Auctus Research Note, 28th June 2022
Zephyr Energy Plc (AIM: ZPHR)
Share price: £0.05
Target: £0.14
Initiating Coverage: Zephyr Energy Plc
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Unlocking an overlooked basin in Utah
Zephyr Energy is a ~US$80 mm market cap US onshore E&P with ~1.6 mboe/d net production in the Bakken and a very high impact resource play in the Paradox Basin, Utah. In the past two years, Zephyr has undergone a transformation, refocusing a scattered multi commodity portfolio into a very focused E&P business. Given the recent macro challenges and the pandemic, this process appears to have gone unnoticed by many investors. While the Paradox Basin is a historically productive area, it has attracted little attention from the industry. By applying modern drilling and completion technologies combined with 3D seismic, Zephyr has already obtained very notable drilling results that could potentially be play opening. These results allowed the certification of ~2 mmboe net 2P reserves and ~27 mmboe net 2C contingent resources. The focus for management is now to scale up this success. Our target price of £0.14/sh reflects our ReNAV and implies ~190% upside.
Cashflow from assets in the Williston basin…
Zephyr has taken advantage of the capital discipline in the industry to acquire at a deeply discounted value small non-operated interests in producing fields that lack materiality for their larger owners. The portfolio of ~3.6 mmboe net 2P reserves could generate US$~30 mm of cashflow in 2022.
… To fund high impact appraisal in the Paradox Basin
Zephyr holds 75%-100% interest in ~37,000 acres in a basin where historical production has come from natural fractures that have been difficult to properly map, resulting in unpredictable drilling results and uncertain development plans. In 4Q21, Zephyr’s State-16-2 LN-CC well, the first multi stage horizontal frac well in the region, flowed at a constrained rate of ~1.1 mboe/d from an area of the Cane Creek reservoir without large natural fractures. This very good result opens the possibility of a very profitable and systematic development of the play. Zephyr will drill 3 new wells in 2H22, to convert a large proportion of the resources into 2P reserves. Overall net production could reach 4 mboe/d by YE23 with a subsequent full field development. The wells will provide important data on 8 shallower reservoirs with 203 mmboe net 2U unrisked prospective resources that appear to have similar characteristics and could be developed with similar techniques.
Value build-up
Converting the Cane Creek’s 27 mmboe 2C resources into reserves by YE22 takes our Core NAV to £0.13/sh. Derisking 25 mmboe 2U resources in another reservoir by then would add a further £0.10/sh to £0.23/sh. With potentially 4 Paradox wells fully on stream from 3Q23, Zephyr could generate ~US$125 mm aggregate free cash flow (FCF) including the Williston over 2024-2026 (=130% of current market cap). Each additional reservoir (8 in total) has an unrisked value of £0.10/sh, adds 4-5 mboe/d net production and US$30-35 mm/y FCF.
