Zephyr Energy investment thesis

Zephyr Energy LON:ZPHR – Unlocking a new basin in the US

Zephyr Energy – Investment Thesis in a nutshell

Former Rose Petroleum, it is an O&G exploration, development and production company in the US but based in London and listed in the AIM of the LSE. In 2019 it suffered a complete renovation, including the change of the management team, who refocused the company, reducing the target areas, and concentrating on the Paradox Basin in Utah. It has completed several M&A operations including operating and non-operating assets in the last year.

Zephyr Energy currently owns two main assets:

  • Non-operated producing assets in the Bakken formation and Williston basin (North Dakota) in the Rocky Mountains region, acquired through several transactions in ~1 year.
  • Exploration and development assets in the Paradox Basin (Utah), where it has drilled its first well (State 16-2) and is drilling other wells, both with the support of two grants from federal and statal organisations. The company has recently acquired additional leaseholds and infrastructure that will be needed for the commercial stage.

This setup allows for the generation of a steady cash flow in parallel to the exploration and development efforts in the Paradox Basin, which has a huge potential if Zephyr Energy can successfully develop it through new modern hydraulically stimulated horizontal wells.

Furthermore, there are several catalysts in the short term such as the progressive end of the hedges, the agreement with the natural gas off-taker, the gas treatment plant being online and the new drills.

Date: 27th Dec 2022

Capital Structure

 1  Common Shares£94.5MM
 2  Preferred Shares   Detailed in the analysis
 3  Debt$28MM

Main Shareholders

Zephyr Energy Shareholders

 Stock Information

1506 MMnº shares
7.06 MM3mth avg vol
3.75 – 8.15p    52 Week Range
Zephyr energy share price

The North Dakota assets

Zephyr Energy has working interests across different licenses and receives its share of the production, as well as has to pay for the corresponding CAPEX to continue the development of the fields.  The production is approximately 80% oil. Regarding production, the non-operated assets in North Dakota produced 1,759 boepd at the end of December 2021 on a pro forma basis and net production of 548 boepd. Since then, the company has announced the production of 1,643 boepd in Q1, 1,856 boepd in Q2 and 1,313 boepd in Q3.

In December 2022, in the announcement of the last acquisition in that basin, Zephyr Energy included a 2023 full-year production forecast of 1,550-1,750 boepd. Despite the progressive acquisitions, it is clear that the North Dakota assets present a high decline, which has not been compensated by the Capex the company is continually spending together with its partners.

Zephyr Energy has hedged part of its production for the next years:

  • Q2 2022: 64,000 bbls (703 boepd equivalents) at US$100.80/bbl
  • Q3 2022: 57,000 bbls (619 boepd equivalents) at US$98.00 /bbl
  • Q4 2022: 50,000 bbls (543 boepd equivalents) at US$94.55 /bbl
  • 1H 2023: 69,000 bbls (381 boepd equivalents) at US$90.05 /bbl
  • 2H 2023: 61,000 bbls (331 boepd equivalents) at US$85.40 /bbl
  • 1H 2024: 27,000 bbls (149 boepd equivalents) at US$82.20 / bbl

The hedges in Q3 were slightly above the average WTI price and in Q4 will be substantially above it. The outlook for 2023 shows that the hedges could be above the WTI again.

The Paradox Basin assets

The most promising asset and the one that provides the most upside is the acreage located in Grand County in Utah. This area has been little explored so far; production has mostly been from vertical wells. Zephyr Energy has been accumulating more acreage in the last 2 years, through multiple transactions. There are several reservoirs in the area, including the Cane Creek, White Sands Unit and the Paradox Basin. We usually refer to the whole acreage in Utah as the Paradox Basin, following the terminology of Zephyr Energy.

The Utah Geological Survey published a report titled “Utah’s emerging Northern Paradox basin unconventional oil play” regarding the Cane Creek and previous to the research well completed by Zephyr in 2021:

Zephyr Energy Paradox Basin

The Cane Creek play has experienced some success over the years, with production totalling over 10 million barrels of oil since the first wells were drilled. However, there is an estimated 1.2 billion barrels of potential oil (barrels of oil equivalent, which includes natural gas) in Cane Creek, meaning that 99.2 percent of the oil in the Cane Creek remains in place. These numbers do not include all the other overlying clastic zones that also have petroleum production potential. So far, the challenges of this play have overshadowed the significant successes.

