Zephyr Energy PLC Final Results (8673D)

Share Name	Share Symbol	Market	Type	Share ISIN	Share Description
Zephyr Energy Plc	AQSE:ZPHR.GB	Aquis Stock Exchange	Ordinary Share	GB00BF44KY60

	Price Change	% Change	Share Price	Bid Price	Offer Price	High Price	Low Price	Open Price	Shares Traded	Last Trade
	0.00	0.00%	3.30	2.50	4.50	3.50	3.15	3.30	0.00	16:29:49

Industry Sector	Turnover	Profit	EPS - Basic	PE Ratio	Market Cap
	0	0		N/A	0

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RNS Number : 8673D

Zephyr Energy PLC

26 June 2023

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.

26 June 2023

Zephyr Energy plc

("Zephyr" or the "Company")

Full Year Results for the year ended 31 December 2022

Notice of AGM

Zephyr Energy plc (AIM: ZPHR) (OTCQB: ZPHRF), the Rocky Mountain oil and gas company focused on responsible resource development from carbon-neutral operations, is pleased to announce its audited results for the year ended 31 December 2022.

Highlights

Over the 2022 financial year, and in the period since, Zephyr has continued to make sustained progress with its primary goal of opening up the next prolific onshore U.S. oil and gas play.

The Company's key goals for 2023 are to move its project in the Paradox Basin, Utah, U.S. (the "Paradox project") into full commercial production while continuing to grow its highly-profitable, cash generating non-operated asset portfolio.

The Company's Board of Directors (the "Board") remains firmly committed to delivering long-term value to our Shareholders, while upholding our core values of being responsible stewards of our shareholders' capital and of the environment in which we operate.

Financial

-- Near seven-fold increase in revenues from prior year to US$41.1 million (2021: US$6 million), and a profit before tax of US$22.6 million (2021: US$1 million), highlighting the extent of the Group's growth during the period.

-- Net profit after tax of US$19.3 million, equating to a profit of 1.26 cents per Ordinary Share for the year ended 31 December 2022 (2021: US$0.8 million or 0.08 cents per Ordinary Share).

-- At 31 December 2022, the Group had cash and cash equivalents of US$9 million (2021: US$1.8 million).

-- Total investment in the Group's exploration and evaluation assets as at 31 December 2022 was US$38 million (2021: US$22.8 million) reflecting the ongoing investment in the Paradox project.

-- Total investment in property, plant, and equipment as at 31 December 2022 was US$51.8 million (2021: US$11.2 million) reflecting the further acquisition of non-operated assets in the Williston Basin, recurring capital expenditure and decommissioning obligations on the non-operated assets.

Paradox Project, Utah, U.S. (operated asset)

-- First flowing hydrocarbons from the Company's State 16-2 LN-CC well (the "State 16-2 well") and the drilling of the State 36-2 LNW-CC well (the "State 36-2 well"), a major milestone for the project.

   --      Working- interest in the project increased to 100% across approximately 45,000 acres.

-- Competent Persons Report which highlighted the scale and resource potential of the project. Based on the Company's 100% working interest Sproule reported:

o 2P Reserves: Maiden Paradox project Proved Reserves of 2.57 million barrels of oil equivalent ("boe")

o 2C Contingent Resources: 34 million boe

o 2U Prospective Resources from overlying reservoirs: 270 million net unrisked boe.

-- Acquisition of assets and infrastructure during the period including 21 miles of natural gas gathering lines, a gas processing plant (not currently in operation), and rights of way for additional gathering lines to help facilitate moving the project into the production phase with less upfront cost.

Williston Basin, North Dakota, U.S. (non-operated assets)

-- Zephyr now has a portfolio of interests in more than 220 wells operated by top-tier operators in the Williston Basin, one of the most prolific basins in the U.S.

-- FY 2022 revenues from the non-operated assets of US$41.1 million (from production of over 500,000 boe) a circa 585% increase from revenues of US$6 million in FY 2021.

-- FY 2022 sales volumes from the portfolio averaged 1,410 barrels of oil equivalent per day ("boepd") (2021: 263 boepd).

-- Portfolio has generated high margin cashflows, providing funding for the Paradox project and further investment in the non-operated portfolio.

-- Implemented inaugural hedging programme with BP Energy Company, locking-in over US$30 million of forecasted Williston Basin revenue over a two-year period.

Corporate

-- In line with the Company's ESG objectives, Zephyr continued to achieve Scope 1 carbon-neutrality across its operational footprint during the period under review.

   --      There were no reported health or safety incidents on Zephyr operated assets.

Rick Grant, Zephyr's Non-Executive Chairman, said:

"I am pleased to report that the 2022 financial year was a period of excellent environmental, financial and operational performance for the Company.

"Zephyr continues to be well positioned as a profitable, cash generating exploration and production group and our balanced portfolio of operated and non-operated assets is expected to continue to yield strong results for Zephyr. Cash flows generated from our non-operated portfolio will continue to be primarily used for the ongoing development of our flagship Paradox project.

" Looking ahead, with a diverse portfolio of cash flowing assets, potential for substantial future organic growth, a solid financial footing and a talented and dedicated team of employees, we continue to be extremely optimistic about Zephyr's future.

"Our key goals for 2023 are to move the Paradox project into full commercial production while continuing to grow our non-operated asset portfolio.

"I would like to thank our employees and contractors for their hard work in 2022, especially those on site who worked tirelessly through historically difficult conditions last winter. I also wish to express gratitude to our Shareholders, lenders, advisers and other stakeholders for their ongoing support to the Group.

"The Board is looking to the future with a high degree of confidence as we continue in our pursuit of building a group of which all our stakeholders can be proud."

