Zephyr Energy plc
Annual Report and Financial Statements
For the year ended 31 December
We are a technology-led producing oil and gas
company focused on responsible resource
development. We have a balanced portfolio of
operated and non-operated assets, located in
two established oil producing basins in the Rocky
Mountain region of the United States.
We are committed to be responsible stewards
of investors’ capital, and the environment in which
we work.
Our vision is to open up the next prolific onshore
U.S. oil and gas play.
Contents
Page
1
2
4
6
10
Strategic report
Business highlights
About us
Our assets
Chairman’s statement
Our strategy and value proposition
Chief Executive officer’s report
12
and operating review
Environmental, Social and Governance 21
23
Financial review
25
Principle risks and uncertainties
26
S172 (1) statement
Governance
Page
28
Board of Directors
29
Senior management
30
Corporate governance statement
Directors’ report
35
Statement of Directors’ responsibilities 39
40
Independent auditor’s report
Financial statements
Consolidated income statement
Consolidated statement of
comprehensive income
Consolidated balance sheet
Consolidated statement of
changes in equity
Consolidated cash flow statement
Company balance sheet
Company statement of changes
in equity
Company cash flow statement
Notes to the financial statements
Other information
Directors, advisers and officers
Glossary
Page
48
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55
56
87
88
Zephyr Energy plc Annual Report and Financial Statements 2023
Strategic report
Business highlights
FY 2023 REVENUES
2P RESERVES PARADOX
FY 2023 HYDROCARBON
SALES VOLUMES
US$25.2million
2.6mmboe
1,116boepd
FY 2023 NET CASH GENERATED
2C RESOURCES PARADOX
PARADOX ACREAGE AT JUNE 2024
FROM OPERATIONS
US$11.6million
34mmboe
46,000+
FY 2023 LOST TIME INJURIES (“LTIs”)
2U RESOURCES PARADOX
Nil
270mmboe
11
About us
Growth & asymmetric upside
in the U.S. oil and gas sector
We are a cash generative, producing oil and
gas company focused on responsible resource
development.
Since 2020, the team has completed 14
acquisitions and increased production from
its non-operated assets from zero to a current
run rate of 1,200 boepd in under three years.
Our Paradox development offers significant
potential upside for increased production.
Our vision
Open up the next
prolific onshore
U.S. oil and gas play
T I N G V A L U E F O R S H A REHOLDERS
A
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G
A R A D O X PROJEC
T
P
Large-scale
exploration upside
Operational control
over organic growth
Long-term development
potential
L
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Balanced portfolio
Our balanced asset base provides
portfolio diversification
and asymmetrical
growth potential.
I S T O N PROJECT
L
W I L
Downside protection through
current production and cashflow
Attractive risk-adjusted returns
in an established basin
Certainty of funding for Paradox and overhead
Each dollar spent generates multiple dollars
available for future investment
Access to prudent levels of lower
cost debt financing
Ability to hedge and dampen
commodity price volatility
2
Zephyr Energy plc Annual Report and Financial Statements 2023 Strategic report
About us
Purpose and values
We recognise we have an important part to
play in shaping the future of our industry and
a sustainable future.
Our purpose is to drive growth and create
long-term value for all stakeholders through
responsible oil and gas production.
Central to our purpose are our values.
- Responsible stewards of investors’ capital
- Responsible stewards of the environment
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GENERATIN
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CREATING
LONG-TERM
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3
Zephyr Energy plc Annual Report and Financial Statements 2023 Strategic report
Our assets
We have a balanced portfolio of both operated and non-operated
assets located in two established oil producing basins in the U.S.
This strategy provides portfolio diversification and asymmetrical
growth potential.
PARADOX PROJECT
UTAH
We hold a 46,000+acre leasehold with 2P
reserves of 2.6 mmboe, 2C resources of 34
mmboe and 2U resources 270 mmboe. We
continue to grow our land position and
develop the project to deliniate the full scale
and potential value of the asset
4
Zephyr Energy plc Annual Report and Financial Statements 2023 Strategic report MONTANA
NORTH DAKOTA
Current projects
Areas of interest
WYOMING
UTAH
COLORADO
WILLISTON PROJECT
NORTH DAKOTA & MONTANA
A growing suite of non-operated production
and near-term production assets acquired for
their low-risk, high-return cashflow potential.
