TIDMZPHR
RNS Number : 8673D
Zephyr Energy PLC
26 June 2023
Prior to publication, the information contained within this
announcement was deemed by the Company to constitute inside
information as stipulated under the UK Market Abuse Regulation.
With the publication of this announcement, this information is now
considered to be in the public domain.
26 June 2023
Zephyr Energy plc
("Zephyr" or the "Company")
Full Year Results for the year ended 31 December 2022
Notice of AGM
Zephyr Energy plc (AIM: ZPHR) (OTCQB: ZPHRF), the Rocky Mountain
oil and gas company focused on responsible resource development
from carbon-neutral operations, is pleased to announce its audited
results for the year ended 31 December 2022.
Highlights
Over the 2022 financial year, and in the period since, Zephyr
has continued to make sustained progress with its primary goal of
opening up the next prolific onshore U.S. oil and gas play.
The Company's key goals for 2023 are to move its project in the
Paradox Basin, Utah, U.S. (the "Paradox project") into full
commercial production while continuing to grow its
highly-profitable, cash generating non-operated asset
portfolio.
The Company's Board of Directors (the "Board") remains firmly
committed to delivering long-term value to our Shareholders, while
upholding our core values of being responsible stewards of our
shareholders' capital and of the environment in which we
operate.
Financial
-- Near seven-fold increase in revenues from prior year to
US$41.1 million (2021: US$6 million), and a profit before tax of
US$22.6 million (2021: US$1 million), highlighting the extent of
the Group's growth during the period.
-- Net profit after tax of US$19.3 million, equating to a profit
of 1.26 cents per Ordinary Share for the year ended 31 December
2022 (2021: US$0.8 million or 0.08 cents per Ordinary Share).
-- At 31 December 2022, the Group had cash and cash equivalents
of US$9 million (2021: US$1.8 million).
-- Total investment in the Group's exploration and evaluation
assets as at 31 December 2022 was US$38 million (2021: US$22.8
million) reflecting the ongoing investment in the Paradox
project.
-- Total investment in property, plant, and equipment as at 31
December 2022 was US$51.8 million (2021: US$11.2 million)
reflecting the further acquisition of non-operated assets in the
Williston Basin, recurring capital expenditure and decommissioning
obligations on the non-operated assets.
Paradox Project, Utah, U.S. (operated asset)
-- First flowing hydrocarbons from the Company's State 16-2
LN-CC well (the "State 16-2 well") and the drilling of the State
36-2 LNW-CC well (the "State 36-2 well"), a major milestone for the
project.
-- Working- interest in the project increased to 100% across approximately 45,000 acres.
-- Competent Persons Report which highlighted the scale and
resource potential of the project. Based on the Company's 100%
working interest Sproule reported:
o 2P Reserves: Maiden Paradox project Proved Reserves of 2.57
million barrels of oil equivalent ("boe")
o 2C Contingent Resources: 34 million boe
o 2U Prospective Resources from overlying reservoirs: 270
million net unrisked boe.
-- Acquisition of assets and infrastructure during the period
including 21 miles of natural gas gathering lines, a gas processing
plant (not currently in operation), and rights of way for
additional gathering lines to help facilitate moving the project
into the production phase with less upfront cost.
Williston Basin, North Dakota, U.S. (non-operated assets)
-- Zephyr now has a portfolio of interests in more than 220
wells operated by top-tier operators in the Williston Basin, one of
the most prolific basins in the U.S.
-- FY 2022 revenues from the non-operated assets of US$41.1
million (from production of over 500,000 boe) a circa 585% increase
from revenues of US$6 million in FY 2021.
-- FY 2022 sales volumes from the portfolio averaged 1,410
barrels of oil equivalent per day ("boepd") (2021: 263 boepd).
-- Portfolio has generated high margin cashflows, providing
funding for the Paradox project and further investment in the
non-operated portfolio.
-- Implemented inaugural hedging programme with BP Energy
Company, locking-in over US$30 million of forecasted Williston
Basin revenue over a two-year period.
Corporate
-- In line with the Company's ESG objectives, Zephyr continued
to achieve Scope 1 carbon-neutrality across its operational
footprint during the period under review.
-- There were no reported health or safety incidents on Zephyr operated assets.
Rick Grant, Zephyr's Non-Executive Chairman, said:
"I am pleased to report that the 2022 financial year was a
period of excellent environmental, financial and operational
performance for the Company.
"Zephyr continues to be well positioned as a profitable, cash
generating exploration and production group and our balanced
portfolio of operated and non-operated assets is expected to
continue to yield strong results for Zephyr. Cash flows generated
from our non-operated portfolio will continue to be primarily used
for the ongoing development of our flagship Paradox project.
" Looking ahead, with a diverse portfolio of cash flowing
assets, potential for substantial future organic growth, a solid
financial footing and a talented and dedicated team of employees,
we continue to be extremely optimistic about Zephyr's future.
"Our key goals for 2023 are to move the Paradox project into
full commercial production while continuing to grow our
non-operated asset portfolio.
"I would like to thank our employees and contractors for their
hard work in 2022, especially those on site who worked tirelessly
through historically difficult conditions last winter. I also wish
to express gratitude to our Shareholders, lenders, advisers and
other stakeholders for their ongoing support to the Group.
"The Board is looking to the future with a high degree of
confidence as we continue in our pursuit of building a group of
which all our stakeholders can be proud."
Notice of AGM and posting of annual report
The Annual General Meeting will be held at 11 a.m. on 26 July
2023 at the offices of Memery Crystal, 165 Fleet Street, London
EC4A 2DY.
A copy of the Company's annual report and accounts, and the
notice of AGM, will shortly be available on Zephyr's
website, http://www.zephyrplc.com , and posted to Zephyr's Shareholders.
Contacts
Zephyr Energy plc Tel: +44 (0)20 7225
Colin Harrington (CEO) 4590
Chris Eadie (FD)
Allenby Capital Limited - AIM Nominated Tel: +44 (0)20 3328
Adviser 5656
Jeremy Porter / Vivek Bhardwaj
Turner Pope Investments - Joint-Broker Tel: +44 (0)20 3657
James Pope / Andy Thacker 0050
Panmure Gordon (UK) Limited - Joint-Broker
John Prior / Hugh Rich / James Sinclair-Ford Tel: +44 (0) 20 7886
2500
Celicourt Communications - Public Relations
Mark Antelme / Felicity Winkles / Ali
AlQahtani
Tel: +44 (0) 20 7770
6424
Qualified Person
Dr Gregor Maxwell, BSc Hons. Geology and Petroleum Geology, PhD,
Technical Adviser to the Board of Zephyr Energy plc, who meets the
criteria of a qualified person under the AIM Note for Mining and
Oil & Gas Companies -June 2009, has reviewed and approved the
technical information contained within this announcement.
Notes to Editors
Zephyr Energy plc (AIM: ZPHR) (OTCQB: ZPHRF) is a technology-led
oil and gas company focused on responsible resource development
from carbon-neutral operations in the Rocky Mountain region of the
United States. The Company's mission is rooted in two core values:
to be responsible stewards of its investors' capital, and to be
responsible stewards of the environment in which it works.
Zephyr's flagship asset is an operated 45,000-acre lease holding
located in the Paradox Basin, Utah, 25,000 acres of which has been
assessed to hold, net to Zephyr, 2P reserves of 2.6 million barrels
of oil equivalent ("mmboe"), 2C resources of 34 mmboe and 2U
resources 270 mmboe.
In addition to its operated assets, the Company owns working
interests in a broad portfolio of non-operated producing wells
across the Williston Basin in North Dakota and Montana.
The Williston portfolio currently consists of working-interests
in over 220 modern horizontal wells. Cash flow from the Williston
production will be used to fund the planned Paradox Basin
development. In addition, the Board will consider further
opportunistic value-accretive acquisitions.
Glossary of terms
Reserves : Reserves are defined as those quantities of petroleum
which are anticipated to be commercially recovered from known
accumulations from a given date forward
1P: proven reserves (both proved developed reserves + proved
undeveloped reserves)
2P: 1P (proven reserves) + probable reserves, hence "proved and
probable"
3P: the sum of 2P (proven reserves + probable reserves) +
possible reserves, all 3Ps "proven and probable and possible"
Contingent Resources : Those quantities of petroleum estimated,
as of a given date, to be potentially recoverable from known
accumulations by application of development projects, but which are
not currently considered to be commercially recoverable due to one
or more contingencies.