Notice of AGM and posting of annual report

The Annual General Meeting will be held at 11 a.m. on 26 July 2023 at the offices of Memery Crystal, 165 Fleet Street, London EC4A 2DY.

A copy of the Company's annual report and accounts, and the notice of AGM, will shortly be available on Zephyr's

website,   http://www.zephyrplc.com , and posted to Zephyr's Shareholders.

Contacts

 
 Zephyr Energy plc                                  Tel: +44 (0)20 7225 
  Colin Harrington (CEO)                                           4590 
  Chris Eadie (FD) 
 Allenby Capital Limited - AIM Nominated            Tel: +44 (0)20 3328 
  Adviser                                                          5656 
  Jeremy Porter / Vivek Bhardwaj 
 Turner Pope Investments - Joint-Broker             Tel: +44 (0)20 3657 
  James Pope / Andy Thacker                                        0050 
 
  Panmure Gordon (UK) Limited - Joint-Broker 
  John Prior / Hugh Rich / James Sinclair-Ford     Tel: +44 (0) 20 7886 
                                                                   2500 
  Celicourt Communications - Public Relations 
  Mark Antelme / Felicity Winkles / Ali 
  AlQahtani 
                                                   Tel: +44 (0) 20 7770 
                                                                   6424

Qualified Person

Dr Gregor Maxwell, BSc Hons. Geology and Petroleum Geology, PhD, Technical Adviser to the Board of Zephyr Energy plc, who meets the criteria of a qualified person under the AIM Note for Mining and Oil & Gas Companies -June 2009, has reviewed and approved the technical information contained within this announcement.

Notes to Editors

Zephyr Energy plc (AIM: ZPHR) (OTCQB: ZPHRF) is a technology-led oil and gas company focused on responsible resource development from carbon-neutral operations in the Rocky Mountain region of the United States. The Company's mission is rooted in two core values: to be responsible stewards of its investors' capital, and to be responsible stewards of the environment in which it works.

Zephyr's flagship asset is an operated 45,000-acre lease holding located in the Paradox Basin, Utah, 25,000 acres of which has been assessed to hold, net to Zephyr, 2P reserves of 2.6 million barrels of oil equivalent ("mmboe"), 2C resources of 34 mmboe and 2U resources 270 mmboe.

In addition to its operated assets, the Company owns working interests in a broad portfolio of non-operated producing wells across the Williston Basin in North Dakota and Montana.

The Williston portfolio currently consists of working-interests in over 220 modern horizontal wells. Cash flow from the Williston production will be used to fund the planned Paradox Basin development. In addition, the Board will consider further opportunistic value-accretive acquisitions.

Glossary of terms

Reserves : Reserves are defined as those quantities of petroleum which are anticipated to be commercially recovered from known accumulations from a given date forward

1P: proven reserves (both proved developed reserves + proved undeveloped reserves)

2P: 1P (proven reserves) + probable reserves, hence "proved and probable"

3P: the sum of 2P (proven reserves + probable reserves) + possible reserves, all 3Ps "proven and probable and possible"

Contingent Resources : Those quantities of petroleum estimated, as of a given date, to be potentially recoverable from known accumulations by application of development projects, but which are not currently considered to be commercially recoverable due to one or more contingencies.

Contingent Resources may include, for example, projects for which there are currently no viable markets, or where commercial recovery is dependent on technology under development, or where evaluation of the accumulation is insufficient to clearly assess commerciality. Contingent Resources are further categorised in accordance with the level of certainty associated with the estimates and may be sub-classified based on project maturity and/or characterised by their economic status.

1C: Low estimate of Contingent Resources

2C: Best estimate of Contingent Resources

3C: High estimate of Contingent Resources

Prospective Resources: Those quantities of petroleum which are estimated, on a given date, to be potentially recoverable from undiscovered accumulations.

1U: Low estimate of Prospective Resources

2U: Best estimate of Prospective Resources

3U: High estimate of Prospective Resources

CHAIRMAN'S STATEMENT

OVERVIEW

" We continue to make sustained progress with our primary goal of opening up the next prolific onshore U.S. oil and gas play"

On behalf of the Company's Board of Directors (the "Board"), I am pleased to present the Company's financial and operational results for the 2022 financial year which reflect the hard work, dedication and focus of the Zephyr team.

The team's execution of our strategy and focused initiatives has driven another year of excellent environmental, financial and operational performance. Zephyr continues to be well positioned as a profitable, cash-generating exploration and production group focused on responsible resource development from carbon-neutral operations in two established oil producing basins in the Rocky Mountain region of the U.S.

The Group reports a near seven-fold increase in revenues from the prior year to US$41.1 million (2021: US$6 million), and profit before tax of US$21.2 million (2021:US$1 million), highlighting the extent of the Group's growth during the year.

Our balanced portfolio of operated and non-operated assets is expected to continue to yield strong results for Zephyr in the future, with cashflows generated from our non-operated portfolio primarily used for the continued development of our flagship project in the Paradox Basin, Utah, U.S. (the "Paradox project"), as we pursue our strategic objective of opening up the next prolific onshore U.S. oil and gas play, while focusing on the delivery of safe, reliable, and responsibly produced hydrocarbons.

OPERATIONAL ACTIVITY

Paradox project

During the period under review Zephyr continued to make material progress towards unlocking what the Board believes to be the significant potential value from our Paradox project. From a lease holding perspective, and due to an opportunist acquisition, our working interest in the Paradox project has now increased to one hundred percent ("%") and covers over 45,000 acres with maiden reserves and a large contingent resource base - significant increases from 2021.