Our non-operated portfolio generated revenue
of circa US$25 million in FY 2023.
5
Zephyr Energy plc Annual Report and Financial Statements 2023 Strategic report Chairman’s statement
“ The Board is looking to the
future with a high degree of
confidence as we continue
to deliver on our vision of
‘opening up the next prolific
onshore U.S. oil and gas play’
and delivering value for all
stakeholders.“
6
On behalf of the Company’s Board of Directors (the “Board”)
I am pleased to present the Company’s financial and
operational results for the 2023 financial year which reflect
the ongoing efforts and commitment of the Zephyr team.
Despite facing a significant operational challenge during the
2023 financial year, we continued to deliver as a cash-generating,
exploration and production group focused on two established oil
producing basins in the Rocky Mountain region of the U.S., and
we have made steady progress in the pursuit of our key objective
of unlocking the next prolific onshore U.S. oil and gas play.
With a balanced portfolio of non-operated assets and an
operated asset with asymmetric growth potential, our strategy is
clear. Cashflows generated from non-operated asset production
in the Williston Basin, North Dakota, U.S. (the “Williston project”)
are recycled and reinvested to pursue development of our
flagship operated asset in the Paradox Basin, Utah, U.S. (the
“Paradox project”).
We are supported and driven by our exceptional people and have
continued to bolster our team in the U.S. by way of several key
hires in operations and finance. Led by an experienced executive
leadership team with a proven track record, I believe this will
enable us to deliver on our strategy and, in-turn, generate value
and responsible growth for all our stakeholders.
BOE
600,000
500,000
300,000
200,000
100,000
$0
2020
2021
2022
2023
REVENUE (US$)
$50,000,000
$40,000,000
$30,000,000
$20,000,000
$10,000,000
$0
2020
2021
2022
2023
Zephyr Energy plc Annual Report and Financial Statements 2023 Strategic report Chairman’s statement
As always, the health, safety and welfare of the team and
contractors is of prime importance. We have a zero-harm safety
culture focused on continuous improvement to achieve an
injury-free and safe work environment. The Board is pleased to
report that during the period there were no Lost Time Injuries (“LTIs”).
The Board is also committed to ensuring that the actions and
investment decisions it makes are in line with our core values
of being responsible stewards of investors’ capital and of the
environment. This includes our commitment to minimising our
environmental impact through positive actions and to protect
the surroundings in which we operate.
After months of meticulous planning, I was delighted that we
managed to successfully drill the State 36-2R LNW-CC well
(the “State 36-2R well”). Drilling operations delivered on all the
key objectives, and we look forward to the commencement of
the production test which will soon allow us to understand the
full potential of the well. This will hopefully be the catalyst for
an exciting and transformational period ahead.
I am pleased to point to several examples of key stakeholders
who have worked with and supported the Company over the
recent months demonstrating a strong endorsement of the
Company and the way in which we operate.
In this respect, I was incredibly proud of how we responded
to the well control issue on the State 36-2 LNW-CC well (the
“State 36-2 well”) in April 2023. The incident was a significant
event for our team but the response, in a difficult and fast-
moving situation, was well executed despite the challenges
faced. There were several important lessons learned from the
incident, but a key takeaway for me was the professionalism
and commitment of our team in addressing the situation in a
responsible manner. It is further credit to the team that the
incident was closed-off with no LTIs or long-term environmental
damage and that we managed to get our day-to-day operations
back on track to the point that drilling operations recommenced
on the Paradox project within twelve months of the incident.
Sturdy and honest relationships, formed over the years of
working with multiple state and federal regulators, proved
of great benefit during the well control issue and subsequent
permitting of the State 36-2R well. The relationship and
knowledge-sharing partnership with the U.S. Department
of Energy and the University of Utah continues to benefit
all parties, and further non-dilutive grant funding has recently
been made available to the Company. Further, the supportive
relationship with a key debt provider, SGR Investments LLC,
as evidenced by the conversion of a sizeable portion of their
existing debt into Zephyr’s equity at the prevailing market price.
I am proud that the Company is recognised by those with whom
we work closely as a professional and quality operator.
7
Zephyr Energy plc Annual Report and Financial Statements 2023 Strategic report Williston project
Our non-operated assets continue to deliver strong cashflows,
allowing us to proceed with our ongoing Paradox project
development, and have been of critical importance during
the period in which we managed the well control incident.