Contingent Resources may include, for example, projects for
which there are currently no viable markets, or where commercial
recovery is dependent on technology under development, or where
evaluation of the accumulation is insufficient to clearly assess
commerciality. Contingent Resources are further categorised in
accordance with the level of certainty associated with the
estimates and may be sub-classified based on project maturity
and/or characterised by their economic status.
1C: Low estimate of Contingent Resources
2C: Best estimate of Contingent Resources
3C: High estimate of Contingent Resources
Prospective Resources: Those quantities of petroleum which are
estimated, on a given date, to be potentially recoverable from
undiscovered accumulations.
1U: Low estimate of Prospective Resources
2U: Best estimate of Prospective Resources
3U: High estimate of Prospective Resources
CHAIRMAN'S STATEMENT
OVERVIEW
" We continue to make sustained progress with our primary goal
of opening up the next prolific onshore U.S. oil and gas play"
On behalf of the Company's Board of Directors (the "Board"), I
am pleased to present the Company's financial and operational
results for the 2022 financial year which reflect the hard work,
dedication and focus of the Zephyr team.
The team's execution of our strategy and focused initiatives has
driven another year of excellent environmental, financial and
operational performance. Zephyr continues to be well positioned as
a profitable, cash-generating exploration and production group
focused on responsible resource development from carbon-neutral
operations in two established oil producing basins in the Rocky
Mountain region of the U.S.
The Group reports a near seven-fold increase in revenues from
the prior year to US$41.1 million (2021: US$6 million), and profit
before tax of US$21.2 million (2021:US$1 million), highlighting the
extent of the Group's growth during the year.
Our balanced portfolio of operated and non-operated assets is
expected to continue to yield strong results for Zephyr in the
future, with cashflows generated from our non-operated portfolio
primarily used for the continued development of our flagship
project in the Paradox Basin, Utah, U.S. (the "Paradox project"),
as we pursue our strategic objective of opening up the next
prolific onshore U.S. oil and gas play, while focusing on the
delivery of safe, reliable, and responsibly produced
hydrocarbons.
OPERATIONAL ACTIVITY
Paradox project
During the period under review Zephyr continued to make material
progress towards unlocking what the Board believes to be the
significant potential value from our Paradox project. From a lease
holding perspective, and due to an opportunist acquisition, our
working interest in the Paradox project has now increased to one
hundred percent ("%") and covers over 45,000 acres with maiden
reserves and a large contingent resource base - significant
increases from 2021.
Despite a number of challenges, (from historically harsh
climatic conditions, supply chain issues and operational challenges
associated with the targeting of a highly pressured reservoir), we
are pleased that drilling results have demonstrated flowing
hydrocarbons in both wells that have been drilled to date and both
of which appear capable of commercial production. Of importance to
Zephyr is that drilling success to date has been achieved utilising
both hydraulic stimulation and production via natural fractures,
indicating significant optionality for the large-scale development
of the project.
The updated Competent Person Report (the "CPR") for the project,
which was completed during the period, further highlighted the
substantial potential scale and profitability of the Paradox
project. Following the acquisition of the remaining 25% working
interest in the project (completed in early 2023), the CPR reports
net to Zephyr, 2P reserves of 2.57 million barrels of oil
equivalent ("mmboe"), 2C contingent resources of circa 34 mmboe and
2U unrisked prospective resources of 270 mmboe.
Our key focus for the next year involves getting our two
newly-drilled wells into full commercial production. After many
years of committing significant resources and investment to the
project this is expected to be a landmark phase for the Group and
one which I hope will see the patience of the Shareholders of the
Company (the "Shareholders") rewarded.
A special word of thanks to our team for how it dealt with the
well control incident that we experienced in April 2023. It was a
testament to the experience, depth and hard work of our operations
team that the incident was managed with no injuries and minimal
environmental impact.
Williston Basin
In 2021, the Group stated that one of its key objectives was to
establish production and positive cashflow via acquisition. The
growth achieved since then through the development of our
non-operated asset portfolio has been exceptional.
From a standing start in 2021, the Group has built a portfolio
of interests in more than 220 wells operated by top-tier operators
in one of the most active and prolific basins in the U.S., and
these interests have generated high margin cashflows which provided
funding for our Paradox project and further investment in the
non-operated portfolio.
The growth of our non-operated asset portfolio resulted in
revenues of US$41.1 million during the year ended 31 December 2022,
with production of over half a million barrels of oil equivalent
("boe"). We expect to see further growth from our non-operated
portfolio in 2023.
During the year, we also implemented an inaugural hedging
programme which had the effect of locking in over US$30 million of
forecasted Williston Basin revenue over a two-year period. This
hedging programme allowed us to provide cashflow surety related to
our debt obligations, as well as to de-risk funding requirements
for our ongoing activity in the Paradox, while still allowing for
additional exposure to future price fluctuations.
ENVIRONMENTAL, SOCIAL AND GOVERNANCE ("ESG")
Followers of Zephyr will be familiar with our commitment to
stewardship of both the natural environment and shareholder capital
being at the core of all our activities. Prudent and careful cash
management and environmental focus are central tenets of our
philosophy and remained our key operating principles during the
period. The Board firmly believes this is not only the proper way
to operate the Group but an approach that will ensure our ongoing
success on behalf of all stakeholders. We believe good
environmental and operational performance, supported by the
appropriate levels of governance, is the optimal way to drive
superior investor returns.
As we grow, we will continue to foster a safe working
environment and be active participants in the communities in which
we operate. Sustaining our local communities through environmental
stewardship, social responsibility and strong corporate governance
is an extension of our mission and reflects our goal to make a
lasting and meaningful positive impact in these communities.
I am proud that we continue to achieve carbon-neutral status as
an oil and gas producer. This is achieved through our Verified
Emission Reduction credits ("VERs") programme, which aims to offset
all Scope 1 carbon emissions from both our operated and
non-operated assets and which is administrated through the Prax
Group ("Prax"), a leading UK- based energy trading company.
As the recent well-control incident demonstrated, the delivery
of our near and longer-term ambitions and strategy would not be
possible without a clear focus on mitigating and managing
day-to-day risks, including costs, safety and the wider operating
environment. We have a zero-harm safety culture focused on
continuous improvement to achieve an injury-free and safe work
environment.
OUTLOOK
Looking ahead, with a diverse portfolio of cash-flowing assets,
potential for substantial future organic growth, a solid financial
footing and a talented and dedicated team of employees, we continue
to be extremely optimistic about Zephyr's future.
Our key goals for 2023 are to move the Paradox project into full
commercial production while continuing to grow our non-operated
asset portfolio.
We remain firmly committed to delivering long-term value to our
Shareholders, while upholding our core values of being responsible
stewards of our Shareholders' capital and responsible stewards of
the environment in which we operate.
CONCLUSION
I would like to thank our employees and contractors for their
hard work in 2022, especially those on site who worked tirelessly
through historically difficult conditions last winter.
I also wish to express gratitude to our Shareholders, lenders,
advisers and other stakeholders for their ongoing support to the
Group.
The Board is looking to the future with a high degree of
confidence as we continue in our pursuit of building a group of
which all our stakeholders can be proud.
RL Grant
Chairman
23 June 2023
CHIEF EXECUTIVE OFFICER'S REPORT AND OPERATING REVIEW
PRINCIPAL OBJECTIVES AND STRATEGIES
Zephyr Energy plc is an oil and gas exploration and production
group operating in the Rocky Mountain region of the U.S.
The Group's stated mission is to open up the next prolific
onshore U.S. oil and gas play through the development of its
flagship Paradox project. The two core values of the Group are to
be responsible stewards of investors' capital and responsible
stewards of the environment.
To achieve this mission, the Group has prioritised:
-- Constructing a team with significant experience in the U.S.
oil and gas sector, with a particular focus on operations,
development, governance, finance, merger, acquisition and
turnaround experience;
-- A sharpening of focus - we are wholly focused on responsible
exploration and production investment in the Rocky Mountain region
and have exited all other legacy sectors and geographies;
-- The development of a non-operated asset portfolio that
provides cashflow to be reinvested in the Paradox project;
-- A continued focus on meaningful ESG efforts, including
corporate governance compliance, ensuring carbon-neutrality across
our operations, and proactive engagement with the communities in
which we operate;
-- The leveraging of partnerships (such as the U.S. Department
of Energy, experienced operators in the basins in which we operate,
and relationships with alternative capital providers);
-- The design and build of a technology-led acquisition process
which can rapidly assess opportunities of further interests through
acquisition, farm-in agreements or joint venture arrangements;
and
-- Tight financial control and cash conservation.
