Prior to publication, the information contained within this announcement was deemed by the Company to constitute inside information as stipulated under the
27 June 2024
Zephyr Energy plc
("Zephyr", the "Company", or the "Group")
Full Year Results for the year ended 31 December 2023
Notice of AGM
Zephyr Energy plc (AIM: ZPHR) (OTCQB: ZPHRF), the Rocky Mountain oil and gas company focused on responsible resource development, is pleased to announce its audited results for the year ended 31 December 2023.
Rick Grant, Zephyr's Non-Executive Chairman, said:
"I am pleased to present the Company's financial and operational results for the 2023 financial year, a period in which we continued to deliver as a cash-generating oil and gas exploration and production group.
"Despite facing a significant operational challenge during the year, we continued to make steady progress in our pursuit of unlocking the next prolific onshore
"With a balanced portfolio of non-operated assets and an operated asset with asymmetric growth potential, our strategy is clear. Cashflows generated from our non-operated asset portfolio in the
"I was delighted by the recent safe and successful drilling operation on the State 36-2R LNW-CC well and we are looking forward to the results from the forthcoming production test.
"I would like to extend my appreciation to the Zephyr team and our contractors for their ongoing work, and I would also like to extend my gratitude to my fellow Board members, leadership team, advisors and most importantly, our Shareholders for their continued support.
"We have an exciting period ahead of us and I believe, more than ever, that we have the pieces in place to enable us to deliver on our strategic objectives successfully."
Notice of AGM and posting of annual report
The Annual General Meeting of the Company (the "AGM") will be held at 11 a.m. on 31 July 2024 at the offices of Memery Crystal, 165 Fleet Street,
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 this week.
The Group's results and director statements, as extracted from the annual report and accounts, are set out further below.
Contacts
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Zephyr Energy plc Colin Harrington (CEO) Chris Eadie (Group Finance Director and Company Secretary)
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Tel: +44 (0)20 7225 4590 |
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Allenby Capital Limited - AIM Nominated Adviser Jeremy Porter / Vivek Bhardwaj
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Tel: +44 (0)20 3328 5656
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Turner Pope Investments - Joint-Broker James Pope / Andy Thacker
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Tel: +44 (0)20 3657 0050
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Panmure Gordon ( Hugh Rich/ James Sinclair-Ford
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Tel: +44 (0) 20 7886 2500
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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
Zephyr's flagship asset is an operated 46,000-acre leaseholding located in the Paradox Basin,
In addition to its operated assets, the Company owns working interests in a broad portfolio of non-operated producing wells across the
CHAIRMAN'S STATEMENT
OVERVIEW
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 2023 financial year which reflect the ongoing efforts and commitment of the Zephyr team.
Despite facing a significant operational challenge during the 2023 financial year, we continued to deliver as a cash-generating, exploration and production group focused on two established oil producing basins in the Rocky Mountain region of the
With a balanced portfolio of non-operated assets and an operated asset with asymmetric growth potential, our strategy is clear. Cashflows generated from non-operated asset production in the
We are supported and driven by our exceptional people, and have continued to bolster our team in the
As always, the health, safety and welfare of the team and contractors is of prime importance. We have a zero-harm safety culture focused on continuous improvement to achieve an injury-free and safe work environment. The Board is pleased to report that during the period there were no Lost Time Injuries ("LTIs").
The Board is also committed to ensuring that the actions and investment decisions it makes are in line with our core values of being responsible stewards of investors' capital and of the environment. This includes our commitment to minimising our environmental impact through positive actions and to protect the surroundings in which we operate.
In this respect, I was incredibly proud of how we responded to the well control issue on the State 36-2 LNW-CC well (the "State 36-2 well") in April 2023. The incident was a significant event for our team but the response, in a difficult and fast-moving situation, was well executed despite the challenges faced. There were several important lessons learned from the incident, but a key takeaway for me was the professionalism and commitment of our team in addressing the situation in a responsible manner. It is further credit to the team that the incident was closed-off with no LTIs or long-term environmental damage and that we managed to get our day-to-day operations back on track to the point that drilling operations recommenced on the Paradox project within twelve months of the incident.
