Zephyr Energy PLC Paradox well to be spudded by year-end (0241B)

TIDMZPHR

RNS Number : 0241B

Zephyr Energy PLC

05 October 2020

Prior to publication, the information contained within this announcement was deemed by the Company to constitute inside information as stipulated under the Market Abuse Regulations (EU) No. 596/2014 ("MAR"). With the publication of this announcement, this information is now considered to be in the public domain.

5 October 2020

Zephyr Energy plc

(the "Company" or "Zephyr")

Dual-purpose well to be spudded on Paradox project by year-end

- US$2m funding from the U.S. Department of Energy;

owned and operated by Zephyr

Zephyr Energy plc (AIM: ZPHR), the Rocky Mountain oil and gas company focused on responsible resource development, provides an update on its project in the Paradox Basin, Utah, U.S. ( the "Paradox" or the "Paradox project").

As previously announced, Zephyr has been working with a project team led by the University of Utah's Energy & Geoscience Institute ("EGI"), in collaboration with the Utah Geological Survey (the "UGS") and other Utah-based partners. This project is sponsored by the U.S. Department of Energy and its National Energy Technology Laboratory (the "DOE").

On 2(nd) September 2020, the Company announced that EGI had selected a Zephyr leasehold pad from which to drill a vertical stratigraphic research well, subject to final funding terms and permitting. The well's objective would be to facilitate the acquisition of additional geologic data so that more efficient and less environmentally-impactful oil production strategies could be developed for the northern Paradox Basin.

Today, Zephyr is delighted to announce it has entered into a definitive binding agreement (the "Agreement") with EGI to sanction and fund US$2 million towards the planned stratigraphic research well. The well's primary objective will be to acquire a comprehensive data set across the Cane Creek reservoir. The well has also been designed to facilitate re-use, which will allow the potential for future drilling of a horizontal appraisal lateral from the wellbore after the initial data acquired has been processed and evaluated. Given the significant commercial benefits of potential well re-use for the Company, Zephyr has agreed to fund up to $1 million of incremental costs, should the total cost of the well go above EGI's US$2 million committed funding, as detailed below.

The spudding of this proposed dual-use well is now only conditional on customary permitting, and with detailed design work already underway, drilling is due to commence by the end of this year.

Summary of Key Terms of the Agreement

-- Zephyr will be the Operator of the vertical well (known as State 16-2) and is responsible for all planning and drilling activity. Zephyr and its 25% joint-venture partner will continue to be the sole working interest owners in the leasehold and of the vertical well.

-- The primary well objectives are to drill vertically to the Cane Creek reservoir at an approximate true vertical depth ("TVD") of 9,850 feet, and to acquire up to 90 feet of continuous core along with a comprehensive electronic log suite, subject to operational constraints.

-- The total cost of the vertical well activity is forecast to be between US$2.5 million to US$3 million, of which the first US$2 million will be funded via a DOE grant. Up to US$1 million will be funded by Zephyr after the DOE grant funds are expended, details of which are set out below.

-- It is anticipated that the data acquired will be processed and analysed within three months of acquisition. Zephyr believes that this analysis, when combined with the Company's pre-existing 3D seismic data, will enable and optimise future drilling and responsible development of the Company's acreage.

-- Once the vertical well is drilled and temporarily plugged back to approximately 6,500 feet TVD, Zephyr (or a future farm-in partner) will have the option to re-utilise the State 16-2 vertical wellbore as a sidetrack host, from which a horizontal lateral can be drilled to fully test the Cane Creek natural fracture play. By re-utilising the vertical portion of the stratigraphic well, the Company estimates the total costs of drilling a future horizontal appraisal well will be reduced from circa US$6.0 million to circa US$3.0 million.

-- In addition to reducing future drilling costs, the re-use of the stratigraphic well would also serve to minimise the overall environmental impact and surface operating footprint of future horizontal development.