Our robust and diverse portfolio of non-operated production
and near-term production assets were acquired for their
low-risk, high-return cashflow potential. Since 2020, we have
completed 14 discrete acquisitions with a portfolio of interests
taking production from zero to a current run rate of over 1,200
barrels of oil equivalent per day (“boepd”).
At 31 March 2024, we had 230 wells in our portfolio available for
production and our net working interests now average 7.1% per
well (equivalent to 16.3 total wells).
Environmental, Social and Governance (“ESG”)
As we grow and transform the Company, we continue to foster
a safe working environment and maintain active relations in the
communities in which we operate. Sustaining our local communities
through environmental stewardship, social responsibility and
strong corporate governance is an extension of our mission
and reflects our goal to make a lasting and meaningful positive
impact in these communities.
I am pleased that we continue to pursue carbon-neutral status
as an oil and gas producer. This is achieved through our Verified
Emission Reduction credits (“VERs”) programme, which aims to
offset all Scope 1 carbon emissions from both our operated and
non-operated assets, and which is administrated through the
Prax Group (“Prax”), a leading UK- based energy trading company.
Chairman’s statement
Operational activity
Paradox project
During the period under review, Zephyr saw a recalibration at the
Paradox project following the discovery of a major and productive
natural fracture network and the subsequent well-control incident
on the State 36-2 well.
What followed was a period of considerable activity to address
the impacts of the well control incident. Once resolved, and after
extensive due diligence, workover operations and confirmation
that our well control insurance would cover substantially all costs
associated with the redrill, the Board concluded that redrilling
the State 36-2 well was the optimal path forward to harness the
significant discovery made by the well.
Following the Board’s decision, Zephyr’s team commenced
detailed internal well-planning processes (supplemented by
multiple high-pressure/high temperature specialist service
providers) which resulted in an augmented well plan. Once
sundry permit approvals were granted, swift progress was made
by our operational team with the award of the drilling permit and
securing a rig contract with Helmerich & Payne (“H&P”), to
enable full drilling operations to commence in April 2024.
We were delighted to recently announce that drilling operations
on the State 36-2R well were completed safely and successfully
and that all key objectives had been met. During the upcoming
production test, the well will be flowed and production tested to
determine reservoir pressure, fluid composition, well flow rate,
bulk reservoir permeability and to deliver an early estimate of
the overall potential recoverable resources.
The drilling successes achieved to date have given added
impetus for the Group to secure an infrastructure solution for
the gas produced from the Paradox project, and in September
2023 we noted the commissioning of the Green River pipeline
owned by Dominion Energy LLC, Utah (“Dominion”). The pipeline
crosses Zephyr’s acreage position and has the potential to
provide a nearby route for gas export from our Paradox acreage.
We are continually looking at ways to increase the scale, optionality
and attractiveness of the Paradox project, and our new farm-in
opportunity in the Salt Wash helium field is another exciting
development. Our team has studied the potential to redevelop
the remaining reserves of the Salt Wash Field, which lies directly
to the south of our White Sands Unit (the “WSU”), utilises the
same road network, and has similar oil and gas potential in the
Paradox Formation as the WSU. While helium is a new addition
to our resource exposure, many nearby Paradox Basin oil and gas
operators are already producing comingled helium in commercial
quantities, with an active local offtake market for produced helium.
While the Group is not looking for helium to become a primary
focus, the Group is cognisant that it may offer optionality and
represent a value-added opportunity for the Paradox project. We
expect to partner with industry participants to help appraise and
fund the potential of this resource while also taking advantage of
our regional knowledge, existing operations and asset platform.
8
Zephyr Energy plc Annual Report and Financial Statements 2023 Strategic report Chairman’s statement
Financial
For the 2023 financial year, the Group reported revenues of
US$25.2 million (2022: US$41.1 million) and a gross profit of
US$7.2 million (2022: US$22.4 million).
These results were largely in line with our expectations, reflecting
the lower oil price environment over the period, normal decline on
the non-operated portfolio wells, and delays to the six wells operated
by Slawson Exploration Company (“Slawson”) coming online.
The Slawson wells are now online, albeit still not at full capacity.
At the date of this report, production information indicates that
the wells remain partially curtailed, likely due to gas infrastructure
constraints.