After months of meticulous planning, I was delighted that we managed to successfully drill the State 36-2R LNW-CC well (the "State 36-2R well"). Drilling operations delivered on all the key objectives, and we look forward to the commencement of the production test which will soon allow us to understand the full potential of the well. This will hopefully be the catalyst for an exciting and transformational period ahead.
I am pleased to point to several examples of key stakeholders who have worked with and supported the Company over the recent months demonstrating a strong endorsement of the Company and the way in which we operate.
Sturdy and honest relationships, formed over the years of working with multiple state and federal regulators, proved of great benefit during the well control issue and subsequent permitting of the State 36-2R well. The relationship and knowledge-sharing partnership with the
OPERATIONAL ACTIVITY
Paradox project
During the period under review, Zephyr saw a recalibration at the Paradox project following the discovery of a major and productive natural fracture network and the subsequent well-control incident on the State 36-2 well.
What followed was a period of considerable activity to address the impacts of the well control incident. Once resolved, and after extensive due diligence, workover operations and confirmation that our well control insurance would cover substantially all costs associated with the redrill, the Board concluded that redrilling the State 36-2 well was the optimal path forward to harness the significant discovery made by the well.
Following the Board's decision, Zephyr's team commenced detailed internal well-planning processes (supplemented by multiple high-pressure/high temperature specialist service providers) which resulted in an augmented well plan. Once sundry permit approvals were granted, swift progress was made by our operational team with the award of the drilling permit and securing a rig contract with Helmerich & Payne ("H&P"), to enable full drilling operations to commence in April 2024.
We were delighted to recently announce that drilling operations on the State 36-2R well were completed safely and successfully and that all key objectives had been met. During the upcoming production test, the well will be flowed and production tested to determine reservoir pressure, fluid composition, well flow rate, bulk reservoir permeability and to deliver an early estimate of the overall potential recoverable resources.
The drilling successes achieved to date have given added impetus for the Group to secure an infrastructure solution for the gas produced from the Paradox project, and in September 2023 we noted the commissioning of the Green River pipeline owned by Dominion Energy LLC,
We are continually looking at ways to increase the scale, optionality and attractiveness of the Paradox project, and our new farm-in opportunity in the Salt Wash helium field is another exciting development. Our team has studied the potential to redevelop the remaining reserves of the Salt Wash Field, which lies directly to the south of our White Sands Unit (the "WSU"), utilises the same road network, and has similar oil and gas potential in the Paradox Formation as the WSU. While helium is a new addition to our resource exposure, many nearby Paradox Basin oil and gas operators are already producing comingled helium in commercial quantities, with an active local offtake market for produced helium. While the Group is not looking for helium to become a primary focus, the Group is cognisant that it may offer optionality and represent a value-added opportunity for the Paradox project. We expect to partner with industry participants to help appraise and fund the potential of this resource while also taking advantage of our regional knowledge, existing operations and asset platform.
Our non-operated assets continue to deliver strong cashflows, allowing us to proceed with our ongoing Paradox project development, and have been of critical importance during the period in which we managed the well control incident.
Our robust and diverse portfolio of non-operated production and near-term production assets were acquired for their low-risk, high-return cashflow potential. Since 2020, we have completed 14 discrete acquisitions with a portfolio of interests taking production from zero to a current run rate of over 1,200 barrels of oil equivalent per day ("boepd").
At 31 March 2024, we had 230 wells in our portfolio available for production and our net working interests now average 7.1% per well (equivalent to 16.3 total wells).
ENVIRONMENTAL, SOCIAL AND GOVERNANCE ("ESG")
As we grow and transform the Company, we continue to foster a safe working environment and maintain active relations 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 pleased that we continue to pursue 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
FINANCIAL
For the 2023 financial year, the Group reported revenues of
These results were largely in line with our expectations, reflecting the lower oil price environment over the period, normal decline on the non-operated portfolio wells, and delays to the six wells operated by Slawson Exploration Company ("Slawson") coming online.
