held on 30 June 2021 at 11.00 a.m. Further details are set out in the notice of AGM.

It is the Company's preference to welcome shareholders in person to the AGM, particularly given the constraints faced in 2020 due to the COVID-19 pandemic. However, with consideration to the Government's current response to the COVID-19 pandemic and given the uncertainty around potentially tighter restrictions due to the COVID-19 pandemic, which could change at short notice, it cannot be known with certainty whether (or how many) Shareholders will be able to attend the AGM. Accordingly, all shareholders are encouraged to vote by proxy following the instructions set out in the notice of AGM.

A copy of the Company's annual report and accounts, which include the notice of AGM, will be available on its website, http://www.zephyrplc.com, shortly and will be sent to Shareholders later today.

Extracts from the Annual Report are set out below.

Contacts:

Chairman's Statement

During the 2020 financial year and in the period since, Zephyr Energy plc (formerly Rose Petroleum plc), ("Zephyr", the "Company" or the "Group") has undergone a wholesale transformation, evolving from a single project exploration company to a self-sustaining oil producing group with a diverse portfolio of assets in two established oil producing basins in the United States of America (the "U.S.").

The speed and depth of the Group's transformation is even more remarkable when one considers that it was achieved against the turmoil, economic uncertainty and restrictive environment stemming from the global COVID-19 pandemic. Our progress during this tumultuous period was largely due to the extraordinary effort of the Zephyr team, which demonstrated loyalty, professionalism, tenacity and skill throughout this very challenging period.

Progress was made across our portfolio, on both operated and non-operated assets. Zephyr's operated asset is its flagship project in the Paradox Basin, Utah, U.S. (the "Paradox project"). Following the successful completion of the State 16-2 "dual-use" stratigraphic test well (the "State 16-2 well") which also provided an extensive amount of new geologic data, the project is poised for significant near-term growth as we plan to drill and target first oil production in the coming months. Our non-operated portfolio of assets now includes producing, near-term production and near-term drilling assets in the Williston Basin, North Dakota, U.S., one of the country's most prolific oil producing basins, and we expect to see substantial cash flows from these over the next twelve months.

In short, I am gratified by the growth achieved and proud that we are successfully executing on our twin core values: to be responsible stewards of our investors' capital, and to be responsible stewards of the environment in which we work.

When I wrote my Chairman's Statement for the 2019 Annual Report, we had recently completed the first phase of the Group's restructuring, a process which involved augmenting the Board, reducing our operational cost base by way of an essential cost cutting programme, restructuring our Paradox Basin joint venture and acreage position, exiting from all non-core legacy assets and, finally, implementing a new strategy to position the Group for responsible growth and profitability. This groundwork paved the way for the corporate and operational achievements of the last twelve months.

In late 2019, we unveiled the Group's new strategy which, in addition to developing the Paradox project, was focused on the acquisition of production and development opportunities in the upstream oil and gas sector in the Rocky Mountain region of the U.S., an area with a significant number of opportunities suited to Zephyr's strengths and size. Our stated goal was to produce a cost-effective path to near-term oil production and cash flow while simultaneously progressing our Paradox project and we have successfully delivered on these two key objectives.

Over the past year, we made substantial headway on our operated Paradox project and Zephyr is now on the cusp of a drilling programme that will target first production after many years of hard work and considerable investment in the project. We believe, perhaps more now than ever, that the Paradox project has the potential to be a project of significant scale and profitability.

Having completed the restructuring of the Paradox project in late 2019, it was important to make progress on (and under) the ground in 2020. I was therefore delighted that we were able to secure United States dollars ("US$") 2 million in U.S. Government grant funding, which enabled us to proceed with the drilling of the State 16-2 well. Securing the funding was a fantastic achievement and one that proved to be an important catalyst for the future development of the project, representing a major step towards realisation of the project's considerable potential while minimising the capital risk to the Group. It is rare to secure grant funding from the U.S. Government for drilling activities of this nature, and this bespoke funding is testament to both the potential of our Paradox project and the efforts of our project team who conceived of, negotiated and delivered this funding successfully.

Once funding was secured, our focus immediately turned to well planning and operations. Zephyr's drilling team executed the drilling programme in a highly-commendable fashion, through harsh winter conditions, to successfully complete the well in record time for the basin. Drilling operations were safe, effective, conducted in accordance with Covid-19-related guidance and restrictions, and were completed well within the Group's forecast timeframe. We were also able to gather significant amounts of reservoir data which, after several months of review and appraisal, gave us the confidence to make the subsequent decision to plan to drill the sidetrack lateral off the State 16-2 well (the "State 16-2LN CC" or "the lateral") as soon as practicable. Following the successful completion of our fundraise in April 2021, we are now fully funded to initiate this drilling programme.

The lateral will target first production from the Cane Creek reservoir and, importantly, will utilise the pre-existing roads, pad and wellbore from the State 16-2 well as a low-cost, low environmental impact sidetrack host. We continue to progress the permitting, drilling plan, contracting and resource evaluation ahead of the drilling programme and we remain on track to drill the well in July 2021.

The significant core and log data acquired from the State 16-2 Cane Creek reservoir corroborated and supported the Board's long-held view that the Paradox has the potential to be a project of considerable scale. The drilling of the lateral well, which has robust and highly attractive forecast economics, has the potential to be a pivotal moment for the Group, and comes after seven years of substantial effort and investment in the asset.

In parallel with delivering on our strategy for the Paradox project, we have also been able to deliver on the second of our corporate objectives, by securing highly economic existing and near-term production through the acquisition of assets in the Williston Basin (the "Williston project") in Q1 2021, and through our subsequent acquisition of 11.6 acres in the Williston Basin (the "Continental acreage") in Q2 2021.

The acquired assets are ideal additions to our asset portfolio and an excellent complement to our Paradox project. Since mid-2019, the Group has evaluated a significant number of potential acquisitions, and the Board believed the assets ultimately acquired to be particularly attractive. We negotiated the Williston project acquisition on highly favourable economic terms, especially in light of the considerable rise in oil prices which occurred during the period between the initial agreement on purchase terms and the ultimate closing of the acquisition. The fact that the first five Williston wells acquired had all drilling risk removed was also a major bonus, and the resulting cash flows expected from the project will enable us to begin to utilise the Group's historical tax losses of more than US$16 million.

The substantial cash flows expected to be generated from the Williston project and the Continental acreage have the potential to be reinvested into the development of the Paradox project or into other opportunities, again demonstrating the strength of a balanced portfolio of project assets.

The Board retains interest in progressing the Company's potential working interest acquisition in the McCoy lease in the Denver-Julesburg Basin ("DJ Basin") in Weld County, Colorado, U.S. (the "McCoy acquisition"). However, while the potential acquisition continues to meet the Company's key acquisition criteria, the timeline for development has been put on hold by the current operator of the project while an expansion of the project is considered. Zephyr will continue to monitor progress and will look to make an investment decision once a firm development schedule is established and if revised terms can be negotiated. In the meantime, given the amount of forthcoming activity on the Company's Paradox and Williston projects, the Board does not intend to seek to negotiate an extension to Zephyr's existing option on the McCoy acquisition beyond the current expiry date of 30 June 2021. That said, the seller of the McCoy asset has confirmed that the Company will be given a right of first refusal for participation in the project, should the seller seek funding once development plans are solidified.

During 2020, we executed a complete rebranding of the Group, including the change of the Company's name. Just as importantly, the Board spent significant time formulating and agreeing upon the core principles and values under which Zephyr will operate. In short, Zephyr's team will always strive to be responsible stewards of its investors' capital and responsible stewards of the environment in which we work. We believe that good environmental performance, together with good governance practices, will translate into good business performance and therefore are focused on delivering strong economic returns in the most environmentally responsible manner practical.

