Up more than 700% in the year-to-date Zephyr Energy Plc will be high on the list of trades you ought to have made in 2021 – along with the likes of Bitcoin, Ethereum, AMC Entertainment and GameStop.
In London, only blockchain and cryptocurrency specialists GST Technologies Ltd and Quantum Blockchain Technologies PLC (AIM:QBT) have outperformed Zephyr shares, in terms of percentage growth.
If you weren’t punting meme-stocks and cryptos in 2021, then AIM-quoted Zephyr would’ve been your top stock through the first 46 weeks of the year.
Zephyr is up another 5% on Monday on its latest acquisition news, changing hands above 7p to value the AIM-quoted firm at close to GBP90mln.
Investors paid just 2p per share in Zephyr’s GBP10mln share placing back in March and had much of the first half of 2021 to accumulate shares at prices that today will look cheap.
The March placing funded an opportunistic and shrewd acquisition of Covid-disrupted wells along with operations on a breakthrough proof-of-concept success in Utah’s Paradox basin.
Altogether they’ve set a rocket beneath the AIM share.
Breakthrough Paradox success
Paradox may be apt word for what might be one the year’s less obvious success stories.
As an oil and gas growth company, Zephyr doesn’t really fit the social media zeitgeist in the way that other big trades in 2021’s ‘winners’ list might.
The Paradox well was drilled first in 2020, before continued testing and development led Zephyr to confirm it as the basin’s ‘first horizontal well with a modern hydraulically stimulated completion’.
It remains a priority and a focal point for the company as an operator.
But, it was Zephyr’s deft positioning as a minority stake-holder and non-operating partner that propelled much of this past year’s performance.
Dealing into Dakota
In March, Zephyr struck a deal to acquire a package of five wells in Williston Basin, North Dakota.
The deal largely flew under the radar – perhaps unsurprising given prevailing oil and gas prices at the time (the US crude benchmark was pitched at about US$45 per barrel when Zephyr negotiated the deal, versus US$76 today).
The assets themselves appeared quite arbitrary. The wells had previously been drilled, and, located in the established Bakken formation they were already defined and understood by the operator.
They were in various stages of development and had been disrupted amidst the pandemic.
Zephyr described it as a low-risk opportunity with the promise of “substantial near-term cash flow”.
According to Zephyr boss Colin Harrington it was the best out of some 75 potential opportunities reviewed by his team.
Weary oil investors may have been forgiven had they shrugged away the promise of jam tomorrow.
But, the project would quickly make good on that promise, coming online quickly to build revenues.
Quick cash returns
Within weeks of the first deal announcement, Zephyr flagged to investors that the new wells would be online and producing ahead of expectations.
It coincided with recovering oil prices and, by May 4, the company had banked the first US$140,000 of oil payments.
By Zephyr’s interim results in September – covering the six months to June 30 – the company said it had received around US$900,000 of revenue from the wells.
The acquisition terms saw Zephyr pay the vendor (a privately owned US company) around US$350,000 and assume some US$3.7mln of previously accrued costs owed to the project operator, NYSE-listed Whiting Petroleum (NYSE:WLL).
The UK firm also took on a further US$4mln of upcoming funding needed to cover its share of costs to complete the unfinished wells.
In return, Zephyr took ownership of interests in the wells, ranging from 16.8% to 37.2%.
Ramp-up, top-up and double-up
Establishing a winning formula, Zephyr added to its portfolio of non-operated wells in September – again picking up stakes in ‘drilled but uncompleted’ wells.
It paid around US$968,000 upfront and, as it did before, paid the tab for the seller’s share of remaining work. The costs were estimated at around US$3.9mln to finish 15 wells that are due online in late 2021 through 2022.
Zephyr’s interests, per well, are smaller in the second batch, 3.1% on average, and it expects to see around 200 to 300 boepd of additional production from that portfolio by the end of March 2022.
Today, Zephyr is raising the bar with its latest transaction.
The latest deal sees the company spend US$36mln for wells that currently deliver close to 900 boepd net and a package of wells due online in 2022 to yield around 1,100 boepd to Zephyr.
All are found in the Williston Basin, North Dakota, spread across 22 well pads. They are again operated by Whiting.
Zephyr expects the latest transaction will more than double its non-operated production levels and cashflow over the next twelve months.
It’s a much bigger deal. In total, Zephyr is acquiring 163 currently producing wells along with 18 further wells that are described as either ‘proved but not producing’ or ‘drilled but uncompleted’.
On top of that, the latest asset package also comprises interests in some 47 additional locations that are designated as ‘proved but not developed’, each of which has plans for well drilling in the future.
In the month of September, the producing assets yielded some 871 boepd net to the seller, and the other 18 wells are forecast to flow 1,100 boepd net to the company once online.
Zephyr has paid a US$3mln deposit for the deal and aims to put in place debt finance for the remaining US$33mln by a targeted closing date of December 22.
It is described as a “transformative” deal. Across the board, non-operated production is now forecast to generate US$22.9mln of earnings (EBITDA) in 2022, with free cash flow predicted to be US$19.3mln after capex.
The economics are in the meantime given a solid head-start, as the company has US$16mln of historical tax losses to utilise.
Zephyr says the non-operated production business is an “excellent complement” and a source of funding for its plans in Utah, where the Paradox basin is described as “a higher upside development”.
Eyes turn to Paradox production
So it is, then, that investors will now keenly eye early flows in Utah from the recently completed 16-2LN-CC well.
The well was the first horizontal well in the wider Paradox Basin to flow hydrocarbons using a modern hydraulically stimulated completion, Zephyr highlighted earlier this month.
Initial flows were constrained, yet measured 420 boepd in short-term tests, whilst quick tests under less restrictive conditions marked a rate of 690 boepd.
Colin Harrington said that Zephyr has always viewed 16-2LN-CC as a ‘proof of concept’ well, and, future wells would benefit from longer laterals and from more refined completion techniques, nonetheless he was “hugely excited” by the well’s initial data.
Harrington previously told investors he “fully expects” to see production rates rise if the company can resolve facility constraints through the remainder of production testing.
More production data is expected from Utah once the test flows become representative of longer-term reservoir performance, Zephyr guided.