Potential Financing

In order to cover the funding requirement for its portion of the vertical well drilling commitment, Zephyr has entered into a non-binding Letter of Intent for a US$1 million debt facility with Booner Capital LLC ("Booner"), a US-based family office focused on real estate and energy development investments. The facility is subject to due diligence and final documentation and, if executed, would fund Zephyr's full pro rata commitment of the vertical well. Further details on this potential debt arrangement are set out below and will be considered alongside other short and longer-term funding options potentially available to the Board, at both asset and PLC level, in order to achieve the best outcome for the project and the Company.

Value to Zephyr

Zephyr's current Paradox acreage is circa 25,353 acres, held by multiple leases with variable expiry dates. The Company is an active manager of this leasehold position and, as such, a continued reshaping of the acreage is expected as work to secure longer lease terms and contiguous acreage in prospective areas remains ongoing. Of the current acreage total, there is a highly prospective core of 7,160 acres which:

   --    is held by leases with five years or greater of remaining term; and 

-- contains 15 of the top 30 drilling targets as identified by the 3D seismic survey of the acreage.

As calculated in accordance with the Company's Competent Persons Report prepared for the Company by Gaffney Cline & Associates in June 2018, the current leasehold position is estimated to hold the following:

-- Net 2C contingent recoverable resources of approximately 9.9 million barrels of oil equivalent ("mmboe"); and

-- Net present value of approximately US$50 million, using a flat oil price of US$45 per barrel and a ten percent discount rate ("NPV(10) ").

   --    Both estimates above are solely from the Cane Creek reservoir. 

-- Zephyr also believes that significant upside exists from 5 additional zones thought to be productive; and

-- Data secured from the vertical stratigraphic well will help the Company to further define this upside potential.

Zephyr recognises that the estimated value of its Paradox leaseholdings is significantly more than the Company's current market capitalisation, and believes the proposed dual-use well is an excellent opportunity to bring additional technical understanding and non-dilutive investment capital in order to unlock the value inherent in these holdings.

Colin Harrington, Zephyr's Chief Executive Officer, said: "The signing of the Agreement to drill a vertical well on our Paradox project is a watershed moment for the Company. With drilling expected to commence by the end of this year, the proposed well will de-risk the project and will help us fast-track the development necessary to finally unlock its underlying value.

"Just as importantly, by transforming a pure research well into one with potential future re-use, the EGI and Zephyr have collaborated to create a win for all sides - one in which Zephyr is delighted to participate as both Operator and investor. By utilising US$2 million of non-dilutive funding and creating re-use potential from what would otherwise result in an abandoned well, we continue to execute upon our mission to be responsible stewards of our investors' capital and responsible stewards of the environment in which we work.

"The data from the vertical stratigraphic well will provide invaluable geological information which can help optimise future development efforts. It will also provide new insights into the stacked potential that overlies the primary Cane Creek reservoir, which could conceivably increase prospective resource estimates. Moreover, the potential to re-use the vertical wellbore will result in significant cost reductions and enhanced economics on a future horizontal lateral project.

"We also believe that the geological data obtained from the initial vertical well - especially when combined with the reduced costs for a future horizontal appraisal well - will be highly beneficial to funding and farm-in discussions for our Paradox holdings.

"I would like to thank the DOE, EGI, UGS and our joint venture partner for all their efforts to date. Zephyr's team has always believed in the importance of working with best-in-class partners - the credibility, experience and knowledge displayed by the EGI-led team has reaffirmed the value of that approach. We look forward to commencing drilling operations as soon as our preparations are complete, with a goal of delivering the vertical well and resulting data in a matter of months.

"We are also delighted at the prospect of bringing Booner on board as a financing partner - they have a long-term track record backing successful energy development companies, and I'm pleased with their level of interest in the Company's strategy and progress. Though the Board has and will consider a number of alternatives for funding Zephyr's portion of the vertical well, we believe the offer from Booner currently represents the most compelling path forward for the Company.

"To commence operational activity on the Paradox project is a hugely exciting development for all stakeholders. We will keep Shareholders regularly updated over the coming months, especially when milestones such as the rig contract and other key developments are delivered."