Under my Chairmanship, I want to ensure that every action and investment decision we make is considered against our core values. This includes the following points of focus:

· we will continue to protect the Group, safeguard its existing asset base and position it for attractive growth opportunities;

· we will continue to seek creative and beneficial funding opportunities in an effort to unlock value from our existing asset portfolio, as evidenced by the U.S. Government funding we received for our recent drilling programme on the Paradox project;

· we will continue to adopt a disciplined focus on growth via the acquisition of producing or near-term development opportunities in the Rocky Mountain region. Even in this unusual economic environment, we believe that attractive, value-additive acquisitions are available and may be acquired using non-traditional funding structures;

· we will continue with our programme of tight financial controls and cash preservation which will enable the Group to continue trading effectively; and

· we will continue to ensure management and the Board are aligned with our Shareholders through significant ownership of shares - the Board currently controls over 14 per cent of the Company's issued Share Capital.

The period under review was one of substantial progress for the Group - I am confident that over the next few months we will continue to see a flurry of corporate and operational activity as we target production from the Paradox project and accumulate significant cash flows from our non-operated assets in the Williston Basin. These are exciting times, and we look forward to keeping all our stakeholders updated on our progress.

A final word must be said about our team and their extraordinary efforts to build value for all Shareholders. During the difficult days in late spring 2020, with the COVID-19 pandemic raging across the globe, our people and partners showed great loyalty in staying committed at a time when we had to implement a radical cost-cutting programme to ensure the survival of the Company. Our team's tenacity and resilience ensured we kept momentum at a crucial time which enabled us all to enjoy the operational successes of recent months. I would like to thank each and every one of them for their hard work, sacrifice and dedication.

Just as importantly, I would like to extend my heartfelt gratitude to our Company's Shareholders and advisers for their support during a year which contained both unimaginable global turmoil and significant corporate growth. You have demonstrated great loyalty during this transformative period in the Company's history, and on behalf of the entire management team and Board of Directors, I thank you.

RL Grant

4 June 2021

Strategic report

Zephyr Energy plc is an Oil & Gas ("O&G") exploration and production company. The Company's key objective is to deliver sustainable Shareholder growth through the responsible development of oil and gas assets in the Rocky Mountain region of the U.S.

To achieve this objective, the Group prioritised:

· the hiring of Board professionals with significant experience in the O&G sector, with a particular focus on operations, development, governance, finance, merger and acquisition and turnaround experience;

· a sharpening of focus - we are wholly focused on responsible Exploration and Production ("E&P") investment in the Rocky Mountain region and have exited all other legacy sectors and geographies;

· the acceleration of data acquisition and development efforts on our flagship Paradox project;

· the redoubling of ESG efforts, including corporate governance compliance and proactive engagement with the communities in which we operate;

· the leveraging of partnerships (such as the U.S. Department of Energy, experienced operators in the Basins in which we operate, and private equity investors);

· the design and build of a technology-led acquisition process which can rapidly assess and acquire distressed E&P assets in our geographical area of focus;

· the potential addition of further interests through acquisition, farm-in agreements or joint venture arrangements; and

· tight financial control and cash conservation.

Background

In the Company's Interim Results announcement for the six months ended 30 June 2020, we stated that following the completion of significant restructuring efforts, the Company was well positioned as a clean, low-overhead, unlevered and value-focused vehicle from which to build - with a strategy and value set designed to deliver responsible growth for all stakeholders. Furthermore, we went on to say that "over the coming months we expect to see further exciting developments on the Paradox project as well as the expansion of our asset portfolio through acquisitions or partnerships."

We are proud to report that, just eight months after making these statements, we have been able to meet and exceed those objectives. Zephyr is now a cash-generating, oil producing Group with significant organic growth prospects. We believe our recent operational successes have been achieved not just by sheer hard work, but by being bold, opportunistic and agile in a marketplace experiencing turmoil and disruption due to the impacts of the global pandemic.

Paradox project

During the period under review and in the following months, the Company made impressive headway on the Paradox project where Zephyr has operatorship and a 75 per cent working interest in over 25,000 gross leased acres. We are happy to report that we are now on the brink of a drilling programme that will target first production on the project, which comes after many years of considerable investment in these assets. We believe, more than ever, that the Paradox project has the potential to be a project of significant scale and profitability.

By way of illustration, in their Competent Persons Report ("CPR") prepared for the Group in June 2018, Gaffney Cline and Associates ("Gaffney Cline") estimated that on a project-wide 2C basis (50% chance of exceedance), the Cane Creek reservoir on the Group's acreage (which includes the proposed State 16-2LN CC) holds estimated recoverable resources of over 12 million barrels of oil equivalent ("mmboe") and a net present value of approximately US$156 million using a flat oil price of US$60 per barrel of oil ("bo") and a ten per cent discount rate. This highlights the considerable opportunity we have with the project - it is now our task to unlock this value.

Background

During the latter part of 2019, the Board completed a comprehensive review of the Paradox project and elected to pursue a strategy which, in its opinion, would optimally position the project for future growth. This included the following steps:

· focusing on the most prospective acreage (as identified by the 3D seismic acquisition undertaken by the Group and from the subsequent verification work carried out by Schlumberger);

· releasing acreage that the Group believed to be non-prospective or on too short a lease to merit further exploration work and / or expenditure; and

· actively acquiring further contiguous acreage in areas we consider most prospective.

Stakeholders will continue to see a reshaping of the Paradox acreage position as we proactively manage our leasehold position, and the work to secure longer lease terms and contiguous acreage in areas we consider most prospective remains ongoing.

This 'high-grading' process was absolutely key for the future success of the project and enabled us to secure the project for the long-term while at the same time reducing carrying costs. The Board believes that a concentrated focus on the most highly prospective acreage not only created a long-term sustainable future for the project, but will also make the organic development of the acreage more economically advantageous.

Having secured the tenure of the most attractive project acreage, our next task was to commence operations on the ground and begin the process of unlocking the considerable potential value of the project. We were therefore delighted to announce, in September 2020, a partnership to drill a "dual-use" research well on our acreage.

State 16-2 well

Following many months of intense effort, negotiation and planning, Zephyr was able to secure US$2 million of U.S. Government grant funding which enabled us to proceed with the drilling of the State 16-2 well, in conjunction with a project team led by the University of Utah's Energy & Geoscience Institute ("EGI") with participants including the Utah Geological Survey (the "UGS") and other Utah-based partners. The project was sponsored by the U.S. Department of Energy and its National Energy Technology Laboratory (the "DOE"), and securing the funding was a notable achievement for the Group and a significant catalyst for accelerated development of the project.

The DOE's ongoing project is entitled "Improving Production in Utah's Emerging Northern Paradox Unconventional Oil Play". Its goal is to assess and perform optimisation analyses for more focused, efficient and less environmentally-impactful oil production strategies in the northern Paradox Basin, particularly in the Pennsylvanian Paradox Formation's Cane Creek reservoir (the "Cane Creek") and adjacent overlying reservoirs.

As part of this study, the EGI and UGS originally planned to drill a vertical stratigraphic test well to gather data to improve the understanding of the Paradox Basin play. The proposed well would target the Cane Creek reservoir and potentially the C18/19 reservoirs, acquiring both core data and a comprehensive well log suite in order to provide valuable new basin data.

Over a period of several months, the project team analysed multiple potential well locations across the Northern Paradox Basin, and we were delighted that the EGI and UGS selected Zephyr's Paradox acreage as the location on which to drill the well. Our acreage was selected for a number of reasons, including the quality of our underlying 3D seismic data (which is being tied into the well results to build a stronger integrated predictive model) as well as a favourable surface location located on a pre-existing pad.

After our acreage was selected as the location for the test well, we worked with our project partners to design the well in such a way that it could be used not only to obtain the data required by the research project, but so that it could be re-used as a low-cost, low environmental-impact host for a future lateral appraisal well.

After a period of intense activity to complete all drill planning activities (including site preparation, road work, permit approvals and vendor selection) we were delighted to announce on 18 December 2020 that the well had been spud - and 19 days later we announced that the well had been successfully drilled to a measured depth of 9,745 feet total depth ("TD"). Drilling operations were safe and effective, conducted in accordance with Covid-19 related guidance and restrictions, and were completed well within the Group's forecast timeframe. This was a fantastic achievement by everybody involved.