Despite a number of challenges, (from historically harsh climatic conditions, supply chain issues and operational challenges associated with the targeting of a highly pressured reservoir), we are pleased that drilling results have demonstrated flowing hydrocarbons in both wells that have been drilled to date and both of which appear capable of commercial production. Of importance to Zephyr is that drilling success to date has been achieved utilising both hydraulic stimulation and production via natural fractures, indicating significant optionality for the large-scale development of the project.

The updated Competent Person Report (the "CPR") for the project, which was completed during the period, further highlighted the substantial potential scale and profitability of the Paradox project. Following the acquisition of the remaining 25% working interest in the project (completed in early 2023), the CPR reports net to Zephyr, 2P reserves of 2.57 million barrels of oil equivalent ("mmboe"), 2C contingent resources of circa 34 mmboe and 2U unrisked prospective resources of 270 mmboe.

Our key focus for the next year involves getting our two newly-drilled wells into full commercial production. After many years of committing significant resources and investment to the project this is expected to be a landmark phase for the Group and one which I hope will see the patience of the Shareholders of the Company (the "Shareholders") rewarded.

A special word of thanks to our team for how it dealt with the well control incident that we experienced in April 2023. It was a testament to the experience, depth and hard work of our operations team that the incident was managed with no injuries and minimal environmental impact.

Williston Basin

In 2021, the Group stated that one of its key objectives was to establish production and positive cashflow via acquisition. The growth achieved since then through the development of our non-operated asset portfolio has been exceptional.

From a standing start in 2021, the Group has built a portfolio of interests in more than 220 wells operated by top-tier operators in one of the most active and prolific basins in the U.S., and these interests have generated high margin cashflows which provided funding for our Paradox project and further investment in the non-operated portfolio.

The growth of our non-operated asset portfolio resulted in revenues of US$41.1 million during the year ended 31 December 2022, with production of over half a million barrels of oil equivalent ("boe"). We expect to see further growth from our non-operated portfolio in 2023.

During the year, we also implemented an inaugural hedging programme which had the effect of locking in over US$30 million of forecasted Williston Basin revenue over a two-year period. This hedging programme allowed us to provide cashflow surety related to our debt obligations, as well as to de-risk funding requirements for our ongoing activity in the Paradox, while still allowing for additional exposure to future price fluctuations.

ENVIRONMENTAL, SOCIAL AND GOVERNANCE ("ESG")

Followers of Zephyr will be familiar with our commitment to stewardship of both the natural environment and shareholder capital being at the core of all our activities. Prudent and careful cash management and environmental focus are central tenets of our philosophy and remained our key operating principles during the period. The Board firmly believes this is not only the proper way to operate the Group but an approach that will ensure our ongoing success on behalf of all stakeholders. We believe good environmental and operational performance, supported by the appropriate levels of governance, is the optimal way to drive superior investor returns.

As we grow, we will continue to foster a safe working environment and be active participants in the communities in which we operate. Sustaining our local communities through environmental stewardship, social responsibility and strong corporate governance is an extension of our mission and reflects our goal to make a lasting and meaningful positive impact in these communities.

I am proud that we continue to achieve carbon-neutral status as an oil and gas producer. This is achieved through our Verified Emission Reduction credits ("VERs") programme, which aims to offset all Scope 1 carbon emissions from both our operated and non-operated assets and which is administrated through the Prax Group ("Prax"), a leading UK- based energy trading company.

As the recent well-control incident demonstrated, the delivery of our near and longer-term ambitions and strategy would not be possible without a clear focus on mitigating and managing day-to-day risks, including costs, safety and the wider operating environment. We have a zero-harm safety culture focused on continuous improvement to achieve an injury-free and safe work environment.

OUTLOOK

Looking ahead, with a diverse portfolio of cash-flowing assets, potential for substantial future organic growth, a solid financial footing and a talented and dedicated team of employees, we continue to be extremely optimistic about Zephyr's future.

Our key goals for 2023 are to move the Paradox project into full commercial production while continuing to grow our non-operated asset portfolio.

We remain firmly committed to delivering long-term value to our Shareholders, while upholding our core values of being responsible stewards of our Shareholders' capital and responsible stewards of the environment in which we operate.

CONCLUSION

I would like to thank our employees and contractors for their hard work in 2022, especially those on site who worked tirelessly through historically difficult conditions last winter.

I also wish to express gratitude to our Shareholders, lenders, advisers and other stakeholders for their ongoing support to the Group.

The Board is looking to the future with a high degree of confidence as we continue in our pursuit of building a group of which all our stakeholders can be proud.

RL Grant

Chairman

23 June 2023

CHIEF EXECUTIVE OFFICER'S REPORT AND OPERATING REVIEW

PRINCIPAL OBJECTIVES AND STRATEGIES

Zephyr Energy plc is an oil and gas exploration and production group operating in the Rocky Mountain region of the U.S.

The Group's stated mission is to open up the next prolific onshore U.S. oil and gas play through the development of its flagship Paradox project. The two core values of the Group are to be responsible stewards of investors' capital and responsible stewards of the environment.

To achieve this mission, the Group has prioritised:

-- Constructing a team with significant experience in the U.S. oil and gas sector, with a particular focus on operations, development, governance, finance, merger, acquisition and turnaround experience;

-- A sharpening of focus - we are wholly focused on responsible exploration and production investment in the Rocky Mountain region and have exited all other legacy sectors and geographies;

-- The development of a non-operated asset portfolio that provides cashflow to be reinvested in the Paradox project;

-- A continued focus on meaningful ESG efforts, including corporate governance compliance, ensuring carbon-neutrality across our operations, 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 relationships with alternative capital providers);

-- The design and build of a technology-led acquisition process which can rapidly assess opportunities of further interests through acquisition, farm-in agreements or joint venture arrangements; and

   --      Tight financial control and cash conservation.

