Zephyr Energy Plc (AIM: ZPHR): Paradox well to be lengthened. Potential funding by industry partner provides external validation
• Zephyr has decided to extend the State 36-2R well in the Paradox basin by drilling a 5,500 ft lateral on the well.• We are not surprised by this decision given that the acid job performed on the existing 130 ft interval was very successful with peak test production of >2,100 boe/d.
• Zephyr believes that the ultimate recovery of the extended well could reach 2 mmboe, which is well above what would have been recovered from the 130 ft interval.
• The 5,500 ft lateral is expected to cost ~US$7 mm (including acidization and production testing). Assuming US$12 mm total cost per development well would imply ~US$2/boe drillex. This is very low.
• Zephyr has entered into a non-binding LOI with a US-based industry investor with non-operated investment experience to fully fund the extended lateral. While the terms of the proposed transaction have not been disclosed, Zephyr would retain operatorship and receive a majority of the economic benefits from the well. In addition, the investor would not receive any further interest or option in the Paradox project other than the individual wellbore interest.
• This is a very positive development as this validates the quality and the potential of Zephyr’s interests in the Paradox basin.
• While transactions with a similar structure are very common in more established US basins, this is a first for the Paradox.
• Pending further visibility on the impact of acidization/long laterals on the development plan, we re-iterate our target price of £0.13 per share.
Next steps
Drilling operations at the State 36-2R well are expected to start late in 4Q24 or early in 1Q25. Zephyr anticipates completing the funding transaction ahead of drilling. We are now expecting production in the Paradox to start in 2Q25 instead of 1Q25. Pending further details, we are assuming Zephyr will keep 60% of the production of the State 36-2R well.
Valuation
Our ReNAV is broadly unchanged at ~£0.13/sh. Fully derisking the Cane Creek contingent resources would add £0.12 per share to our Core NAV or £0.03 per share to our ReNAV.
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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