Zephyr Energy Plc (AIM: ZPHR): Positive well test result in the Paradox but still some uncertainties to be lifted
• The State 36-2R LNW-CC well has been tested at peak production rates of 1,350 boe/d with the well still choked and production constrained.• Initial reservoir pressure was ~8,600 psi, which is very high.
• The condensate yield of 180 bbl/mmcf is much higher than at well State 16-2LN-CC and higher than expected, which is a positive surprise. This suggests that the well is producing slightly more condensate than gas. We only expected a condensate yield of 50 bbl/mmcf. With 58 deg API for the condensate and the much higher realizations for liquids (~US$80/bbl for WTI) versus gas (~US$2/mcf for Henry Hub), this has very positive implications for the economics of the larger development.
• Overall, Zephyr’s position in the Paradox could be much more liquids rich as ~50% of the acreage could be located in the liquids rich window with similar condensate yields.
• The flow test did imply that the natural fracture network could be partially restricted from the greater reservoir at this well location. This could be due to residual heavyweight drilling mud used in both the initial well and the redrill. Not all the mud used to kill the initial well has been recovered. This could also be due to compartmentalization by faulting.
• The company will run a larger acidization operation to further remove any drilling mud emulsion from the network. A small acid job already had a very positive impact and the larger job could improve further the flow rate. This operation is expected to take place in the next few weeks and will be immediately followed by a second production test.
• The production test has to be read in the context of an horizontal section of only 150’ long. The design of the initial horizontal well was for a 4,000’ lateral and the well could therefore be re-entered accordingly. Such a well would target a much larger area of natural fractures and have hydraulic stimulation. Everything else being equal, it would deliver a higher flow rate.
• Pending the result of this second test, we have not changed our forecasts nor our target price of £0.12 per share.
Reflections of costs
The cost of the acidization plus further testing programme represents only a few hundreds of thousands dollars. Zephyr is also already selling the condensate produced from the State 36-2R LNW-CC well.
Valuation
Our ReNAV is unchanged at £0.12 per share. Fully derisking the Cane Creek contingent resources would add £0.04 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.
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