Our primary objective was to drill and set casing at 6,450 measured depth ("MD") in order to provide a host wellbore for a future horizontal side track. This goal was achieved within thirteen days from spud. As mentioned above, we subsequently reached TD within nineteen days of spud, a marked improvement over historical drilling efforts in this part of the Paradox Basin. The reduction in drilling time represented a major operational success and demonstrated that the cost of future development wells could be significantly reduced from earlier estimates, thereby improving the overall potential value of the Paradox project for Shareholders.

Our secondary objective was to acquire a significant amount of new data to improve our understanding of our Paradox acreage. We were pleased to report that Zephyr's data acquisition programme secured the following:

· approximately 113 feet of continuous whole core across the historically productive Cane Creek reservoir interval - the first whole Cane Creek core ever to be retrieved in the northern part of the Paradox Basin;

· rotary side wall cores in eleven shallower exploration targets; and

· gamma ray, neutron density, resistivity, formation litho scanner and sonic wireline log data across the bulk of the Paradox Formation, which secured significant additional petrophysical data.

Following the completion of drilling and data acquisition operations, the State 16-2 well was temporarily plugged at 6,450 feet TD, stable and for future re-use as a lateral wellbore host.

Decision to proceed with the State 16-2LN CC lateral well

The core and log data acquired from the State 16-2 Cane Creek reservoir both corroborated and supported the Board's long-held view that the Paradox has the potential to be a project of considerable scale.

On 15 March 2021, we announced a detailed update on the Paradox project, which included confirmation of evidence of hydrocarbon saturation across the entirety of the continuous core acquired from the Cane Creek reservoir. When integrated with the recently acquired log data, existing 3D seismic data, geologic and regional analogue analysis, the resulting analysis gave the Board strong justification for advancement to the next phase of project. The Board therefore elected to proceed with detailed planning for the near-term drilling of the lateral, and following the successful completion of a fundraise in April 2021, the Company is fully funded to commence the drilling of the lateral portion of the well.

The lateral will test the potential productivity and target initial production from the Cane Creek reservoir natural fracture system, and will utilise the pre-existing roads, pad and wellbore from the State 16-2 as a low-cost, low environmental impact sidetrack host. We continue to progress the permitting, drilling plan, contracting and resource evaluation ahead of the drilling programme and the Company remains on track to drill the well in July 2021. It is estimated that the cost of the lateral well will be approximately US$3.8 million, including contingency funds.

We have continued to refine the cost and economic benefits of the lateral, which is forecast to have strong economics based on its 2C estimate, including:

· A single-well net present value of approximately US$8.2 million at US$60.00 /bo and at a ten per cent. discount rate (NPV-10);

· a cash flow breakeven oil price of US$20.55 /bo; and

· a single-well estimated ultimate recovery of 694,000 boe.

The Board recognises that commercial production from the Paradox Formation across the Zephyr lease holding has not yet been proven. The State 16-2LN-CC well will represent another milestone in testing this potential and the effectiveness of the Cane Creek reservoir and natural fracture system. The well has been designed to target a series of 3D seismic attributes that are often associated with natural fractures. This will test both the reservoir effectiveness at the well location and the ability of the 3D to predict fracture presence and productivity elsewhere within the 3D area. The team is also evaluating the potential to hydraulically stimulate the well if the natural fracture system is not productive at this location. This may be a secondary route to delivering a profitable well and greater development.

The drilling of the State 16-2LN CC well, with its robust and highly attractive forecast economics, has the potential to be a pivotal moment for the Group, and comes on the back of seven years of substantial time and investment in the asset. We are excited for this next phase of development.

Further upside to Paradox project

In addition to the potential of the Cane Creek reservoir, the Board remains encouraged by indications that demonstrate the potential for multiple stacked overlying reservoirs across our Paradox resource base. Initial log analysis from the State 16-2 well suggested hydrocarbon saturation across the bulk of these reservoirs, a result consistent with offset wells and which provided compelling evidence for the presence of stacked continuous oil and gas plays - plays which could potentially be drained should viable natural fracture networks be identified or should artificial hydraulic stimulation completion techniques be applied successfully. Unlike the Cane Creek reservoir, these overlying secondary zones have not demonstrated historical production and therefore require significant additional evaluation before a resource base assessment can be concluded. We are directing a considerable amount of effort to this at present and will keep the market updated as the detailed analysis progresses.

A key consideration for the Board was how to optimally fund additional development of the Paradox project. I was therefore delighted that we were able to complete the acquisition of the Williston project which has the potential to provide the Company with cash flow to fund future additional Paradox activity well beyond the near-term drilling of the State 16-2LN CC.

Williston Project

In March 2021, the Group completed the purchase of the Williston project which is expected to provide the Group with low-risk oil production from five already drilled wells which are, as mentioned above, expected to generate substantial cash flows that can be utilised across the Group.

The initial cost of the acquisition was US$350,000 (payable to the seller of the assets). In addition, the Company made a payment of approximately US$3.7 million to the project Operator for historical capital expenditure ("CAPEX") obligations on the project.

The key details of the project were as follows:

· acquisition of non-operated working interests in five wells (one producing well and four drilled but uncompleted wells (a "DUC" or "DUCS") in Mountrail County, North Dakota, U.S.;

· the working interests on the five wells ranged from 16.8% to 37.2%;

· the wells are operated by Whiting Petroleum, an active and highly experienced operator in the Williston Basin;

· the Group agreed headline terms with the vendor when the oil price was at US$45 /bo;

· the producing well has been on production since March 2020 and first revenue payments have now been received by Zephyr;

· the completions on the four DUCs commenced in April and production revenues are targeted to be received on all four wells by September 2021;

· 2P Reserves acquired were estimated at 449,434 boe to the Group; and

· the five wells are spread across three separate drilling pads, creating attractive production diversification.

The key benefits of the Williston acquisition were as follows:

· a low-risk acquisition with substantial near-term cash flow expected;

· no remaining drilling risk - all five wells were already drilled successfully to target depth;

· excellent complement to (and funding source for future development on) the Paradox project; and

· no federal tax payments payable in the short-term as profits can be offset against the Group's historic tax losses.

Zephyr is now responsible for payment of future CAPEX obligations related to the Williston project as the DUCs are completed and tied in. These costs are estimated to be approximately US$4.2 million, and will become due after the wells are completed.

The economics on the Williston project, as calculated by the Group, are extremely attractive and the acquisition established the Group as an immediate oil producer. Once the four DUC wells are online in summer 2021, the Group forecasts that the acquisition will provide:

· up to US$8 million of undiscounted cash flow over the next 12 months, and a total of US$15 million of undiscounted cash flow over the lifetime of the project, for Zephyr to deploy into the Paradox development or into additional projects (assuming an oil price of US$60/bo);

· 2P net present value at NPV-10 of US$4.3 million;

· a cash flow breakeven oil price of US$36.69/bo (inclusive of all CAPEX expended);

· approximately 720 barrels of oil equivalent per day ("boepd") average production anticipated in H2 2021;

· a one-year cash payback; and

· the opportunity to shelter U.S. federal tax payments by utilising the Group's historical tax losses of more than US$16 million.

Continental acreage

In May 2021, Zephyr announced the acquisition of the Continental acreage, which gave the Group a working interest in a drilling spacing unit ("DSU") operated by Continental Resources Inc ("Continental"), the largest operator in the Williston Basin. The Continental acreage is located approximately ten miles from the Company's Williston project, in a highly attractive part of the Basin. The cost of the acreage acquired by Zephyr was approximately US$170,000 and was paid for from the Company's existing cash resources. 

Continental has already commenced drilling two initial wells on the DSU ("Initial wells"), with up to an additional 22 future wells ("Future wells") forecast to be drilled by 2023.

· Zephyr's forecast net CAPEX for the initial wells is approximately US$135,000 which will be funded from existing cash resources.

