Zephyr Energy, the Rocky Mountain oil and gas company focused on responsible resource development from carbon-neutral operations, has entered into a binding agreement to acquire further non-operated working interests in currently producing and near-term production wells in the Williston Basin, North Dakota, USA.

The Directors of Zephyr believe that the Assets will be an ideal addition to Zephyr's existing asset portfolio and that the cashflows generated from the Acquisition will enable the Company to proceed with, amongst other things, the fast-track development of its flagship Paradox project.

Summary

Zephyr has entered into a binding agreement with Kaiser Acquisition and Development - Sanish Non-op, LLC, a privately owned exploration and production company based in the USA (the "Seller") to acquire a portfolio of non-operatedworking-interests in wells located in the same Williston Basin field as a number of Zephyr's existing non-operated assets. The assets being acquired are operated by Whiting Petroleum, one of the largest and most experienced operators in the Williston Basin and which already serves as the operator of a number of Zephyr's existing non-operated wells. The Acquisition has an effective date of 1 October 2021.

• Under the terms of the Acquisition, which is expected to close by 22 December 2021, Zephyr will acquire working interests in 163 currently producing wells (the "PDP wells") with approximately 871 barrels of oil equivalent per day ("boepd") net to the Assets being produced in September 2021.
• In addition to the PDP wells, the Acquisition includes:

• • 18 proved not producing ("PNP") and drilled but uncompleted ("DUC") wells, all of which have been drilled and are expected to come online in the coming months. When online, which is expected to be in 2022, the PNP and DUC wells are expected to increase net production of the Assets above 1,100 boepd; and
  • 47 proved but undeveloped ("PUD") locations for future drilling demonstrating the long-term potential of the Assets.
• The Assets are spread across 22 separate drilling pads in Mountrail County, North Dakota and are estimated, by the independent reserve consulting firm Sproule Incorporated ("Sproule"), to hold a net 2.764 million barrels of oil equivalent ("mmboe") of Proven Reserves.
• Consideration for the Acquisition, which is subject to various customary closing adjustments, is US$36 million, of which US$3 million will be paid immediately as a non-refundable deposit. Zephyr is currently evaluating a range of financing alternatives to fund the remainder of the consideration via structured debt, including alternatives which would be non- dilutive to equity holders. In the event the Acquisition is completely funded by debt, pro forma net debt as a multiple of 2022 forecast adjusted earnings before interest, tax, depreciation and amortisation ("EBITDA") for the Company post acquisition is expected to be approximately 1.6x, a level which the Board deems to be suitably conservative.
• The Acquisition has robust economics which, along with Zephyr's existing Williston Basin production assets, is expected to generate substantial low risk cashflow which can be redeployed into the Company's growing Paradox Basin development. The Company estimates:
• • The Acquisition cost equates to 2.1x the Assets' 2022 forecasted EBITDA
  • Low operating expense of approximately US$13.91 per barrel of oil equivalent ("boe") which provides high cash margins of over 75%, as forecasted over the next three years
  • When combined with Zephyr's current Williston Basin assets, the Company's pro forma non-operated portfolio is expected to generate approximately US$22.9 million of EBITDA in 2022 and US$19.3 million of free cash flow after expected capital expenditure ("CAPEX"), as forecast by the Board
  • The Board estimates the post-tax net present value of the Acquisition is US$46.3 million, using Sproule's pricing (outlined in Appendix A) at a ten per cent discount rate ("NPV-10")
  • Cashflows generated by the PDP wells acquired are expected to utilise the Company's historical tax losses of more than US$16 million
     
• Zephyr has completed its financial, technical and commercial due diligence on the Assets, a process undertaken over the past six months. As part of its due diligence process, the Company commissioned Sproule to produce a Competent Persons Report ("CPR") on the assets being acquired. 
• The Company has drawn down on a short-term bridge loan facility of £3.0m to fund the deposit to secure the Acquisition. The Loan, which has favourable commercial terms and no dilutive equity component to Zephyr, has been provided by a group including existing Shareholders and members of the Board.

Colin Harrington, Chief Executive of Zephyr, said:
"The Acquisition announced today is another landmark deal for Zephyr and will further transform the Company by adding a significant, low-decline,low-risk, high margin production base - with both near and long-term upside exposure into a further 65 wells, thirteen of which have already been drilled and are expected to be online soon.

"The Assets are located in the same core Williston Basin field as many of our existing non-operated wells and will be a significant complement to our current non-operated portfolio.

"As we outlined to Shareholders in January 2021, our goal for the year was to establish production and positive cash flow for the Company either through our existing portfolio, via acquisition, or through a combination of both. Assuming we complete the Acquisition by the end of the year, we will end 2021 having outperformed even my most optimistic expectations, having grown a considerable non-operated portfolio during the year and having achieved a huge milestone with first production from our Paradox project, where production testing data from the State 16-2LN-CC well remains highly encouraging.

"Upon closing, the Acquisition is expected to more than double Zephyr's non-operated production levels and related cashflow over the next twelve months. The Acquisition will provide Zephyr with significantly more resources with which to accelerate the development of its Paradox Basin project. This year, cashflows generated by our existing non-operated portfolio have already been utilised on our Paradox project, have enabled us to acquire additional leases, and have allowed us to acquire further non- operated assets with production coming online shortly. We are firm in our intention to continue with this successful strategy as we position the Company for further growth and increased profitability.

"In addition, in line with our previously stated commitment, we intend to ensure that all hydrocarbons produced from the Acquisition, net to Zephyr, will have a "net-zero" operational carbon impact while under our ownership. This will be achieved largely through our programme of purchasing Verified Emission Reduction credits to mitigate all Scope 1 carbon emissions.

"The Acquisition assets are situated in a prime location in the Sanish Field in the Williston Basin and all wells are operated by Whiting, a top basin producer already serving as operator of a number of our existing wells. I look forward to further developing our relationship with Whiting as we grow our asset base in the Williston Basin.

"I would like to extend a sincere thank you to our Shareholders and Board members who participated in the bridge loan funding which enabled us to proceed with the Acquisition. The funding, secured on highly favourable terms, and with no dilutive equity component, demonstrates the faith that these parties have in both the Company and the Acquisition. I am also highly encouraged by our discussions to date with a diverse range of potential lenders in respect of the remainder of our Acquisition funding.

"It's important to note that, to date, Zephyr has delivered multiple acquisitions and significant progress on its Paradox asset without utilising any debt, as the Board did not consider appraisal and development assets to have a suitable risk profile for leveraging at the time. However, the Acquisition assets have a long production history and have reached a lower decline phase. Combined with appropriate hedging and with our success in delivering production from our existing non-operated portfolio, the result means we believe we can now safely utilise conservative levels of leverage.

"In conclusion, I'd like to reiterate that we are operating in particularly exciting and unusual times - times which simultaneously offer strengthening commodity prices as well potential to complete opportunistic acquisitions at highly compelling valuations. Zephyr's Board has unanimously agreed to be aggressive in these times in order to fortify our ability to deliver an accelerated development schedule on our Paradox asset, which in turn is expected to position the Company for significant long-term growth. The value already delivered from this year's progress now means that additional growth has the potential to be delivered with minimal dilution to Shareholders.

"We will be providing regular updates as we progress through this transformational period in both our operated and non- operated portfolio - and in the meantime, we will continue to operate in line with our core values of being responsible stewards of both our investors' capital and of the environment in which we work."