Zephyr’s assets in the Paradox Basin and Cane Creek are perfectly located in an undeveloped and little-explored area, see Figure 1.

The basin has been considered to be naturally fractured, which reduces the need for artificial fracking and completion costs. In fact, Zephyr owns the most recent Paradox high-resolution 3D seismic data from which to predict natural fractures. The area has been explored, more than 10mmboe produced to date from the Paradox Formation, with a peak production slightly above 5,000 bopd. There are different reservoirs shown in the samples collected in the area, being the Cane Creek reservoir the most well-known of them. The company has identified the C9 and C19 reservoirs as potential targets for additional production.

The oil in the area has traditionally been produced from vertical wells in the Cane Creek reservoir, being Long Canyon 1 the first commercial well to be drilled in 1962. However, it wasn’t until 2012 that a well was drilled integrating 3D seismic and horizontal drilling, the Cane Creek 12-1, achieving more than 1,400 bopd and producing more than 1 mmboe to date.

In January 2021, Zephyr’s State 16-2 LN-CC vertical well was drilled to a total depth of 9,745 feet. It penetrated 21 clastic reservoirs and observed substantial gas shows across 5 of the reservoirs, with gas shows in 10 additional reservoirs. In July 2021, the company drilled a 5,000-foot side-track lateral, which was hydraulically stimulated in 14 stages. Subsequently, the well was flow tested and produced 420 boepd with a 7/64 inch choke and 690 boepd with a 12/64 inch choke with limited pressure drawdown. During the flow tests, the well had a gas-liquids ratio of 1:11.3; the hydrocarbons produced were sold to a refinery in Utah.

The result of the well was in line with the production obtained from a nearby well, Federal 28-11. The company estimated that the State 16-2LN-CC well drainage area from the Cane Creek reservoir (there are other reservoirs) holds a potential 1.2 to 4.5 million barrels of oil equivalent (“mmboe”) of hydrocarbons in place.

A Competent Persons Report (“CPR”), compiled by Sproule International (“Sproule”) in March 2021 calculated a NPV10 of over $111 million of the 2P reserves, highlighting the scale and resource potential of the Paradox project. This calculation covered 30,700 acres of the total 45,000 acres of Zephyr’s Utah-operated assets.

Net 2P Proved Reserves

Net 2C Resources

Net 2U Prospective Resources

2.57 million boe

34 million boe

270 million unrisked boe

Table 1. Reserves in December 2022


In March 2021, Zephyr announced the acquisition of an interest (range from 16.8% to 37.2%) in 5 wells in the Bakken formation, operated by Whiting Petroleum, for a total amount of $7.9 million. This acquisition gave the company an inflow of cash, starting in August 2021. The deal was negotiated when the oil price was at $45/bbl and the asset had a breakeven oil price of $36.69/bbl, and it included 450,000 barrels of 2P reserves.

In May 2021, the company announced the acquisition of an additional interest in the Williston Basin, operated by Continental Resources, for an amount of $170,000, which included 60,000 barrels of 2P reserves. The first 2 wells were being drilled at the time of the announcement, with up to an additional 22 future wells.

In September 2021, Zephyr acquired an interest (5.6%) in 4 wells operated by Prima Exploration and an interest (3.1%) in 11 wells operated by Whiting Petroleum for a consideration of $968,000. The total 2P reserves were 194,000 barrels. Additionally, the interests covered 15 wells to be drilled and completed.

In November 2021, the company announced the acquisition of interests in 163 currently producing wells, 18 proved not producing (“PNP”) and drilled but uncompleted (“DUC”) wells and 47 proved but undeveloped (“PUD”) locations. Whiting Petroleum is the operator. The acquisition granted the company a net production of 871 boepd with an opex of $13.91/bbl, and net 2P Reserves estimated at 2.764 million boe. Zephyr paid $36 million, which required a £3 million bridge loan, an equity raise of £12 million and the issuance of a $28 million senior debt facility (interest rate of 6.74%). These funds were also used to cover CAPEX and the acquisition of equipment.