· Zephyr's net CAPEX for the proposed 22 Future wells is forecast to be approximately US$710,000, which could also be funded from the Group's existing cash resources. 

· CAPEX on the Future wells is discretionary, and Zephyr's Board of Directors will elect whether to participate in those wells on a case-by-case basis.

The Continental acreage has, net to Zephyr, Company estimated 2P reserves (from all 24 wells) of circa 60,000 boe which were acquired at a price of approximately US$2.83/ boe. The 1P reserves on the Continental acreage are, net to Zephyr, estimated at circa 41,000 boe and the 3P reserves at circa 72,000 boe.

This opportunistic acquisition has strong forecast economics and provided the Company with further exposure to low risk, near-term production. Initial revenues from the acquisition are expected to be received in the second half of this year.

The acquisition of the Continental acreage, in a DSU operated by a first-class Williston Basin participant, is a strong example of what can be achieved in the current market. The acreage is in an excellent location and provides both near-term drilling exposure and future drilling optionality. While the initial scale of the acquisition is small, for a minimal upfront cost Zephyr now has potential to participate in up to twenty-four highly economic wells over the next two years. Given the continued improvement in drilling costs and robust oil price environment, we believe this acreage will provide attractive near-term cash flow returns and is an excellent addition to our asset portfolio.

McCoy update

In November 2019, the Group announced that it had entered into a Letter of Intent ("LOI") with Captiva Energy Holdings II, LLC ("CEH") in respect of the proposed McCoy acquisition.

The McCoy acquisition would provide the Group with near-term, low-risk horizontal development drilling exposure in the prolific Niobrara resource play, and on acreage contiguous to other major DJ Basin operators including Occidental Petroleum Corporation, Great Western Operating Company LLC (a subsidiary of Great Western Petroleum), and Crestone Peak Resources. The DJ Basin is a mature oil and gas basin currently undergoing a resurgence as vertical production is replaced with successful one-, two-, and three-mile horizontal well developments. The McCoy lease is located in an active part of the DJ Basin and a horizontal redevelopment of the existing productive lease is proposed.

The Board retains interest in progressing the McCoy acquisition. However, while the asset continues to meet the Company's key acquisition criteria, the timeline for development has been put on hold by the current operator of the project while an expansion of the project is considered. Zephyr will continue to monitor progress and will look to make an investment decision once a firm development schedule is established and if revised terms can be negotiated. In the meantime, given the amount of forthcoming activity on the Company's Paradox and Williston projects, the Board does not intend to seek to negotiate an extension to Zephyr's existing option on the McCoy acquisition beyond the current expiry date of 30 June 2021. That said, the seller of the McCoy asset has confirmed that the Company will be given a right of first refusal for participation in the project, should the seller seek funding once development plans are solidified. The Board will continue to monitor the situation on the project and plans to review the project again once development milestones are more clearly defined.

FINANCIAL REVIEW

Zephyr reports a net loss after tax from continuing operations of US$2.3 million or a loss of 0.66 cents per Ordinary Share for the year ended 31 December 2020 (2019: net loss after tax from continuing operations of US$3.0 million or 1.74 cents per Ordinary Share). The operating loss for the year was US$2.36 million, which was lower than that in the prior year (2019: US$2.81 million) primarily due to a reduction in administrative expenses as a result of the cost cutting programme implemented during the period.

The first production revenues from the Williston project will be evident in the interim financial statements for the 2021 financial year.

Total investment in the Group's intangible exploration and evaluation assets as at 31 December 2020 was US$13.9 million (2019: US$13.5 million) reflecting continuing investment in the Paradox project. The Group's expenditure on intangible exploration and evaluation assets is shown net of US$1.8 million funded by the DOE during the year.

Cash and cash equivalents as at 31 December 2020 were US$3.9 million (2019: US$1.1 million). During the period, the Company raised gross proceeds of US$2.9 million (2019: US$2.0 million) through the placing of new Ordinary Shares in the Company. In March 2021 the Company announced that it had raised a further US$13.6 million (before expenses) through the placing of new Ordinary Shares in the Company.

During the year under review, the Directors secured US$2 million in U.S. Government grant funding to facilitate the drilling of the State 16-2 well. The decisions to proceed with the grant funding and the drilling on the State 16-2 well were logical decisions to ensure the advancement of the Paradox project and were unanimously deemed by Board members to be in the best interests of the Company.

In addition, and to facilitate the drilling of the State 16-2 well, the Company completed an equity fundraise through the issue of Ordinary Shares in the Company. Details of this fundraise can be found in the relevant sections of the Annual Report. In arriving at the decision to proceed with the fundraise the Directors considered the cash position of the Company, the dilution impact that the respective fundraises would have on the existing Shareholders of the Company and the importance of progressing the Paradox project. After due consideration, the Directors considered the fundraise to be in the best interests of the Company and its Shareholders.

We would like to thank all Shareholders for their continued support.

On behalf of the Board

JC Harrington

Chief Executive Officer

4 June 2021

CONSOLIDATED INCOME STATEMENTFor the year ended 31 December 2020

CONSOLIDATED BALANCE SHEETAs at 31 December 2020

CONSOLIDATED STATEMENT OF CHANGES IN EQUITYFor the year ended 31 December 2020

CONSOLIDATED CASH FLOW STATEMENTFor the year ended 31 December 2020

NOTES TO THE FINANCIAL STATEMENTS

For the year ended 31 December 2020

The figures for the years ended 31 December 2020 and 2019 do not constitute statutory accounts within the meaning of Section 434 of the Companies Act 2006. The figures for the year ended 31 December 2020 have been extracted from the statutory accounts for that year on which the auditor has issued an unqualified audit report (and did not draw attention to any matters by way of emphasis) which have yet to be delivered to the Registrar of Companies.

The figures for the year ended 31 December 2019 have been extracted from the statutory accounts for that year which have been delivered to the Registrar of Companies. The auditor issued an unqualified audit report but drew attention by way of emphasis to a material uncertainty related to going concern.

No statement has been made by the auditor under Section 498(2) or (3) of the Companies Act 2006 in respect of either of these sets of accounts.

The consolidated financial statements have been prepared in accordance with International Accounting Standards in conformity with the requirements of the Companies Act 2006 ("IAS"). The information in this preliminary statement has been extracted from the audited financial statements for the year ended 31 December 2020 and does not contain all the disclosures required by accounts prepared in accordance with IAS and as such, does not contain all the information required to be disclosed in the financial statements prepared in accordance with IAS.

1. CORPORATE INFORMATION

On 3 August 2020, the Company, formerly known as Rose Petroleum plc, changed its name to Zephyr Energy plc.

Zephyr Energy plc (the "Company" and, together with its subsidiaries, the "Group") is domiciled and incorporated in the United Kingdom under the Companies Act 2006 and is limited by shares. The address of the registered office is 20-22 Wenlock Road, London, N1 7GU.

The nature of the Group's operations and its principal activity is the exploration and development of O&G resources.

2. ADOPTION OF NEW AND REVISED STANDARDS

STANDARDS ADOPTED DURING THE YEAR

The Group has adopted all of the new or amended Accounting Standards and interpretations issued by the International Accounting Standards Board ("IASB") that are mandatory and relevant to the Group's activities for the current reporting period.