REVIEW OF OPERATIONS AND FUTURE DEVELOPMENTS

Background

The 2022 financial year, and the period since, were a time of intense operational activity during which Zephyr continued to build on the momentum gained in 2021. During the period under review, the Group achieved multiple operational milestones, most notably with the first flowing hydrocarbons from the Paradox project and with the rapid growth of our highly profitable cash-generating non-operated portfolio.

As outlined in the Chairman's Statement, the Board remains fully committed to the primary goal of opening up the next prolific onshore U.S. oil and gas play through the systematic development of the Paradox project and our key goal for the next period is to establish commercial production from the project.

The Paradox project is located in the Paradox Basin, Utah, U.S. where Zephyr operates a now 45,000 acre leasehold position with demonstrable scale and impressive upside potential. The drilling success achieved during the period was a significant appraisal milestone, and the Board are both optimistic and excited about unlocking additional value from the project by progressing to commercial hydrocarbon production over the coming months.

The Group's non-operated production comes from working interests in wells across the Middle Bakken and Three Forks reservoirs in the Williston Basin (in both North Dakota and Montana). By the end of March 2023, Zephyr had working interests in 223 wells that were available for production. 2022 sales volumes from the portfolio averaged 1,410 barrels of oil equivalent per day ("boepd") (2021: 263 boepd).

The Board's strategy is to utilise the majority of the considerable cashflows generated from the non-operated Williston Basin portfolio in the Paradox project development programme, and this organic growth strategy will continue.

Paradox project - operated asset

Overview

The period under review was highlighted by the drilling of two successful wells, the State 16-2 LN-CC well (the "State 16-2 well") and the State 36-2 LNW-CC well (the "State 36-2 well"), a production test of the State 16-2 well and increases in both acreage and working interest percentages across our Paradox project land position. In addition, we acquired surface assets and infrastructure that will facilitate us in bringing the project into production.

The Board believes that the Paradox project has substantial potential upside. Of significance, our main geological target, the Cane Creek reservoir has two demonstrable methods of development (via the targeting of natural fractures and through hydraulic stimulation). Both wells drilled to date have discovered hydrocarbons, and both appear capable of commercial production when ultimately tied into natural gas infrastructure. In addition, eight overlying reservoirs have been high graded as suitable for future exploration and potential development.

The second half of 2023 is expected to be a major inflection point for the Paradox project, one in which the project moves from its current appraisal status into a cash-flowing development asset. The Group expects to see flush production when the State 36-2 and State 16-2 wells come online.

The drilling of the two wells has provided the Group with a wealth of new geological information which has in turn resulted in a far greater geological understanding of our acreage position. This information includes strong evidence of:

   --      A continuous resource play (tight oil and tight gas); 
   --      Repeatable petrophysics across a large area; 
   --      Geology which correlates with the seismic; 
   --      Consistent reservoir thickness within a sub area; 
   --      High reservoir pressures; 
   --      High matrix permeability for a resource play;

-- A reservoir which can be stimulated (with favourable rock mechanics albeit under high stress); and

   --      The presence of productive natural fractures

Competent Persons Report ("CPR")

Following the successful completion of the State 16-2 well in late 2021, Zephyr commissioned the independent reserve consulting firm Sproule International ("Sproule") to complete a CPR to assess the Group's reserves across both the Cane Creek reservoir and the eight overlying reservoirs.

Sproule audited the crude oil, natural gas, and field condensate reserves and contingent resources and the associated future net revenue attributable to the Group's White Sands Unit ("WSU") and Cane Creek Drilling Spacing Unit ("DSU") with an effective date of 31 March 2022. Sproule also conducted an audit of the Prospective Resources attributable to the WSU on the same date.

The Board was delighted with the conclusions drawn by Sproule, which demonstrated the impact of Zephyr's drilling success of the State 16-2 well and further highlighted the substantial potential scale and profitability of the Paradox project.

The key findings from the CPR were as follows:

-- Net 2P Proved Reserves: Proved Reserves of 2.1 million barrels of oil equivalent ("mmboe") net to Zephyr, the Group's first proved reserves booked in the Paradox project (following the Group's acquisition of the remaining 25% non-operated interests Proved Reserves increased to 2.6 mmboe).

-- Net 2C Resources: 27 mmboe net to Zephyr, more than double the 12.3 mmboe in the previous CPR prepared in 2018 (following the Group's acquisition of the remaining 25% non-operated interests Net 2C Reserves increased to 34 mmboe).

-- Net Prospective Resources from overlying reservoirs: 203 net unrisked mmboe net to Zephyr (68 mmboe risked with a weighted-average 33% chance of success) (following the Group's acquisition of the remaining 25% non-operated interests Net Prospective Resources increased to 270 mmboe).

Sproule's evaluation took place across 30,700 acres of Zephyr's Utah assets. Zephyr now operate 45,000 gross acres in the Paradox Basin and further evaluation is planned for the acreage not yet included in the CPR.

Project development and consolidation

Having completed a comprehensive restructuring of the Paradox acreage position in 2021, the Group continued with the consolidation of the project during the period. This was spearheaded by the acquisition of additional project acreage, the acquisition of a number of infrastructure assets and through the acquisition of the remaining 25% working interest in the core acreage of the project.

Acquisition of additional acreage

In October 2021, the Group announced U.S. Federal Government approval for the formation of a new federal unit, the WSU, which enables Zephyr to proceed with an optimal long-term development plan for the acreage. In August 2022, Zephyr announced the acquisition of an additional 1,920 acres (the "new acreage") in the Paradox Basin, directly adjacent to the WSU. T he new acreage has been approved for inclusion into the federal unit by removing less prospective acreage that had yet to have 3D seismic acquisition acquired across it. The acreage is largely covered by Zephyr's existing 3D seismic, and directly borders the Zephyr lease on which the State 36-2 well is located.

