Zephyr Energy PLC (ZPHR.L) Final Results and notice of AGM

Zephyr Energy plc (AIM: ZPHR), the Rocky Mountain oil and gas company focused on responsible resource development, announces its audited results for the year ended 31 December 2020.

Overview

During the 2020 financial year and in the period since Zephyr underwent a wholesale transformation as it evolved from a single project exploration company to a self-sustaining oil-producing group with a diverse portfolio of assets in two established oil-producing basins in the United States of America (the “U.S.”).

The Company expects to accumulate substantial cash flows over the next twelve months from its recently acquired non-operated assets in the Williston Basin, North Dakota, U.S. In addition, Zephyr is poised for significant near-term organic growth as it plans to drill and target first production from its flagship appraisal project in the Paradox Basin, Utah, U.S (the ”Paradox project”). The Company also expects to complete its initial analysis of the geologic data acquired from the recently drilled State 16-2 “dual-use” well shortly, in both the Cane Creek and the multiple overlying reservoirs.

Rick Grant, Zephyr’s Non-Executive Chairman, said “The period under review was one of remarkable progress for Zephyr, and I’m confident that in the coming months we will continue to see a flurry of corporate activity. Upcoming operational milestones are expected to occur across our asset portfolio – we expect all of our acquired wells in the Williston Basin to be online and generating significant near-term cash flow soon, and our upcoming drilling and ongoing geologic evaluation activity has the potential to generate considerable value from our Paradox project.

“I am gratified by the growth achieved and I’m proud that we are executing successfully on our twin core values: to be responsible stewards of our investors’ capital, and to be responsible stewards of the environment in which we work.

“The extent of the Company’s recent progress is even more extraordinary when one considers that it was achieved against the turmoil, economic uncertainty and restrictive environment stemming from the COVID-19 pandemic, and I’d like to thank the Zephyr team and our partners and advisers who demonstrated great loyalty, professionalism, tenacity and skill while navigating us successfully through the challenging global environment. Most of all, I would also like to thank our Shareholders for their ongoing support.

“These are exciting times for Zephyr, and we look forward to keeping our stakeholders updated on our continued progress over the coming period.”

Annual report and notice of Annual General Meeting

The Company’s Annual General Meeting (“AGM”) will be held on 30 June 2021 at 11.00 a.m. Further details are set out in the notice of AGM.

It is the Company’s preference to welcome shareholders in person to the AGM, particularly given the constraints faced in 2020 due to the COVID-19 pandemic. However, with consideration to the Government’s current response to the COVID-19 pandemic and given the uncertainty around potentially tighter restrictions due to the COVID-19 pandemic, which could change at short notice, it cannot be known with certainty whether (or how many) Shareholders will be able to attend the AGM. Accordingly, all shareholders are encouraged to vote by proxy following the instructions set out in the notice of AGM.

A copy of the Company’s annual report and accounts, which include the notice of AGM, will be available on its website, http://www.zephyrplc.com, shortly and will be sent to Shareholders later today.

Extracts from the Annual Report are set out below.

Chairman’s Statement

OVERVIEW
During the 2020 financial year and in the period since, Zephyr Energy plc (formerly Rose Petroleum plc), (“Zephyr”, the “Company” or the “Group”) has undergone a wholesale transformation, evolving from a single project exploration company to a self-sustaining oil-producing group with a diverse portfolio of assets in two established oil-producing basins in the United States of America (the “U.S.”).

The speed and depth of the Group’s transformation is even more remarkable when one considers that it was achieved against the turmoil, economic uncertainty and restrictive environment stemming from the global COVID-19 pandemic. Our progress during this tumultuous period was largely due to the extraordinary effort of the Zephyr team, which demonstrated loyalty, professionalism, tenacity and skill throughout this very challenging period.

Progress was made across our portfolio, on both operated and non-operated assets. Zephyr’s operated asset is its flagship project in the Paradox Basin, Utah, U.S. (the “Paradox project”). Following the successful completion of the State 16-2 “dual-use” stratigraphic test well (the “State 16-2 well”) which also provided an extensive amount of new geologic data, the project is poised for significant near-term growth as we plan to drill and target first oil production in the coming months. Our non-operated portfolio of assets now includes producing, near-term production and near-term drilling assets in the Williston Basin, North Dakota, U.S., one of the country’s most prolific oil producing basins, and we expect to see substantial cash flows from these over the next twelve months.