REVIEW OF OPERATIONS AND FUTURE DEVELOPMENTS
Background
The 2022 financial year, and the period since, were a time of
intense operational activity during which Zephyr continued to build
on the momentum gained in 2021. During the period under review, the
Group achieved multiple operational milestones, most notably with
the first flowing hydrocarbons from the Paradox project and with
the rapid growth of our highly profitable cash-generating
non-operated portfolio.
As outlined in the Chairman's Statement, the Board remains fully
committed to the primary goal of opening up the next prolific
onshore U.S. oil and gas play through the systematic development of
the Paradox project and our key goal for the next period is to
establish commercial production from the project.
The Paradox project is located in the Paradox Basin, Utah, U.S.
where Zephyr operates a now 45,000 acre leasehold position with
demonstrable scale and impressive upside potential. The drilling
success achieved during the period was a significant appraisal
milestone, and the Board are both optimistic and excited about
unlocking additional value from the project by progressing to
commercial hydrocarbon production over the coming months.
The Group's non-operated production comes from working interests
in wells across the Middle Bakken and Three Forks reservoirs in the
Williston Basin (in both North Dakota and Montana). By the end of
March 2023, Zephyr had working interests in 223 wells that were
available for production. 2022 sales volumes from the portfolio
averaged 1,410 barrels of oil equivalent per day ("boepd") (2021:
263 boepd).
The Board's strategy is to utilise the majority of the
considerable cashflows generated from the non-operated Williston
Basin portfolio in the Paradox project development programme, and
this organic growth strategy will continue.
Paradox project - operated asset
Overview
The period under review was highlighted by the drilling of two
successful wells, the State 16-2 LN-CC well (the "State 16-2 well")
and the State 36-2 LNW-CC well (the "State 36-2 well"), a
production test of the State 16-2 well and increases in both
acreage and working interest percentages across our Paradox project
land position. In addition, we acquired surface assets and
infrastructure that will facilitate us in bringing the project into
production.
The Board believes that the Paradox project has substantial
potential upside. Of significance, our main geological target, the
Cane Creek reservoir has two demonstrable methods of development
(via the targeting of natural fractures and through hydraulic
stimulation). Both wells drilled to date have discovered
hydrocarbons, and both appear capable of commercial production when
ultimately tied into natural gas infrastructure. In addition, eight
overlying reservoirs have been high graded as suitable for future
exploration and potential development.
The second half of 2023 is expected to be a major inflection
point for the Paradox project, one in which the project moves from
its current appraisal status into a cash-flowing development asset.
The Group expects to see flush production when the State 36-2 and
State 16-2 wells come online.
The drilling of the two wells has provided the Group with a
wealth of new geological information which has in turn resulted in
a far greater geological understanding of our acreage position.
This information includes strong evidence of:
-- A continuous resource play (tight oil and tight gas);
-- Repeatable petrophysics across a large area;
-- Geology which correlates with the seismic;
-- Consistent reservoir thickness within a sub area;
-- High reservoir pressures;
-- High matrix permeability for a resource play;
-- A reservoir which can be stimulated (with favourable rock
mechanics albeit under high stress); and
-- The presence of productive natural fractures
Competent Persons Report ("CPR")
Following the successful completion of the State 16-2 well in
late 2021, Zephyr commissioned the independent reserve consulting
firm Sproule International ("Sproule") to complete a CPR to assess
the Group's reserves across both the Cane Creek reservoir and the
eight overlying reservoirs.
Sproule audited the crude oil, natural gas, and field condensate
reserves and contingent resources and the associated future net
revenue attributable to the Group's White Sands Unit ("WSU") and
Cane Creek Drilling Spacing Unit ("DSU") with an effective date of
31 March 2022. Sproule also conducted an audit of the Prospective
Resources attributable to the WSU on the same date.
The Board was delighted with the conclusions drawn by Sproule,
which demonstrated the impact of Zephyr's drilling success of the
State 16-2 well and further highlighted the substantial potential
scale and profitability of the Paradox project.
The key findings from the CPR were as follows:
-- Net 2P Proved Reserves: Proved Reserves of 2.1 million
barrels of oil equivalent ("mmboe") net to Zephyr, the Group's
first proved reserves booked in the Paradox project (following the
Group's acquisition of the remaining 25% non-operated interests
Proved Reserves increased to 2.6 mmboe).
-- Net 2C Resources: 27 mmboe net to Zephyr, more than double
the 12.3 mmboe in the previous CPR prepared in 2018 (following the
Group's acquisition of the remaining 25% non-operated interests Net
2C Reserves increased to 34 mmboe).
-- Net Prospective Resources from overlying reservoirs: 203 net
unrisked mmboe net to Zephyr (68 mmboe risked with a
weighted-average 33% chance of success) (following the Group's
acquisition of the remaining 25% non-operated interests Net
Prospective Resources increased to 270 mmboe).
Sproule's evaluation took place across 30,700 acres of Zephyr's
Utah assets. Zephyr now operate 45,000 gross acres in the Paradox
Basin and further evaluation is planned for the acreage not yet
included in the CPR.
Project development and consolidation
Having completed a comprehensive restructuring of the Paradox
acreage position in 2021, the Group continued with the
consolidation of the project during the period. This was
spearheaded by the acquisition of additional project acreage, the
acquisition of a number of infrastructure assets and through the
acquisition of the remaining 25% working interest in the core
acreage of the project.
Acquisition of additional acreage
In October 2021, the Group announced U.S. Federal Government
approval for the formation of a new federal unit, the WSU, which
enables Zephyr to proceed with an optimal long-term development
plan for the acreage. In August 2022, Zephyr announced the
acquisition of an additional 1,920 acres (the "new acreage") in the
Paradox Basin, directly adjacent to the WSU. T he new acreage has
been approved for inclusion into the federal unit by removing less
prospective acreage that had yet to have 3D seismic acquisition
acquired across it. The acreage is largely covered by Zephyr's
existing 3D seismic, and directly borders the Zephyr lease on which
the State 36-2 well is located.
This opportunistic new acreage acquisition was part of the
Group's ongoing portfolio management of its Paradox Basin position.
This active land management strategy has resulted in a growing
portfolio of development opportunities which the Board believes is
increasingly difficult to replicate in today's regulatory and
political environment.
In February 2023, the Group completed the acquisition of the
remaining 25% working interest in the core acreage of the Paradox
project. This acquisition increased Zephyr's net acreage in the
project to circa 45,000 acres, further details of which are
outlined below.
Working interest acquisition
In December 2022, Zephyr announced that it had agreed to acquire
the remaining 25% working interest in the core acreage of the
Paradox project from Rockies Standard Oil Company LLC ("RSOC"). The
acquisition completed in February 2023.
The total consideration payable for the working interest is up
to US$3 million, payable by way of the issue of new Ordinary Shares
of 0.1 pence each in the capital of the Company ("Ordinary Shares")
at a price of 6.05 pence per Ordinary Share, representing a circa
11% premium to the Company's mid-market closing share price on the
prevailing share price on 20 December 2022.
-- A first tranche of 13,483,095 new Ordinary Shares was issued
to RSOC on the completion of the acquisition;
-- A second tranche of 26,966,189 new Ordinary Shares will be
issued upon Zephyr's final investment decision with respect to the
contract award to a primary contractor to commence construction
activities to make the Powerline Road gas processing plant
operational; and
-- All equity issued to the vendor will be subject to a lock-up
period which expires at the earlier of the date that first gas from
the State 36-2 well is sold via the Dominion Energy Utah, LLC
("Dominion Energy") 16-inch gas export pipeline; or 15 December
2023.
The acquisition provided an immediate opportunity for Zephyr to
consolidate its working interest in the core acreage of the Paradox
project and includes the following assets:
-- The remaining 25% interest in the State 16-2 well (with an
estimated NPV-10 of US$3.1 million);
-- The remaining 25% interest in the State 36-2 well; and
-- Zephyr retains its 100% ownership in the infrastructure assets acquired in 2022.
The acquisition was also immediately accretive across all
reserve and resource categories. Zephyr's technical team estimated
that the acquisition adds:
-- Over 450,000 boe in 2P Reserves;
-- Over 7 million boe in 2C Contingent Resources; and
-- Over 67 million boe of 2U unrisked Prospective Resources.
