THIS ANNOUNCEMENT AND THE INFORMATION CONTAINED HEREIN IS RESTRICTED AND IS NOT FOR RELEASE, PUBLICATION OR DISTRIBUTION, IN WHOLE OR IN PART, DIRECTLY OR INDIRECTLY, IN, INTO OR FROM THE UNITED STATES, RUSSIA, CANADA, AUSTRALIA, NEW ZEALAND, THE REPUBLIC OF SOUTH AFRICA OR JAPAN OR ANY OTHER JURISDICTION IN WHICH SUCH RELEASE, PUBLICATION OR DISTRIBUTION WOULD BE UNLAWFUL.

THIS ANNOUNCEMENT IS FOR INFORMATION PURPOSES ONLY AND SHALL NOT CONSTITUTE AN OFFER TO SELL OR ISSUE OR THE SOLICITATION OF AN OFFER TO BUY, SUBSCRIBE FOR OR OTHERWISE ACQUIRE ANY ORDINARY SHARES OF ZEPHYR ENERGY PLC.

THIS ANNOUNCEMENT CONTAINS INSIDE INFORMATION AS DEFINED IN ARTICLE 7 OF THE UK VERSION OF THE MARKET ABUSE REGULATION NO. 596/2014 ("MAR"), WHICH IS PART OF ENGLISH LAW BY VIRTUE OF THE EUROPEAN UNION (WITHDRAWAL) ACT 2018, AS AMENDED. MARKET SOUNDINGS, AS DEFINED IN MAR, WERE TAKEN IN RESPECT OF THE MATTERS CONTAINED IN THIS ANNOUNCEMENT, WITH THE RESULT THAT CERTAIN PERSONS PREVIOUSLY BECAME AWARE OF SUCH INSIDE INFORMATION. UPON THE PUBLICATION OF THIS ANNOUNCEMENT, THIS INSIDE INFORMATION IS NOW CONSIDERED TO BE IN THE PUBLIC DOMAIN AND ALL SUCH PERSONS SHALL THEREFORE CEASE TO BE IN POSSESSION OF INSIDE INFORMATION.

6 June 2023

Zephyr Energy plc

("Zephyr" or the "Company")

£3.15 million raised in a Placing and Subscription

Update on State 36-2 well and operational guidance

Zephyr Energy plc (AIM: ZPHR) (OTCQB: ZPHRF), the Rocky Mountain oil and gas company focused on responsible resource development from carbon-neutral operations, is pleased to announce a placing of ("Placing") and subscription for ("Subscription"), in aggregate, 90,000,000 new ordinary shares of 0.1 pence ("p") each in the Company ("Fundraising Shares"), at a price of 3.5p per Fundraising Share ("Issue Price"), to raise £3.15 million before expenses (together, the "Fundraising").

The Fundraising was conducted using existing share authorities granted to directors of Zephyr (the "Directors" or the "Board") at the Company's annual general meeting held on 21 July 2022 (the "2022 AGM") and has been supported by a range of existing institutional and other investors, including clients of Premier Miton. The Placing was conducted by the Company's Joint Broker, Turner Pope Investments ("TPI"), acting as Placing Agent for the Company.

Highlights

·    The Company is undertaking a fundraise which consists of a £3.15 million equity Placing and Subscription (before expenses).

·    The net proceeds of the Fundraising will be used to fund an estimated US$3.65 million of incremental near-term CAPEX at the Company's flagship project in the Paradox Basin, Utah, U.S. (the "Paradox project"). This is expected to include a production test on the Company's State 36-2 LNW-CC well (the "State 36-2 well") as well as future infrastructure and gas processing costs.

·    In the Paradox Basin, operations to prepare the State 36-2 well for production test continue at a methodical and expected pace. The Company's goal is to production test the well prior to the end of June, but the safety of its team and retaining control of the well dictates the speed at which it works.  Evidence of high pressure and hydrocarbons in the well remain substantial.

Background

Over the past six months, the Company deployed significant organic cash flow into both the Paradox project and its high impact project in the Williston Basin, details of which are outlined below.

Williston assets

On 21 December 2022, the Company announced the acquisition of non-operated working-interests in six wells (the "Slawson wells"), equivalent to a net 1.1 well, for a total consideration of US$2.9 million. The operator of the wells is Slawson Exploration ("Slawson"), a top-tier operator and one of the largest private companies in the Williston Basin. As part of the acquisition, Zephyr announced that it would pay US$8.9 million of CAPEX associated with the working-interests to bring the wells into production.

Paradox project

On 19 January 2023 the Company announced that it had intersected a major, highly-pressured, natural fracture network while drilling the State 36-2 well and on 20 March 2023 the Company announced that workover and subsequent production test operations were set to commence.

