Auctus Advisers Research Note, 19th January 2023

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Paradox well encounters substantial hydrocarbons while drilling

• The State 36-2 LNW-CC well in the Paradox basin encountered a significant influx of natural gas and condensate from the Cane Creekreservoir. The well has been stabilised and currently has a high flow rate to surface where production is currently being flared.
• The influx was caused by the well intersecting an apparent major natural fracture network in the reservoir.
• Encountering natural facture networks has historically been the key to delivering major wells in the basin. For instance, the Cane Creek 12-1 well drilled in 2012 recovered 1 mmbbl and flowed at IP rate >1.4 mbbl/d with no decline over the first few months.
• Zephyr is now considering its options to complete the well. The company might decide it does not need to drill the remainder of the lateral. Fracking the well may also not be required, which would reduce execution risk.
• While the company’s evaluation is in its early phases, three key points are apparent at this juncture – the well has demonstrated clear hydrocarbon presence, significant reservoir overpressure, and a highly permeable natural fracture network – all in a separate part of the Cane Creek Unit than had been tested with the previous well. We view these as positive signs for both the 36-2 well itself and the acreage as a whole.
• Pending further details on next steps at the State 36-2 LNW-CC well, we re-iterate our target price of £0.20/sh. The ongoing drilling programme has an unrisked value of £0.14/sh just based on the contingent resources (39 mmboe) in the Cane Creek reservoir. Success in the C-9 reservoir around YE23 could add a further £0.13/sh.