As of today, and following activity in the period, the tenure of
the Paradox project is strong and the land position is stable. This
security and right to operate provides the Board with the
confidence to further invest in the drilling activity on the
project.
The period under review began with the drilling of the State
16-2 well and ended with the spud of the State 36-2 well and both
were successfully drilled and demonstrated the ability to flow
commercial volumes of hydrocarbons.
State 36-2 well drilling
In November 2022, the Group announced that drilling on the State
36-2 well had commenced with the prime objective being to target
potential production from the Cane Creek reservoir.
After a complex drilling operation hampered by extreme weather
conditions and, having reached the Cane Creek reservoir at a depth
of 9,598 feet true vertical depth, the well experienced a
significant influx of hydrocarbons which consequently led to
suspension of drilling operations while the well was stabilised.
The influx was caused by the well intersecting an apparent major
natural fracture network in the reservoir, and the resultant
flowing hydrocarbons were diverted safely at surface through the
drilling rig flare stack whereby they were subsequently flared.
Throughout this period, Zephyr's operations team followed
appropriate well control procedures, and stabilised the well
without incident.
This influx was managed and safely controlled, which
subsequently allowed for the drilling of an additional 132 feet
into the Cane Creek reservoir, at which point the Group elected to
run production casing down the total depth of the well.
Operations to run 7-inch production casing were successful and
the well was made fully safe and the drilling rig was released. The
Group then planned to commence production testing and potential
completion of the fractured Cane Creek reservoir interval.
In addition to near-term testing, the running of the 7-inch
casing string provided the Group with the option to return to the
well (should it elect to do so) to drill an extended lateral at a
later date. A subsequent lateral would enable the Group to test for
further natural fracture presence at this location within the Cane
Creek reservoir, and also enable the well to be completed by
hydraulic stimulation across a longer lateral should Zephyr seek to
increase well productivity in the future.
Results from the drilling operations indicated that the well
penetrated a folded and naturally fractured Cane Creek reservoir,
features which have been highly productive in other Cane Creek
wells. Pore pressure analysis suggested that the well encountered
very high reservoir overpressure, with formation pressures
estimated at around 9,300 pounds per square inch (which is broadly
consistent with previously drilled offset wells).
The well further delineated the presence of natural gas and
condensate within a large structural compartment, and at a new
location within Zephyr's acreage and 3D seismic coverage, which
provided additional confirmation of Zephyr's model for hydrocarbons
in place across the acreage position.
State 36-2 well production test and well control incident
On 8 March 2023, the Group announced that planning for the
production test had been completed and that all services for the
test had been procured. A Zephyr-contracted service rig was
mobilised to the well-site and operations on the ground commenced.
This was achieved despite the ongoing difficult winter weather
conditions encountered in Utah this year. Workover operations
(which were to include perforating the well in the productive
portion of the Cane Creek reservoir) and subsequent production
testing were estimated to take four to six weeks. As the well was
expected to flow from natural fractures, no hydraulic stimulation
was expected as part of this test.
On 7 April 2023, as workover operations were being completed,
the well experienced a significant control issue despite multiple
attempts to secure the well by the rig crew. The incident was
initially caused by the failure in a safety valve, and subsequently
resulted in hydrocarbons being released from the well in an
uncontrolled manner.
In keeping with safety procedures, all personnel were safely
evacuated without injury. All relevant authorities were notified
and a specialist well control team (recommended by the Group's
insurers) was deployed to bring the well under control as quickly
as possible.
Ultimately, well control efforts were successful and remediation
and clean-up operations have commenced. A third-party confirmatory
environmental survey was subsequently completed and the initial
results found no evidence of lingering environmental impact.
At present, the well is static and under control, and Zephyr is
in the process of completing well work necessary to commence a
production test. This work included a methodical process to remove
and inspect the 2-7/8-inch production casing. Once that work is
completed, the Group plans to undertake a final cement squeeze and
then perforate the casing across the reservoir interval prior to
production testing the well.
Timing of the well test will be dictated by operational
conditions to ensure well control is maintained and working
conditions are safe for our team. Evidence of pressures and
hydrocarbons in the well remain substantial.
State 16-2 well
Following on from the successful drilling, completion and
production test of the State 16-2 well in 2021, the first phase of
the extended production testing on the well was completed within
the flare consent limit set by the regulatory bodies, and Zephyr
subsequently tested the well a second time to commission surface
facilities, improve flow assurance and to gather more production
data.
Unfortunately, the second well test was hampered by severe
weather and initial surface facility commissioning issues which
resulted in delays to the programme and, at times, intermittent
operational activity.
Once the start-up commissioning issues had been successfully
resolved the well was initially brought online at choked-back,
moderate rates to test for flow assurance at varying levels of
production. At a controlled rate of 2 million cubic feet of gas per
day and 100 barrels of oil per day (an average of 433 boepd) the
well flowed continuously and surface flow assurance efforts proved
successful.
As flow rates were increased above those levels, well
performance became limited by freshwater pumping capacity and was
subsequently impacted by the formation of down hole salt
precipitate, a not uncommon issue. The precipitate, which blocked
and subsequently cleared multiple times, impacted the well's flow
capacity to achieve extended higher rates. The Group was in early
stages of testing higher rates when its mandated flaring limits
were reached.
The Group is now assessing whether the precipitate issue is a
function of continued flow back of injected completion fluids or a
function of normal flowing conditions. If it is a result of normal
flowing conditions, a series of mitigation solutions that have been
successful with other wells in the Paradox in the past can be
applied, and the Group will likely test these solutions in the
coming months (subject to regulatory approvals) to fully determine
the potential of the reservoir.
Acquisition of infrastructure assets
In September 2022, Zephyr announced that it had entered into an
agreement to acquire a package of oil and gas assets located on and
around the Paradox project.
Zephyr acquired 21 miles of natural gas gathering lines, the
Powerline Road gas processing plant (not currently in operation),
rights of way for additional gathering lines, active permits, five
existing wellbores and additional acreage which is contiguous to
the WSU.
The assets acquired will enable Zephyr to substantially reduce
the capital required to build the necessary gas export
infrastructure for its forecast gas production from the Paradox
project. The consideration for the asset package was
US$750,000.
Next Steps
The immediate next steps on the Paradox project are as
follows:
-- To complete the production tests on the State 36-2 well;
-- The completed production test, when combined with data from
the State 16-2 production test, will provide information related to
the sizing of the gas processing infrastructure required for
commercial roll-out of the project. The infrastructure will then be
constructed and commissioned; and
-- Once the infrastructure is in place, and the Dominion
pipeline take-away is completed, export of hydrocarbons from the
project will commence.
Williston project - Non-operated assets
Overview
In 2021, Zephyr stated that one of its key goals was to
establish production and positive cashflow either through its
existing portfolio (the Paradox project), via acquisition, or
through a combination of both. Since then, the Group has delivered
on this goal and the Board is pleased to report that, following
twelve discrete acquisitions, the Group now has a non-operated
asset portfolio that delivered sales of over 1,410 boepd, net to
Zephyr, in 2022, with corresponding revenues of US$41.1 million for
the year.
As at 31 December 2022, Zephyr had working interests in 223
wells that were available for production. The working interests are
in prime locations, and the majority of the wells are operated by
Chord Energy Corporation, a leading Williston Basin producer.
The Group's non-operated portfolio continues to perform above
the Board's expectations, in part due to the high commodity price
environment in 2022. In April 2022, in order to lock in cashflow to
develop our Paradox asset and meet the Group's funding commitments,
the Group hedged just under half of its forecast 2022 production at
more than US$98 per barrel of oil. The hedging programme was
structured to provide cashflow surety related to the Group's debt
obligations, as well as to de-risk funding requirements for the
Paradox project, while allowing for additional exposure to future
fluctuations in prices. The Group announced an extension to this
hedging programme in May 2023.
The Group will continue to develop and grow its non-operated
portfolio through opportunistic acquisitions.
Acquisitions
The non-operated portfolio has been carefully crafted and
achieved through twelve discrete acquisitions, the most important
one being the transformative acquisition of the Kaiser assets
completed in February 2022 (the "Kaiser acquisition") which nearly
tripled the Group's non-operated production from its four previous
acquisitions. The Kaiser acquisition was the driver of the
impressive performance of the non-operated portfolio in 2022.