This opportunistic new acreage acquisition was part of the Group's ongoing portfolio management of its Paradox Basin position. This active land management strategy has resulted in a growing portfolio of development opportunities which the Board believes is increasingly difficult to replicate in today's regulatory and political environment.

In February 2023, the Group completed the acquisition of the remaining 25% working interest in the core acreage of the Paradox project. This acquisition increased Zephyr's net acreage in the project to circa 45,000 acres, further details of which are outlined below.

Working interest acquisition

In December 2022, Zephyr announced that it had agreed to acquire the remaining 25% working interest in the core acreage of the Paradox project from Rockies Standard Oil Company LLC ("RSOC"). The acquisition completed in February 2023.

The total consideration payable for the working interest is up to US$3 million, payable by way of the issue of new Ordinary Shares of 0.1 pence each in the capital of the Company ("Ordinary Shares") at a price of 6.05 pence per Ordinary Share, representing a circa 11% premium to the Company's mid-market closing share price on the prevailing share price on 20 December 2022.

-- A first tranche of 13,483,095 new Ordinary Shares was issued to RSOC on the completion of the acquisition;

-- A second tranche of 26,966,189 new Ordinary Shares will be issued upon Zephyr's final investment decision with respect to the contract award to a primary contractor to commence construction activities to make the Powerline Road gas processing plant operational; and

-- All equity issued to the vendor will be subject to a lock-up period which expires at the earlier of the date that first gas from the State 36-2 well is sold via the Dominion Energy Utah, LLC ("Dominion Energy") 16-inch gas export pipeline; or 15 December 2023.

The acquisition provided an immediate opportunity for Zephyr to consolidate its working interest in the core acreage of the Paradox project and includes the following assets:

-- The remaining 25% interest in the State 16-2 well (with an estimated NPV-10 of US$3.1 million);

   --      The remaining 25% interest in the State 36-2 well; and 
   --      Zephyr retains its 100% ownership in the infrastructure assets acquired in 2022.

The acquisition was also immediately accretive across all reserve and resource categories. Zephyr's technical team estimated that the acquisition adds:

   --      Over 450,000 boe in 2P Reserves; 
   --      Over 7 million boe in 2C Contingent Resources; and 
   --      Over 67 million boe of 2U unrisked Prospective Resources.

As of today, and following activity in the period, the tenure of the Paradox project is strong and the land position is stable. This security and right to operate provides the Board with the confidence to further invest in the drilling activity on the project.

The period under review began with the drilling of the State 16-2 well and ended with the spud of the State 36-2 well and both were successfully drilled and demonstrated the ability to flow commercial volumes of hydrocarbons.

State 36-2 well drilling

In November 2022, the Group announced that drilling on the State 36-2 well had commenced with the prime objective being to target potential production from the Cane Creek reservoir.

After a complex drilling operation hampered by extreme weather conditions and, having reached the Cane Creek reservoir at a depth of 9,598 feet true vertical depth, the well experienced a significant influx of hydrocarbons which consequently led to suspension of drilling operations while the well was stabilised. The influx was caused by the well intersecting an apparent major natural fracture network in the reservoir, and the resultant flowing hydrocarbons were diverted safely at surface through the drilling rig flare stack whereby they were subsequently flared. Throughout this period, Zephyr's operations team followed appropriate well control procedures, and stabilised the well without incident.

This influx was managed and safely controlled, which subsequently allowed for the drilling of an additional 132 feet into the Cane Creek reservoir, at which point the Group elected to run production casing down the total depth of the well.

Operations to run 7-inch production casing were successful and the well was made fully safe and the drilling rig was released. The Group then planned to commence production testing and potential completion of the fractured Cane Creek reservoir interval.

In addition to near-term testing, the running of the 7-inch casing string provided the Group with the option to return to the well (should it elect to do so) to drill an extended lateral at a later date. A subsequent lateral would enable the Group to test for further natural fracture presence at this location within the Cane Creek reservoir, and also enable the well to be completed by hydraulic stimulation across a longer lateral should Zephyr seek to increase well productivity in the future.

Results from the drilling operations indicated that the well penetrated a folded and naturally fractured Cane Creek reservoir, features which have been highly productive in other Cane Creek wells. Pore pressure analysis suggested that the well encountered very high reservoir overpressure, with formation pressures estimated at around 9,300 pounds per square inch (which is broadly consistent with previously drilled offset wells).

The well further delineated the presence of natural gas and condensate within a large structural compartment, and at a new location within Zephyr's acreage and 3D seismic coverage, which provided additional confirmation of Zephyr's model for hydrocarbons in place across the acreage position.

State 36-2 well production test and well control incident

On 8 March 2023, the Group announced that planning for the production test had been completed and that all services for the test had been procured. A Zephyr-contracted service rig was mobilised to the well-site and operations on the ground commenced. This was achieved despite the ongoing difficult winter weather conditions encountered in Utah this year. Workover operations (which were to include perforating the well in the productive portion of the Cane Creek reservoir) and subsequent production testing were estimated to take four to six weeks. As the well was expected to flow from natural fractures, no hydraulic stimulation was expected as part of this test.

On 7 April 2023, as workover operations were being completed, the well experienced a significant control issue despite multiple attempts to secure the well by the rig crew. The incident was initially caused by the failure in a safety valve, and subsequently resulted in hydrocarbons being released from the well in an uncontrolled manner.

In keeping with safety procedures, all personnel were safely evacuated without injury. All relevant authorities were notified and a specialist well control team (recommended by the Group's insurers) was deployed to bring the well under control as quickly as possible.