The following new and revised Standards have been adopted but have not had any material impact on the amounts reported in these financial statements:

· Amendments to IFRS 3 - Definition of a business

· Amendments to IAS 1 and IAS 8 - Definition of material

· Amendments to IFRS 9, IAS 39 and IFRS 7 - Interest rate benchmark reform

· Amendments to references to the conceptual framework in IFRS standards

STANDARDS ISSUED BUT NOT YET EFFECTIVE

Any new or amended Accounting Standards or interpretations that are not yet mandatory (and in some cases, had not yet been adopted by the EU) have not been early adopted by the Group for the year ended 31 December 2020. They are as follows:

· Amendments to IAS 1 - Classification of liabilities as current or non-current

· Amendments to IFRS 17 - Insurance contracts

· Amendments to IFRS 3 - Reference to the conceptual framework

· Amendments to IAS 16 - Property, plant and equipment - proceeds before intended use

· Amendments to IAS 37 - Onerous contracts - cost of fulfilling a contract

· Amendment to IFRS 16 - Covid -19 related rent concessions

· Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16 - Interest rate benchmark reform phase 2

· Amendments to IAS 1 and IFRS practice statement 2 - Disclosure of accounting policies

· Amendments to IAS 8 - Definition of accounting estimates

· Annual improvements to IFRS standards 2018-2020

The Directors do not expect that the adoption of these Standards or Interpretations in future periods will have a material impact on the financial statements of the Company or the Group.

3. SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PREPARATION

The financial statements have been prepared and approved by the Directors in accordance with International Accounting Standards in conformity with the requirements of the Companies Act 2006.

The financial statements have been prepared on the historical cost basis, other than certain financial assets and liabilities which are stated at their fair value. Historical cost is generally based on the fair value of the consideration given in exchange for assets.

The financial statements are presented in United States dollars ("US$") as the Group's business is influenced by pricing in international commodity markets which are primarily US$ based. All amounts have been rounded to the nearest thousand, unless otherwise indicated.

As described below, the Directors continue to adopt the going concern basis in preparing the consolidated financial statements.

The accounting policies set out below have, unless otherwise stated, been applied consistently to all periods presented in these financial statements.

Judgements made by the Directors in the application of these accounting policies that have significant impact on the financial statements and estimates with a significant risk of material adjustment in the next year, are discussed in note 4.

GOING CONCERN

The Directors have prepared cash flow forecasts for the Group for the period to June 2022 based on their assessment of both the discretionary and the non-discretionary cash requirements of the Group during this period. These cash flow forecasts include its normal operating costs for operations together with all committed development expenditure. The forecasts also take account of the Company's recent fundraise and the near-term CAPEX requirements for, and the forecast revenues from, the Paradox project, the Williston project and the Continental acreage, and they indicate that the Group currently has sufficient cash resources to service these costs over the forecast period.

The Group has no bank facilities and has been meeting its working capital requirements from cash resources. At the year end, the Group had cash and cash equivalents amounting to US$3.9 million (2019: US$1.1 million).

The Directors continue to adopt the going concern basis in preparing the consolidated financial statements.

BASIS OF CONSOLIDATION

The consolidated financial statements incorporate the financial statements of the Company and its subsidiary undertakings (together, "the Group") made up to 31 December each year.

Subsidiary undertakings are those entities controlled directly or indirectly by the Company. Control is achieved when the Company is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity.

The results of subsidiaries acquired or disposed of during the year are included in the consolidated income statement from the date on which control is transferred to the Group or, up to the date that control ceases, as appropriate. Where necessary, adjustments are made to the financial statements of subsidiaries to bring accounting policies used into line with those used by the Group.

The Group applies the acquisition method to account for business combinations. The consideration for each acquisition is measured at the aggregate of the fair values (at the date of exchange) of assets given, liabilities incurred or assumed, and equity instruments issued by the Group in exchange for control of the acquire.

All intra-group transactions, balances, income and expenses are eliminated on consolidation.

INVESTMENTS IN SUBSIDIARY UNDERTAKINGS

Long term investments representing interests in subsidiary undertakings are stated at cost less any provision for impairment in the value of the non-current investment.

INTANGIBLE EXPLORATION AND EVALUATION ASSETS

The Group applies the full cost method of accounting for Exploration and Evaluation ("E&E") costs, having regard to the requirements of IFRS 6 Exploration for and Evaluation of Mineral Resources. Under the full cost method of accounting, costs of exploring for and evaluating mineral resources are accumulated by reference to appropriate cost centres being the appropriate licence area but are tested for impairment on a cost pool basis as described below.

E&E assets comprise costs of (i) E&E activities that are on-going at the balance sheet date, pending determination of whether or not commercial reserves exist and (ii) costs of E&E that, whilst representing part of the E&E activities associated with adding to the commercial reserves of an established cost pool, did not result in the discovery of commercial reserves.

Costs incurred prior to having obtained the legal rights to explore an area are expensed directly to the income statement as they are incurred.

Exploration and evaluation costs

All costs of E&E are initially capitalised as E&E assets. Payments to acquire the legal right to explore, costs of technical services and studies, seismic acquisition, exploratory drilling and testing are capitalised as intangible E&E assets.

Intangible costs include directly attributable overheads together with the cost of other materials consumed during the exploration and evaluation phases.

Treatment of E&E assets at conclusion of appraisal activities

Intangible E&E assets related to each exploration licence/project are carried forward until the existence (or otherwise) of commercial reserves has been determined. If commercial reserves have been discovered, the related E&E asset are assessed for impairment on a cost pool basis as set out below and any impairment is recognised in the income statement. The carrying value, after any impairment loss, of the relevant E&E assets is then reclassified as development and production assets.

Intangible E&E assets that related to E&E activities that are determined not to have resulted in the discovery of commercial reserves remain capitalised as intangible E&E assets at cost less accumulated amortisation, subject to meeting a pool-wide impairment test in accordance with the accounting policy for impairment of E&E assets set out below. Such E&E assets are amortised on a unit-of-production basis over the life of the commercial reserves of the pool to which they relate.

Impairment of intangible exploration and evaluation assets

E&E assets are assessed for impairment when facts and circumstances suggest that the carrying amount may exceed its recoverable amount. Such indicators include, but are not limited to, those situations outlined in paragraph 20 of IFRS 6 Exploration for and Evaluation of Mineral Resources and include the point at which a determination is made as to whether or not commercial reserves exist.

Where there are indications of impairment, the E&E assets concerned are tested for impairment. Where the E&E assets concerned fall within the scope of an established full cost pool, the E&E assets are tested for impairment together with all development and production assets associated with that cost pool, as a single cash generating unit.

The aggregate carrying value is compared against the expected recoverable amount of the pool, generally by reference to the present value of the future net cash flow expected to be derived from production of commercial reserves. Where the E&E assets to be tested fall outside the scope of any established cost pool, there will generally be no commercial reserves and the E&E assets concerned will generally be written off in full.

If the recoverable amount of a cash-generating unit is estimated to be less than its carrying amount, the carrying amount of the cash-generating unit is reduced to its recoverable amount. An impairment loss is recognised immediately in profit or loss.

When an impairment loss subsequently reverses, the carrying amount of the cash-generating unit is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the cash-generating unit in prior years. A reversal of an impairment loss is recognised immediately in profit or loss.

The Group considers each area of oil and gas exploration, on a geographical basis to be a separate cost pool and therefore aggregates all specific assets for the purposes of determining whether impairment of E&E assets has occurred.

GRANT INCOME

Government grants are recognised only when there is a reasonable assurance that the Group will comply with any conditions attached to the grant, and that the grant will be received.

The Group presents grants receivable by deducting the funds received from the carrying value of the Group's intangible exploration and evaluation assets.

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are stated at cost less accumulated depreciation and accumulated impairment losses. The cost of an item of property, plant and equipment comprises its purchase price and any costs directly attributable to bringing the asset into use.

Depreciation is recognised so as to write off the cost of assets less their residual values over their useful lives at the following rates:

Plant and machinery straight-line over 5 years

Right-of-use assets straight-line over the shorter of the lease term and the useful life of the underlying asset

The estimated useful lives, residual value and depreciation method are reviewed at the end of each reporting period, with the effect of any changes in estimate accounted for on a prospective basis.

An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on the disposal or retirement of an item of property, plant and equipment is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in profit or loss. 

JOINT ARRANGEMENTS

The Company is party to a joint arrangement when there is a contractual agreement that sets out the terms of the relationship over the relevant activities of the Company and at least one other party.

Management has a legal degree of control over these joint operating arrangements through Joint Operating Agreements.