The Kaiser acquisition provides a stable foundation of
low-decline production and cashflows from 163 gross producing
wells. In addition, 18 drilled but uncompleted wells ("DUCs") have
been brought online since and 47 additional gross undeveloped
locations are expected to provide meaningful upside for years to
come.
The key benefits of the Kaiser acquisition were as follows:
-- A diversified, low-decline base of mature production with
established history and stable cashflows;
-- Near term growth from DUCs currently being brought online;
-- Mid to longer term infill drilling opportunities on Zephyr acreage;
-- Potential to hedge a significant portion of the existing
production at attractive prices to lock in returns and provide
downside protection; and
-- Excellent complement to (and funding source for) the less
mature, higher upside Paradox Basin development.
In order to fund the acquisition, the Group undertook an equity
fundraise of US$17.4 million (GBP12.8 million) in February 2022 and
secured a US$28 million senior debt facility from a
long-established North Dakota-based commercial bank, First
International Bank & Trust ("FIBT"). See note 22.
On 21 December 2022, Zephyr announced the a cquisition of
working interests in six further wells, equivalent to a net 1.1
wells, near to Zephyr's current non-operated working interests for
a total consideration of US$2.9 million. In addition, Zephyr is
paying the US$8.9 million CAPEX associated with the working
interests to bring the wells into production.
These new wells are expected to provide a Q4 2023 production
boost, having been spud in November 2022, and first sales volumes
are expected in autumn 2023. The operator of these new wells is
Slawson Exploration Company ("Slawson"), a top-tier operator and
one of the largest private companies in the Williston Basin.
Slawson was an early pioneer of horizontal development in the
Williston Basin and has excellent access to oilfield service
companies and infrastructure.
Zephyr's working interest in the six new wells ranges from 11%
to 32% and management currently estimates 2P Reserves being
acquired are circa 550,000 boe net to Zephyr.
Zephyr secured a US$8 million bridge loan facility, on
favourable terms, to part fund the acquisition and associated
CAPEX. There was no equity component to the US$8 million bridge
loan facility. See note 22.
2022 Production summary
FY 2022 sales volume from the non-operated portfolio averaged
circa 1,410 boepd net to Zephyr, up from 263 boepd in 2021.
FY 2022 revenues were US$41.1 million, compared to US$6 million
in FY 2021.
At 31 December 2022, 223 wells in the portfolio were available
for production, including 17 wells which came online at some point
during the quarter. Net working interests across the Williston
Basin non-operated portfolio now average 6.3% per well, equivalent
to 15 total wells net to Zephyr, all of which utilised horizontal
drilling and modern, hydraulically stimulated completions.
Hedging
In April 2022, the Group hedged just under half of its forecast
non-operated production for the following two years, with an
average hedged production price of US$98 for the remainder of 2022
and US$87 thereafter.
In May 2023, the Board elected to enter into additional oil
hedge agreements given that most of the hedges acquired in 2022 had
since crystallised. Volumes hedged for the nine months ending 31
December 2023 have now been increased from 94,000 barrels ("bbls")
to 137,000 bbls, at an average hedged production price of US$85,
with BP Energy Company ("BP"), one of the world's leading energy
trading houses, continuing to serve as the counterparty.
Significant decisions made
During the year under review, the Directors approved multiple
discrete acquisitions of non-operated assets. The decisions to
proceed with the acquisitions and the corresponding debt and equity
funding were logical decisions made to ensure the continued growth
of the business and the advancement of the Paradox project. All
acquisitions were unanimously deemed by Board members to be in the
best interests of the Company. Details of the acquisitions can be
found in the relevant sections of this Annual Report.
On the Paradox project, the Board approved the acquisition of
further project acreage and infrastructure assets. In addition, the
Board approved the acquisition of the remaining 25% working
interest in the project and the drilling of the State 36-2 well.
These were all funded by cashflows generated from the non-operated
portfolio. In arriving at the decision to proceed with this
activity the Directors considered the cash position of the Group
and the importance of progressing the Paradox project. After due
consideration, the Directors unanimously considered the activity to
be in the best interests of the Company and its Shareholders.
We would like to thank all Shareholders for their continued
support.
On behalf of the Board,
JC Harrington
Chief Executive Officer
23 June 2023
FINANCIAL REVIEW
The 2022 financial year saw a transformation in the Group's
financial position and performance from the prior year. This was
primarily due to the full-year impact of strong performance from
the Group's non-operated asset portfolio and the continued
investment into both the Paradox and Williston projects.
INCOME STATEMENT
During the year ended 31 December 2022, the Group generated
revenue of US$41.1 million (2021: US$6 million) from its
non-operated asset portfolio, and reported a gross profit of
US$22.4 million (2021: US$3.3 million), which includes a gain of
US$1.8 million (2021: nil) in respect of the Group's hedging
programme. The revenue in the income Statement of US$41.1 million
is US$1.8 million less than the full-year revenue figure provided
in the Group's market update of 15 February 2023 of US$42.9
million. The market update included US$1.8 million revenue from the
final settlement of the Kaiser acquisition. Under IFRS these
revenues form part of the acquisition price and therefore do not
appear within the income Statement in these financial
statements.
Administrative expenses for the year were US$4.8 million (2021:
US$2.7 million). The increase from the 2021 financial year
highlights the expansion of the Group's operational footprint to
provide it with the capacity and capability to develop, manage and
grow its operated and non-operated asset portfolios. The increase
also reflects expenditure incurred in appraising new opportunities
and other business development costs.
The Group reports a foreign exchange gain of US$6.1 million for
the year (2021: US$0.5 million) which is predominantly in respect
of unrealised gains on the restatement of intercompany loans
between the Company and its subsidiaries. These gains arise due to
the weakness of sterling against the U.S. dollar at the end of
2022.
Finance charges of US$2.2 million (2021: US$0.1 million) have
been charged in respect of interest charges and associated costs
relating to the Group's borrowings and unwinding of discount on
decommissioning. See note 7.
During the year ended 31 December 2022, the Group has recognised
a deferred tax charge and a corresponding net deferred tax
liability of US$2 million relating to unrelieved tax losses and
temporary timing differences arising in the U.S. businesses.
The Group reports a net profit after tax of US$19.3 million or a
profit of 1.26 cents per Ordinary Share for the year ended 31
December 2022 (2021: US$0.8 million or 0.08 cents per Ordinary
Share).
BALANCE SHEET
Total investment in the Group's exploration and evaluation
assets as at 31 December 2022 was US$38 million (2021: US$22.8
million) reflecting the ongoing investment in the Paradox
project.
Total investment in property, plant and equipment as at 31
December 2022 was US$51.8 million (2021: US$11.2 million)
reflecting the further acquisition of non-operated assets in the
Williston Basin, recurring capital expenditure and decommissioning
obligations on the non-operated assets.
At 31 December 2022, the Group has recognised US$1.3 million
outstanding derivative contracts in respect of its hedging
programme at fair value, of which US$0.2 million (2021: nil) has
been recognised in non-current assets and a further US$1.1 million
(2021: nil) in current assets.
Cash and cash equivalents as at 31 December 2022 were US$9
million (2021: US$1.8 million). During the year, the Company raised
gross proceeds of US$17.4 million (2021: US$15.5 million) through
the placing of new Ordinary Shares in the Company.
In February 2022, the Group secured debt funding of US$28
million and in December 2022 entered into a further 12-month
revolving credit facility of up to US$8 million, of which US$2.5
million had been drawn down at 31 December 2022. The proceeds from
these debt instruments were used to complete the Group's
acquisition of non-operated assets in the Williston Basin.
SUBSEQUENT DEVELOPMENTS
In June 2023, the Company announced that it had raised a further
US$3.9 million (before expenses) through the placing of new
Ordinary Shares in the Company.
At 16 June 2023, the Group had cash and cash equivalents of
US$7.5 million.
KEY PERFORMANCE INDICATORS
As part of Zephyr's ongoing development of the Paradox project
and the build-out of the non-operated portfolio in the Williston
Basin, the Board tracks its performance against indicators that
reflect the strategic, operational and financial progress, as well
as our impact on society and the environment. These indicators
allow the Board, management and stakeholders to compare Zephyr's
performance to its goals.