The Slawson wells are now online, albeit still not at full capacity. At the date of this report, production information indicates that the wells remain partially curtailed, likely due to gas infrastructure constraints.
CONCLUSION
I would like to extend my appreciation to the team and our contractors for their work during the past year to deliver on the development of the Paradox project and on our wider strategy. I would also like to extend my gratitude to my fellow Board members, leadership team, advisors and most importantly our Shareholders for their continued support.
The Board is looking to the future with a high degree of confidence as we continue to deliver on our vision of 'opening up the next prolific onshore
We have an exciting period ahead of us and I believe we have the pieces in place to enable us to deliver on our strategic objectives successfully.
RL Grant
Chairman
26 June 2024
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
The Group's stated mission is to open up the next prolific onshore
To achieve this mission, the Group has prioritised:
· Building a team with significant experience in the
· Maintaining a clear strategic direction - we are wholly focused on responsible exploration and production assets in the Rocky Mountain region;
· 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, pursuing carbon-neutrality across our operations, and proactive engagement with the communities in which we operate;
· The leveraging of partnerships (such as the
· 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
Overview
The 2023 financial year, and the period since, were a time of sustained progress and activity for Zephyr despite an unwelcome operational setback with the well-publicised State 36-2 well control issue.
The Group continues to lay the foundations to bring the Paradox project into commercial production, and in doing so will deliver on the Board's core mission of unlocking the next prolific onshore oil and gas play in the
Having made excellent progress in rectifying matters following the well control incident on the State 36-2 well, we subsequently recommenced our drilling operations, and the recent drilling of the State 36-2R well means we have now fully resumed our Paradox project activity and the wider project development.
In addition to our planned activity on the Paradox project, we expect to see increased cashflows from our non-operated assets over the course of the next financial year, particularly now that the Slawson wells are online. Planning is underway to develop our new farm-in project in the Salt Wash natural gas and helium field. The Salt Wash project will likely be undertaken in a financial partnership with industry participants.
I feel that we can look forward to the next period with a degree of optimism and excitement as we look to further unlock the value from our strong asset portfolio for our Shareholders.
Paradox project - operated asset
Background
The Board continues to believe that the Paradox project has considerable scale and economic potential.
The Paradox project is an operated lease holding of over 46,000 gross acres, 25,000 acres of which has been assessed, by third-party consultant Sproule International ("Sproule"), to hold, net to Zephyr, 2P reserves of 2.6 million barrels of oil equivalent ("mmboe"), 2C resources of 34 mmboe and net unrisked 2U resources of 270 mmboe.
The Group's land management strategy continues to be active and has resulted in a defensible and growing land position which Zephyr's Board believes is increasingly difficult to replicate in today's increasingly regulatory and political environment.
To date, all three wells drilled by Zephyr at the Paradox project have discovered hydrocarbons, and the project appears capable of being transformed into commercial production once the wells are tied into natural gas infrastructure.
Drilling activity to date has provided the Group with a wealth of new reservoir 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 results;
· 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.
Based on this, the Board believes that the Paradox project contains substantial potential upside and is fully focused on continuing the work required to develop the acreage into a revenue generating project.
The Board is delighted that Dominion's 16-inch gas export pipeline which extends across the Paradox project has now been completed. This off-take solution directly crosses over Zephyr's asset base and provides the potential for the commercial export of natural gas from our wells to the sales market.
State 36-2 well
In November 2022, the Group announced that drilling on the State 36-2 well had commenced with the prime objective to target potential production from the Cane Creek reservoir. Drilling operations continued into 2023.
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 Cane Creek wells drilled by other operators. 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 at a new location within Zephyr's acreage and 3D seismic coverage, and provided additional confirmation of Zephyr's model for hydrocarbons in place across its entire 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 on the well had been completed and that all services for the test had been procured. A service rig was mobilised to the well-site and operations on the ground commenced. 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 control issue despite multiple attempts to secure the well by the rig crew. The incident was initially caused by a downhole barrier failure and then a subsequent failure of a surface safety valve, which resulted in hydrocarbons being released from the well.