In early April 2023, a significant well control issue arose in which hydrocarbons flowed from the well in an uncontrolled manner. The incident was the result of a failure in a safety valve.

At present, the well is static and under control, and Zephyr is in the process of pulling the 2-7/8-inch production tubing out of the hole, as some joints were compressed/compromised or stuck due to the high pressures of the well control incident. To date approximately 6,500 feet of 8,900 feet of tubing has been pulled and inspected with twenty-six 31-foot joints replaced. The Company is moving methodically to remove and inspect the remaining joints while keeping the wellbore static. Once the tubing work is complete, a final cement squeeze will be performed and then the casing will be perforated across the reservoir interval prior to production testing the well.

Timing of the well test will be dictated by operational conditions to ensure well control is maintained and working conditions are safe for our team. Should the operations continue as expected, the production test is expected to commence in June 2023. Evidence of pressures and hydrocarbons in the well remain substantial.

Rationale for the Fundraising and use of proceeds

While the Company is pleased to note that the Slawson wells have been drilled and fully completed (with no remaining drilling or completion risk exposure to the Company), Slawson recently provided an update to the expected schedule for related surface facilities build-out. As a result, the Company now expects to see first production from the wells in October 2023 and first cashflows in January 2024 (versus earlier forecasts of March 2023 and August 2023, respectively).

In parallel with this, while the State 36-2 well control incident was a powerful illustration of the high pressures and productivity inherent in certain Paradox Basin natural fracture networks, resulting well work operations have subsequently resulted in delays to schedule and an increase in costs.   While the Company retains well control insurance coverage which is ultimately expected to cover the vast majority of costs associated with the well control incident, insurance proceeds are paid on a reimbursement basis and thereby impact the Company's near-term working capital commitments.  

Finally, given the pressures and hydrocarbon volumes witnessed during the four-day well control incident, the Company may require a larger gas processing facility than initially envisaged.  Ultimate sizing of any processing facility will be determined post completion of the State 36-2 well test.

Approximately £1.0 million raised pursuant to the Fundraising will be used towards completing the State 36-2 well production testing, and the balance of the net funds raised (approximately £1.9 million) will be used for near-term working capital needs and long term infrastructure and gas processing CAPEX.

Operational guidance and next steps

Production from the Slawson wells is expected to add an initial approximately 750 barrels of oil equivalent a day net to the Company in Q4 2023, and the Paradox project has the potential to further significantly increase the Company's production when the Paradox wells come online.  Zephyr will revise its production guidance for 2023 after the conclusion of the State 36-2 well production test.

The second half of 2023 is expected to be an inflection point for the Paradox project, as the Company works to turn the project from an exploration and appraisal play into a cash flowing development project, and future Paradox drilling is expected to benefit from knowledge gained during the drilling of the State 36-2 and State 16-2 wells. 

The Company is committed to advancing the Paradox project drilling programme as soon as possible, and plans to explore options for partnerships, joint-ventures, project finance and farm-in opportunities in the second half of 2023.  In the meantime, the Company looks forward to updating the market with news flow over the next few months which is expected to include:

·    State 36-2 well production test results;

·    Updated CAPEX and drilling plans (dependent on State 36-2 well production test results);

·    Continued progress on the Dominion Energy 16-inch pipeline, which is permitted, currently under construction and expected to be available to accept gas volumes in Q4 2023;

·    Updated Competent Persons Report (post State 36-2 well production test); and

·    Initial production volumes from the Slawson wells.

Colin Harrington, Chief Executive of Zephyr, said: "I am grateful for the support received from shareholders to ensure the successful completion of the Fundraising. The funds raised will enable the Company to continue delivering on its key strategic objective of bringing the Paradox project into commercial production over the coming months, while bridging to the significant revenues expected from both the Paradox project and the Company's Williston assets.

"The Board looked at a number of financing alternatives and felt that given current market conditions (particularly the cost of debt), and after taking into account Zephyr's bespoke situation, that an equity raise with circa 5% dilution was the optimal choice for the Company.

"The proceeds raised ensure we remain in a strong position to further advance the Paradox project development, and the Board believes that the minimal dilution to shareholders will be outweighed by continued progress and positive newsflow expected over the coming months, both with regards to the upcoming well test and with the cash generative Slawson wells coming on stream by Q4 this year.