Safety Why we measure Performance
performance * The Group has a zero-harm safety culture focused on * There we no reported LTIs during the 2022 financial
continuous improvement to achieve an injury-free and year (2021: nil)
safe work environment
* We require employees and contractors to work in a
safe and responsible manner and provide them with the
training and equipment to do so
Adjusted EBITDA Why we measure Performance
(EBITDA adjusted * Indicator of the Group's cash generation to fund * 2022 Adjusted EBITDA was US$28.2 million
for expenditures and/or return capital to Shareholders
unrealised
foreign * 2021 Adjusted EBITDA was US$2.3 million
exchange and
hedge
gains)
----------------------------------------------------------------- -----------------------------------------------------------------
Net production Why we measure Performance
* Indicator of revenue generation potential * FY 2022 production of 514,650 barrels of oil
equivalent ("boe")
* Measure of progress towards achieving production
forecasts and driving profitable production growth * 484% increase in production from FY 2021 production
of 88,037 boe from non-operated Williston Basin
----------------------------------------------------------------- -----------------------------------------------------------------
Growth of Why we measure Performance
Paradox * Indicator of economic viability and long-term * During the year the Group booked its first reserves
project reserve production potential of projects on the Paradox project and increased the
resource reserve/resource base by acquiring the remaining 25%
play working interest in the project post-year end
* At 31 December 2022, the Group had Paradox Basin 2P
reserves of 2.57 million barrels of oil equivalent
("mmboe"), 2C resources of circa 34 mmboe and 2U
resources of 270 mmboe
----------------------------------------------------------------- -----------------------------------------------------------------
Carbon emissions Why we measure Performance
* Zephyr Energy is committed to sustainable and * Recorded Scope 1 carbon-neutrality from both operated
responsible oil and gas production and non-operated assets
* VER credit partnership with Prax which aims to
mitigate all Scope 1 carbon emissions. The cost of
the scheme was circa US$0.2 million in the 2022
financial year.
----------------------------------------------------------------- -----------------------------------------------------------------
CJ Eadie
Finance Director
23 June 2023
Going Concern
The Directors have prepared cashflow forecasts for the Group and
Parent Company for the period to 31 December 2024 based on their
assessment of both the discretionary and the non-discretionary cash
requirements of the Group during this period and based on a range
of sensitivities and scenarios.
These cashflow forecasts include the forecast revenues from, and
the operating costs of, the Group's operations, together with all
committed development expenditure and cashflows related to the well
control incident on the State 36-2 well. The Board has also
incorporated its best current estimates on the timing of first
cashflows from the six Slawson operated wells that were acquired in
December 2022. The wells are currently expected to come online in
autumn 2023 with first cashflows received by the Group in January
2024.
The cashflows reflect the Board's current best estimates on
quantum and timings in respect of expected insurance recoveries in
relation to the well control incident. While the Board expect the
insurance proceeds to be received in accordance with the forecast,
these proceeds have not been received at the date of this report.
Should the insurance proceeds be delayed or lower than expected,
the Group could require further funding to meet its commitments
within the going concern assessment period.
Following detailed discussions, the Directors are confident that
the Group and the Parent Company have, or will be able to secure
insurance recoveries as per above, or additional funding to enable
it to continue in operation for at least the next twelve months,
however, the Group and Parent Company's ability to secure such
proceeds or funding cannot be guaranteed, which leads to material
uncertainty which may cast significant doubt over the Group and
Parent Company's ability to continue as a going concern, and that
it may be unable to realise its assets and discharge its
liabilities in the normal course of business.
The Directors have extensive experience in raising capital for
projects and ventures and remain confident in the Group's ability
to raise the capital needed to maintain and deliver on its
commitments and continue as a going concern.
The Directors continue to adopt the going concern basis in
preparing the consolidated financial statements. The financial
statements do not include any adjustments that would be required
should the going concern basis of preparation no longer be
appropriate.
CONSOLIDATED INCOME STATEMENT
For the year ended 31 December 2022
2022 2021
Notes US$'000 US$'000
Revenue 6 41,062 6,005
Operating and transportation expenses (4,458) (396)
Production taxes (3,318) (543)
Depreciation, depletion and amortisation (12,666) (1,755)
Gains on derivative contracts 16 1,781 -
Gross profit 22,401 3,311
Administrative expenses (4,834) (2,687)
Share-based payments (210) (93)
Foreign exchange gains 8 6,102 461
Finance income 3 -
Finance costs 7 (2,236) (144)
Profit on ordinary activities before
taxation 8 21,226 848
Taxation charge 11 (1,955) -
Profit for the year attributable to
owners of the parent company 19,271 848
Profit per Ordinary Share
Basic, cents per share 12 1.26 0.08
Diluted, cents per share 12 1.18 0.07
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
For the year ended 31 December 2022
2022 2021
US$'000 US$'000
Profit for the year attributable to
owners of the parent company 19,271 848
Other comprehensive income
Items that may be subsequently reclassified
to profit or loss
Foreign currency translation differences
on foreign operations (6,205) (554)
Total comprehensive profit for the
year attributable to owners of the
parent company 13,066 294
CONSOLIDATED BALANCE SHEET
As at 31 December 2022
2022 2021
Notes US$'000 US$'000
Non-current assets
Exploration and evaluation assets 13 37,986 22,773
Property, plant and equipment 14 51,805 11,156
Derivative contracts 16 175 -
89,966 33,929
Current assets
Trade and other receivables 18 4,290 1,263
Prepayments and deposits 19 347 3,573
Cash and cash equivalents 20 8,996 1,811
Derivative contracts 16 1,133 -
14,766 6,647
Total assets 104,732 40,576
Current liabilities
Trade and other payables 21 (12,520) (5,414)
Borrowings 22 (14,572) (4,060)
(27,092) (9,474)
Non-current liabilities
Borrowings 22 (10,821) -
Deferred tax 23 (1,955) -
Provisions 24 (4,138) (508)
(16,914) (508)
Total liabilities (44,006) (9,982)
Net assets 60,726 30,594
Equity
Share capital 25 42,412 42,065
Share premium account 27 66,847 52,875
Shares to be issued 27 539 -
Warrant reserve 26 1,557 89
Share-based payment reserve 27 3,284 3,065
Cumulative translation reserve 27 (15,984) (9,779)
Retained deficit 27 (37,929) (57,721)
Equity attributable to owners
of the parent company 60,726 30,594
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
For the year ended 31 December 2022
Share Share-based Cumulative
premium Shares Warrant payment translation Retained
Share account to be reserve reserve reserve deficit Total
capital issued
US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000
As at 1
January
2021 41,221 39,638 - 227 3,762 (9,225) (60,085) 15,538
Transactions
with owners in
their capacity
as owners:
Issue of
equity
shares 816 14,679 - - - - - 15,495
Expenses of
issue
of equity
shares - (1,442) - - 616 - - (826)
Transfer to
retained
deficit in
respect
of exercised
warrants - - - (138) (629) - 767 -
Share-based
payments 28 - - - 65 - - 93
Transfer to
retained
deficit in
respect
of expired
options - - - - (749) - 749 -
Total
transactions
with owners
in
their
capacity
as owner 844 13,237 - (138) (697) - 1,516 14,762
Profit for the
year - - - - - - 848 848
Other
comprehensive
income:
Currency
translation
differences - - - - - (554) - (554)
Total other
comprehensive
income for
the
year - - - - - (554) - (554)
Total
comprehensive
income for
the
year - - - - - (554) 848 294
As at 31
December
2021 42,065 52,875 - 89 3,065 (9,779) (57,721) 30,594
Transactions
with owners in
their capacity
as owners:
Issue of
equity
shares 347 17,023 - - - - - 17,370
Exercise of
warrants - - 539 (122) - - 122 539
Expenses of
issue
of equity
shares - (1,461) - - 408 - - (1,053)
Warrant
exercise
extension - (33) - 33 - - - -
Grant of
warrants - (1,557) - 1,557 - - - -
Share-based
payments - - - - 210 - - 210
Transfer to
retained
deficit in
respect
of lapsed
options - - - - (387) - 387 -
Transfer to
retained
deficit in
respect
of expired
warrants - - - - (12) - 12 -
Total
transactions
with owners
in
their
capacity
as owner 347 13,972 539 1,468 219 - 521 17,066
Profit for the
year - - - - - - 19,271 19,271
Other
comprehensive
income:
Currency
translation
differences - - - - - (6,205) - (6,205)
Total other
comprehensive
income for
the
year - - - - - (6,205) - (6,205)
Total
comprehensive
income for
the
year - - - - - (6,205) 19,271 13,066
As at 31
December
2022 42,412 66,847 539 1,557 3,284 (15,984) (37,929) 60,726
CONSOLIDATED CASH FLOW STATEMENT
For the year ended 31 December 2022
2022 2021
US$'000 US$'000
Operating activities
Profit for the year from continuing operations 21,226 848
Adjustments for:
Finance income (3) -
Finance costs 2,236 144
Unrealised gain on derivative contracts (1,308) -
Depreciation and depletion of property, plant and equipment 12,668 1,778
Share-based payments 210 93
Unrealised foreign exchange gain (5,672) (451)
Operating cash inflow before movements in working capital 29,357 2,412
Increase in trade and other receivables (3,028) (1,079)
Decrease/(increase) in prepayments and deposits 178 (572)
Increase in trade and other payables 723 172
Cash generated from operations 27,230 933
Income tax paid - -
Net cash generated from operating activities 27,230 933
Investing activities
Additions to exploration and evaluations assets (13,297) (9,083)
Business combination (37,880) -
Acquisition of oil and gas properties (3,362) (5,443)
Additions to oil and gas properties (10,482) (7,031)
Deposits paid - (3,000)
Increase in capital expenditures related payables 9,300 2,773
Additions to plant and machinery - (4)
Grant funds received - 290
Interest received 3 -
Net cash used in investing activities (55,718) (21,498)
Financing activities
Net proceeds from issue of shares 16,317 14,669
Exercise of warrants 539 -
Repayment of lease liabilities - (8)
Proceeds from borrowings 30,500 4,060
Repayment of borrowings (8,931) -
Interest and fees paid on borrowings (2,218) (124)
Increase in prepayments and deposits - (50)
Net cash generated from financing activities 36,207 18,547
Net increase/ (decrease) in cash and cash equivalents 7,719 (2,018)
Cash and cash equivalents at beginning of year 1,811 3,940
Effect of foreign exchange rate changes (534) (111)
Cash and cash equivalents at end of year 8,996 1,811
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2022
The following notes are extracted from the audited accounts of
the Company for the year ended 31 December 2022:
3. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PREPARATION
The financial statements have been prepared in accordance with
UK-adopted International Accounting Standards and with the
requirements of the Companies Act 2006 as applicable to companies
reporting under those standards.