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 completed. A third-party confirmatory environmental survey was subsequently undertaken and the results found no evidence of any environmental impact. The relevant authorities confirmed that the remediation satisfied regulatory standards.
During the incident, multiple joints of the well's 2 7/8-inch production tubing were compromised, and Zephyr's operations team worked methodically to remove and inspect the joints while keeping the wellbore static. Operations to retrieve the damaged tubing progressed slower than expected due to the poor condition of the tubing, as exhibited by the multiple damaged and buckled joints retrieved that led to the need for milling operations. Ultimately operations did not result in sufficient recoveries to justify the continuation of the ongoing cost of this well work versus the estimated cost to redrill the well.
Therefore, and following consultation with our regulators and insurers, the Board elected to proceed with a redrill of a "twinned" well, the State 36-2R well, from an adjacent location on the same drilling pad.
The Group retains full well control insurance coverage and expects to recover substantially all costs associated with the well control incident and the drilling costs associated with the redrill. At the date of this report, circa
State 36-2R well
Over the last few months of 2023, with the aim of ensuring an optimal drilling outcome for the State 36-2R well, Zephyr's team commenced a detailed internal well-planning processes (supplemented by multiple high-pressure/high temperature specialist service providers) and continued its extensive interaction with the Group's well control insurance providers. This process culminated in an updated drilling plan which was then submitted to state and federal regulators for approval.
In February 2024, the Group announced that it had received the regulatory approvals and permits required to proceed with the redrill and in March 2024, following a detailed selection process, Zephyr announced that it had signed a rig contract with H&P for its Rig 257 to drill the well.
The key objectives of the State 36-2R well were:
· To successfully complete drilling operations to total depth safely and without harm to people, the environment or equipment;
· To successfully twin the State 36-2 well and intersect the same Cane Creek reservoir natural fracture system identified by it;
· To confirm the presence of hydrocarbons as found by the State 36-2R well, and further appraise the Cane Creek reservoir at Zephyr's federal WSU; and
· Should the original well result be replicated, to assess the reservoir productivity by flow testing the new well.
In April 2024, the Group announced that full drilling operations had commenced and the surface section of the well had been spud. By June 2024, the Group announced that the well had been completed safely and successfully, with the well drilled to a total depth of 10,290 feet (measured depth) where it intersected the same Cane Creek reservoir within 15 feet of the original wellbore and its natural fracture network. This means that the three of the four key objectives for the well have now been met.
Zephyr has mobilised the equipment for completion and production testing of the naturally fractured reservoir zone that was intersected during drilling operations and production testing is expected to be underway shortly.
Initial analysis from drilling indicates that the State 36-2R well, like the State 36-2 well, penetrated a folded and naturally fractured section of the Cane Creek reservoir. The well encountered drilling mud gas shows of a similar magnitude to the original well and pore pressure analysis suggest formation pressures estimated at approximately 9,300 pounds per square inch (which is broadly consistent with previously drilled offset wells).
The well further confirms the presence of hydrocarbons within a large structural compartment, within Zephyr's acreage and 3D seismic coverage. During the ongoing production test, the well will be flowed and production tested to determine reservoir pressure, fluid composition, well flow rate, bulk reservoir permeability and deliver an early estimate of the overall potential recoverable resources.
State 16-2LN-CC well update
Following on from the successful drilling, completion and production test of the State 16-2LN-CC well (the "State 16-2 well") in 2022, 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 in March 2023 to commission surface facilities, improve flow assurance and to gather more production data.
This 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. The precipitate, which blocked and was 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 operational team is assessing whether the precipitate issue is a function of continued flow back of injected completion fluids or a function of normal flowing conditions. Under either scenario, the Group has planned mitigation solutions in place and plans to test these solutions in the coming months (subject to regulatory approvals and gas export availability) in order to fully determine the potential of the reservoir at this location.