Background and Further Details

As announced on 2(nd) September 2020, the Company has been working with a project team led by the EGI in collaboration with the UGS and other Utah-based partners. The project is entitled "Improving Production in Utah's Emerging Northern Paradox Unconventional Oil Play" and 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 shale and adjacent clastic zones. This project is sponsored by the U.S. Department of Energy and its National Energy Technology Laboratory (the "DOE").

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. It was planned that the proposed well would target the Cane Creek 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 Paradox Basin, and the Company was delighted that the EGI and UGS selected Zephyr's Paradox acreage as the location on which to drill the well.

The Company's location was selected for a number of reasons, including the quality of the Group's underlying 3D seismic data (which can be tied into the well results to build a stronger integrated predictive model) as well as a favourable surface location which will be sited on a pre-existing pad.

Since Zephyr's Paradox acreage was selected as the location for the test well, Zephyr has been working with its project partners to construct a project plan that maximises the opportunity for all parties.

A key part of this plan is to design the well in such a way that not only can it be used to obtain all the data required by the research project, but that it can also be re-used by the Company in the future as the host for a lateral appraisal well. This approach not only reduces environmental impact but it will also potentially significantly reduce future well costs for the Company.

It is currently expected that the total cost of the vertical well activity is forecast to be between US$2.5 million to US$3 million, of which the first US$2 million will be funded by grant funding from the DOE and up to US$1 million will be funded by Zephyr. Neither party is liable for any costs in excess of the US$3 million combined project limit, and Zephyr, as operator, controls the decision point to ensure costs do not exceed the US$3 million cap.

The primary objectives of the initial stratigraphic well are to drill vertically to an approximate true vertical depth ("TVD") of 9,850 feet, and to acquire up to 90 feet of continuous core from the Cane Creek reservoir. The results from the analysis of the core and from other drilling data are expected to be available within three months from the completion of drilling.

Once the vertical well is completed it will be temporarily plugged back to 6,500 feet TVD. Zephyr (or a farm-in partner) will then have the opportunity to re-utilise the vertical wellbore as a sidetrack host from which a horizontal appraisal well can drilled. By re-utilising the vertical portion of the stratigraphic well, the Company estimates the total costs of drilling a future horizontal appraisal well will be reduced from circa US$6.0 million to circa US$3.0 million.

Booner Funding Proposal

Zephyr has entered into a non-binding Letter of Intent for a US$1 million debt facility with Booner, a US-based family office focused on real estate and energy development investments. If signed, the facility would potentially fund Zephyr's entire commitment for the proposed vertical well.

This funding proposal is still subject to due diligence and documentation.

The key terms of the proposed debt facility are as follows:

   --    Senior secured debt facility of US$1 million 
   --    Three-year term, interest only, principal due at maturity 
   --    11% annual interest rate payable quarterly on the outstanding loan balance 

-- Company option to defer any interest payments to the end of the three-year term, with such deferred interest payments payable at a 13% annual interest rate

   --    3% Origination Fee 

-- Warrants equivalent to 5% of the issued share capital of Zephyr issued to Booner upon drawdown of the debt facility ("Closing"). The warrants would have a life of five years and would be exercisable at a price of 150% above the 20-day volume weighted average price of Zephyr's outstanding Ordinary shares prior to Closing.

The Board has a number of potential options for funding the Company's portion of the vertical well, but believes that Booner would be an excellent financing partner potentially for this well and future drilling programmes as the Company continues with its transformation.

Contacts:

 
 Zephyr Energy plc                                   Tel: [phone] 
  Colin Harrington (CEO) 
  Chris Eadie (CFO) 
 Allenby Capital Limited - AIM Nominated             Tel: [phone] 
  Adviser 
  Jeremy Porter / Liz Kirchner 
 Turner Pope Investments - Broker                    Tel: [phone] 
  Andy Thacker / Zoe Alexander 
  Flagstaff Strategic and Investor Communications 
  Tim Thompson / Mark Edwards / Fergus                   Tel: [phone] 
  Mellon                                                                 1474 
 
 

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.

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October 05, 2020 02:00 ET (06:00 GMT)