The financial statements have been prepared on the historical
cost basis, other than certain financial assets and liabilities,
which are stated at fair value. Historical cost is generally based
on the fair value of the consideration given in exchange for
assets.
The financial statements are presented in United States dollars
("US$"). All amounts have been rounded to the nearest thousand,
unless otherwise indicated.
As described below, the Directors continue to adopt the going
concern basis in preparing the consolidated and the Company
financial statements.
The accounting policies set out below have, unless otherwise
stated, been applied consistently to all periods presented in these
financial statements.
The preparation of the financial statements in compliance with
UK-adopted international accounting standards requires management
to make estimates and exercise judgement in applying the Group's
accounting policies. The significant judgments made by the
Directors in the application of these accounting policies that have
significant impact on the financial statements and the key sources
of estimation uncertainty are disclosed in note 4.
6. REVENUE
Petroleum and natural gas revenue earned by the Group in the
U.S. is disaggregated by commodity, as follows:
2022 2021
US$'000 US$'000
Crude oil 35,257 5,359
Natural gas liquids 3,040 391
Natural gas 2,765 255
41,062 6,005
7. FINANCE COSTS
2022 2021
US$'000 US$'000
Loan interest and fees 1,880 137
Amortisation of debt costs 236 -
Unwinding of discount on decommissioning 120 7
2,236 144
8. PROFIT ON ORDINARY ACTIVITIES BEFORE TAXATION
The profit before taxation for the year has been arrived at
after charging/(crediting):
2022 2021
US$'000 US$'000
Gains on derivative contracts (1,781) -
Depreciation and depletion
of property, plant and equipment 12,668 1,778
Staff costs excluding share-based
payments 1,830 892
Share-based payments 210 93
Expense relating to short-term
leases 31 7
Foreign exchange gains(1) (6,102) (461)
(1) Foreign exchange gains include a gain of US$5.6 million in
respect of the translation of GBP designated loans between the
Company and its U.S. subsidiary entities at 31 December 2022. See
note 17.
11. TAXATION
2022 2021
US$'000 US$'000
Current tax:
Current year - -
Deferred tax:
Deferred tax 1,955 -
Tax charge on profit for the year 1,955 -
The charge for the year can be reconciled to the profit per the
income statement as follows:
2022 2021
US$'000 US$'000
Profit before tax 21,226 848
Profit multiplied by applicable
tax rate - 25% U.S. (2021: 25%
U.S.) 5,307 212
Effects of:
Share-based payments 52 22
Prior year U.S. tax losses now
recognised (3,400) (455)
Profits not deductible for tax
purposes (85) -
Unrelieved tax losses carried
forward 81 221
Tax charge on profit for the year 1,955 -
12. PROFIT PER ORDINARY SHARE
Basic profit per Ordinary Share is calculated by dividing the
net profit for the year by the weighted average number of Ordinary
Shares in issue during the year. Diluted profit per Ordinary Share
is calculated by dividing the net profit for the year by the
weighted average number of Ordinary Shares in issue during the year
adjusted for the dilutive effect of potential Ordinary Shares
arising from the Company's share options and warrants.
At 31 December 2022, 2.4 million share options and 89.6 million
warrants were excluded from the diluted number of shares based on
their market share price and exercise price.
The calculation of the basic and diluted profit per Ordinary
Share is based on the following data:
2022 2021
US$'000 US$'000
Profits
Profits for the purpose of basic
and diluted profit per Ordinary
Share being net profit for the
year 19,271 848
2022 2021
Number Number
'000 '000
Number of shares
Weighted average number of shares
for the purpose of basic profit
per Ordinary Share 1,533,110 1,116,414
Weighted average number of shares
for the purpose of basic profit
per Ordinary Share 1,533,110 1,116,414
Dilutive share options 42,526 42,510
Dilutive warrants 55,721 100,033
Weighted average number of shares
for the purpose of diluted profit
per Ordinary Share 1,631,357 1,258,957
Profit per Ordinary Share
Basic, cents per share 1.26 0.08
Diluted, cents per share 1.18 0.07
14. PROPERTY, PLANT AND EQUIPMENT
Group Company
Oil and gas Plant and Right-of-use Plant Right-of-use
properties machinery assets Total and machinery assets Total
US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 US$'00
Cost
At 1 January
2021 - 129 57 186 23 57 80
Acquisitions 5,443 - - 5,443 - - -
Additions 7,459 4 - 7,459 4 - 4
De-recognition - (106) (57) (163) - (57) (57)
At 1 January
2022 12,902 27 - 12,929 27 - 27
Business
combination
(see note
15) 40,199 - - 40,199 - - -
Acquisitions 3,362 - - 3,362 - - -
Additions 9,757 - - 9,757 - - -
Exchange
differences - (3) - (3) (3) - (3)
At 31 December
2022 66,220 24 - 66,244 24 - 24
Accumulated depreciation
At 1 January
2021 - 117 41 158 11 41 52
Charge for
the year 1,755 7 16 1,778 7 16 23
De-recognition - (106) (57) (163) - (57) (57)
At 1 January
2022 1,755 18 - 1,773 18 - 18
Charge for
the year 12,666 2 - 12,668 2 - 2
Exchange
differences - (2) - (2) (2) - (2)
At 31 December
2022 14,421 18 - 14,439 18 - 18
Carrying amount
At 31 December
2022 51,799 6 - 51,805 6 - 6
At 31 December
2021 11,147 9 - 11,156 9 - 9
At 1 January
2021 - 12 16 28 12 16 28
The Group depreciation and depletion charge has been allocated
to the income statement as follows:
2022 2021
US$'000 US$'000
Cost of sales 12,666 1,755
Administrative expenses 2 23
12,668 1,778
During the year ended 31 December 2022, the Group acquired
non-operated working interests in a number of projects located in
the Williston Basin, North Dakota, U.S.
SLAWSON ACQUISITION
In December 2022, the Group completed the acquisition of
non-operated working interests, ranging from 11% to 32%, in a
further 6 proved not producing wells ("PNP") in the Williston
Basin, North Dakota. The wells are operated by Slawson
Exploration.
The cost of the acquisition was US$2.9 million and the Group
will contribute approximately US$8.9 million CAPEX to bring the
wells into production.
On 19 December 2022, the Group entered into a facility agreement
with an experienced U.S. based institutional investor from which
the Group received a 12-month revolving credit facility of up to
US$8 million. At 31 December 2022, US$2.5 million had been drawn
and used to finance the Slawson acquisition. See note 22.
