Zephyr Energy

Zephyr has announced that, further to the Company’s announcement on 24 October 2022, it has received approval of its Application for Permit to Drill from the U.S. Bureau of Land Management, the final regulatory approval required to spud the State 36-2 LNW-CC well on its project in the Paradox Basin, Utah, U.S.  Zephyr simultaneously received approval of its APD for the State 36-3 LN-C9 exploration well, which has been permitted to target the shallower C9 reservoir and which is planned to be drilled from the same well pad.

The State 36-2 LNW-CC well is fully-funded and will target the Cane Creek reservoir. Drilling is planned to a total depth at 20,456 feet measured depth (9,598 feet true vertical depth) incorporating a 10,346 feet horizontal reservoir section.  The well’s objective is to further delineate the Cane Creek reservoir beyond the productive State 16-2 LN-CC well and the nearby Federal 28-11 well (which was recently acquired by Zephyr and is currently shut-in due to infrastructure constraints – details of which were announced by the Company on 14 September 2022). 

In parallel with the permitting process, Zephyr has completed all road and site preparation work at the well-site in order to spud the well as soon as possible following the execution of a rig contract.  The Company is in the process of finalising a rig contract, and will update the market on the expected timeline for the spud of the well upon award of the contract.  The timeline for drilling two additional wells (the State 36-3 LN-C9 exploration well and the non-operated Kirkwood Oil & Gas well targeting the oil-prone Cane Creek reservoir near the Cane Creek Field) will be determined after the State 36-2 LNW-CC has been drilled, factoring in infrastructure capacity and rig availability.

Colin Harrington, Zephyr’s Chief Executive, said: 
“We are delighted to have cleared the final regulatory hurdle for the spud of the 36-2 LNW-CC well and are close to finalising the rig contract. Once the rig contract is awarded, Zephyr will recommence its Paradox drilling activity which we believe will be a major step forward in our efforts to unlock what may be substantial potential across our 45,000 acres of Paradox Basin holdings.

“We look forward to sharing further updates on the drilling programme, including expected completion and testing schedules, once the rig contract has been awarded.

“As we embark on this potentially transformational drilling programme, I would like to reiterate that our mission, as always, is to be responsible stewards of investors’ capital while also being responsible stewards of the environment.”

The market had been waiting for these permits which allow the consecutive drilling of the two key wells at the Paradox Basin, the long awaited State 36-2 LNW-CC well and the State 36-3 LN-C9 well and after that the non-operated Kirkwood well. 

I am expecting the first two wells to add substantially to the existing reserves number  as already telegraphed by the company when they said that this programme is expected ‘to unlock what may be substantial potential’.

The shares are up some 8% as I speak which is understandable given the all clear given for the company to start drilling at the Paradox. But 6.1p is not what the Zephyr story is all about, this company is a wolf in sheep’s clothing as they get stuck into the 45,000 acres of the Paradox…

Sound Energy

Sound has provided an update to the Company’s announcements of 7 September 2022 and 14 September 2022, confirming its wholly owned dormant subsidiary Sound Energy Morocco SARL AU (“SEMS”) has now filed to the Moroccan Court its challenge to the assessments levied against SEMS, relating to the Moroccan Tax Administration’s assessment of purported historical taxable events. The Filing has been made within the stipulated period of 60 days from the date of notification of the local tax committee decision.

As previously announced, the Company remains of the strong opinion that the assessments levied against SEMS, that certain purported historical intra Group transactions between SEMS and Sound Energy Morocco East Limited have taxable bases, have been wrongly interpreted by the Moroccan Tax Administration. 

The Company, together with its advisors, continues to seek to engage constructively with the authorities but in the meantime continues to defend its rights through the Court and will continue to do so in the event that the Moroccan Tax Authority does not withdraw the assessments levied against SEMS.

The company must be getting rather tired of having to regularly file documents which they feel are being wrongly interpreted by the Moroccan Tax Administration but know that it has to spend time and money in preparing them. This is rather a shame as the hard work done in recent years by the Moroccan authorities to welcome international investors in its hydrocarbon industry will be wasted if the country gets blacklisted for taxation blunders. 

Hurricane Energy- For sale boards up…

Hurricane has announced that, following receipt of an unsolicited offer and after a period of engagement with the bidder, Hurricane has received an offer for the entire issued share capital of the Company at an indicative price of 7.7 pence per share in cash. The Indicative Offer is at a premium of only 13% compared to the mid-market closing price of 6.8 pence per share on 1 November 2022. The directors of Hurricane have concluded that the Indicative Offer should not be recommended to shareholders.