Conclusion
I would like to extend my appreciation to the team and our contractors
for their work during the past year to deliver on the development of the
Paradox project and on our wider strategy. I would also like to extend
my gratitude to my fellow Board members, leadership team, advisors
and most importantly our Shareholders for their continued support.
The Board is looking to the future with a high degree of confidence
as we continue to deliver on our vision of ‘opening up the next
prolific onshore U.S. oil and gas play’ and delivering value for all
stakeholders.
We have an exciting period ahead of us and I believe we have the
pieces in place to enable us to deliver on our strategic objectives
successfully
RL Grant
Chairman
26 June 2024
9
Zephyr Energy plc Annual Report and Financial Statements 2023 Strategic report Our strategy and investment
proposition
Our strategy
Our strategy remains clear, build cashflow
generation from our non-operated portfolio
(Williston Basin and other core basins) to
systematically develop our flagship Paradox
project.
We are focused on long-term production of
profitable volumes of oil and gas across our
portfolio.
We are focused on growth both organically and
through value-accretive opportunities whilst
maintaining strong financial controls and
cautious risk management.
Our strategy is underpinned by our values
and commitment to be a trusted partner and
ambassador to create positive impact for all
stakeholders.
Our three strategic pillars:
1
ACQUIRE
production assets in
U.S. basins
•• Acquire working interest positions in
value accretive, high-quality, cash
generative production and growth
assets
•• Utilise cash generation from portfolio
to develop flagship Paradox project
2
REINVEST
in the Paradox
project
•• Further define Paradox project and
materially increase reserve base
•• Increase land position and acquisition
of infrastructure to further reduce
forecast expenditure
MAINTAIN
VALUES
3
•• Responsible stewards of:
- Investors capital
- The environment
“ The Board is looking to the future with a high degree
of confidence as we continue to deliver on our vision
of opening up the next prolific onshore U.S. oil and
gas play and delivering value for all stakeholders.“
10
Zephyr Energy plc Annual Report and Financial Statements 2023 Strategic report
Zephyr Energy plc Annual Report and Financial Statements 2023
Strategic report
Our strategy and investment proposition
Investment proposition
Our balanced portfolio of operated and
non-operated assets continues to yield strong
results. Growth of our non-operated portfolio has
been considerable with revenues increasing from
nil to over US$25 million over the last three years,
with sales volumes of 403,877 boe for FY 2023.
NON-OP
TRACK
RECORD
•• From inception to 31 December 2023,
the non-op portfolio delivered
operating income of circa US$52.9
million, with all its cashflow reinvested
•• To date, Zephyr’s drilling
investments have paid back in less
than 20 months. Newer investments
are projected to pay out in shorter
time frames at current strip prices
BALANCED
DE-RISKED
PORTFOLIO
with asymmetrical
upside potential
•• Stable cashflows from the
Williston project to be invested
in the Paradox project
•• Modern seismic, detailed core,
log and pressure data
•• U.S. Department of Energy grant
funding and academic partnership
SIGNIFICANT
DEVELOPMENT
OPPORTUNITY
•• Paradox project: 46,000+ acre
position with significant inventory
in an emerging basin where modern
drilling and completions have not
been used prior to Zephyr
•• Significant inventory across the
Paradox project, with 2U potential
of over 270 mmboe
•• Further upside through exposure
to the Salt Wash Field helium play
TEAM
POISED
TO DELIVER
•• A growing operational team
proportional to Paradox activity
•• Track record of delivering sustainable
growth for energy companies
ESG
FOCUS
NEAR-TERM
CATALYSTS
•• Limit our own carbon emissions
•• State 36-2R production testing
through our VERs credit programme
with a goal to mitigate all Scope 1
carbon emissions
•• Proactive engagement with the
communities in which we operate
underway
• • Drilling the Salt Wash Field,
increasing resource exposure
•• Updated Paradox CPR
11
Xxxx
Chief Executive Officer’s report
and operating review
Principal objectives and strategies
Zephyr Energy plc is an oil and gas exploration and production
group operating in the Rocky Mountain region of the U.S.
The Group’s stated mission is to open up the next prolific
onshore U.S. oil and gas play through the development of its
flagship Paradox project. The two core values of the Group are
to be responsible stewards of investors’ capital and responsible
stewards of the environment.