Zephyr Energy New Acreage

In Q3 2022, the company completed 2 acquisitions. The first one included 1,920 leased acres contiguous to the Zephyr-operated WSU, largely covered by Zephyr’s existing 3D seismic. The second transaction added 21 miles of natural gas gathering lines, the Powerline Road gas processing plant, rights of way for additional gathering lines, active permits, five existing wellbores and additional 5,480 acres near the WSU. This included the rights over the Federal 28-11 well. Zephyr’s acreage after these acquisitions is shown in Figure 2.

In October 2022, Zephyr completed a Cooperation Agreement with Kirkwood Oil and Gas LLC related to data sharing and planned joint drilling in the Paradox Basin in the Cane Creek reservoir within the black oil fairway play. The new well will have a 2-mile horizontal leg that will cross both Zephyr’s and Kirkwood’s acreage, will be operated by Kirkwood and funded 50-50 by both companies.

In December 2022, the company announced the acquisition of an additional working interest in six wells in the Williston Basin plus an equity-only purchase of the remaining 25% working interest in the White Sands Unit (the central acreage owned by Zephyr) in the Paradox Basin. The rationale of the operation is to increase cash flow on one hand and to avoid carrying the partner over the Capex phase, which will allow it to enforce its rights at a later stage, on the other hand. Zephyr will issue the vender (Rockies Standard Oil Company LLC) the equivalent of $3 million in shares at a valuation of 6.05p (an 11% premium) in 3 tranches. Zephyr will pay for the additional working interest in the Williston Basin an initial $2.9 million plus $8.9 million in Capex, as the wells are not currently in production, which will be funded by a bridge loan facility of $8 million. The company adds 550,000 boe to its 2P reserved.

Zephyr Energy Short-term plans

The company has recently obtained the permits for conducting the new batch of drills, including the State 36-2 LNW-CC and State 36-3 LN-C9 drilled from the same pad. These two wells will improve the knowledge of the Cane Creek reservoir beyond the productive State 16-2 LN-CC well drilled in 2021.

  • State 36-2 LNW-CC: a development well targeting the Crane Creek reservoir with a total depth of 20,456 ft (horizontal leg 10,346 ft). Hydraulically stimulated after drilling. Production test planned in Q1 2023
  • State 36-3 LN-C9: an exploration well targeting the shallower C9 reservoir that would derisk a further ~25 mmboe net resources in a different reservoir.

Initially, the company decided to collocate a gas-powered crypto mining facility next to the State 16-2 LN-CC to reduce flaring and start production, but these plans were abandoned, and the company pursues its commercialisation using the gas transport infrastructure in the area that has recently acquired. A key element of the recent acquisition is the Powerline Road Gas Processing Plant, which allows Zephyr to receive the gas from the gathering lines and inject it into the gas transmission network. However, that infrastructure has been offline for many years, closed by the regulator due to its poor safety measures and preventive maintenance by its previous owner, Pacific Energy & Mining Co. This gas treatment plant is expected to have a processing capacity of 10mmscf/d.

Zephyr Energy

The company hasn’t announced yet a deal with an off-taker for the gas produced from the Paradox. Dominion Energy seems the best alternative, it owns a gas transportation, treatment and distribution network in Grand County, marked in blue in Figure 3. That picture also shows the location of the State 16-2 LN-CC well (orange label) at a distance of 8.4 km (5.2 mi) from the gas processing plant connected to that network. However, the company has already submitted the application for a permit to build a new pipeline from the State 16-2 LN-CC well to connect it to one of the gas gathering pipelines tied to the Powerline Road Gas Processing Plant, shown in Figure 4.

