Zephyr Energy Plc (AIM: ZPHR): Reducing the cost of debt. Testing at State 36-2R to start imminently
• The FY23 operating cashflow after interests of ~US$9 mm was above our forecasts (US$7 mm) due to change of working capital. We expected a negative change of working capital given (1) Zephyr had to make advance payments for the remedial of the State 36-2R well ahead of being reimbursed by the insurance and (2) the fact that the proceeds of the production for the Slawson wells were not received until part way through 1H24.• Zephyr’s revolving credit facility (RCF) has been redetermined with an unchanged borrowing base (compared to December 2023) of US$15.15 mm. The same lender, longstanding North Dakota-based commercial bank FIBT, has also provided Zephyr with a new term loan of US$5.6 mm.
• Overall, Zephyr now holds ~US$29 mm of debt (~US$30 mm previously), including the existing US$8.75 mm amortising term loan, as the more expensive US$6 mm bridge loan has been repaid out of the proceeds of the new term loan. The terms of the bridge loan included 12% per annum interest rate plus 1% royalty interest on the production associated with the new Williston wells. The overall average interest rate is now 9.5% per annum (10% per annum previously).
• The imminent focus remains the testing of the State 36-2R well that is currently cleaning-up. Zephyr had used very heavy mud to keep the well balanced while drilling (due to the very high pressure) and the company is slowly reducing the mud weight.
• Our unrisked NAV for the contingent resources that the State 36-2R well will contribute to derisk is £0.11 per share. A high flow rate would allow the booking of 2P reserves and growth in production. With success, overall production rates could increase by 250% by end of 4Q24 (compared to the FY23 average production).
• In addition, the well has encountered the overlying reservoirs with a similar response as at the original well. 270 mmboe prospective resources have been estimated at the nine overlying reservoirs. This represents 6-7 times the contingent resources estimated in the Cane Creek reservoir, which was the target of the State 36-2R well.
• The deadline to start drilling a helium well at Salt Wash has been extended from 30 June to 1 September. Our unrisked NAV of the helium is £0.03 per share. We re-iterate our target price of £0.12 per share.
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.
Auctus provides Corporate Broking, Equity Research and Investment Banking services.
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