Working interest acquisition, WSU restructuring and acreage acquisition
As outlined above, we continue to take a number of steps to strengthen the Paradox project land position which will be critical for the long-term success of the project.
In February 2023, Zephyr announced that it had completed its acquisition of the remaining 25% working interest in the core acreage of the Paradox project from Rockies Standard Oil Company LLC ("RSOC").
The total consideration payable for the working interest is up to
· A first tranche of 13,483,095 new Ordinary Shares was issued to RSOC on the completion of the acquisition; and
· 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.
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
· 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 added:
· Over 450,000 barrels of oil equivalent ("boe") in 2P Reserves;
· Over 7 million boe in 2C Contingent Resources; and
· Over 67 million boe of 2U unrisked Prospective Resources.
In late 2022, the Group announced the acquisition of additional Paradox Basin acreage adjacent to its WSU deemed by the Board to have immediate development potential.
The acquired acreage was largely covered by Zephyr's existing 3D seismic, and directly bordered the Zephyr lease on which the State 36-2 and State 36-2R wells are located, and with access to pre-existing surface infrastructure which Zephyr subsequently acquired.
A portion of the acquired acreage was envisioned to be added to the WSU, subject to approval from the
These actions are part of the Group's active and ongoing portfolio management of its project position. The Board is pleased with its ongoing BLM interactions which resulted in an amended federal unit with an upgraded and manageable acreage position - a position increasingly difficult to replicate in today's regulatory and political environment.
In August 2023, the Group announced an agreement to increase its land position through the targeted acquisition of an additional 640 leased acres deemed by the Group to be prospective for mid to long-term development.
The new acreage is on Utah School and Institutional Trust Lands Administration ("SITLA") lands and was secured during a SITLA auction. The acreage is close to the Group's existing WSU and gas export infrastructure.
Greentown wells
In July 2023, the Group announced that it had commenced an assessment of five existing wellbores (located in the WSU) acquired as part of a larger acquisition of infrastructure assets in 2022. Several of the existing wells are former producers of hydrocarbons and were subsequently shut-in due to lack of operating infrastructure. Others were deemed to have potential future use as salt water disposal wells or as producers of salt water brine for potential extraction of lithium resources.
As part of this assessment, Zephyr commenced production from the Greentown Federal 28-11 well (the "28-11 well") in order to understand the well's potential contribution to overall field production when ongoing field infrastructure work has been completed. Hydrocarbons were produced from the well, with condensate volumes collected for sale and natural gas volumes being flared within mandated limits.
Historically, the 28-11 well produced over 0.36 billion cubic feet ("bcf") of gas and 93,000 barrels of oil prior to being shut-in due to a pipeline shut-down.
Farm-in to Salt Wash helium field
In October 2023, the Group announced that it had opted to farm-in to the Salt Wash Field to increase the Group's oil and gas resource potential, and to achieve exposure to the
The field has an already discovered, proven helium resource in the Leadville Formation, with further opportunity for upside through two deeper helium exploration targets.
The Group's management forecasts the Salt Wash project to include:
· Net helium discovered resource potential of 0.07 to 0.19 bcf (Lower Leadville Formation only);
· Net helium un-risked, prospective resource of a further 0.04 to 0.66 bcf (including exploration targets); and
· An estimated net present value at a 10% discount rate ("NPV-10") of circa
Under the terms of the farm-in agreement, payments totalling
Dominion pipeline availability
In September 2023, the Group was notified by Dominion that its gas supply pipeline from the Northwest Gas Pipeline system to the
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. The
At 31 March 2024, Zephyr had working interests in 230 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
The Group's non-operated portfolio continues to perform above the Board's initial expectations, and the cashflow from the portfolio proved to be critical in 2023 as the Group managed the fallout from the well control issue on the State 36-2 well.
The Group will continue to develop and grow its non-operated portfolio through opportunistic acquisitions.
2023 summary and outlook
2023 production from the non-operated portfolio averaged circa 1,040 boepd net to Zephyr, down from 1,410 boepd in 2022. 2023 full-year production was lower than in the previous year due to the standard decline of the portfolio and delays to the six Slawson wells coming online in which Zephyr has significant working interests.