Details of the Fundraising

In total, 90,000,000 Fundraising Shares are proposed to be allotted and issued pursuant to the Placing and Subscription, at an Issue Price of 3.5p per Fundraising Share to raise gross proceeds of £3.15 million (£3.03 million from the Placing and £0.12 million from the Subscription). The Fundraising Shares to be issued pursuant to the Placing have been conditionally placed by TPI, acting as agent and broker of the Company, with certain existing institutional and other investors pursuant to a Placing Agreement, as detailed below. The Subscription for £0.12 million has been subscribed for directly with the Company by an existing shareholder pursuant to a subscription agreement.

The Fundraising Shares will be issued on a non-pre-emptive basis pursuant to the authorities granted to the Directors at the 2022 AGM. 

When issued, the Fundraising Shares will represent approximately 5.3 per cent of the enlarged share capital of the Company as enlarged by the Fundraising and will rank pari passu with the existing ordinary shares of 0.1 p each in the Company ("Ordinary Shares").

Placing Agreement and issue of warrants

The Company and TPI have entered into a Placing Agreement pursuant to which TPI has agreed, subject to certain conditions, to use its respective reasonable endeavours to procure subscribers for the Placing Shares at the Issue Price. The Company has given customary warranties and undertakings to TPI in relation to, inter alia, its business and the performance of its duties. In addition, the Company has agreed to indemnify TPI in relation to certain liabilities that they may incur in undertaking the Placing. TPI has the right to terminate the Placing Agreement in certain circumstances prior to Admission (as defined below) and, in particular, in the event that there has been, inter alia, a material breach of any of the warranties. No part of the Fundraising is being underwritten. The Placing is conditional upon Admission (as defined below) taking place by no later than 8.00 a.m. on 12 June 2023 (or such later date as TPI may agree in writing with the Company, being not later than 8.00 a.m. on 30 June 2023) and the Placing Agreement entered into between the TPI and the Company not being terminated prior to Admission.

Under the terms of the Placing Agreement, TPI will receive a corporate finance fee from the Company, commission relating to the Placing Shares and warrants to subscribe for 10,388,571 new Ordinary Shares ("Broker Warrants"). The Broker Warrants are exercisable at a price of 4.375 pence per Ordinary Share, representing a 25 per cent. premium to the Issue Price, for a period of three years from the date of Admission. The Broker Warrants will not be admitted to trading on AIM or any other stock exchange.

Admission to AIM

Application has been made to London Stock Exchange plc for the Fundraising Shares to be admitted to trading on AIM ("Admission"). It is currently anticipated that Admission will become effective and that dealings in the Fundraising Shares will commence on AIM at 8.00 a.m. on or around 12 June 2023.

Total voting rights

On Admission, the Company will have 1,686,501,823 ordinary shares of 0.1p each in issue, each with one voting right. There are no shares held in treasury. Therefore, the Company's total number of ordinary shares in issue and voting rights will be 1,686,501,823 and this figure may be used by shareholders from Admission as the denominator for the calculations by which they will determine if they are required to notify their interest in, or a change to their interest in, the Company under the FCA's Disclosure Guidance and Transparency Rules.

Contacts

Qualified Person

Dr Gregor Maxwell, BSc Hons. Geology and Petroleum Geology, PhD, Technical Adviser to the Board of Zephyr Energy plc, who meets the criteria of a qualified person under the AIM Note for Mining and Oil & Gas Companies - June 2009, has reviewed and approved the technical information contained within this announcement.

Notes to Editors

Zephyr Energy plc (AIM: ZPHR) (OTCQB: ZPHRF) is a technology-led oil and gas company focused on responsible resource development from carbon-neutral operations in the Rocky Mountain region of the United States.  The Company's mission is rooted in two core values: to be responsible stewards of its investors' capital, and to be responsible stewards of the environment in which it works.

Zephyr's flagship asset is an operated 45,000-acre leaseholding located in the Paradox Basin, Utah, 25,000 acres of which has been assessed to hold, net to Zephyr, 2P reserves of 2.6 million barrels of oil equivalent ("mmboe"), 2C resources of 34 mmboe and 2U resources 240 mmboe.

In addition to its operated assets, the Company owns working interests in a broad portfolio of non-operated producing wells across the Williston Basin in North Dakota and Montana. Cash flow from the Williston production will be used to fund the planned Paradox Basin development. In addition, the Board will consider further opportunistic value-accretive acquisitions.

Glossary of Terms

The following terms apply throughout this announcement unless the context requires otherwise:

1P  proven reserves (both proved developed reserves + proved undeveloped reserves);

2P: 1P (proven reserves) + probable reserves, hence "proved and probable";

3P: the sum of 2P (proven reserves + probable reserves) + possible reserves, all 3Ps "proven and probable and possible";

CAPEX: capital expenditure; and

Reserves: Reserves are defined as those quantities of petroleum which are anticipated to be commercially recovered from known accumulations from a given date forward.