Ultimately, well control efforts were successful and remediation and clean-up operations have commenced. A third-party confirmatory environmental survey was subsequently completed and the initial results found no evidence of lingering environmental impact.

At present, the well is static and under control, and Zephyr is in the process of completing well work necessary to commence a production test. This work included a methodical process to remove and inspect the 2-7/8-inch production casing. Once that work is completed, the Group plans to undertake a final cement squeeze and then perforate the casing across the reservoir interval prior to production testing the well.

Timing of the well test will be dictated by operational conditions to ensure well control is maintained and working conditions are safe for our team. Evidence of pressures and hydrocarbons in the well remain substantial.

State 16-2 well

Following on from the successful drilling, completion and production test of the State 16-2 well in 2021, the first phase of the extended production testing on the well was completed within the flare consent limit set by the regulatory bodies, and Zephyr subsequently tested the well a second time to commission surface facilities, improve flow assurance and to gather more production data.

Unfortunately, the second well test was hampered by severe weather and initial surface facility commissioning issues which resulted in delays to the programme and, at times, intermittent operational activity.

Once the start-up commissioning issues had been successfully resolved the well was initially brought online at choked-back, moderate rates to test for flow assurance at varying levels of production. At a controlled rate of 2 million cubic feet of gas per day and 100 barrels of oil per day (an average of 433 boepd) the well flowed continuously and surface flow assurance efforts proved successful.

As flow rates were increased above those levels, well performance became limited by freshwater pumping capacity and was subsequently impacted by the formation of down hole salt precipitate, a not uncommon issue. The precipitate, which blocked and subsequently cleared multiple times, impacted the well's flow capacity to achieve extended higher rates. The Group was in early stages of testing higher rates when its mandated flaring limits were reached.

The Group is now assessing whether the precipitate issue is a function of continued flow back of injected completion fluids or a function of normal flowing conditions. If it is a result of normal flowing conditions, a series of mitigation solutions that have been successful with other wells in the Paradox in the past can be applied, and the Group will likely test these solutions in the coming months (subject to regulatory approvals) to fully determine the potential of the reservoir.

Acquisition of infrastructure assets

In September 2022, Zephyr announced that it had entered into an agreement to acquire a package of oil and gas assets located on and around the Paradox project.

Zephyr acquired 21 miles of natural gas gathering lines, the Powerline Road gas processing plant (not currently in operation), rights of way for additional gathering lines, active permits, five existing wellbores and additional acreage which is contiguous to the WSU.

The assets acquired will enable Zephyr to substantially reduce the capital required to build the necessary gas export infrastructure for its forecast gas production from the Paradox project. The consideration for the asset package was US$750,000.

Next Steps

The immediate next steps on the Paradox project are as follows:

   --      To complete the production tests on the State 36-2 well;

-- The completed production test, when combined with data from the State 16-2 production test, will provide information related to the sizing of the gas processing infrastructure required for commercial roll-out of the project. The infrastructure will then be constructed and commissioned; and

-- Once the infrastructure is in place, and the Dominion pipeline take-away is completed, export of hydrocarbons from the project will commence.

Williston project - Non-operated assets

Overview

In 2021, Zephyr stated that one of its key goals was to establish production and positive cashflow either through its existing portfolio (the Paradox project), via acquisition, or through a combination of both. Since then, the Group has delivered on this goal and the Board is pleased to report that, following twelve discrete acquisitions, the Group now has a non-operated asset portfolio that delivered sales of over 1,410 boepd, net to Zephyr, in 2022, with corresponding revenues of US$41.1 million for the year.

As at 31 December 2022, Zephyr had working interests in 223 wells that were available for production. The working interests are in prime locations, and the majority of the wells are operated by Chord Energy Corporation, a leading Williston Basin producer.

The Group's non-operated portfolio continues to perform above the Board's expectations, in part due to the high commodity price environment in 2022. In April 2022, in order to lock in cashflow to develop our Paradox asset and meet the Group's funding commitments, the Group hedged just under half of its forecast 2022 production at more than US$98 per barrel of oil. The hedging programme was structured to provide cashflow surety related to the Group's debt obligations, as well as to de-risk funding requirements for the Paradox project, while allowing for additional exposure to future fluctuations in prices. The Group announced an extension to this hedging programme in May 2023.

The Group will continue to develop and grow its non-operated portfolio through opportunistic acquisitions.

Acquisitions

The non-operated portfolio has been carefully crafted and achieved through twelve discrete acquisitions, the most important one being the transformative acquisition of the Kaiser assets completed in February 2022 (the "Kaiser acquisition") which nearly tripled the Group's non-operated production from its four previous acquisitions. The Kaiser acquisition was the driver of the impressive performance of the non-operated portfolio in 2022.

The Kaiser acquisition provides a stable foundation of low-decline production and cashflows from 163 gross producing wells. In addition, 18 drilled but uncompleted wells ("DUCs") have been brought online since and 47 additional gross undeveloped locations are expected to provide meaningful upside for years to come.

The key benefits of the Kaiser acquisition were as follows:

-- A diversified, low-decline base of mature production with established history and stable cashflows;

   --      Near term growth from DUCs currently being brought online; 
   --      Mid to longer term infill drilling opportunities on Zephyr acreage;

-- Potential to hedge a significant portion of the existing production at attractive prices to lock in returns and provide downside protection; and

-- Excellent complement to (and funding source for) the less mature, higher upside Paradox Basin development.

In order to fund the acquisition, the Group undertook an equity fundraise of US$17.4 million (GBP12.8 million) in February 2022 and secured a US$28 million senior debt facility from a long-established North Dakota-based commercial bank, First International Bank & Trust ("FIBT"). See note 22.