In short, I am gratified by the growth achieved and proud that we are successfully executing on our twin core values: to be responsible stewards of our investors’ capital, and to be responsible stewards of the environment in which we work.

BACKGROUND
When I wrote my Chairman’s Statement for the 2019 Annual Report, we had recently completed the first phase of the Group’s restructuring, a process which involved augmenting the Board, reducing our operational cost base by way of an essential cost cutting programme, restructuring our Paradox Basin joint venture and acreage position, exiting from all non-core legacy assets and, finally, implementing a new strategy to position the Group for responsible growth and profitability. This groundwork paved the way for the corporate and operational achievements of the last twelve months.

In late 2019, we unveiled the Group’s new strategy which, in addition to developing the Paradox project, was focused on the acquisition of production and development opportunities in the upstream oil and gas sector in the Rocky Mountain region of the U.S., an area with a significant number of opportunities suited to Zephyr’s strengths and size. Our stated goal was to produce a cost-effective path to near-term oil production and cash flow while simultaneously progressing our Paradox project and we have successfully delivered on these two key objectives.

OPERATIONAL ACTIVITY
Over the past year, we made substantial headway on our operated Paradox project and Zephyr is now on the cusp of a drilling programme that will target first production after many years of hard work and considerable investment in the project. We believe, perhaps more now than ever, that the Paradox project has the potential to be a project of significant scale and profitability.

Having completed the restructuring of the Paradox project in late 2019, it was important to make progress on (and under) the ground in 2020. I was therefore delighted that we were able to secure United States dollars (“US$”) 2 million in U.S. Government grant funding, which enabled us to proceed with the drilling of the State 16-2 well. Securing the funding was a fantastic achievement and one that proved to be an important catalyst for the future development of the project, representing a major step towards realisation of the project’s considerable potential while minimising the capital risk to the Group. It is rare to secure grant funding from the U.S. Government for drilling activities of this nature, and this bespoke funding is testament to both the potential of our Paradox project and the efforts of our project team who conceived of, negotiated and delivered this funding successfully.

Once funding was secured, our focus immediately turned to well planning and operations. Zephyr’s drilling team executed the drilling programme in a highly-commendable fashion, through harsh winter conditions, to successfully complete the well in record time for the basin. Drilling operations were safe, effective, conducted in accordance with Covid-19-related guidance and restrictions, and were completed well within the Group’s forecast timeframe. We were also able to gather significant amounts of reservoir data which, after several months of review and appraisal, gave us the confidence to make the subsequent decision to plan to drill the sidetrack lateral off the State 16-2 well (the “State 16-2LN CC” or “the lateral”) as soon as practicable. Following the successful completion of our fundraise in April 2021, we are now fully funded to initiate this drilling programme.

The lateral will target first production from the Cane Creek reservoir and, importantly, will utilise the pre-existing roads, pad and wellbore from the State 16-2 well as a low-cost, low environmental impact sidetrack host. We continue to progress the permitting, drilling plan, contracting and resource evaluation ahead of the drilling programme and we remain on track to drill the well in July 2021.

The significant core and log data acquired from the State 16-2 Cane Creek reservoir corroborated and supported the Board’s long-held view that the Paradox has the potential to be a project of considerable scale. The drilling of the lateral well, which has robust and highly attractive forecast economics, has the potential to be a pivotal moment for the Group, and comes after seven years of substantial effort and investment in the asset.

In parallel with delivering on our strategy for the Paradox project, we have also been able to deliver on the second of our corporate objectives, by securing highly economic existing and near-term production through the acquisition of assets in the Williston Basin (the “Williston project”) in Q1 2021, and through our subsequent acquisition of 11.6 acres in the Williston Basin (the “Continental acreage”) in Q2 2021.