The Company classifies its interests in joint arrangements as joint operations where the Company has both the right to assets and obligations for the liabilities of the joint arrangement. It accounts for its interests in joint operations by recognising its share of assets and liabilities, revenues and expenses in accordance with its contractually conferred rights and obligations.

The Company accounts for its own assets, liabilities and cash flows measured in accordance with the terms of the Joint Operating agreement and the accounting treatment reflects the agreement's commercial effect.

Where the percentage ownership in joint arrangements changes during a reporting period, the arrangement is reassessed to ensure it is still appropriately classified, and the Company's share of income and expenses is adjusted prospectively from the date of change.

LEASES

The Group assesses whether a contract is or contains a lease, at inception of the contract. The Group recognises a right-of-use asset and a corresponding lease liability with respect to all lease agreements in which it is the lessee, except for short-term leases (defined as leases with a lease term of 12 months or less) and leases of low value assets. For these leases, the Group recognises the lease payments as an operating expense on a straight-line basis over the term of the lease.

The lease liability is presented as a separate line in the Balance Sheet and is subsequently measured by reducing the carrying amount to reflect the lease payments made.

The right-of-use assets comprise the initial measurement of the corresponding lease liability, lease payments made at or before the commencement day and any initial direct costs. They are subsequently measured at cost less accumulated depreciation and impairment losses.

Right-of-use assets are depreciated over the shorter of the period of the lease term and the useful life of the underlying asset.

The right-of-use assets are presented within property, plant and equipment in the consolidated and company Balance Sheet.

The Group applies IAS 36 Impairment of assets to determine whether a right-of-use asset is impaired.

FOREIGN CURRENCIES

For the purpose of the consolidated financial statements, the results and financial position are expressed in United States dollar, which is the presentation currency for both company and consolidated financial statements.

In preparing the financial statements of the individual companies, transactions in currencies other than the functional currency of each group company ("foreign currencies") are translated into the functional currency at the rates of exchange prevailing on the dates of the transactions. At each reporting date, monetary assets and liabilities that are denominated in foreign currencies are retranslated into the functional currency at the rates prevailing on the reporting date. Non-monetary assets and liabilities carried at fair value that are denominated in foreign currencies are translated at the rates prevailing at the date when the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated.

Foreign exchange differences are recognised in the profit or loss in the period in which they arise, except for foreign exchange differences on monetary items receivable from or payable to a foreign operation for which settlement is neither planned nor likely to occur and which, therefore, form part of the net investment in the foreign operation. Foreign exchange differences arising on the translation of the Group's net investment in foreign operations are recognised as a separate component of Shareholders' equity via the statement of other comprehensive income. On disposal of foreign operations and foreign entities, the cumulative translation differences are recognised in the income statement as part of the gain or loss on disposal. 

For the purpose of presenting company and consolidated financial statements, the assets and liabilities of the Company, and the Group's operations which have a functional currency other than United States dollar, are translated using exchange rates prevailing at the end of each reporting period. Income and expense items are translated at the average exchange rates for the period, unless exchange rates fluctuate significantly during that period, in which case the exchange rates at the date of transactions are used. Foreign exchange differences arising, if any, are recognised in other comprehensive income and accumulated in equity. Equity items are translated at the exchange rates at the date of transactions and foreign exchange differences arising, if any, are accumulated directly in equity.

On the disposal of a foreign operation (i.e. a disposal of the Group's entire interest in a foreign operation, a disposal involving loss of control over a subsidiary that includes a foreign operation or loss of joint control over a jointly controlled entity that includes a foreign operation), all of the accumulated exchange differences in respect of that operation attributable to the Group are reclassified to profit or loss. Where there is no change in the proportionate percentage interest in an entity then there has been no disposal or partial disposal and accumulated exchange differences attributable to the Group are not reclassified to profit or loss.

Fair value adjustments arising on the acquisition of a foreign operation are treated as assets and liabilities of the foreign operation and translated at the rate of exchange prevailing at the end of each reporting period. Exchange differences arising are recognised in equity.

RETIREMENT BENEFITS

The Group makes contributions to the personal pension schemes for some of its employees and Directors. Payments to these schemes are charged as an expense in the income statement in respect of pension costs payable in the year.

TAXATION

The tax expense represents the sum of the tax currently payable for the year and deferred tax.

The tax currently payable is based on taxable profit for the year. Taxable profit differs from profit as reported in the consolidated income statement because it excludes items of income or expense that are taxable or deductible in other years and items that are never taxable or deductible. The Group's liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the reporting date.

Deferred tax is recognised on temporary differences between the carrying amounts of assets and liabilities in the consolidated financial statements and the corresponding tax bases used in the computation of taxable profit. Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are generally recognised for all deductible temporary differences to the extent that it is probable that taxable profits will be available against which those deductible temporary differences can be utilised. Such deferred tax assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction which affects neither the taxable profit nor the accounting profit.

Deferred tax liabilities are recognised for taxable temporary differences associated with investments in subsidiaries and interests in joint ventures, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets arising from deductible temporary differences associated with such investments and interest are only recognised to the extent that it is probable that there will be sufficient taxable profits against which to utilise the benefits of the temporary differences and they are expected to reverse in the foreseeable future.

The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the assets to be recovered.

Deferred tax liabilities and assets are measured at the tax rates that are expected to apply in the period in which the liability is settled or the asset realised, based on tax rates that have been enacted or substantively enacted at the reporting date.

Current and deferred tax are recognised in profit or loss, except when they relate to items that are recognised in other comprehensive income or directly in equity, in which case, the current and deferred tax are also recognised in other comprehensive income or directly in equity respectively. Where current tax or deferred tax arises from the initial accounting for a business combination, the tax effect is included in the accounting for the business combination.

Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and liabilities on a net basis.

INVESTMENTS AND OTHER FINANCIAL INSTRUMENTS

Recognition of financial assets and financial liabilities

Financial assets and financial liabilities are recognised on the Group's Balance Sheet when the Group becomes a party to the contractual provisions of the instrument, and are initially measured at fair value. Transaction costs are included as part of the initial measurement, except for financial assets at fair value through profit or loss.

Investments and other financial assets are subsequently measured at either amortised cost or fair value depending on their classification. Classification is determined based on both the business model within which such assets are held and the contractual cash flow characteristics of the financial asset unless an accounting mismatch is being avoided.

Financial liabilities are subsequently measured at either amortised cost or fair value.

Derecognition of financial assets and financial liabilities

The Group derecognises a financial asset only when the contractual rights to cash flows from the asset expire, or it transfers the financial asset and substantially all the risks and rewards of ownership of the asset to another entity. If the Group neither transfers nor retains substantially all the risks and rewards of ownership and continues to control the transferred asset, the Group recognises its retained interest in the asset and an associated liability for the amount it may have to pay. If the Group retains substantially all the risks and rewards of ownership of a transferred financial asset, the Group continues to recognise the financial asset and also recognises a collateralised borrowing for the proceeds received.

On derecognition of a financial asset and financial liability a gain or loss is recognised in profit or loss.

Impairment of financial assets

The Group recognises a loss allowance for expected credit losses on financial assets which are measured at amortised cost. The measurement of the loss allowance depends upon the Group's assessment at the end of each reporting period as to whether the financial instrument's credit risk has increased significantly since initial recognition, based on reasonable and supportable information that is available without undue cost or effort to obtain.

Where there has not been a significant increase in exposure to credit risk since initial recognition, a 12-month expected credit loss allowance is estimated. This represents a portion of the asset's lifetime expected credit losses that is attributable to a default event that is possible within the next 12 months. Where a financial asset has become credit impaired or where it is determined that credit risk has increased significantly, the loss allowance is based on the asset's lifetime expected credit losses. The amount of expected credit loss recognised is measured on the basis of the probability weighted present value of anticipated cash shortfalls over the life of the instrument discounted at the original effective interest rate.

For financial assets measured at fair value through other comprehensive income, the loss allowance is recognised within other comprehensive income. In all other cases, the loss allowance is recognised in profit or loss.