On 21 December 2022, Zephyr announced the a cquisition of working interests in six further wells, equivalent to a net 1.1 wells, near to Zephyr's current non-operated working interests for a total consideration of US$2.9 million. In addition, Zephyr is paying the US$8.9 million CAPEX associated with the working interests to bring the wells into production.

These new wells are expected to provide a Q4 2023 production boost, having been spud in November 2022, and first sales volumes are expected in autumn 2023. The operator of these new wells is Slawson Exploration Company ("Slawson"), a top-tier operator and one of the largest private companies in the Williston Basin. Slawson was an early pioneer of horizontal development in the Williston Basin and has excellent access to oilfield service companies and infrastructure.

Zephyr's working interest in the six new wells ranges from 11% to 32% and management currently estimates 2P Reserves being acquired are circa 550,000 boe net to Zephyr.

Zephyr secured a US$8 million bridge loan facility, on favourable terms, to part fund the acquisition and associated CAPEX. There was no equity component to the US$8 million bridge loan facility. See note 22.

2022 Production summary

FY 2022 sales volume from the non-operated portfolio averaged circa 1,410 boepd net to Zephyr, up from 263 boepd in 2021.

FY 2022 revenues were US$41.1 million, compared to US$6 million in FY 2021.

At 31 December 2022, 223 wells in the portfolio were available for production, including 17 wells which came online at some point during the quarter. Net working interests across the Williston Basin non-operated portfolio now average 6.3% per well, equivalent to 15 total wells net to Zephyr, all of which utilised horizontal drilling and modern, hydraulically stimulated completions.

Hedging

In April 2022, the Group hedged just under half of its forecast non-operated production for the following two years, with an average hedged production price of US$98 for the remainder of 2022 and US$87 thereafter.

In May 2023, the Board elected to enter into additional oil hedge agreements given that most of the hedges acquired in 2022 had since crystallised. Volumes hedged for the nine months ending 31 December 2023 have now been increased from 94,000 barrels ("bbls") to 137,000 bbls, at an average hedged production price of US$85, with BP Energy Company ("BP"), one of the world's leading energy trading houses, continuing to serve as the counterparty.

Significant decisions made

During the year under review, the Directors approved multiple discrete acquisitions of non-operated assets. The decisions to proceed with the acquisitions and the corresponding debt and equity funding were logical decisions made to ensure the continued growth of the business and the advancement of the Paradox project. All acquisitions were unanimously deemed by Board members to be in the best interests of the Company. Details of the acquisitions can be found in the relevant sections of this Annual Report.

On the Paradox project, the Board approved the acquisition of further project acreage and infrastructure assets. In addition, the Board approved the acquisition of the remaining 25% working interest in the project and the drilling of the State 36-2 well. These were all funded by cashflows generated from the non-operated portfolio. In arriving at the decision to proceed with this activity the Directors considered the cash position of the Group and the importance of progressing the Paradox project. After due consideration, the Directors unanimously considered the activity 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

23 June 2023

FINANCIAL REVIEW

The 2022 financial year saw a transformation in the Group's financial position and performance from the prior year. This was primarily due to the full-year impact of strong performance from the Group's non-operated asset portfolio and the continued investment into both the Paradox and Williston projects.

INCOME STATEMENT

During the year ended 31 December 2022, the Group generated revenue of US$41.1 million (2021: US$6 million) from its non-operated asset portfolio, and reported a gross profit of US$22.4 million (2021: US$3.3 million), which includes a gain of US$1.8 million (2021: nil) in respect of the Group's hedging programme. The revenue in the income Statement of US$41.1 million is US$1.8 million less than the full-year revenue figure provided in the Group's market update of 15 February 2023 of US$42.9 million. The market update included US$1.8 million revenue from the final settlement of the Kaiser acquisition. Under IFRS these revenues form part of the acquisition price and therefore do not appear within the income Statement in these financial statements.

Administrative expenses for the year were US$4.8 million (2021: US$2.7 million). The increase from the 2021 financial year highlights the expansion of the Group's operational footprint to provide it with the capacity and capability to develop, manage and grow its operated and non-operated asset portfolios. The increase also reflects expenditure incurred in appraising new opportunities and other business development costs.

The Group reports a foreign exchange gain of US$6.1 million for the year (2021: US$0.5 million) which is predominantly in respect of unrealised gains on the restatement of intercompany loans between the Company and its subsidiaries. These gains arise due to the weakness of sterling against the U.S. dollar at the end of 2022.

Finance charges of US$2.2 million (2021: US$0.1 million) have been charged in respect of interest charges and associated costs relating to the Group's borrowings and unwinding of discount on decommissioning. See note 7.

During the year ended 31 December 2022, the Group has recognised a deferred tax charge and a corresponding net deferred tax liability of US$2 million relating to unrelieved tax losses and temporary timing differences arising in the U.S. businesses.

The Group reports a net profit after tax of US$19.3 million or a profit of 1.26 cents per Ordinary Share for the year ended 31 December 2022 (2021: US$0.8 million or 0.08 cents per Ordinary Share).

BALANCE SHEET

Total investment in the Group's exploration and evaluation assets as at 31 December 2022 was US$38 million (2021: US$22.8 million) reflecting the ongoing investment in the Paradox project.

Total investment in property, plant and equipment as at 31 December 2022 was US$51.8 million (2021: US$11.2 million) reflecting the further acquisition of non-operated assets in the Williston Basin, recurring capital expenditure and decommissioning obligations on the non-operated assets.

At 31 December 2022, the Group has recognised US$1.3 million outstanding derivative contracts in respect of its hedging programme at fair value, of which US$0.2 million (2021: nil) has been recognised in non-current assets and a further US$1.1 million (2021: nil) in current assets.

