Second Quarter 2023 Williston Basin results;
Paradox acreage acquisition;
State 36-2 LNW-CC well work continues
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 provide initial second quarter 2023 (“Q2”) results related to hydrocarbon production and cashflows from its non-operated asset portfolio in the Williston Basin, North Dakota, U.S (the “Williston project”), and an update on its flagship project in the Paradox Basin, Utah, U.S (the “Paradox project”).
Q2 Williston Basin Highlights
· Quarterly revenues totaled US$7.1 million, net to Zephyr, compared to first quarter 2023 (“Q1”) revenues of US$6.3 million (subject to audit).
· Q2 operating income was US$4.2 million (after taxes, lease operating expenses, realised hedging impacts, and gathering and marketing fees), compared to Q1 operating income of US$5.7 million.
· Q2 sales volumes averaged 1,385 barrels of oil equivalent per day (“boepd”) compared to Q1 sales volumes average of 1,093 boepd.
· At 30 June 2023, 223 wells in the portfolio were available for production.
o Net working interests across the Company portfolio now average 7% per well, equivalent to 15.1 gross wells in total, all of which utilised horizontal drilling and modern, hydraulically stimulated completions.
· The recently acquired Slawson Exploration (“Slawson”) operated wellbore interests (as announced on 21 December 2022) are fully drilled and completed. Production from these working interests is forecast to be online by October 2023 following completion of surface facilities on the well pad. The Company will provide an update in relation to FY 2023 production guidance when those wells are brought online.
· The Company has received notice from Continental Resources (“Continental”), operator of a drilling and drilling spacing unit (“DSU”) in which Zephyr holds existing working interests, that it plans to drill ten new wells on the DSU. The acreage is located in a highly attractive part of the Williston Basin, and the initial two wells drilled by Continental in 2021 have been some of the top performers in Zephyr’s non-operated portfolio, paying out in under six months from first production. Zephyr’s Board of Directors has elected to participate in the upcoming drilling programme, and Zephyr’s forecasted net capital expenditure (CAPEX) related to the drilling is approximately US$205,000 which will be funded from existing cash resources. The planned new development drilling is an illustration of the continued organic growth from the Company’s existing Williston position and provides continued access to low risk, near-term production.
Acquisition of additional acreage in the Paradox Basin
Zephyr is also pleased to announce an agreement to increase its land position in the Paradox Basin through the targeted acquisition of an additional 640 leased acres deemed by the Company 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 the most recent SITLA auction. The acreage is close to the Company’s existing White Sands Unit and gas export infrastructure.
The acquisition of the new acreage is part of Zephyr’s ongoing portfolio management of its Paradox Basin position – this active land management strategy has resulted in a defensible and growing land position which Zephyr’s Board believes is increasingly difficult to replicate in today’s regulatory and political environment.
Consideration for the new acreage was satisfied from the Company’s existing cash resources. Following the closing of the acquisition of the new acreage, the Company now operates over 46,000 gross acres in the Paradox Basin, the majority of which the Company holds as operator with a 100% working interest.
State 36-2 LNW-CC well update
The State 36-2 LNW-CC well remains static and under control, and Zephyr’s operations team continues to complete the well work required prior to commencement of a production test. Operations over the last month were hindered by the extreme heat witnessed in the U.S. Southwest, with record high temperatures being recorded in the region. In order to maintain safe working conditions, operations over the last month were limited to nighttime only. Given recent improvements in conditions, the team plans to resume daytime operations this week.
All current and future operations will continue to be conducted in such a way that well control is maintained and working conditions are safe for the team. The Board notes the safe progress to date and fully expects to deliver a production test in the near-term. This methodical and patient approach is necessitated by the expected high pressure and substantial apparent deliverability of the well and reservoir, as witnessed during the earlier phases of operations.
As previously reported, the Company retains comprehensive well control insurance coverage, and the Board ultimately expects to recover the vast majority of costs associated with the well control incident. Under the terms of Zephyr’s insurance policy these payment recoveries are made on a reimbursement basis (after approval by the insurer, and after the Company has paid the corresponding contractor invoices).
The Company is pleased to report that all invoices submitted to date to its insurer have been approved and funds due from Zephyr’s claims have been paid promptly. Additional invoices are being submitted on a regular basis with payments expected within 30 days of receipt by the insurer.
Colin Harrington, Chief Executive of Zephyr, said: “Zephyr’s profitable and diverse non-operated asset base continues to deliver low risk, high margin cash flows for the Company. The Company now has a multi-year track record of successful non-operated investment, with rapid paybacks and solid cash flows available to fund future growth within both our operated and non-operated portfolios.
“Near term growth includes our investment in the newly drilled and completed Slawson-operated wells which are expected to significantly boost non-operated production rates when brought online in the autumn. The new wells proposed by Continental will also help to grow volumes over the upcoming year and demonstrate continued growth from the existing non-operated portfolio.
“On our operated Paradox project, our near-term priority is to deliver a safe and successful production test of the State 36-2 LNW-CC well, and we look forward to updating shareholders when the test commences.”
Q2 Sales Detail
Zephyr’s net sales for Q2 were approximately 126,044 boe.
Q2 sales product mix was 89% crude oil, 4% natural gas, and 7% natural gas liquids. The table below provides sales volumes, product mix, and average sales prices for the quarter:
85,310 bbls at an average sales price of US$74.70/bbl*
121,773 thousand cubic feet (“mcf”) at an average sales price of US$2.21 /mcf
Natural Gas Liquids:
20,438 bbls at an average sales price of US$24.33 per bbl
*not including hedges
(Note: Q2 volumes and average sales prices figures include field estimates in respect of June 2023 natural gas and natural gas liquids sales volumes and are subject to future revision.)
The Company has hedged 117,000 barrels of oil for 12 months starting 1 April 2023 at a weighted-average price of US$83.35 per barrel. 33,000 bbls were hedged in Q2 at an average price of $90.05. The Company is expecting significant additional production volumes by the end of October 2023 from new wells coming online and will continue to evaluate its commodity price risk management strategy on a regular basis.
During Q2, more of Zephyr’s existing production wells were changed from temporarily shut-in to producing status. As new infill wells are drilled, existing offset wells may be temporarily shut in to optimise the nearby completion and mitigate offset well production losses. The Company is now seeing those offset wells being re-instated for production when the new infill wells are started up for production.
In the Williston Basin, cash flow from non-operated interests in newly drilled wells may lag actual production by up to five months. Such payments from the operator accrue on a monthly basis and are paid in full prior to the sixth month of production, which may result in impacts on quarterly sales volumes and revenues during times of significant completion activity. Zephyr expects additional accrued payments from operators during the remainder of 2023 given the Company’s interest in 25 newly drilled wells which came online over the last two quarters.
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