Auctus Advisers Research Note, 14th September 2022

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Another accretive transaction in the Paradox

• Zephyr is acquiring 21 miles of natural gas gathering lines, the Powerline Road gas processing plant, rights of way for additional gathering lines, active permits, five existing wellbores and 5,480 acres additional acreage which is partly contiguous to Zephyr’s operated White Sands Unit (WSU).
• As a consideration for the acquisition, Zephyr will pay the seller US$0.75 mm in cash and assume all future decommissioning, plugging and abandonment liabilities estimated at ~US$2.5 mm.
• This transaction has multiple positive implications. (1) It adds 1,160 acres which comprises the final leasehold acreage parcel under Zephyr’s existing 3D seismic, adding 1.25 mmboe 2C resources in the Cane Creek with two drilling locations. (2) It adds 4,320 additional acres, in locations near to the WSU, which are not covered by the pre-existing 3D seismic data but with resource upside potential. (3) Three of the existing wells could be worked-over as potential future producers. (4) The surface infrastructure (and the existing related permits) would give the ability to Zephyr to sell gas to the Dominion pipeline once upgrades are complete.
• The surface infrastructure has a replacement cost of ~US$10 mm which reduces Zephyr’s future cost by up to the same amount. It includes lines that passes alongside the planned State 36-2 well and ties into the gas aalqahtani @ celicourt.uk processing plant connected to the Dominion’s pipeline.
• We have added 1.25 mmboe net 2C resources (to ~32 mmbboe) to our valuation (chance of development of 65%). We previously assumed that Zephyr would pay a US$0.50/mcf gas processing fee. We have reduced the processing cost to US$0.25/mcf (it could potentially be nil) as Zephyr will now own the processing plant. We increase our target price from £0.15 to £0.16 per share.