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Zephyr Energy

Zephyr has provided third quarter 2022 results related to hydrocarbon production from its non-operated asset portfolio in the Williston Basin, North Dakota, U.S., and to provide an update on current operations on its project in the Paradox Basin, Utah, U.S.

Q3 2022 Williston Basin Highlights

• Q3 revenues totalled US$9.6 million net to Zephyr, giving Zephyr total revenues for the nine-months to 30 September 2022 of US$35.5 million.
  • Q3 sales volumes averaged circa 1,313 barrels of oil equivalent per day (“boepd”).
  • Q3 wellhead production averaged circa 1,208 boepd net to Zephyr, in line with management expectations and marginally impacted by temporary shut-ins due to planned “frac-protect” procedures on existing wells while new nearby wells were completed.
• Q3 operating income was US$7.9 million (after taxes, lease operating expenses, realised hedging impacts, and gathering and marketing fees), giving Zephyr US$29.8 million operating income for the nine-months to 30 September 2022.
• Based on the strong cash flows from the Williston Basin portfolio to date, Zephyr has upgraded its full-year 2022 revenue forecast for the Company to a range of US$40-45 million (up from a previously announced range of US$35-40 million) and the Company reaffirms its 2022 full-year production forecast of 500,000 – 550,000 barrels of oil equivalent (“boe”).

Paradox project operations update

• CWC Ironhand Drilling Rig 118 is in the process of mobilising to the State 36-2 LNW-CC well site, and the Company continues to expect to spud the well in the second half of November 2022.  Multiple other service providers are currently on-site completing preparations for the upcoming drilling operation.
• Preparations to commence production testing of the previously drilled State 16-2LN-CC are also largely complete.  Pre-test operations included a coil unit cleanout of the well’s 5.5 inch production casing (from surface to total depth), and the completion of procedures designed to enhance the well’s flow assurance.  Work to connect the surface facilities is underway, and production testing is scheduled to commence in the second half of November 2022.

Colin Harrington, Chief Executive of Zephyr, said:
“I continue to be delighted with the strong cash flows generated from our non-operated Williston Basin portfolio.  Our goal, as we acquired our various Williston interests, was to generate multiples on cash invested which could ultimately be redeployed from the Williston into our Paradox project activity.  I’m pleased to report the Williston assets have provided exactly that, demonstrating rapid paybacks and significant cash generation prior to settling into a more mature production and decline phase.

“The numbers from the portfolio speak for themselves. Over the last 18 months, Zephyr raised and deployed US$19.6 million of equity into the Williston portfolio – and in the first three quarters of 2022 alone, that portfolio generated over US$35 million in revenue and US$29.8 million of operating income.   While quarterly revenues naturally fluctuate, depending on the timing of new wells coming online and at times for frac protect operations, the overall trend has provided stronger year-to-date cash flow performance than that originally forecast, and significant future cash flow is expected to continue for many years to come.

“As a direct result of the portfolio’s strong performance, during 2022 we’ve been able to reduce the Company’s borrowings from an already conservative US$29.9 million to US$24.8 million (representing a 18.6% reduction in total borrowing), expand our Paradox acreage position from 36,000 to 45,000 acres, and acquire the pipeline and processing infrastructure across our White Sands Unit in the Paradox Basin.  In addition, our assets have generated more than enough excess liquidity (US$18.5 million in cash and available borrowing base) to fund the next phase of our ambitious Paradox drilling programme.

“With interests in a further 26 Williston wells expected to come online over the next six months, our non-op portfolio is poised to continue to produce significant additional cash flow available for redeployment across our portfolio.

“We are now rapidly progressing our fully-funded operations in the Paradox, where the augmented surface infrastructure at the State 16-2LN-CC is largely complete and the next phase of production testing is about to commence.  Combined with the high impact drilling potential at the State 36-2 LNW-CC location, I believe it’s a hugely exciting time to be a Zephyr shareholder.  We’re coming into a period of significant near-term news flow, and I look forward to sharing additional updates as operations on the ground progress.”

Things couldnt get much better for Zephyr shareholders as they head towards the drilling operations in the Paradox Basin, fully funded as we know and this update explains quite how successful that the investment in production has been. 

The numbers really do speak for themselves, an original investment in the Williston of less than $20m has already generated over $35m of revenue alone and in the first 9 months of 2022 almost $30m of operating income. This has led to an increase in revenue guidance for 2022, now to a range of US$40-45 million (up from a previously announced range of US$35-40 million) and the Company reaffirms its 2022 full-year production forecast of 500,000 – 550,000 barrels of oil equivalent.

To put this into some perspective this is more than enough to pay down some of the debt, acquire the previously announced infrastructure and additional acreage deals in the Paradox, pay for additional Williston capex and fund the upcoming drilling program in the Paradox.  

So, when the board said that it was investing in order to make the Paradox a fully funded operation with potential for significant upside from the drilling programme it meant what it said. I have repeatedly said that I have huge respect for this high quality management team who have done what they promised and made a fully rounded hydrocarbon company ready to explore the Paradox.

I have also said that the potential totality of the size of this company is huge compared to where we are now, indeed it should be remembered that 2023 forecasts are too low, should be increased and of course will soon include contributions from the Basin and maybe even more from the Williston when  the frac protect wells and additional DUCs come online.  All in all, production is exactly on forecast and revenues are decently higher.

I have rarely been so confident about the potential for a company that I have looked at since day 1, there is now plenty of news flow on the horizon and I am looking forward to reporting back from the Paradox when I visit before long, I’m sure that an interview with CEO Colin Harrington is imminent, maybe even from the site…

Further data published today is below.

Q3 Williston Basin Sales Detail

For the third quarter of 2022, the Company reports net sales of approximately 120,821 boe. Product mix for Q3 was 74% crude oil, 14% natural gas, and 12% natural gas liquids. The table below provides sales volumes, product mix, and average sales prices for the quarter:

• Oil:                                      88,883 barrels (“bbls”) at an average sales price of US$91.38/bbl
• Natural Gas:                      101,315 thousand cubic feet (“mcf”) at an average sales price of US$8.19 /mcf
• Natural Gas Liquids:        15,052 bbls at an average sales price of US$42.65 per bbl

(Note: Third quarter production volumes and average sales prices figures include field estimates in respect of Sep 2022 natural gas and natural gas liquids sales volumes and are subject to future revision.)

During Q3, a number of Zephyr’s existing production wells were temporarily shut-in due to “frac-protect” procedures while new nearby wells were stimulated and completed.  As new infill wells are drilled, existing offset wells are temporarily shut in to optimise the nearby completion and mitigate offset well production losses. Offset wells are then re-instated for production when the new infill wells are started up for production.

In comparison to Q3, Q2 sales volumes of 168,880 boe included approximately 41,480 boe produced prior to Q2 but for which payments were received during Q2.  In the Williston Basin, cashflow from non-operated interests in newly drilled wells may lag actual production by up to five months.  Such payments from the operator accrue on a monthly basis and are paid in full prior to the sixth month of production, which may result in fluctuating impacts to quarterly sales volumes and revenues during times of significant completion activity.

Q3 revenues totalled US$9.6 million, net to Zephyr.  This compares to quarterly revenues in the second quarter of 2022 (“Q2”) of US$14.3 million.  As referred to above, Q2 revenues were positively impacted by deferred payments for production of US$3.7 million on newly completed wells generated prior to that quarter but paid to Zephyr in Q2.

Total revenues for the nine months to 30 September 2022 were US$35.5 million.

Q3 operating income was US$7.9 million (after taxes, lease operating expenses, realised hedging impacts, and gathering and marketing fees).

Q3 Williston Basin Production Detail

Q3 wellhead production averaged circa 1,208 boepd of wet oil and gas produced, net to Zephyr, in line with management expectations albeit marginally impacted by temporary shut-ins due to planned “frac-protect” procedures on existing wells while new nearby wells were completed.  At the end of Q3, 199 wells in the portfolio were available for production, including four wells which came online during the quarter.

An estimated 26 additional wells in which Zephyr has minority working interests are forecast to be brought on production over the next six months, which will help to decrease typical Williston Basin portfolio decline rates.

Net working interests across the Williston Basin non-operated portfolio now average 7.3% per well, equivalent to 15 gross wells, all of which utilised horizontal drilling and modern, hydraulically stimulated completions.

Williston Basin production outlook

As mentioned above, 26 additional producing wells from Zephyr’s existing portfolio are expected to be brought online during the next six months, which will partially mitigate further decline rates typical of Williston Basin production.

The Company previously announced hedges on just under half of its forecast non-operated production for the fourth quarter of 2022, with an average hedged production price of US$94.55 for the remainder of the 2022 calendar year.

Based on the strong cash flows to date from the Williston Basin portfolio, Zephyr is upgrading its 2022 revenue forecast for the Company to a range of US$40-45 million (an increase from a previously announced range of US$35-40 million) and reaffirms its 2022 production forecast of 500,000 – 550,000 boe.

United Oil & Gas

United Oil & Gas has announced an update on the testing of the ASH-4 development well (“ASH-4”) in the Abu Sennan licence, onshore Egypt. United holds a 22% non-operating interest in the Abu Sennan licence, which is operated by Kuwait Energy Egypt.

Summary

• Preliminary test results from the ASH-4 well-test indicate a flow-rate of 2,101 bopd and 3 mmscf/d (c. 2,700 boepd gross; 594 boepd net) from the Alam El Bueib (“AEB”) reservoir on a maximum 40/64″ choke
• On a reduced, 32/64″ choke, which is expected to be more representative of the producing flow rates, the well flowed at 1,325 bopd and 1.8 mmscf/d (c. 1,685 boepd gross; 371 boepd net)
• ASH-4 is expected to be tied into the existing facilities and brought on stream in the coming days
• The ST-1 rig will now move to the ASW-1X exploration well location to commence drilling the fifth well in the 2022 programme
• Stimulation programme expected to be completed on the AJ-14 well over the coming weeks  

United Chief Executive Officer, Brian Larkin commented:
“We are very pleased with the news of the ASH-4 initial well test result. It is expected that the well will be brought onstream in the coming days and will immediately contribute production and revenue for the Company.  The ASH field has proved to be a prolific area of the Abu Sennan licence and we are pleased to be reporting this positive well test result, as we move to drill the final well of the 2022 drilling programme. This will be the ASW-1X exploration well (previously named ASF-1X) which is targeting 8mmbbls of gross recoverable resources.”

Much more to come from UOG this week, a presentation tomorrow and I’m interviewing CEO Brian Larkin later in the week.

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