Notice to Distributors

Solely for the purposes of the temporary product intervention rules made under sections S137D and 138M of the FSMA and the FCA Product Intervention and Product Governance Sourcebook (together, the "Product Governance Requirements"), and disclaiming all and any liability, whether arising in tort, contract or otherwise, which any "manufacturer" (for the purposes of the Product Governance Requirements) may otherwise have with respect thereto, the Placing Shares have been subject to a product approval process, which has determined that the Placing Shares are: (i) compatible with an end target market of retail investors and investors who meet the criteria of professional clients and eligible counterparties, as defined under the FCA Conduct of Business Sourcebook COBS 3 Client categorisation, and are eligible for distribution through all distribution channels as are permitted by the FCA Product Intervention and Product Governance Sourcebook (the "Target Market Assessment").

Notwithstanding the Target Market Assessment, distributors should note that: the price of the Placing Shares may decline and investors could lose all or part of their investment; the Placing offer no guaranteed income and no capital protection; and an investment in the Placing is compatible only with investors who do not need a guaranteed income or capital protection, who (either alone or in conjunction with an appropriate financial or other adviser) are capable of evaluating the merits and risks of such an investment and who have sufficient resources to be able to bear any losses that may result therefrom. The Target Market Assessment is without prejudice to the requirements of any contractual, legal or regulatory selling restrictions in relation to the Placing. Furthermore, it is noted that, notwithstanding the Target Market Assessment, Turner Pope Investments will only procure investors who meet the criteria of professional clients and eligible counterparties. For the avoidance of doubt, the Target Market Assessment does not constitute: (a) an assessment of suitability or appropriateness for the purposes of the FCA Conduct of Business Sourcebook COBS 9A and 10A respectively; or (b) a recommendation to any investor or group of investors to invest in, or purchase, or take any other action whatsoever with respect to the Placing Shares.

Each distributor is responsible for undertaking its own target market assessment in respect of the Placing Shares and determining appropriate distribution channels.

Forward Looking Statements

This announcement includes statements that are, or may be deemed to be, "forward-looking statements". These forward-looking statements can be identified by the use of forward-looking terminology, including the terms "believes", "estimates", "plans", "anticipates", "targets", "aims", "continues", "expects", "intends", "hopes", "may", "will", "would", "could" or "should" or, in each case, their negative or other variations or comparable terminology. These forward-looking statements include matters that are not facts. They appear in a number of places throughout this announcement and include statements regarding the Directors' beliefs or current expectations. By their nature, forward-looking statements involve risk and uncertainty because they relate to future events and circumstances. Investors should not place undue reliance on forward-looking statements, which speak only as of the date of this announcement.

Notice to overseas persons

This announcement does not constitute, or form part of, a prospectus relating to the Company, nor does it constitute or contain any invitation or offer to any person, or any public offer, to subscribe for, purchase or otherwise acquire any shares in the Company or advise persons to do so in any jurisdiction, nor shall it, or any part of it form the basis of or be relied on in connection with any contract or as an inducement to enter into any contract or commitment with the Company.

This announcement is not for release, publication or distribution, in whole or in part, directly or indirectly, in or into Australia, Canada, Japan or the Republic of South Africa, Russia or any jurisdiction into which the publication or distribution would be unlawful. This announcement is for information purposes only and does not constitute an offer to sell or issue or the solicitation of an offer to buy or acquire shares in the capital of the Company in  Australia, Canada, Japan, New Zealand, the Republic of South Africa, Russia or any jurisdiction in which such offer or solicitation would be unlawful or require preparation of any prospectus or other offer documentation or would be unlawful prior to registration, exemption from registration or qualification under the securities laws of any such jurisdiction.  Persons into whose possession this announcement comes are required by the Company to inform themselves about, and to observe, such restrictions.

This announcement is not for publication or distribution, directly or indirectly, in or into the United States of America.  This announcement is not an offer of securities for sale into the United States.  The securities referred to herein have not been and will not be registered under the U.S. Securities Act of 1933, as amended, and may not be offered or sold in the United States, except pursuant to an applicable exemption from registration.  No public offering of securities is being made in the United States.

General

No statement in this announcement is intended to be a profit forecast or estimate, and no statement in this announcement should be interpreted to mean that earnings per share of the Company for the current or future financial years would necessarily match or exceed the historical published earnings per share of the Company.

Neither the content of the Company's website (or any other website) nor any website accessible by hyperlinks on the Company's website (or any other website) or any previous announcement made by the Company is incorporated in, or forms part of, this announcement.