The company now has to spend a considerable amount of CAPEX to increase production in North Dakota and start up the Utah fields. The Williston assets will require a total of ~$12.5 million between previous and new commitments. In The Paradox Basin, the company has to complete the State 36-2 LNW-CC well, build and improve the gas infrastructure and complete a well with Kirkwood (included in the transaction of September 2022). In the announcement of the December 2022 acquisition, the company mentioned that the vendor’s share of CAPEX for drilling the State 36-2 LNW-CC well and workover of the gas infrastructure equates to $5 million. Hence, the current CAPEX program for the Paradox Basin can be in the range of $25-$30 million, if we add the additional production tests ongoing in the State 16-2 LN-CC, without considering the State 36-3 LN-C9 well, which may add other $5-6 million.

Hence, the company will need to spend a minimum of $42 million and a maximum of $48 million in 2023, necessary to commence production from the Paradox Basin by Q3 or Q4 2023 and maintain production levels in the Williston Basin.

Aplication to Bureau - Zephyr Energy

Zephyr Energy team

Although the team has a deep knowledge of finance, neither management nor board members are experienced in managing oil and gas operations in the US. Most of them come from the VC and investment sectors. The only engineer does not have experience in the US. There is a single Geologist as COO, who worked in the North Sea and does not show large expertise in development operations. The education and experience of the most relevant officers are:

  1. Colin Harrington (CEO) holds an M.B.A. from the Wharton School at the University of Pennsylvania, a B.A. from Colby College, was a Hansard Scholar at the London School of Economics and is an alumnus of the National Outdoor School of Leadership (NOLS). Before Zephyr, Colin served as CEO of Origin Creek Energy, a special situations investor in the onshore US oil and gas sector. Before that, Colin was Managing Partner of the Wellford Energy Group and former CEO of Wellford Capital Markets, a FINRA-registered broker-dealer boutique which specialized in the energy markets.
  2. Rick Grant (chairman) has a 40-year track record of success in the oil and gas industry. Rick is co-founder and Chairman of Origin Creek Energy LLC (“OCE”). Before OCE, Rick was CEO of Suez North America LNG and then served as CEO of Suez Global LNG (“Suez LNG”).
  3. Chris Eadie (CFO) qualified as a Chartered Accountant with PricewaterhouseCoopers. Before joining Zephyr, Chris was, amongst other things, the Finance Director of AIM-listed Aurum Mining PLC, and was involved in the wholesale restructuring of the Company into Shearwater Group PLC, the AIM-listed cybersecurity and risk management company.
  4. Gregor Maxwell (COO) holds a PhD in Reservoir Geology. Before joining Zephyr, he worked in Rocksource in Norway as COO, Venture Manager and Business Development in the UK.

Zephyr Energy Capital structure


In the interim results of 2022, the company had 1,505,017,000 shares outstanding

In the deal announced in December 2022, the company included the issuance of 13,483,095 new ordinary shares in January 2023 and 26,966,189 new ordinary shares upon Zephyr’s final investment decision related to the Powerline Road Gas Processing Plant (estimated in Q1 2023). Thus, the total number of shares issued in January 2023 (considered the new number of shares outstanding) will be 1,518,500,095, which will grow to 1,545,466,284 shares after the investment decision.


To complete the $36 million of the Williston basin assets, the company obtained a $28 million debt facility, consisting of a fully amortising four-year $18 million term loan and a $10 million revolving credit facility. Both carry a fixed interest rate of 6.74%.

In November 2022, there was $15.8 million of outstanding borrowings from the term loan. The revolving credit facility was redetermined and set at $13 million, at that moment $8 million remained drawn.

In December 2022, the company announced an $8 million bridge loan facility for the payment of its CAPEX contribution for the acquisition announced on the 21st of December.

Hence, the total debt of the company can be estimated at ~$28 million as of today.

Share options

In the interim results of 2022, the company had issued 45.3 million options, considering both dilutive and anti-dilutive ones at that time, with an exercise price ranging between 0.1p and 342.5p and an estimated weighted average remaining contractual life of 8 years. They represent ~3% of outstanding shares.


In the interim results of 2022, the company had issued 194.3 million warrants, considering both dilutive and anti-dilutive ones at that time. Exercise prices include 0.55p, 0.6875p, 2p, 3p, 5p, 7.5p and 11.25p.

