WTI (July) $72.15 +41c, Brent (Aug) $76.71 +58c, Diff -$4.56 +17c
USNG (July) $2.24 +7c, UKNG (July) 69.27p +12.81p, TTF (July) €26.650 +€1.64

Oil price

Oil has settled down after the Opec meeting and it seems that $70 and $75 respectively is what they think. But Mr Market has been warned about shorting and it seems is prepared to take it on. Time will tell…

Zephyr Energy

Zephyr announced a placing of and subscription for, in aggregate, 90,000,000 new ordinary shares of 0.1 pence each in the Company, at a price of 3.5p per Fundraising Share, to raise £3.15 million before expenses.

The Fundraising was conducted using existing share authorities granted to directors of Zephyr at the Company’s annual general meeting held on 21 July 2022 and has been supported by a range of existing institutional and other investors, including clients of Premier Miton. The Placing was conducted by the Company’s Joint Broker, Turner Pope Investments, acting as Placing Agent for the Company. 

Highlights

• The Company is undertaking a fundraise which consists of a £3.15 million equity Placing and Subscription (before expenses).
• The net proceeds of the Fundraising will be used to fund an estimated US$3.65 million of incremental near-term CAPEX at the Company’s flagship project in the Paradox Basin, Utah, U.S. This is expected to include a production test on the Company’s State 36-2 LNW-CC well (the “State 36-2 well”) as well as future infrastructure and gas processing costs.
• In the Paradox Basin, operations to prepare the State 36-2 well for production test continue at a methodical and expected pace. The Company’s goal is to production test the well prior to the end of June, but the safety of its team and retaining control of the well dictates the speed at which it works. Evidence of high pressure and hydrocarbons in the well remain substantial.

Background
Over the past six months, the Company deployed significant organic cash flow into both the Paradox project and its high impact project in the Williston Basin, details of which are outlined below.

Williston assets
On 21 December 2022, the Company announced the acquisition of non-operated working-interests in six wells, equivalent to a net 1.1 well, for a total consideration of US$2.9 million. The operator of the wells is Slawson Exploration, a top-tier operator and one of the largest private companies in the Williston Basin. As part of the acquisition, Zephyr announced that it would pay US$8.9 million of CAPEX associated with the working-interests to bring the wells into production.

Paradox project
On 19 January 2023 the Company announced that it had intersected a major, highly-pressured, natural fracture network while drilling the State 36-2 well and on 20 March 2023 the Company announced that workover and subsequent production test operations were set to commence.

In early April 2023, a significant well control issue arose in which hydrocarbons flowed from the well in an uncontrolled manner. The incident was the result of a failure in a safety valve.

At present, the well is static and under control, and Zephyr is in the process of pulling the 2-7/8-inch production tubing out of the hole, as some joints were compressed/compromised or stuck due to the high pressures of the well control incident. To date approximately 6,500 feet of 8,900 feet of tubing has been pulled and inspected with twenty-six 31-foot joints replaced. The Company is moving methodically to remove and inspect the remaining joints while keeping the wellbore static. Once the tubing work is complete, a final cement squeeze will be performed and then the casing will be perforated 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. Should the operations continue as expected, the production test is expected to commence in June 2023. Evidence of pressures and hydrocarbons in the well remain substantial. 

Rationale for the Fundraising and use of proceeds
While the Company is pleased to note that the Slawson wells have been drilled and fully completed (with no remaining drilling or completion risk exposure to the Company), Slawson recently provided an update to the expected schedule for related surface facilities build-out. As a result, the Company now expects to see first production from the wells in October 2023 and first cashflows in January 2024 (versus earlier forecasts of March 2023 and August 2023, respectively).

In parallel with this, while the State 36-2 well control incident was a powerful illustration of the high pressures and productivity inherent in certain Paradox Basin natural fracture networks, resulting well work operations have subsequently resulted in delays to schedule and an increase in costs. While the Company retains well control insurance coverage which is ultimately expected to cover the vast majority of costs associated with the well control incident, insurance proceeds are paid on a reimbursement basis and thereby impact the Company’s near-term working capital commitments.  

Finally, given the pressures and hydrocarbon volumes witnessed during the four-day well control incident, the Company may require a larger gas processing facility than initially envisaged. Ultimate sizing of any processing facility will be determined post completion of the State 36-2 well test.

Approximately £1.0 million raised pursuant to the Fundraising will be used towards completing the State 36-2 well production testing, and the balance of the net funds raised (approximately £1.9 million) will be used for near-term working capital needs and long term infrastructure and gas processing CAPEX. 

Operational guidance and next steps
Production from the Slawson wells is expected to add an initial approximately 750 barrels of oil equivalent a day net to the Company in Q4 2023, and the Paradox project has the potential to further significantly increase the Company’s production when the Paradox wells come online.  Zephyr will revise its production guidance for 2023 after the conclusion of the State 36-2 well production test.

The second half of 2023 is expected to be an inflection point for the Paradox project, as the Company works to turn the project from an exploration and appraisal play into a cash flowing development project, and future Paradox drilling is expected to benefit from knowledge gained during the drilling of the State 36-2 and State 16-2 wells.

The Company is committed to advancing the Paradox project drilling programme as soon as possible, and plans to explore options for partnerships, joint-ventures, project finance and farm-in opportunities in the second half of 2023.  In the meantime, the Company looks forward to updating the market with news flow over the next few months which is expected to include:

State 36-2 well production test results;

• Updated CAPEX and drilling plans (dependent on State 36-2 well production test results);
• Continued progress on the Dominion Energy 16-inch pipeline, which is permitted, currently under construction and expected to be available to accept gas volumes in Q4 2023;
• Updated Competent Persons Report (post State 36-2 well production test); and
• Initial production volumes from the Slawson wells.