Trade and other receivables are measured at initial recognition at fair value, and are subsequently measured at amortised cost using the effective interest method, less any allowance for expected credit losses.

The Group has applied the simplified approach to measuring expected credit losses which uses a lifetime expected loss allowance. To measure the expected credit losses, trade receivables are grouped on the basis of days overdue.

Cash and cash equivalents comprise cash-in-hand and on-demand deposits.

Trade and other payables are initially measured at their fair value, and are subsequently measured at amortised cost using the effective interest rate method.

An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities. Equity instruments issued by the Group are recognised at the proceeds received, net of direct issue costs.

The costs of an equity transaction are accounted for as a deduction from equity to the extent they are incremental costs directly attributable to the equity transaction that would otherwise have been avoided.

PROVISIONS

Provisions are recognised when the Group has a legal or constructive obligation, as a result of past events, for which it is probable that an outflow of economic resources will result and that outflow can be reliably measured.

The amount recognised as a provision is the best estimate of the consideration required to settle the present obligation at the end of the reporting period, considering the risks and uncertainties surrounding the obligation. When a provision is measured using the cash flow estimated to settle the present obligation, its carrying amount is the present value of those cash flows.

Provision for decommissioning is recognised in full when the related assets are installed. The decommissioning provision is calculated as the net present value of the Group's share of the expenditure expected to be incurred at the end of the life of the asset. The cost of recognising the decommissioning provision is included as part of the cost of the relevant asset and is thus charged to the income statement in accordance with the Group's policy for depreciation of property, plant and equipment or for impairment of intangible exploration and evaluation assets, depending upon the stage of the assets at the time of retirement. Periodic charges for changes in the net present value of the decommissioning provision arising from discounting are included in finance costs.

SHARE-BASED PAYMENTS

The Group has applied the requirements of IFRS 2 Share-based Payment for all grants of equity instruments.

The Group operates an equity-settled share option plan and a share-based compensation plan in respect of certain Directors, employees and consultants. Equity-settled share-based payments are measured at fair value (excluding the effect of non-market based vesting conditions) at the date of grant. The fair value of the service received in exchange for the grant of options and equity is recognised as an expense. The fair value determined at the grant date of equity-settled share-based payment is expensed on a straight-line basis over the vesting period, based on the Group's estimate of shares that will eventually vest and adjusted for the effect of non-market based vesting conditions.

Fair value of option grants is measured by use of the Black Scholes model for non-performance-based options. The expected life used in the model has been adjusted, based on management's best estimate, for the effect of non-transferability, exercise restrictions and behavioural considerations.

The grant by the Company of options and share-based compensation plans over its equity instruments to the employees of subsidiary undertakings in the Group is treated as a capital contribution. The fair value of employee services received, measured by reference to the grant date fair value, is recognised over the vesting period as an increase to investment in subsidiary undertakings, with a corresponding credit to equity in the parent entity accounts.

DEVELOPMENT EXPENSES

Costs incurred by the Group in respect of the assessment and pursuit of potential new projects are expensed directly to the income statement and included as development expenses. Material expenses relating to a specific project are disclosed on a separate line in the income statement.

SEGMENTAL REPORTING

Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker. The chief operating decision maker, who is responsible for allocating resources and assessing performance of the operating segments and making strategic decisions, has been identified as the Board of Directors.

4. CRITICAL ACCOUNTING JUDGEMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY

In the application of the Group's accounting policies, which are described in note 3, the Directors are required to make judgements, estimates and assumptions about the carrying amounts of the assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed on an on-going basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both the current and future periods.

The following are the critical judgements and estimations that the Directors have made in the process of applying the Group's and Company's accounting policies and that have the most significant effect on the amounts recognised in the financial statements:

RECOVERABILITY OF INTANGIBLE EXPLORATION AND EVALUATION ASSETS - GROUP

Determining whether an exploration and evaluation asset is impaired requires an assessment of whether there are any indicators of impairment, including by reference to specific impairment indicators prescribed in IFRS 6 Exploration for and Evaluation of Mineral Resources. If there is any indication of potential impairment, an impairment test is required based on the recoverable amount of the asset. The value in use calculation requires the entity to estimate the future cash flows expected to arise from the cash-generating unit and a suitable discount rate in order to calculate present value.

During the year ended 31 December 2020, the Group completed its restructure of the Paradox project and is now focused on a core acreage position of circa 25,000 acres, whilst also recognising further exploration potential in eleven shallower reservoir targets which could add even further value to the project over time. At 31 December 2020, the Group had drilled its first vertical well which was designed to facilitate a reuse which will allow the potential for future drilling of a horizontal appraisal lateral from the wellbore at significantly reduced cost to the Group. The Board believes that the restructured project is a highly attractive investment opportunity and ensures that the project will remain a central part of the Group's future focus and activity. 

At 31 December 2020, the Directors considered the indicators of impairment as set out in IFRS 6 and have satisfied themselves that there was no requirement to perform an impairment test.

The carrying amount of intangible exploration and evaluation assets at the balance sheet date was US$13.9 million (2019: US$13.5 million) and the Directors did not consider that it was appropriate to make a provision for impairment in respect of these assets at 31 December 2020.

RECOVERABILITY OF LOANS TO SUBSIDIARY UNDERTAKINGS - COMPANY ONLY

The Company has outstanding loans from its directly held subsidiaries which have then made a number of loans to indirectly held subsidiaries as the primary method of financing the activity of those subsidiaries. The principal loans are shown in the Company balance sheet on the basis that the loans incur interest at a commercial rate according to the Group's inter-company loan policy, which is being rolled up until such time as the subsidiaries are in a position to settle. However, there is a risk that the indirectly held subsidiaries will not commence revenue-generating activities and that the carrying amount of the Company's investment will, therefore, exceed the recoverable amount.

In accordance with IFRS 9 Financial instruments, as the subsidiary undertakings cannot repay the loans at the reporting date, the Board has made an assessment of expected credit losses ("ECL"). Having considered multiple scenarios on the manner, timing, quantum and probability of recovery of the receivables, the Board do not consider that any further provision is required and, therefore, subject to the recognition of exchange differences, a cumulative lifetime ECL of US$32.1 million has been recognised at 31 December 2020 (2019: US$31.2 million).

The calculation of the allowance for lifetime ECL requires a significant degree of estimation and judgement, in particular in determining the probability weighted likely outcome for each scenario considered. The Directors assessment of ECL included repayment through future cash flows over time (which are inherently difficult to forecast for the Group at its current stage of development), the amount that could be realised through an immediate sale of the subsidiary undertakings or its underlying assets and the loss that would arise should commercial extraction not occur. The Directors' assessment of repayment through future cash flows included a scenario where the loan was not recovered in full. The Directors' allocated a probability weighting of 65% to scenarios where recovery would be repayment over time, 10% to the scenario where immediate sale of the subsidiary undertaking or its underlying assets was contemplated, and 25% to the scenario where no extraction would occur.

At 31 December 2020, the Company has total loans in its directly held subsidiaries of US$49.0 million (2019: US$46.4 million). See note 15.

The outcome of any assessment is materially sensitive to the key assumptions inherent in the calculation and any downside in these estimates would result in an additional impairment of the underlying loans.

5. SEGMENTAL INFORMATION

The Group has one main operating segment, the exploration and development of O&G resources, which is primarily based in U.S. As a result, no segmental information is presented.

6. DEVELOPMENT EXPENSES

Development expenses represent material expenditure incurred by the Group in respect of the assessment and pursuit of specific projects.

7. OTHER INCOME

The Group was in receipt of the business rates grant introduced by the UK government to provide financial support to businesses during the COVID-19 pandemic. No further support was received or required by the Group.

8. LOSS BEFORE TAXATION

The loss before taxation for the year has been arrived at after charging/(crediting):

9. AUDITOR'S REMUNERATION

Amounts payable to the external auditors and their associates in respect of both audit and non-audit services:

10. STAFF COSTS

The average monthly number of employees (including Executive Directors) was:

Their aggregate remuneration comprised:

1A proportion of staff costs were deferred during the year. See note 27.

