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: +44 (0)20 7225 4590
Colin Harrington (CEO)
Chris Eadie (CFO)
Allenby Capital Limited - AIM Nominated Tel: +44 (0)20 3328 5656
Adviser
Jeremy Porter / Liz Kirchner
Turner Pope Investments - Broker Tel: +44 (0)20 3657 0050
Andy Thacker / Zoe Alexander
Flagstaff Strategic and Investor Communications
Tim Thompson / Mark Edwards / Fergus Tel: +44 (0) 20 7129
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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