The Company is in a very strong financial and operational position. However, Crystal Amber Fund Limited, which holds 28.9 per cent. of the Company’s shares and is the Company’s largest shareholder, has indicated to the Board its desire to monetise the value of its shareholding.

The Company has decided to launch a formal sale process as referred to in Note 2 on Rule 2.6 of the Code, in order to establish whether there is a bidder prepared to offer a value that the Board considers attractive, relative to the standalone prospects of Hurricane as a publicly traded company and accordingly one that should be recommended to all shareholders.

Whilst the outcome of the FSP is uncertain, the Board is confident of the ongoing strength of the Company’s business in both financial and operational terms, including its:

Very strong financial position

• Debt free, with forecast year end net free cash[1] of c. $118 million (at $90/bbl oil)
• Decommissioning liabilities fully funded

Valuable asset base

• Significant oil price-geared cash generation from predictable P6 well
• Material inventory held, covering drilling, completion and subsea equipment

Significant tax loss position

• Over $370 million of value available in tax losses, as at 30 June 2022[2]

In the event that the FSP does not result in a transaction, the Board intends to commence a significant capital return programme with up to $70 million (equivalent to 3.1 pence per share[3]) to be returned to shareholders in Q1 2023, upon completion of a capital reduction.  Following that, and in the absence of more favourable alternatives, further distributions could then be made during 2023 and beyond.

[1] Unrestricted cash and cash equivalents, plus current financial trade and other receivables, current oil price derivatives, less current financial trade and other payables.
[2] The estimated value of these losses and allowances at prevailing tax rates, including the Group’s pre-trading expenditure, future decommissioning costs and non-ring fence losses, was $373 million at 30 June 2022. This is the maximum possible theoretical value at that date and is subject to timing and circumstance; and it is unlikely that all of the potential value would be able to be realised.
[3] Converted at an exchange rate of GBP 1.00: USD 1.15

Formal Sale Process
The Board has appointed Stifel Nicolaus Europe Limited (“Stifel”) as its financial adviser with regards to the FSP and as independent financial adviser for the purposes of Rule 3 of the Code.

Parties interested in submitting any expression of interest should contact Stifel through the contact details given below. It is currently expected that any party interested in submitting any form of proposal will, at the appropriate time, enter into a non-disclosure agreement and standstill arrangement with the Company on terms satisfactory to the Board before being permitted to participate in the process.

The Company then intends to provide such interested parties with certain information on its business, following which interested parties shall be invited to submit their proposals to Stifel. The Company will update the market in due course regarding timings for the FSP.

Other than the unsolicited offer referred to above, the Company is not currently in discussions with, nor in receipt of an approach from, any potential offeror relating to an acquisition of the issued and to be issued share capital of the Company. The Bidder referred to above is participating in the FSP.

The Takeover Panel has agreed that any discussions with third parties may be conducted within the context of a FSP under the Code, which will enable conversations with parties interested in making a proposal to take place on a confidential basis.

The Takeover Panel has granted a dispensation from the requirements of Rules 2.4(b) and 2.6(a) of the Code such that any interested party participating in the FSP will not be required to be publicly identified (subject to note 3 to Rule 2.2 of the Code) and will not be subject to the 28 day deadline referred to in Rule 2.6(a), for so long as they are participating in the FSP.

The Board reserves the right to alter any aspect of the process as outlined above or to terminate the process at any time and in such cases will make an announcement as appropriate. The Board also reserves the right to reject any approach or terminate discussions with any interested party at any time.

This announcement is being made without the consent of the Bidder. Shareholders are advised this is not a firm intention to make an offer under Rule 2.7 of the Code and there can be no certainty that any offers will be made as a result of the FSP, that any sale or other transaction will be concluded, nor as to the terms on which any offer or other transaction may be made.

Philip Wolfe, Chairman of Hurricane commented:
“The Board intends to deliver near term shareholder returns through either the successful outcome of the formal sale process or with a substantial capital return programme. Hurricane is in a strong position with an experienced senior team, robust balance sheet, profitable ongoing production and significant tax losses – a platform capable of supporting distributions throughout Lancaster’s expected economically productive life. We look forward to updating shareholders in due course.”

I will need to do much more work before making any further comment on this position although readers will know that I have been begging for some corporate activity to justify a  much bigger price to shareholders. This will include trying to speak to the company (little chance on recent attempts to make a meeting) and with Crystal Amber (much easier to chat to). 

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