Zephyr Energy Plc (AIM: ZPHR): Private equity funding unlocks growth in the Williston and provides external validation
• Zephyr has secured a US$100 mm drilling funding agreement with a US private equity firm to enable growth in its non-operated asset portfolio in the Williston Basin. The structure appears to be similar to a “DrillCo”, in which the investor will fund up to 100% of Zephyr’s drillex on a case by case basis. The agreement covers drilling on future well acquisitions but also could apply to new wells proposed on the Zephyr’s existing acreage.• The funding should enable Zephyr to scale production in a highly cost effective manner. With its current land position, Zephyr consistently receives AFEs for new wells, and the investor has potential to fund those developments going forward in an accretive manner for Zephyr.
• As oil prices have declined, valuation expectations have also dropped, creating attractive acquisition opportunities. Several acreage holders are looking to exit their commitments, while OFS companies have lowered service costs, improving project economics.
• This agreement serves as an external validation of Zephyr’s strategy and expertise in the Williston Basin. Notably, following the US$6 bn merger of Whiting Petroleum and Oasis Petroleum, several key personnel chose to join Zephyr rather than relocate to the combined entity’s headquarters in Houston.
• Zephyr’s funding partner has an in-house upstream oil and gas technical team, offering an additional layer of expertise to screen investment opportunities and further enhance project selection.
• We re-iterate our target price of £0.15 per share. The total unrisked NAV for the business stands at £1.13 per share.
More on the transaction
Amid tighter capital markets, DrillCo transactions became an alternative to traditional financing for upstream oil & gas operations. A DrillCo transaction functions as a drilling JV, where an investor finances all or a significant portion of drilling costs in return for a direct WI in the oil & gas lease or well. In a typical Drillco, the WI assigned to the investor is subject to partial reversion to the operator once the investor achieves a predetermined IRR hurdle. Zephyr retains the right (but not the obligation) to fund up to 33% of pro rata capex. The agreement is for an initial term of six months. Economic details of this particular funding agreement have not been released given a competitive commercial environment, but we would expect the Zephyr to detail the economic benefits it will receive on a case by case basis as funding is drawn.
Valuation
Our Core NAV and ReNAV are unchanged at respectively £0.05 per share and £0.15 per share.
Rose Petroleum is an oil and gas (O&G) and mining company with exploration assets and an operational crushing and flotation mill. Co.'s principal activities are the exploration and development of O&G resources together with the evaluation and acquisition of other mineral exploration targets, principally gold, silver, uranium and copper, and the development and operation of mines in Mexico. In Co.'s O&G division, the area of focus is on two unconventional oil and gas basins in the U.S.: the Uinta Basin and the Paradox Basin. In its mining division, Co. continues its milling operations through its subsidiary, Minerales VANE S.A. de C.V., which owns the SDA Mill in Mexico.
Auctus Advisors is a specialist Equity Capital Markets and Advisory business with a focus in the Energy Sector.
The partners have complementary skill sets, with decades of experience across Equity Capital Markets, Investment Banking and the Energy industry. We have worked at Société Générale, Canaccord Capital, BMO Capital Markets and Schlumberger. Most recently we have worked together for many years at GMP FirstEnergy.
Auctus has been set up at the beginning of a new decade in which we see significant opportunities in the Energy space. Globally, demand for energy is at record levels and continues to grow. Conversely, investment in traditional energy sources has been severely constrained. We believe this imbalance creates opportunities for both companies and investors.
Auctus provides Corporate Broking, Equity Research and Investment Banking services.
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