2023 revenues were
At 31 December 2023, 225 wells in the portfolio were available for production, and net working interests across the
The Slawson wells are expected to give a boost to production in 2024. The average daily production rate from the portfolio in March 2024 was 1,212 boepd (versus 1,053 boepd in the fourth quarter of 2023), reflecting the impact from the Slawson wells being online, albeit not at full capacity. At the date of this report, production information indicates that the wells remain partially curtailed, likely due to gas infrastructure constraints.
Slawson wells
In December 2022, Zephyr announced the acquisition of working interests in the six Slawson wells (equivalent to 1.1 total well) near to Zephyr's existing non-operated working interests for a total consideration of
The wells are operated by Slawson, a top-tier operator and one of the largest private companies in the
Zephyr's working interest in the six new wells ranges from 11% to 32% and management estimates 2P Reserves acquired are circa 550,000 boe, net to Zephyr.
These new wells were originally expected to provide a sizeable production boost to the Group in the 2023 financial year (having been spud in November 2022 and expected online in the first half of 2023). However, delays were experienced due to issues with the completion of surface facilities on the well pad. The wells eventually came online on 1 November 2023 with initial flow rates exceeding management expectations, with production data adjusted for uptime showing an average flow rate of 897 boepd, net to Zephyr during the wells initial month of production.
Production from the Slawson wells was subsequently temporarily curtailed in mid-December 2023 due to adverse weather conditions and infrastructure constraints, and production resumed in late January 2024. At the date of this report, the wells are currently producing albeit not at full capacity as they remain partially curtailed, likely due to gas infrastructure constraints.
While the delays in production from the Slawson wells has been frustrating, management believes that performance from the wells will ultimately meet expectations, with an increase to the Group's overall production expected in 2024 as a result of production from the wells.
Further production additions
During February 2024, ten wells in which Zephyr holds working interests and which are operated by Continental Resources (Harms Federal and Quale Federal) were placed in production. Early production data shows these wells performing ahead of management expectations, adding initial production rates, net to Zephyr, of circa 75 boepd.
Hedging
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 were increased from 94,000 barrels ("bbls") to 137,000 bbls, at an average hedged production price of
At 31 December 2023, the Group had hedged 27,000 barrels of oil over the first quarter of 2024 at a weighted-average price of
Corporate
In June 2023, the Company raised gross proceeds of
During the period the Group strengthened its team in the
· Andy Lee - appointed Chief Financial Officer (
· Heather Hatfield - appointed Chief Accounting Officer
· Ryan Walter - promoted to Vice President - Operations
All three officers are based in
In April 2024, the Company issued a total of 61,503,028 share options to Directors, certain employees and consultants of Zephyr, either to reflect historic awards under the Company's Long-Term Incentive Plan, bonuses for performances achieved in 2021 and 2022, to satisfy employee contractual commitments or commitments in lieu of deferred remuneration and fees from 2020, during the COVID-19 pandemic.
In May 2024, the Company retired
The Ordinary Shares were issued to SGR Investments LLC ("SGRI"), a US-based institutional investor. In December 2022, SGRI provided debt funding to Zephyr Williston LLC, one of the Group's subsidiaries, to enable it to acquire the Slawson wells.
In May 2024, the Group announced that it had been awarded an additional
The grant is administered by the University of
In June 2024, the Group announced a new
Significant decisions made
During the period under review, the Directors made several discrete commercial decisions to ensure the continued growth of the business and, particularly, the advancement of the Paradox project.
The most significant decisions were the approvals required in respect of the State 36-2R well drill, the equity fundraise in June 2023 and the debt for equity exchange in May 2024. All key decisions were unanimously deemed by Board members to be in the best interests of the Group. Details of these items can be found in the relevant sections of this Annual Report.
Outlook
We are off to a strong start in the 2024 financial year with the successful drilling operation at the 36-2R well and the increased production performance from the
Over the last few months, we have witnessed the value and benefit of our two-tiered operating model with our non-operated asset portfolio providing essential funds for growth of the Group as a whole, and we look forward to the rest of the year with confidence.