No revenues were received from the Slawson acquisition during
the year ended 31 December 2022.
The Group applied the requirements of IFRS 3 Business
combinations to the acquisition and concluded that it meets the
requirements of the initial concentration test and it has,
therefore, been classified as an asset acquisition. See note 4.
WILLISTON BASIN ACCRETIVE ACQUISITIONS
In June 2022, the Group completed the acquisition of
non-operated working interests in a further 14 wells, the majority
of which had already been drilled and were awaiting completion. The
working interest across the assets averaged approximately 1.4% per
well and the operators in the newly acquired wells include Kraken
Oil and Gas LLC and Bowline Energy LLC.
The cost of the acquisitions was US$0.4 million.
The Group applied the requirements of IFRS 3 Business
combinations to the acquisition and concluded that it meets the
requirements of the initial concentration test and it has,
therefore, been classified as an asset acquisition. See note 4.
IMPAIRMENT
At 31 December 2022, the Directors considered the requirements
of IAS 36 Impairment of assets in respect of its production and
development assets. They have satisfied themselves that there were
no indicators of impairment and, therefore, there was no
requirement to perform an impairment test. As a result, no
provision for impairment has been made in respect of these assets
at 31 December 2022 (2021: nil). See note 4.
15. BUSINESS COMBINATION
KAISER ACQUISITION
In February 2022, the Group completed the acquisition of
non-operated working interests in 163 producing wells ("PDP"), 18
PNP and DUCs and 47 proved but undeveloped ("PUD") locations for
future drilling. The working interest across the assets averaged
approximately 4%.
The assets were spread across 22 separate drilling pads in
Mountrail County, North Dakota and are operated by Whiting
Petroleum Corporation.
The initial cost of the acquisition, which was subject to post
completion closing adjustments, was US$36 million, of which US$3
million was paid in 2021. See note 19. The closing adjustments
included US$3.9 million in respect of CAPEX and net income of US$2
million in respect of income generated and expenditure arising in
the period between the effective date of the agreement and
subsequent completion on 16 February 2022. The total consideration
paid in respect of the acquisition including post-closing
adjustments was US$37.9 million.
On 16 February 2022, the Group entered into a credit facility
agreement with FIBT in respect of a term loan of US$18 million, and
a 12-month revolving credit facility of US$10 million which was
used towards financing the acquisition. Under the terms of the
facility FIBT has a lien on the assets acquired. See note 22.
The Group applied the requirements of IFRS 3 Business
combinations to the acquisition and concluded that it meets the
criteria to be classified as a business combination.
The fair value of the identifiable assets and liabilities
acquired in respect of the acquisition are as follows:
US$'000
Assets
Oil and gas assets 40,199
Liabilities
Decommissioning obligation (2,319)
Identifiable net assets at fair value 37,880
Consideration
Cash paid at date of completion 39,543
Receivables outstanding at date of
completion (1,663)
37,880
The fair value of the net assets acquired is deemed to be equal
to the fair value of the consideration transferred and, therefore,
the Group has not recognised goodwill or a bargain purchase on the
acquisitions.
All outstanding receivables had been received at 31 December
2022.
Since the date of acquisition, the non-operated working
interests acquired contributed US$26.6 million to revenue and
US$22.1 million of operating profit. If the acquisition had taken
place at the beginning of the year, revenue from continuing
operations would have been US$42.4 million and the profit before
tax from continuing operations would have been US$23.8 million. In
determining these amounts, management has assumed that the fair
value adjustments arising on the date of acquisition would have
been the same had the acquisition taken place on 1 January
2022.
16. DERIVATIVE CONTRACTS
During the year ended 31 December 2022, the Group entered into
the following derivative contracts to mitigate its exposure to
fluctuations in commodity prices.
Fair value
Strike 31 December
Oil Volume price 2022
Contracts Bbl Pricing per bbl Term US$'000
point US$
1 April 2022 to 30 June
Swap 64,000 WTI NYMEX 100.80 2022 Settled
1 July 2022 to 30 September
Swap 57,000 WTI NYMEX 98.00 2022 Settled
1 October 2022 to 31
Swap 50,000 WTI NYMEX 94.55 December 2022 Settled
1 January 2023 to 30
Swap 69,000 WTI NYMEX 90.05 June 2023 677
1 July 2023 to 31 December
Swap 61,000 WTI NYMEX 85.40 2023 456
1 January 2024 to 31
Swap 27,000 WTI NYMEX 82.20 March 2024 175
1,308
The fair value of the outstanding contracts at
31 December 2022 has been recognised as follows:
2022 2021
US$'000 US$'000
Current assets 1,133 -
Non-current assets 175 -
1,308 -
The fair value measurement of derivative contracts has been
categorised as Level 1 in the fair value hierarchy as the
measurement inputs are quoted prices in active markets for
identical assets at the measurement date.
The recognised gain on derivative contracts was as follows:
2022 2021
US$'000 US$'000
Realised gains 473 -
Unrealised gains 1,308 -
1,781 -
22. BORROWINGS
Group Company
2022 2021 2022 2021
US$'000 US$'000 US$'000 US$'000
Bridge loan - 4,060 - 4,060
Term loan 15,129 - - -
Revolving credit 8,000 - - -
Less: amortised debt costs (239) - - -
FIBT facility 22,890 - - -
Revolving credit 2,580 - - -
Less: amortised debt costs (77) - - -
Slawson asset bridge facility 2,503 - - -
Total borrowings 25,393 4,060 - 4,060
Current borrowings 14,572 4,060 - 4,060
Non-current borrowings 10,821 - - -
25,393 4,060 - 4,060
Group Company
2022 2021 2022 2021
US$'000 US$'000 US$'000 US$'000
Maturity analysis
Less than 6 months 1,964 4,060 - 4,060
6 months to 1 year 12,607 - - -
1 year to 2 years 4,471 - - -
2 years to 5 years 6,351 - - -
25,393 4,060 - 4,060
BRIDGE LOAN FACILITY
On 22 November 2021, the Group announced that it had drawn down
a bridge loan facility of US$4 million (GBP3 million) provided by a
number of sources, including certain Directors and Shareholders,
which were primarily to fund payment of the non-refundable deposit
due in respect of an agreement with Kaiser Acquisition and
Development to acquire a portfolio of non-operated working interest
in wells located in the Williston Basin. See note 19.
The terms of these loan agreements include payment of a 2%
arrangement fee and interest payable at the rate of 1% per month
payable monthly in arrears. These loans were due for repayment on
22 May 2022 but this was subsequently extended to 21 November 2022
and the rate of interest was increased to 1.25% per month. The
loans were repaid in full during the year ended 31 December
2022.
FIRST INTERNATIONAL BANK AND TRUST ("FIBT")
On 16 February 2022, the Group entered into a facility agreement
with FIBT through its U.S. subsidiaries. Under the terms of the
agreement the Group received a term loan of US$18 million,
repayable by 48 monthly instalments, and a 12-month revolving
credit facility of US$10 million. The term loan and revolving
credit facility both incur interest at a rate of 6.74% and were
subject to an arrangement fee of US$180,000 and US$100,000
respectively. A non-refundable fee of US$50,000 was paid prior to
the completion of the agreement.
The revolving credit facility has a standard redetermination
every six months and was increased to a facility of up to US$13
million in October 2022, which will next be redetermined in October
2023, and incurs interest at a rate of 9.74%. The loan was subject
to an arrangement fee of US$60,000. At 31 December 2022, the Group
had drawn US$8 million in respect of the facility.
FIBT has a lien on the assets of the Group's U.S. subsidiaries,
Zephyr Bakken LLC and Rose Petroleum (Utah) LLC.
SLAWSON ASSET BRIDGE FACILITY
On 19 December 2022, the Group entered into a facility agreement
with an experienced U.S. based institutional investor through its
U.S. subsidiary Zephyr Williston LLC. Under the terms of the
agreement the Group received a 12-month revolving credit facility
of up to US$8 million, of which US$2.5 million had been drawn at 31
December 2022. The facility incurs interest at a rate 12% and was
subject to an arrangement fee of US$80,000 which was rolled up into
the loan facility.
The movement in total borrowings during the year was:
2022 2021
US$'000 US$'000
At 1 January 4,060 -
Cashflows - financing activities 21,569 4,060
Amortised debt costs (236) -
At 31 December 25,393 4,060
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