Auctus Advisers Research Note, 27 June 2024

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Reducing the cost of debt. Testing at State 36-2R to start imminently

• The FY23 operating cashflow after interests of ~US$9 mm was above our forecasts (US$7 mm) due to change of working capital. We expected a negative change of working capital given (1) Zephyr had to make advance payments for the remedial of the State 36-2R well ahead of being reimbursed by the insurance and (2) the fact that the proceeds of the production for the Slawson wells were not received until part way through 1H24.
• Zephyr’s revolving credit facility (RCF) has been redetermined with an unchanged borrowing base (compared to December 2023) of US$15.15 mm. The same lender, longstanding North Dakota-based commercial bank FIBT, has also provided Zephyr with a new term loan of US$5.6 mm.
• Overall, Zephyr now holds ~US$29 mm of debt (~US$30 mm. previously), including the existing US$8.75 mm amortising term loan, as the more expensive US$6 mm bridge loan has been repaid out of the proceeds of the new term loan. The terms of the bridge loan included 12% per annum interest rate plus 1% royalty interest on the production associated with the new Williston wells. The overall average interest rate is now 9.5% per annum (10% per annum previously).
• The imminent focus remains the testing of the State 36-2R well that is currently cleaning-up. Zephyr had used very heavy mud to keep the well balanced while drilling (due to the very high pressure) and the company is slowly reducing the mud weight.
• Our unrisked NAV for the contingent resources that the State 36-2R well will contribute to derisk is £0.11 per share. A high flow rate would allow the booking of 2P reserves and growth in production. With success, overall production rates could increase by 250% by end of 4Q24 (compared to the FY23 average production).
• In addition, the well has encountered the overlying reservoirs with a similar response as at the original well. 270 mmboe prospective resources have been estimated at the nine overlying reservoirs. This represents 6-7 times the contingent resources estimated in the Cane Creek reservoir, which was the target of the State 36-2R well.
• The deadline to start drilling a helium well at Salt Wash has been extended from 30 June to 1 September. Our unrisked NAV of the helium is £0.03 per share. We re-iterate our target price of £0.12 per share.