We would like to thank all Shareholders for their continued support.
On behalf of the Board,
JC Harrington
Chief Executive Officer
26 June 2024
FINANCIAL REVIEW
The 2023 financial year was characterised by further investment in both the Paradox and the
Profitability and liquidity were down from the prior year primarily due to delays in the Slawson wells coming online, the State 36-2 well drilling costs and the associated well control issue.
With the Slawson wells now online, profitability is expected to increase again in the 2024 financial year.
INCOME STATEMENT
During the year ended 31 December 2023, the Group generated revenue of
Administrative expenses for the year were
The Group reports foreign exchange losses of
Finance charges of
During the year ended 31 December 2023, the Group has recognised a deferred tax credit, and a corresponding reduction in its net deferred tax liability, of
The Group reports a net loss after tax of
BALANCE SHEET
Total investment in the Group's exploration and evaluation assets as at 31 December 2023 was
Total investment in property, plant and equipment as at 31 December 2023 was
At 31 December 2023, the Group has recognised
Trade and other receivables have increased by
Cash and cash equivalents as at 31 December 2023 were
The Group's borrowings as at 31 December 2023 were
SUBSEQUENT DEVELOPMENTS
In April 2024, the Company issued a total of 61,503,028 share options to Directors, certain employees and consultants of Zephyr, either to reflect historic awards under the Company's Long-Term Incentive Plan, bonuses for performances achieved in 2021 and 2022 (the "Bonus Scheme"), to satisfy employee contractual commitments or commitments in lieu of deferred remuneration and fees from 2020, during the COVID-19 pandemic.
In May 2024 the Company retired
In June 2024, the Group announced that it had fully repaid the remaining
At 18 June 2024, the Group had cash and cash equivalents of
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
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Safety performance
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Why we measure · The Group has a zero-harm safety culture focused on continuous improvement to achieve an injury-free and 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
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Performance · There were no reported LTIs during the 2023 financial year (2022: nil) · The Group experienced a well control issue in the 2023 financial year while drilling the State 36-2 well. The incident was professionally managed and did not result in any LTIs or long-term damage to the environment. |
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Adjusted EBITDA Profit before tax adjusted for DD&A, finance costs, unrealised foreign exchange gains / losses and unrealised hedge gains / losses |
Why we measure · Indicator of the Group's cash generation to fund expenditures and/or return capital to Shareholders |
Performance · 2023 Adjusted EBITDA was · 2022 Adjusted EBITDA was · The difference between the Adjusted EBITDA for 2023 and the prior year was primarily the result of the standard production decline of the non-operated asset portfolio, lower commodity prices in the year and delays to the six Slawson wells coming online. |
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Net production |
Why we measure · Indicator of revenue generation potential · Measure of progress towards achieving production forecasts and driving profitable production growth |
Performance · 2023 production of 407,600 boe. · 21% decrease in production from 2022 production of 514,650 boe · Decrease primarily the result of the standard production decline of the non-operated asset portfolio, lower commodity prices in the year and delays to the six Slawson wells coming online.
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Growth of Paradox project reserves / resources |
Why we measure · Indicator of economic viability and long-term production potential of projects |
Performance · No changes to the Paradox reserves / resources during the year · It is expected that a revised Competent Persons Report on the Paradox project will be prepared in the second half of 2024. · At 31 December 2023, the Group had Paradox Basin 2P reserves of 2.6 mmboe, 2C resources of circa 34 mmboe and 2U resources of 270 mmboe
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Why we measure · Zephyr Energy is committed to sustainable and responsible oil and gas production |
Performance · Pursued Scope 1 carbon-neutrality from both operated and non-operated assets · VERs credit partnership with Prax which aims to mitigate all Scope 1 carbon emissions.
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CJ Eadie
Group Finance Director
26 June 2024
CONSOLIDATED INCOME STATEMENT
For the year ended 31 December 2023
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Notes |
2023 US | ||