In December 2022, OCE and Chris Eadie indicated that they plan to exercise their warrants over 21,818,182 new Ordinary Shares and 454,545 new Ordinary Shares respectively, for a total consideration of £445,454. Hence, the total amount of outstanding warrants is 74.19 million, representing ~4.9% of outstanding shares.


In November 2022, the company had $13.5 million in cash reserves, which gave the company $18.5m in available liquidity including the $5 million available in the credit facility. Later, the company announced the reception of a $1 million grant, we don’t know when this amount will be paid to the company.

The company recognised $14.1 million of deferred tax losses in the UK and the US, which will offset the payment of taxes at least during 2023.


As commented before, the Group hedged part of its production for 2022, 2023 and 2024 at good prices. In total the hedging programme related to 328,000 bbls production from the Williston assets over the next two years. In September 2022, Zephyr had an unrealised gain on its outstanding hedges of US$1.5 million, which has widened since then.

Main risks

Apart from the typical exposure to the volatile oil price markets, two main risks can be inferred from our point of view are:

  1. The rapid decline in the North Dakota assets generated lower cash flow than expected, making the company unable to satisfy both its Capex commitments and development cost for the Paradox Basin.
  2. Execution risk in Utah due to the ongoing drills and preparation works of the gas transport infrastructure. Zephyr’s operational team has been slow in completing previous works in the State 16-2; its results were published after several months since spud. The lack of experience and knowledge of the particularities of the Paradox Basin geology cast a shadow over their ability to deliver positive results.
  3. Geology in the Paradox Basin is less known than others, O&G exploration and production have been limited until today, hence the grants received to study geology during the drills. We haven’t seen an estimation of the geological probability of success, but they are not 100%, and more importantly, the economic viability of the development has yet to be confirmed. The naturally-fracture characteristic of the reservoirs plays increases the chances of success and can help to keep declining at lower rates than other basins in the US. The additional production test from the State 16-2 LN-CC well will provide further information on the commercial viability and, particularly, the potential recovery factor of the oil and gas in place.

However, we don’t believe there is a regulatory or permitting risk in the Paradox Basin, the area to be developed is mostly a deserted area with little environmental value (but nonzero), and different public departments have been supportive of Zephyr’s exploration efforts. In summary, we estimate that the combined risks advise us to be conservative when estimating the success of the operations on all fronts. Contrary to this perception, it seems the market is giving the company a premium at the current share price. We are not oil engineers or geologists, so we are just applying our caution in trying to minimise the downside and balance it with the potential upside whether the company achieves its goals in full and on time.

Zephyt Energy Estimations for 2022-2025

We have estimated the P&L and roughly cash flow for the end of 2022 to 2025, considering the public information. The company provided guidance of a combined year-end production of 4,500 boepd for 2023, including 3,300 boepd from Paradox by year-end and an average of 1,550-1,750 boepd from North Dakota. We expect production from the Paradox Basin to begin in Q3 2023.

We estimate that once the company identifies the better plays in the Paradox area, it can drill a considerable number of wells, drilling a new well every quarter until the end of 2025. We also believe that as the Paradox Basin increases production, investment and production in North Dakota will decline considerably. The company has always expressed their interest to use the cash flow generated by that asset to fund the exploration and development in Utah. Therefore, we expect to see a greater decline in Williston than in Paradox, due to the presence of fractures in the reservoirs. Hence, we project the company will progressively reduce further investment in Williston and focus CAPEX in Paradox, with an additional ~$4 million per quarter in Paradox versus an annual $2 million in Williston (after the $8 million of commitments for 2023). Should Zephyr Energy provide an updated long-term strategy for both basins, these numbers shall be updated. In Figure 6 we show our estimations for the P&L and simplified FCF for the 2022-2025 period and different price levels.

These calculations are our own and have not been independently verified. They are based on the information published by the company, but they include many uncertainties. We haven’t included any accelerated payment of debt or the issuance of additional loans. However, given the performance of the company in the last year, we acknowledge the M&A activity may be relevant, but we lack enough information to make an educated guess on how the company may work on that front. Hence, we only consider organic and conservative growth, expecting the success of the exploration and development of the Paradox Basin. We have considered a 1:10 gas-liquid ratio from the Paradox Basin, slightly over the results from the State 16-2 LN-CC well (1:11.3).

