Zephyr Energy Plc (AIM: ZPHR): Acidization results in high flow rate at Paradox well. Potential game changer for the play.

• Following a successful acidization job, Well State 36-2R has been tested at peak rates of >2,100 boe/d, including up to 510 bbl/d of condensate/light oil and almost no water. This excludes potential natural gas liquids production that would result in an even higher rate.
• This flow rate compares very positively with the peak rate of 1,350 boe/d achieved during the first test (announced in July). The pressure response during the second test is also much better than during the previous test. This is very important.
• The acidization operation removed any remaining near-wellbore formation damage, with a notable improvement to near-wellbore reservoir permeability after each acid treatment. Early well test data suggests that some of the additional production comes from microfractures and the matrix. If confirmed, this could have very positive implications for the play as acidization might be enough to develop the reservoirs rather than having to rely on much more expensive and riskier hydraulic stimulation (fraccing). Using acidization rather than fraccing could reduce drilling and completion costs by 20-30%. Acidization has not been previously used in the Paradox.
• Well State 36-2R has been tested on a reservoir interval of only 130’. Zephyr is now considering to either produce the well from this small interval or extend and acidize the lateral to up to 10,000’. Given that no fraccing would be required, we estimate the incremental cost is only a few US$ mm with a very material positive impact on economics. Returning to the well once the smaller interval has been produced could be riskier. A decision is expected in the coming 3-4 weeks.
• Given the importance of the result, Zephyr has commenced discussions with potential industry partners.
• Pending visibility on next steps, we have not changed our forecasts. We have however increased our chance of commerciality for the Paradox from 65% to 75% and increased our target price from £0.12/sh to £0.13/sh.

Expected well test data
Zephyr will now undertake PVT analysis to better understand the nature of the fluid, which could cast some light on the contribution of the matrix to the flow rate. In addition, the result of the pressure build-up will allow Zephyr to estimate better the volume of recoverable reserves from the small interval tested at Well State 36-2R.

Valuation
Our ReNAV is now ~£0.13/sh. Fully derisking the Cane Creek contingent resources would add £0.03 per share to our ReNAV.