Cash and cash equivalents as at 31 December 2022 were US$9 million (2021: US$1.8 million). During the year, the Company raised gross proceeds of US$17.4 million (2021: US$15.5 million) through the placing of new Ordinary Shares in the Company.

In February 2022, the Group secured debt funding of US$28 million and in December 2022 entered into a further 12-month revolving credit facility of up to US$8 million, of which US$2.5 million had been drawn down at 31 December 2022. The proceeds from these debt instruments were used to complete the Group's acquisition of non-operated assets in the Williston Basin.

SUBSEQUENT DEVELOPMENTS

In June 2023, the Company announced that it had raised a further US$3.9 million (before expenses) through the placing of new Ordinary Shares in the Company.

At 16 June 2023, the Group had cash and cash equivalents of US$7.5 million.

KEY PERFORMANCE INDICATORS

As part of Zephyr's ongoing development of the Paradox project and the build-out of the non-operated portfolio in the Williston Basin, the Board tracks its performance against indicators that reflect the strategic, operational and financial progress, as well as our impact on society and the environment. These indicators allow the Board, management and stakeholders to compare Zephyr's performance to its goals.

 
 Safety                  Why we measure                                                     Performance 
 performance              *    The Group has a zero-harm safety culture focused on            *    There we no reported LTIs during the 2022 financial 
                               continuous improvement to achieve an injury-free and                year (2021: nil) 
                               safe work environment 
 
 
                          *    We require employees and contractors to work in a 
                               safe and responsible manner and provide them with the 
                               training and equipment to do so 
 Adjusted EBITDA         Why we measure                                                     Performance 
 (EBITDA adjusted          *    Indicator of the Group's cash generation to fund              *    2022 Adjusted EBITDA was US$28.2 million 
 for                            expenditures and/or return capital to Shareholders 
 unrealised 
 foreign                                                                                      *    2021 Adjusted EBITDA was US$2.3 million 
 exchange and 
 hedge 
 gains) 
                   -----------------------------------------------------------------  ----------------------------------------------------------------- 
 Net production          Why we measure                                                     Performance 
                           *    Indicator of revenue generation potential                     *    FY 2022 production of 514,650 barrels of oil 
                                                                                                   equivalent ("boe") 
 
                           *    Measure of progress towards achieving production 
                                forecasts and driving profitable production growth            *    484% increase in production from FY 2021 production 
                                                                                                   of 88,037 boe from non-operated Williston Basin 
                   -----------------------------------------------------------------  ----------------------------------------------------------------- 
 Growth of               Why we measure                                                     Performance 
 Paradox                   *    Indicator of economic viability and long-term                 *    During the year the Group booked its first reserves 
 project reserve                production potential of projects                                   on the Paradox project and increased the 
 resource                                                                                          reserve/resource base by acquiring the remaining 25% 
 play                                                                                              working interest in the project post-year end 
 
 
                                                                                              *    At 31 December 2022, the Group had Paradox Basin 2P 
                                                                                                   reserves of 2.57 million barrels of oil equivalent 
                                                                                                   ("mmboe"), 2C resources of circa 34 mmboe and 2U 
                                                                                                   resources of 270 mmboe 
                   -----------------------------------------------------------------  ----------------------------------------------------------------- 
 Carbon emissions        Why we measure                                                     Performance 
                           *    Zephyr Energy is committed to sustainable and                *    Recorded Scope 1 carbon-neutrality from both operated 
                                responsible oil and gas production                                and non-operated assets 
 
 
                                                                                             *    VER credit partnership with Prax which aims to 
                                                                                                  mitigate all Scope 1 carbon emissions. The cost of 
                                                                                                  the scheme was circa US$0.2 million in the 2022 
                                                                                                  financial year. 
                   -----------------------------------------------------------------  -----------------------------------------------------------------

CJ Eadie

Finance Director

23 June 2023

Going Concern

The Directors have prepared cashflow forecasts for the Group and Parent Company for the period to 31 December 2024 based on their assessment of both the discretionary and the non-discretionary cash requirements of the Group during this period and based on a range of sensitivities and scenarios.

These cashflow forecasts include the forecast revenues from, and the operating costs of, the Group's operations, together with all committed development expenditure and cashflows related to the well control incident on the State 36-2 well. The Board has also incorporated its best current estimates on the timing of first cashflows from the six Slawson operated wells that were acquired in December 2022. The wells are currently expected to come online in autumn 2023 with first cashflows received by the Group in January 2024.

The cashflows reflect the Board's current best estimates on quantum and timings in respect of expected insurance recoveries in relation to the well control incident. While the Board expect the insurance proceeds to be received in accordance with the forecast, these proceeds have not been received at the date of this report. Should the insurance proceeds be delayed or lower than expected, the Group could require further funding to meet its commitments within the going concern assessment period.

Following detailed discussions, the Directors are confident that the Group and the Parent Company have, or will be able to secure insurance recoveries as per above, or additional funding to enable it to continue in operation for at least the next twelve months, however, the Group and Parent Company's ability to secure such proceeds or funding cannot be guaranteed, which leads to material uncertainty which may cast significant doubt over the Group and Parent Company's ability to continue as a going concern, and that it may be unable to realise its assets and discharge its liabilities in the normal course of business.

The Directors have extensive experience in raising capital for projects and ventures and remain confident in the Group's ability to raise the capital needed to maintain and deliver on its commitments and continue as a going concern.

The Directors continue to adopt the going concern basis in preparing the consolidated financial statements. The financial statements do not include any adjustments that would be required should the going concern basis of preparation no longer be appropriate.

CONSOLIDATED INCOME STATEMENT