The acquired assets are ideal additions to our asset portfolio and an excellent complement to our Paradox project. Since mid-2019, the Group has evaluated a significant number of potential acquisitions, and the Board believed the assets ultimately acquired to be particularly attractive. We negotiated the Williston project acquisition on highly favourable economic terms, especially in light of the considerable rise in oil prices which occurred during the period between the initial agreement on purchase terms and the ultimate closing of the acquisition. The fact that the first five Williston wells acquired had all drilling risk removed was also a major bonus, and the resulting cash flows expected from the project will enable us to begin to utilise the Group’s historical tax losses of more than US$16 million.

The substantial cash flows expected to be generated from the Williston project and the Continental acreage have the potential to be reinvested into the development of the Paradox project or into other opportunities, again demonstrating the strength of a balanced portfolio of project assets.

The Board retains interest in progressing the Company’s potential working interest acquisition in the McCoy lease in the Denver-Julesburg Basin (“DJ Basin”) in Weld County, Colorado, U.S. (the “McCoy acquisition”). However, while the potential acquisition continues to meet the Company’s key acquisition criteria, the timeline for development has been put on hold by the current operator of the project while an expansion of the project is considered. Zephyr will continue to monitor progress and will look to make an investment decision once a firm development schedule is established and if revised terms can be negotiated. In the meantime, given the amount of forthcoming activity on the Company’s Paradox and Williston projects, the Board does not intend to seek to negotiate an extension to Zephyr’s existing option on the McCoy acquisition beyond the current expiry date of 30 June 2021. That said, the seller of the McCoy asset has confirmed that the Company will be given a right of first refusal for participation in the project, should the seller seek funding once development plans are solidified.

ENVIRONMENTAL, SOCIAL AND GOVERNANCE (ESG)
During 2020, we executed a complete rebranding of the Group, including the change of the Company’s name. Just as importantly, the Board spent significant time formulating and agreeing upon the core principles and values under which Zephyr will operate. In short, Zephyr’s team will always strive to be responsible stewards of its investors’ capital and responsible stewards of the environment in which we work. We believe that good environmental performance, together with good governance practices, will translate into good business performance and therefore are focused on delivering strong economic returns in the most environmentally responsible manner practical.

Under my Chairmanship, I want to ensure that every action and investment decision we make is considered against our core values. This includes the following points of focus:

·we will continue to protect the Group, safeguard its existing asset base and position it for attractive growth opportunities;

· we will continue to seek creative and beneficial funding opportunities in an effort to unlock value from our existing asset portfolio, as evidenced by the U.S. Government funding we received for our recent drilling programme on the Paradox project;

·we will continue to adopt a disciplined focus on growth via the acquisition of producing or near-term development opportunities in the Rocky Mountain region. Even in this unusual economic environment, we believe that attractive, value-additive acquisitions are available and may be acquired using non-traditional funding structures;

· we will continue with our programme of tight financial controls and cash preservation which will enable the Group to continue trading effectively; and

·we will continue to ensure management and the Board are aligned with our Shareholders through significant ownership of shares – the Board currently controls over 14 per cent of the Company’s issued Share Capital.

OUTLOOK
The period under review was one of substantial progress for the Group – I am confident that over the next few months we will continue to see a flurry of corporate and operational activity as we target production from the Paradox project and accumulate significant cash flows from our non-operated assets in the Williston Basin. These are exciting times, and we look forward to keeping all our stakeholders updated on our progress.

A final word must be said about our team and their extraordinary efforts to build value for all Shareholders. During the difficult days in late spring 2020, with the COVID-19 pandemic raging across the globe, our people and partners showed great loyalty in staying committed at a time when we had to implement a radical cost-cutting programme to ensure the survival of the Company. Our team’s tenacity and resilience ensured we kept momentum at a crucial time which enabled us all to enjoy the operational successes of recent months. I would like to thank each and every one of them for their hard work, sacrifice and dedication.

Just as importantly, I would like to extend my heartfelt gratitude to our Company’s Shareholders and advisers for their support during a year which contained both unimaginable global turmoil and significant corporate growth. You have demonstrated great loyalty during this transformative period in the Company’s history, and on behalf of the entire management team and Board of Directors, I thank you.

RL Grant

4 June 2021

https://www.investegate.co.uk/zephyr-energy-plc–zphr-/rns/final-results-and-notice-of-agm/202106070700119536A/


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