Zephyr Energy PLC (AIM:ZPHR, OTCQB:ZPHRF) transformation has been a little like trading up from a scooter to a Harley-Davidson (NYSE:HOG). So, investors along for the ride should grab on tightly to those cow-horn handlebars as things are going to move a little faster from here on in.
Giving the business that low grunt you’d hear from a hog is the Paradox project in Utah, which is on the brink of becoming a significant ‘play opening’.
It adds to the initial horsepower brought by the Williston Basin, in North Dakota, where Zephyr is sitting on 230 wells.
At Paradox, Zephyr is now on the cusp of a ‘play opening success’ – which would validate a significant large-scale field development opportunity and garner industry-wide attention amongst US onshore operators.
Paradox opportunity
Zephyr began the work to unearth the Paradox opportunity practically from scratch, with its early progress supported by US Department of Energy grant dollars and an important collaboration with the University of Utah.
That early work laid the foundations for Zephyr to build up the Paradox opportunity.
To date, this has culminated in the drilling of multiple wells, which brought the company to this summer’s pivotal well testing.
The State 36-2R well has been a focal point, recently completing its initial production test with highly encouraging results.
The well demonstrated excellent reservoir deliverability, achieving a peak production rate of 1,350 barrels of oil equivalent per day, with almost zero evidence of water production.
This result is particularly significant as it enhances the project economics and demonstrates the high potential of the Paradox Basin.
These results mark a key milestone for Zephyr, positioning the company for further development and potential scale-up in the near future.
July’s good result
Production testing began last month, in the State 36-2R LNW-CC well, with initial results described as highly encouraging.
The initial rates reached a peak of 1,350 barrels oil equivalent per day, reflecting a strong start and a viable scale of reservoir deliverability.
This rate remained ‘choked back’ while analysis indicated that the natural fracture network at this location may be partially obstructed by heavyweight drilling mud or compartmentalized by faulting.
Further well work, using acidization to remove blockages, promises to further enhance the production performance.
Moreover, the well's design was for a relatively short horizontal section (around 270 feet) off a 10,000-foot vertical. Given that a lateral could extend much further, potentially longer than 1,000 feet, a scaled-up development would clearly have significantly higher potential in terms of volumes.
It is in this context that the next phases of testing and future operations will progress.
The ultimate goal is to ‘open the play,’ i.e. to demonstrate that the technical and economic aspects of the project can scale beneficially. Once this is achieved, the company can proceed with larger-scale development work.
Success along the way will, no doubt, attract attention.
Remember the pilot has lot of scope
“In the coming weeks –the well will be flow tested for a second time.
“This is a highly encouraging result, with the initial flow rates coming in at higher rates and with a higher condensate yield than previous wells in the Paradox,” Panmure Liberum analyst Ashley Kelty commented in a recent research note.
The analyst added: “We would anticipate that flowrates post-acidization may be higher and give a better indication of longer-term potential from this well.
“The readthrough from the condensate yield is encouraging – with produced 58 degree API condensate sold at prices close to WTI – and would substantially improve the wider field development economics.”
“Overall, [it was] very positive for ZPHR and we eagerly await upcoming updates on the flowrates post-acidization.”
Panmure Liberum rates Zephyr as a ‘buy’ with a share price target of 14.6p which suggest very substantial potential upside to the current price of close to 5p per share.
Responsible and sustainable balance sheet
Currently, the Williston wells are producing approximately 1,212 boepd (barrels of oil equivalent per day).
This is a valuable source of funds for Zephyr, which has established a more sustainable financial foothold than is typical for AIM-quoted small-cap explorers.
In 2024, the company reported significant progress in its recent financial results. From Williston, it is generating substantial revenue, bolstering its financial position.
Zephyr’s financial results for 2023, released in June, reported revenues of $25.2 million from the Williston wells, with the company making a $7.2 million gross profit. However, a calmer year for commodity pricing meant it was somewhat less lucrative than the extraordinary preceding year.
The asset base in the Williston is described as ‘low-risk and high-margin’.
A series of new wells had taken longer than previously expected but are now coming online and ramping up to full capacity, further supporting Zephyr’s financial wherewithal.
Helium potential
Besides Williston and Paradox, Zephyr is also establishing a third potential important avenue for value creation.
In late July, the company landed a key approval for a drill permit at its Salt Wash Field helium project in Utah.
This will see Zephyr build-up its profile in helium, which is fast becoming a popular non-hydrocarbon area of interest for explorers.
Helium, which is abundant but not concentrated in the atmosphere, commands a premium price compared to natural gases used for energy and heating.
It is an essential component in several important industrial and medical applications, including its use in MRI scanning technology.
Zephyr has previously estimated that Salt Wash could host between 70 million and 190 million cubic feet from the Leadville formation target, before considering a portfolio of other targets and leads.
The company estimates the Salt Wash project’s helium value at around $58 million (discounted NPV), with its upside ‘risked’ value pitched at $120 million.
A drill permit is now in hand, nevertheless, progress is likely to come first at the deal table rather than in the field for Zephyr.
This week, Zephyr told investors that it is holding active talks with industry participants and investors over funding for the helium project's commitment well.
Where can the share price go from here
At around 4.3p, Zephyr shares are up nearly 60% in the year-to-date, as the small-cap firm has consistently moved its key projects forward.
Having traded as high as 6.4p in the past twelve months, though, its clear that scope and sentiment both favour the share.
Specifically, brokers see the stock going a lot higher if the Zephyr team can deliver on its apparent promise.
Anything like Panmure Liberum’s target of 14.6p would be truly transformational.
The City broker is not alone in its bullishness, though- Auctus Advisors in a recent note pitched a target price of 12p per share.
Catalysts for Zephyr shares to kick on would most likely come from the next round of well test results at Paradox, especially if the numbers validate those upside indications.
Meanwhile, deal-making or funding to push the Helium project toward drilling would also be one to move the needle.
At the Williston, meanwhile, the company and its shareholders will be quite happy to just see the cash-generating wheels keep turning. This asset base has seen Zephyr shrug off the worst of the squeeze on equity capital.
It’s one of this year’s top-performing small-cap oil and gas shares, though it looks like it could still have more room to run.