Zephyr Energy - Forecast 2022-2025

Given these figures, we project that a conservative valuation of Zephyr Energy may be approximately $147 million or £122 million (0.829 USD/GBP). The current market capitalisation is $92 million, which gives a conservative 32% upside to current share price levels. This does not include further acquisitions or the impact that lower or higher-than-expected results in the Paradox Basin may have. Hence, we recommend taking these projections with caution, as there are inherent risks in the oil and gas industry that only an insider can accurately estimate.

Our conclusions about Zephyr Energy

Zephyr Energy has a good prospect in the Paradox Basin, and it has performed well and conservatively in the deployment of Capex. The financial situation of the company is much stronger than one year ago, with recurring revenue from the Williston assets. The $36 million acquisition of the producing assets at the Williston basin showed how much management cares about dilution. Contrary to other companies like Southern Energy (USA) or Prospera Energy (CA), the company found a balance between excessive indebtedness and dilution. This allowed the company to finance the operation with a reasonable level of debt.

The capital structure of Zephuy Energy is reasonable and dilution via options and warrants is below 10%, which is acceptable. Also, debt is controlled and should not become a problem even if the oil prices drop under 70$. Nevertheless, the company is not listed in its natural stock market, and it should be listed in the US instead of the UK. This would increase the interest in the company and reduce the exposure to FX volatility.

Current hedges for 2023 and 2024 are above the WTI curve, which will allow Zephyr Energy to sell them and realise a profit in case it would need additional resources for the development of the Paradox Basin. However, this would only be achieved if its creditors gave the company the necessary waiver for the hedging policy. We see this unlikely at the current production, debt levels and future CAPEX obligations.

The team behind Zephyr Energy has limited experience with managing O&G operations in the US. This is a clear setback and reduces the confidence in the ability of the company to successfully achieve its short-term objectives. In our opinion, this weakness shall be addressed by the company ASAP, by electing a new drilling manager or COO with long and proven experience in the US.

However, having said this, it also puts a positive note on the whole project. The Paradox Basin has not been commercially developed yet due to a series of reasons. Previous techniques and assumptions have not worked and, as a result, the area is mostly undeveloped. A new team with new ideas, bringing a new approach to the development of tight oil reservoirs, may be key in solving previous bottlenecks. Furthermore, Colin Harrington seems 100% committed to the project, which should not be overlooked.

The two grants received by the company to drill the State 16-2 and State 36-2 LNW-CC wells show strong support from the federal and state authorities. This is also a recognition that the geology in the area is not well understood, and more studies must be carried out. This gives Zephyr a first-mover advantage, as its team has direct access to the information before it reaches the public domain. The recent agreement with Kirkwood shows that there is an interest, but very limited as that company cannot be considered a relevant player, despite having drilled several wells in the last decades.

The company has progressed slowly in the Paradox Basin, we don’t know the causes of the little advances since the publication of the State 16-2 LN-CC results, with some changes in the project since then. The company first planned to use a crypto mining facility to reduce flaring, but these plans were dropped by a more traditional approach and extract and commercialise the gas, we guess that due to the drop of the crypto prices and rise of the natural gas price in the US. We can only speculate about why the progress during 2022 hasn’t been substantial in the Paradox Basin, but we believe the M&A operations in North Dakota consumed a large portion of the time of the management team.

Finally, the company is developing a new basin with a different approach that can be very lucrative, if successful. There is great potential, but also risks. In our opinion, the 32% upside at the current share price does not represent the current risks in the project to make this company an important position in a balanced portfolio. We have some reserves on the ability of the team to complete the development of the Paradox Basin, and we do hope to see new additions to the team that reassure us of their capacity to deliver on time. The agreement with the off-taker for the gas is key for the 2023 year, as it will send a strong message that the puzzle is complete and the project can go into operation. 


Disclaimer: This document only represents the opinion of its authors; its content cannot be considered investment advice and it has been prepared only for informative purposes. The authors of this document do not hold a long or short position in the company at the moment of writing it. However, they may acquire a position in the short term.

Main Author: Alejandro Varas (Alxo)

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