To achieve this mission, the Group has prioritised:
•• Building a team with significant experience in the U.S. oil and
gas sector, with a particular focus on operations, development,
governance, finance, merger, acquisition, and turnaround
experience. The Group has strengthened the operational team
significantly during the 2023 financial year with several key
appointments and promotions;
•• Maintaining a clear strategic direction - we are wholly focused
on responsible exploration and production assets in the Rocky
Mountain region;
•• The development of a non-operated asset portfolio that
provides cashflow to be reinvested in the Paradox project;
•• A continued focus on meaningful ESG efforts, including
corporate governance compliance, pursuing carbon-neutrality
across our operations, and proactive engagement with the
communities in which we operate;
•• The leveraging of partnerships (such as the U.S. Department of
Energy, experienced operators in the basins in which we operate,
and relationships with our debt providers and Shareholders);
•• The design and build of a technology-led acquisition process
which can rapidly assess opportunities of further interests
through acquisition, farm-in agreements or joint venture
arrangements; and
•• Tight financial control and cash conservation.
Review of operations and future developments
Overview
The 2023 financial year, and the period since, were a time of sustained
progress and activity for Zephyr despite an unwelcome operational
setback with the well-publicised State 36-2 well control issue.
The Group continues to lay the foundations to bring the Paradox
project into commercial production, and in doing so will deliver
on the Board’s core mission of unlocking the next prolific onshore
oil and gas play in the U.S.
Having made excellent progress in rectifying matters following
the well control incident on the State 36-2 well, we subsequently
recommenced our drilling operations, and the recent drilling of
the State 36-2R well means we have now fully resumed our
Paradox project activity and the wider project development.
In addition to our planned activity on the Paradox project,
we expect to see increased cashflows from our non-operated
assets over the course of the next financial year, particularly
“ The Group’s stated mission
is to open up the next
prolific onshore U.S. oil
and gas play through the
development of its flagship
Paradox project“
12
Zephyr Energy plc Annual Report and Financial Statements 2023 Strategic report
Chief Executive Officer’s report and operating review
now that the Slawson wells are online. Planning is underway to
develop our new farm-in project in the Salt Wash natural gas and
helium field. The Salt Wash project will likely be undertaken in a
financial partnership with industry participants.
I feel that we can look forward to the next period with a degree
of optimism and excitement as we look to further unlock the
value from our strong asset portfolio for our Shareholders.
Paradox project – operated asset
Background
The Board continues to believe that the Paradox project has
considerable scale and economic potential.
The Paradox project is an operated lease holding of over 46,000
gross acres, 25,000 acres of which has been assessed, by
third-party consultant Sproule International (“Sproule”), to hold,
net to Zephyr, 2P reserves of 2.6 million barrels of oil equivalent
(“mmboe”), 2C resources of 34 mmboe and net unrisked 2U
resources of 270 mmboe.
The Group’s land management strategy continues to be active
and has resulted in a defensible and growing land position which
Zephyr’s Board believes is increasingly difficult to replicate in
today’s increasingly regulatory and political environment.
To date, all three wells drilled by Zephyr at the Paradox project
have discovered hydrocarbons, and the project appears capable
of being transformed into commercial production once the wells
are tied into natural gas infrastructure.
Drilling activity to date has provided the Group with a wealth
of new reservoir information which has in turn resulted in a far
greater geological understanding of our acreage position.
This information includes strong evidence of:
•• A continuous resource play (tight oil and tight gas);
•• Repeatable petrophysics across a large area;
•• Geology which correlates with the seismic results;
•• Consistent reservoir thickness within a sub area;
•• High reservoir pressures;
•• High matrix permeability for a resource play;
•• A reservoir which can be stimulated (with favourable rock
mechanics albeit under high stress); and
•• The presence of productive natural fractures.
Based on this, the Board believes that the Paradox project
contains substantial potential upside and is fully focused on
continuing the work required to develop the acreage into a
revenue generating project.
The Board is delighted that Dominion’s 16-inch gas export
pipeline which extends across the Paradox project has now been
completed. This off-take solution directly crosses over Zephyr’s
asset base and provides the potential for the commercial export
of natural gas from our wells to the sales market.
