Zephyr Energy Regulatory News (ZPHR)

4 January 2021

Zephyr Energy plc

(the "Company" or "Zephyr")

 Update on State 16-2 well, business development and outlook for 2021

Zephyr Energy plc (AIM: ZPHR), the Rocky Mountain oil and gas company focused on responsible resource development, is pleased to provide the following operational update:

State 16-2 well, Paradox Basin, Utah, U.S.

· Drilling crews at the State 16-2 well site have been operating around the clock since the December spud, and progress to date is fully in line with the Company's expectations.

· Following the spud of the State 16-2 well, the Company received the third US$600,000 tranche of the US$2 million grant funds allocated by the U.S Department of Energy and its National Energy Technology Laboratory (the "DOE") for the drilling of the well. The final balance of US$200,000 will be received following the completion of drilling operations.

Business Development activity

· While the safe and successful completion of the State 16-2 well drilling operation is the Company's top priority, the Company's key goal for 2021 is to establish production and positive cash flow, either through our existing portfolio, via acquisition, or through a combination of both. We aim to end 2021 with a balanced asset base, one that contains a mix of current production and substantial long-term development upside.

· Management continues to assess acquisition opportunities with the potential to deliver near-term cash flow at attractive valuations. Potential acquisitions under consideration have the following criteria which meet the Company's strategic profile:

o Oil and gas interests located in the greater Rocky Mountain region of the U.S.;

o Current or near-term production potential, in order to balance the significant long-term upside potential provided by the Company's Paradox project;

o Low-risk, low-entry cost assets located in core areas of established, historically prolific basins;

o Ability to generate near-term value from the Company's existing $15 million tax loss asset; and

o Proprietary acquisition angles (via land strategy, relationship, or unique view on upside opportunity).

· Related to the above criteria, we continue to monitor progress on our proposed working interest acquisition in the McCoy lease in the Denver-Julesburg Basin ("DJ Basin") in Weld County, Colorado, U.S. While the potential McCoy acquisition meets most of the Company's key criteria, the timeline for development has been delayed by the current operator of the project. Zephyr will continue to monitor progress on the project and will make an investment decision on whether to proceed once a firm development schedule is established. In the meantime, the period to close the potential transaction has been extended by mutual agreement until June 30, 2021, providing optionality to the Company at no additional expense. More details on the potential McCoy transaction can be found in the background section below (and which were also announced on 10 February 2020).

Colin Harrington, Zephyr's Chief Executive, said "I'd like to wish our Shareholders and partners a very happy New Year - in particular, I'd like to thank our crew on site at the State 16-2 well for their exceptional and tireless work in extremely cold conditions through the entirety of the Christmas and New Year's holidays. We greatly appreciate their efforts and we are very pleased with progress made to date. I'd also like to thank our partners at the DOE and the University of Utah's Energy and Geosciences Institute for their continued support throughout the development.

"2021 promises to be a very exciting year for the Company, both from the continued development of our Paradox project and with an acceleration of our efforts in the broader acquisition market.

"Any acquisitions made will have to conform to our strict search criteria, most notably the ability to accelerate production and cash flows to the Company. We continue to be excited about the potential McCoy acquisition, and will make an investment decision at the point of development when we can properly assess the timing and economic drivers of the project.

"The goal for Zephyr over the next twelve months is straightforward - we want to transform the Company into a well-capitalised producer of oil and natural gas, with strong positive cash flow and significant growth potential in its asset portfolio, and one which has developed its assets in an environmentally responsible way. The first step on that journey begins with the safe and successful completion the State 16-2 well.

"The coming weeks will be filled with activity, and we look forward to updating Shareholders on our progress."

Contacts:

Background to the McCoy Acquisition

The McCoy lease is a 317-acre leasehold in the Denver-Julesburg Basin ("DJ Basin") in Weld County, Colorado, U.S. (the "McCoy lease" or "McCoy"). 

On 4 November 2019, the Company announced it had entered into a Letter of Intent ("LOI") with Captiva Energy Holdings II, LLC ("CEH") for the Acquisition of an initial 10% of CEH's 89.5% working interest in the McCoy lease (the "Acquisition"), with an option to acquire up to a further 80% of CEH's working interest in the lease (the "Option").

On 1 May 2020, the Company announced that its period to close the Acquisition, and to exercise its Option, had been extended until 31 December 2020, allowing the Company more time to assess market conditions prior to making an investment decision.

The Company is now pleased to announce that it has now negotiated a further extension to close the Acquisition, and to exercise its Option until 30 June 2021. The extension to the Acquisition and Option were granted at no additional financial cost to the Company.

The Board continues to believe that the McCoy Acquisition would fit well with the Company's stated strategy of targeting low-risk, low-entry cost acquisitions which can deliver near-term production to balance the Group's asset portfolio and would complement the Company's Paradox project in Utah where the Company is currently in the process of drilling its State 16-2 well.

The Acquisition would provide the Group with low-risk horizontal development drilling exposure in the prolific Niobrara shale 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 basin currently undergoing a resurgence as vertical production is replaced with successful one and two-mile horizontal well developments. The McCoy lease is located in an active part of the DJ Basin - a horizontal redevelopment of the existing productive lease is proposed, with an initial 12 well drilling programme utilizing two-mile long laterals.

The Board views the McCoy acquisition as a low-risk development opportunity to participate alongside Great Western Petroleum, one of the most active developers in the DJ Basin with a long track record of successful horizontal development in the immediate area.

The Acquisition would also mark the beginning of a partner relationship with CEH and its operating affiliate Captiva Energy Partners ("CEP"). This partnership would provide further deal flow, access to proven competence and a wealth of experience in the Rocky Mountain region. The deal fits well with the stated strategy of the Group, targeting low-risk, low-entry cost acquisitions which can deliver near-term production to balance the Group's asset portfolio currently comprised of the longer-term Paradox Basin appraisal asset.

Due to the economic crises related to coronavirus and the associated downturn in the oil price since the Group signed the McCoy deal, the McCoy project was not drilled in the first half of 2020 as originally planned. However, the Board has now been able to extend the Group's Option to proceed with the Acquisition until the end of June 2021. This is expected to give time for a recovery in the oil sector and in market sentiment. In addition, capital costs to drill two-mile wells in the DJ Basin have been reduced by over 30% over the last twelve months, significantly lowering break even prices on horizontal developments. The Group believes that in the current market with lowered capital costs, the breakeven oil price at McCoy will be below US$30 per barrel of oil equivalent ("BOE").