Colin Harrington, Chief Executive of Zephyr, said: 
“I am grateful for the support received from shareholders to ensure the successful completion of the Fundraising. The funds raised will enable the Company to continue delivering on its key strategic objective of bringing the Paradox project into commercial production over the coming months, while bridging to the significant revenues expected from both the Paradox project and the Company’s Williston assets.

“The Board looked at a number of financing alternatives and felt that given current market conditions (particularly the cost of debt), and after taking into account Zephyr’s bespoke situation, that an equity raise with circa 5% dilution was the optimal choice for the Company.

“The proceeds raised ensure we remain in a strong position to further advance the Paradox project development, and the Board believes that the minimal dilution to shareholders will be outweighed by continued progress and positive newsflow expected over the coming months, both with regards to the upcoming well test and with the cash generative Slawson wells coming on stream by Q4 this year.

It’s not often that I write that companies have a raise for all the right reasons but today it is close to that for Zephyr. The £3.15m has been raised for extra capex needed to complete and test the State 36-2 well at the Paradox Basin, normally this wouldn’t have been needed but well documented well control issues have led to increased costs despite the fact that insurance will, albeit en retard, pay up. 

Secondly, the invested capital in Slawson, despite the programme going very well, has been updated and the expected schedule for related surface facilities build-out is slightly behind targets. Accordingly, the Company now expects to see first production from the wells in question in October 2023 and first cashflows in January 2024 (versus earlier forecasts of March 2023 and August 2023, respectively).

This has created a sort of cash flow swing which means a top-up was needed and given the modest nature it was deemed most important to ask the company’s leading shareholders for advice and accordingly they felt that this raise, at a modest 5% dilution was the preferred route for the company and all shareholders. 

What is most important is that the size of the Paradox is still believed to be very substantial, note the pressures and hydrocarbon volumes witnessed during the four-day well control incident and more importantly, the fact that the Company may require a larger gas processing facility than initially envisaged. 

The shares have fallen modestly this morning, I believe because investors who have followed this company in its recent history genuinely feel that the prize from the Paradox is worth these measures and that with careful, methodical work at 36-2 being completed soon with little flowback and perforation ahead of testing. 

I have no hesitation whatsoever in thinking that Zephyr has a very high quality management running a really fantastic portfolio which has a world class asset at the Paradox and this is no time to leave the ship, indeed from here I suspect most money will be made…

Southern Energy

Southern has announced the closing of its acquisition of the remaining producing acreage in the Gwinville Field in Jefferson Davis County, Mississippi from PetroTX Energy, LLC for a cash purchase price of $3.2 million that was previously announced May 23, 2023.

Ian Atkinson, President and CEO of Southern, commented:
“We are very pleased to close this highly accretive acquisition. Our team has already begun optimising the newly consolidated assets including through marketing opportunities, with additional volumes and access to the Florida Gas Transmission sales point, which is currently receiving a strong premium to NYMEX Henry Hub, and the rationalisation of operating costs. We will continue to achieve synergies through the further reduction of operating costs and through additional marketing opportunities. This Transaction demonstrates our ability to execute high value growth opportunities at all stages in the commodity cycle and we will look to build on this through organic development of the Gwinville area in the future.”    

This is merely the closing of a deal that I have written about before a couple of times recently, the PetroTX Energy acquisition makes a huge amount of sense and has significant synergies which will not only benefit right now but as natural gas prices rise bring home a huge amount of upside.

Beacon Energy

Beacon has announced that the E202 drilling rig contracted to its wholly-owned subsidiary, Rhein Petroleum GmbH, is expected to mobilise on 12th June for the planned Schwarzbach-2 (“SCHB-2”) development well within the Erfelden Field, onshore South West Germany. This rig is fully-crewed and has been contracted from RED Drilling & Services GmbH.

The rig is scheduled to be on location and operational by 19th June. Drilling operations are expected to take in the region of 25 days to reach the prognosed TD drilling depth of 2255m (1709m True Vertical Depth), with an additional 12 days planned for reservoir clean-up and production testing.

The drilling pad is located next to the Schwarzbach facility which is owned and operated by Rhein Petroleum and it is anticipated that once completed, the SCHB-2 well will be tied-in to these existing production facilities to enable immediate production from the well.

Larry Bottomley, Chief Executive Officer of Beacon Energy, commented:
“The Rhein Petroleum team is doing an excellent job in conjunction with RED Drilling to enable the start of the drilling programme so quickly after the RTO and the readmission of the Company on to AIM. This well is the first of potentially four development wells to be drilled at Erfelden over the following 2 years and is the next step in delivering the self-funding business model created by the acquisition of Rhein Petroleum.

The SCHB-2 well represents a material value catalyst for Beacon.  In the success case, this well will deliver a step-change in production and cashflow which will enable the Company to fund further value enhancing activity across the portfolio.  We look forward to providing further updates on the progress of the SCHB-2 well as appropriate.”

Everything has happened quickly for Beacon who have assembled a good team of people and a starter pack asset base which might transform the company should this well come in, either way it doesn’t carry huge risk.

I’m looking forward to joining a few of London’s top analysts when visiting SCHB-2 in a couple of weeks time, Beacon have an interesting start. 

KeyFacts Energy Industry Directory: Malcy's Blog