Zephyr Energy Plc (AIM: ZPHR): Balance sheet ahead of expectations. Waiting on Paradox progress
• 1H23 sales had been previously reported. Zephyr held US$6.2 mm in cash at the end of June, ahead of our expectations of US$4.8 mm. Zephyr is also carrying US$6.0 mm of current receivables and US$12.8 mm of current payables. Adding pre-payments results in a positive working capital position (pre debt) of ~US$2.2 mm. This is more favourable that the working capital deficit of US$5 mm that we were forecasting.• Total debt at the end of June was US$33.7 mm, very close to our estimate of US$32.1 mm. While US$24 mm debt is classified as current, this reflects the US$13 mm revolver that is redetermined every six months as a normal course of business. The size of the revolver is driven by oil price and production. Both have increased since the last redetermination and we anticipate the borrowing base will grow again.
• With very limited capex in 2H23 (we assume ~US$2mm) and production from the Slawson wells expected to boost production in 4Q23, we anticipate the company’s net debt to reduce during the period.
• As we incorporate a six month delay in the Paradox and cost inflation, we have changed our target price to £0.16/sh in line with our new ReNAV.
What is happening in the Paradox?
The tubing remains stuck in Well 36-2. If it cannot be retrieved over the coming weeks, a re-drill or a sidetrack of the well will be considered, especially given the productivity witnessed from this well. This is expected to be covered by Zephyr’s insurance. The growing cash position of the company is enough to bridge the gap between the time the costs are incurred and when the invoices are re-imbursed. Zephyr has already recovered US$3.7 mm from its insurer in respect of the well incident and invoices continue to be reimbursed promptly. Dominion has confirmed that its gas supply pipeline from the Northwest Gas Pipeline system to the Green River area will be operational in the early part of the fourth quarter of 2023.Futhermore, the pipeline will be available to accept natural gas volumes from third-party sources. This is an important piece of news that addresses concerns about the export route for Zephyr’s gas production.
Forecasts and Valuation
We understand that Zephyr has potentially identified a low capex solution for a gas processing plant (based on a processing tariff) for the Paradox. We are now assuming a 6 month delay to first gas to June 2024 with 1H24 development capex of only US$5 mm and overall production of 4.8 mboe/d in 2H24 and >8.0 mboe/d in early 2026. We have also factored some cost increases due to inflation. Our new ReNAV is £0.16 per share. Our unrisked NAV for the 39 mmboe 2C contingent resources in the Cane Creek reservoir targeted by the State 36-2 well in the Paradox basin is £0.12 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.
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