Timeline
2024
• Salt Wash Field update
• Paraodx Basin updated CPR
• State 36-2R production testing
• State 36-2R drilled
• Zephyr agrees to farm into the proven
Salt Wash Field, further expanding
acreage position
2023
• Dominion finishes pipeline extension
and is capable of accepting gas volumes
• 36-2 hits major natural fracture and
28-11 well re-started with oil production
2022
• Additional Paradox Basin acreage
acquired
• Unit-level gas pipelines and processing
infrastructure acquired by Zephyr
• Dominion Energy, one of the U.S. largest
utilities, acquires the 16” pipeline leading
to the drilling unit with plans to refurbish
and extend it
2021
• U.S. Government approval for formation
of new 25,000 acre federal drilling unit
• 16-2 Horizontal lateral drilled, stimulated
and tested - a first for the basin and with
resulting peak initial production rates
above 1,100 boe/d
2020
• 16-2 well drilled to Cane Creek reservoir
in record time, with evident hydrocarbon
shows
• U.S. Government grant award to fund
initial vertical well (which confirmed
movable hydrocarbons and seismic tie
to actual geological conditions)
2018
• 25,000 acres of modern 3D seismic
acquired and processed – best seismic in
the basin
1313
Zephyr Energy plc Annual Report and Financial Statements 2023 Strategic report Chief Executive Officer’s report and operating review
State 36-2 well
In November 2022, the Group announced that drilling on the
State 36-2 well had commenced with the prime objective to
target potential production from the Cane Creek reservoir.
Drilling operations continued into 2023.
Results from the drilling operations indicated that the well
penetrated a folded and naturally fractured Cane Creek reservoir,
features which have been highly productive in Cane Creek wells
drilled by other operators. Pore pressure analysis suggested that
the well encountered very high reservoir overpressure, with
formation pressures estimated at around 9,300 pounds per
square inch (which is broadly consistent with previously drilled
offset wells).
The well further delineated the presence of natural gas and
condensate within a large structural compartment at a new
location within Zephyr’s acreage and 3D seismic coverage,
and provided additional confirmation of Zephyr’s model for
hydrocarbons in place across its entire acreage position.
State 36-2 well production test and well control incident
On 8 March 2023, the Group announced that planning for the
production test on the well had been completed and that all
services for the test had been procured. A service rig was
mobilised to the well-site and operations on the ground
commenced. Workover operations (which were to include
perforating the well in the productive portion of the Cane Creek
reservoir) and subsequent production testing were estimated to
take four to six weeks. As the well was expected to flow from
natural fractures, no hydraulic stimulation was expected as part
of this test.
On 7 April 2023, as workover operations were being completed,
the well experienced a control issue despite multiple attempts
to secure the well by the rig crew. The incident was initially
caused by a downhole barrier failure and then a subsequent
failure of a surface safety valve, which resulted in hydrocarbons
being released from the well.
In keeping with safety procedures, all personnel were safely
evacuated without injury. All relevant authorities were notified
and a specialist well control team (recommended by the Group’s
insurers) was deployed to bring the well under control as quickly
as possible.
Ultimately, well control efforts were successful and remediation
and clean–up operations completed. A third-party confirmatory
environmental survey was subsequently undertaken and the
results found no evidence of any environmental impact. The
relevant authorities confirmed that the remediation satisfied
regulatory standards.
During the incident, multiple joints of the well’s 2 7/8-inch
production tubing were compromised, and Zephyr’s operations
team worked methodically to remove and inspect the joints
while keeping the wellbore static. Operations to retrieve the
damaged tubing progressed slower than expected due to the
poor condition of the tubing, as exhibited by the multiple
damaged and buckled joints retrieved that led to the need for
milling operations. Ultimately operations did not result in sufficient
recoveries to justify the continuation of the ongoing cost of this
well work versus the estimated cost to redrill the well.
Therefore, and following consultation with our regulators and
insurers, the Board elected to proceed with a redrill of a
“twinned” well, the State 36-2R well, from an adjacent location
on the same drilling pad.
The Group retains full well control insurance coverage and
expects to recover substantially all costs associated with the
well control incident and the drilling costs associated with the
redrill. At the date of this report, circa US$12 million has been
recovered in respect of the incident.
State 36-2R well
Over the last few months of 2023, with the aim of ensuring an
optimal drilling outcome for the State 36-2R well, Zephyr’s team
commenced a detailed internal well-planning processes
(supplemented by multiple high-pressure/high temperature
specialist service providers) and continued its extensive
interaction with the Group’s well control insurance providers.