Included within Group wages and salaries is US$0.1 million (2019: US$0.04 million) capitalised to intangible exploration and evaluation assets.

Included within Company wages and salaries is US$0.2 million (2019: US$0.2 million) which was recharged to other Group entities.

Included within both Group and Company wages and salaries for the year ended 31 December 2019 were the sums of US$0.06 million in respect of pay in lieu of notice and US$0.03 million in respect of an ex-gratia payment made to a former Director.

The remuneration of certain Company Directors is paid through a subsidiary entity and is therefore not included in the Company only aggregate remuneration.

Refer to note 27 for details regarding the remuneration of the highest paid Director.

11. TAXATION

The charge for the year can be reconciled to the loss per the income statement as follows:

There has been no impact due to changes in UK taxation rates during the years reported.

Unrelieved tax losses carried forward, as detailed in note 20, have not been recognised as a deferred tax asset as there is currently insufficient evidence that the asset will be recoverable in the foreseeable future. The losses must be utilised in relation to the same operations.

12. LOSS PER ORDINARY SHARE

Basic loss per Ordinary Share is calculated by dividing the net loss for the year attributable to owners of the parent company by the weighted average number of Ordinary Shares in issue during the year. The calculation of the basic and diluted loss per Ordinary Share is based on the following data:

Due to the losses incurred from continuing operations in the years reported, there is no dilutive effect from the existing share options, share based compensation plan or warrants.

13. INTANGIBLE ASSETS

JOINT OPERATION

Rockies Standard Agreement

In March 2014, the Group signed an agreement under which its subsidiary, Rose Petroleum (Utah) LLC ("Rose Utah"), acquired the right to commence earning into a 75 per cent working interest of certain oil, gas and hydrocarbon leases in Grand and Emery Counties, Utah, from Rockies Standard Oil Company LLC ("RSOC"), which retained the remaining 25 per cent working interest.

In October 2019, the Group signed a new agreement with RSOC which gave it an immediate 75 per cent working interest and operatorship of key acreage. This agreement replaced the earn-in structure of the original agreement and gave the Group immediate ownership of the highest potential 12,920 lease acres. The Group terminated its remaining farm-in rights over less prospective acreage and reassigned those rights back to RSOC.

In February 2020, the Group announced that a sub-set of leases, located within the project core, had been extended for a further two years and added back into the Group's portfolio of leases with the result that the Group has been granted regulatory approval by the U.S. Bureau of Land Management ("BLM") for two-year lease extensions on circa 11,300 acres within the core of its project area. The Group is now focused on a core acreage position of circa 25,000 acres, within the Paradox basin.

The Group retains its obligations under the original earn-in agreement to carry RSOC for a 25 per cent working interest on the first well drilled on the project and has also agreed to carry RSOC for a 25 per cent working interest for the acquisition of specified targeted leases in and around the core acreage area, in aggregate, up to a total of US$0.5 million. It is the current view of both the Group and RSOC that the final figure will be considerably lower and any payments would be incurred over an extended period of time.

The project is not conducted within a separate legal entity and the Group is required to operate within the terms of the agreement. Therefore, costs incurred by the Group under the RSOC agreement have been accounted for as a joint operation, in accordance with the requirements of IFRS 11 Joint arrangements. Accordingly, the intangible exploration and evaluation assets presented above represents the Group's own asset in respect of the project and comprises costs capitalised in accordance with the Group's accounting policy on intangible exploration and evaluation assets.

U.S. Department of Energy Funding

During 2020, the Group worked with a project team led by the EGI on a project sponsored by the DOE. In September 2020, the Group announced that the EGI had selected the Group's acreage in the Paradox Basin on which to drill a vertical stratigraphic research well, the purpose of which, was to gather data to improve the understanding of the Paradox Basin play.

On 5 October 2020, the Group entered into an agreement with the EGI under which the EGI would fund US$2.0 million towards the planned stratigraphic research well. The well, State 16-2, was designed to facilitate re-use which will allow the potential for future drilling of a horizontal appraisal lateral from the wellbore and, given the commercial benefits of potential well re-use for the Group, the Group agreed to fund up to US$1.0 million of incremental costs, should the total cost of the well go above the EGI's US$2.0 million committed funding.

On 2 December 2020, the Group announced that it had received the regulatory approvals required to proceed with the spud of the State 16-2 and this was completed by 31 December 2020.

Under the terms of the agreement, the Group is the operator of the vertical well and is responsible for all planning and drilling activity. The Group and its 25 per cent partner RSOC continue to be the sole working interest owners in the leasehold and of the vertical well.

During the year, the Group had received US$1.8 million of funding from the EGI as described above. In accordance with IAS 20, the the carrying value of the Group's intangible exploration and evaluation assets have been presented net of the funds received. The remaining grant funding of US$0.2 million was received in February 2021.

14. PROPERTY, PLANT AND EQUIPMENT

The Group depreciation charge has been allocated to the income statement as follows:

15. INVESTMENTS

Company

The Company has outstanding loans made to its subsidiaries which incur interest at a commercial rate, according to the Group's inter-company loan policy. The loans are due for repayment once the subsidiaries commence revenue-generating activities which is not anticipated within the next twelve months and, therefore the loans are presented within non-current assets. The Board has assessed the recoverability of the loans and investments based on the expected future cash flows arising to the Company from its subsidiary entities and consider that no additional provision (2019: US$0.15 million) should be recognised in the period.

The Company had investments in the following subsidiary undertakings as at 31 December 2020:

Since the year end a new company, Zephyr Bakken LLC was incorporated in the U.S.. This is an exploration company through which the Williston Basin project will be accounted for.

The registered office address of all companies incorporated in the United Kingdom is 20-22 Wenlock Road, London, N1 7GU.

The registered office address for Minerales VANE S.A. de C.V. is Humboldt No. 121, Colonia del Valle, C.P. 78200, San Luis Potosi, S.L.P.

The registered office address for Rose Petroleum (US) LLC and Rose Petroleum (Utah) LLC is 1 Shipwright Street, Annapolis, MD 21401.

16. TRADE AND OTHER RECEIVABLES

The Group has an outstanding amount due for US$0.2million in respect of a loan made to Magellan to facilitate completion of the sale of the Group's Mexico assets. The loan is non-interest bearing and due for repayment when Magellan recovers indirect tax incurred in Mexico upon acquisition of the Group's ore processing mill in the year ended 31 December 2017. In accordance with IFRS 9 Financial instruments, whilst the Board intends to pursue repayment of the loan in full, it has assessed expected credit losses ("ECL") and, having considered the current trading position of Magellan within Mexico, a cumulative lifetime ECL of US$ 0.2 million continues to be recognised at 31 December 2020 (2019: US$0.2 million).

The Directors consider that the carrying amount of trade and other receivables approximates to their fair value, and represents the Group's maximum exposure to credit risk.

17. CASH AND CASH EQUIVALENTS

Cash and cash equivalents held by the Group and the Company as at 31 December 2020 were US$3.9 million and US$2.2 million respectively (2019: US$1.1 million, US$1.1 million). The Directors consider that the carrying amount of these assets approximate to their fair value.

18. TRADE AND OTHER PAYABLES

Trade payables and accruals principally comprise amounts outstanding for trade purchases and on-going costs.

Other payables primarily represent the potential liability due to the German licencing authorities in respect of the relinquished hydrocarbon licences in south-western Germany. The Group has continued to recognise the remaining potential liability although it continues to negotiate further reductions with the German licencing authorities.

No interest is generally charged on balances outstanding.

The Group has financial risk management policies to ensure that all payables are paid within the credit time frame.

The Directors consider that the carrying amount of trade and other payables approximates to their fair value.

19. LEASE LIABILITIES

The Group does not face a significant liquidity risk with regard to lease liabilities.

20. DEFERRED TAX

There are unrecognised deferred tax assets in relation to: