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Auctus Advisers Research Note, 26th August 2022

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Adding contingent resources in the Paradox

  • Zephyr is acquiring 1,920 net acres in the Paradox Basin. The new acreage is directly contiguous to the Zephyr-operated White Sands Unit (WSU) and is largely covered by Zephyr’s existing 3D seismic. It also directly borders the Zephyr lease on which the planned State 36-2 LNW- CC and 36-3 LN-C9 well pad will be located.
  • With this new acreage, the lateral for the upcoming State 36-2 LNW-CC well can be completed across a longer 10,000-foot lateral length (extending the reach of the well into the new acreage). This should increase the ultimate recovery from the well and enhance the economics of the well. This area is also expected to be more liquids rich.
  • The new acreage also adds 4 new drilling locations in the Cane Creek, resulting in a 4 mmbbl increase of Zephyr’s net 2C resources. The company values these additional resources (NPV10) at ~US$40 mm. Prospective resources in the 8 overlying reservoirs add further upside.
  • The consideration for the new acreage consists of a small payment (not material to Zephyr’s cash position). In addition, the seller will be entitled to receive royalty payments which are only payable in the event of drilling success.
  • We have added 4 mmboe net 2C resources (to 31 mmbboe) to our valuation (chance of development of 65%) and we increase our target price from £0.14 per share to £0.15 per share.
Auctus

Auctus Advisers Research Note, 26th August 2022