This process culminated in an updated drilling plan which was
then submitted to state and federal regulators for approval.
In February 2024, the Group announced that it had received the
regulatory approvals and permits required to proceed with the
redrill and in March 2024, following a detailed selection process,
Zephyr announced that it had signed a rig contract with H&P for
its Rig 257 to drill the well.
“ The Board’s strategy is to utilise the majority of the considerable
cashflows generated from the non-operated Williston Basin
portfolio in the Paradox project development programme,
and this organic growth strategy will continue.“
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Zephyr Energy plc Annual Report and Financial Statements 2023 Strategic report Chief Executive Officer’s report and operating review
The key objectives of the State 36-2R well were:
•• To successfully complete drilling operations to total depth
safely and without harm to people, the environment or equipment;
•• To successfully twin the State 36-2 well and intersect the same
Cane Creek reservoir natural fracture system identified by it;
•• To confirm the presence of hydrocarbons as found by the
State 36-2R well, and further appraise the Cane Creek
reservoir at Zephyr’s federal WSU; and
•• Should the original well result be replicated, to assess the
reservoir productivity by flow testing the new well.
In April 2024, the Group announced that full drilling operations
had commenced and the surface section of the well had been
spud. By June 2024, the Group announced that the well had been
completed safely and successfully, with the well drilled to a total
depth of 10,290 feet (measured depth) where it intersected the
same Cane Creek reservoir within 15 feet of the original wellbore
and its natural fracture network. This means that the three of the
four key objectives for the well have now been met.
Zephyr has mobilised the equipment for completion and
production testing of the naturally fractured reservoir zone that
was intersected during drilling operations and production testing
is expected to be underway shortly.
Initial analysis from drilling indicates that the State 36-2R well, like
the State 36-2 well, penetrated a folded and naturally fractured
section of the Cane Creek reservoir. The well encountered drilling
mud gas shows of a similar magnitude to the original well and
pore pressure analysis suggest formation pressures estimated
at approximately 9,300 pounds per square inch (which is broadly
consistent with previously drilled offset wells).
The well further confirms the presence of hydrocarbons within
a large structural compartment, within Zephyr’s acreage and 3D
seismic coverage. During the ongoing production test, the well
will be flowed and production tested to determine reservoir
pressure, fluid composition, well flow rate, bulk reservoir
permeability and deliver an early estimate of the overall potential
recoverable resources.
State 16-2LN-CC well update
Following on from the successful drilling, completion and
production test of the State 16-2LN-CC well (the “State 16-2
well”) in 2022, the first phase of the extended production testing
on the well was completed within the flare consent limit set by
the regulatory bodies, and Zephyr subsequently tested the well
a second time in March 2023 to commission surface facilities,
improve flow assurance and to gather more production data.
This second well test was hampered by severe weather and initial
surface facility commissioning issues which resulted in delays to
the programme and, at times, intermittent operational activity.
Once the start-up commissioning issues had been successfully
resolved the well was initially brought online at choked-back,
moderate rates to test for flow assurance at varying levels of
production. At a controlled rate of 2 million cubic feet of gas per
day and 100 barrels of oil per day (an average of 433 boepd) the
well flowed continuously and surface flow assurance efforts
proved successful.
As flow rates were increased above those levels, well performance
became limited by freshwater pumping capacity and was
subsequently impacted by the formation of down-hole salt
precipitate. The precipitate, which blocked and was subsequently
cleared multiple times, impacted the well’s flow capacity to
achieve extended higher rates. The Group was in early stages of
testing higher rates when its mandated flaring limits were reached.
The operational team is assessing whether the precipitate issue
is a function of continued flow back of injected completion
fluids or a function of normal flowing conditions. Under either
scenario, the Group has planned mitigation solutions in place
and plans to test these solutions in the coming months (subject
to regulatory approvals and gas export availability) in order to
fully determine the potential of the reservoir at this location.
Working interest acquisition, WSU restructuring and
acreage acquisition
As outlined above, we continue to take a number of steps to
strengthen the Paradox project land position which will be
critical for the long-term success of the project.
In February 2023, Zephyr announced that it had completed its
acquisition of the remaining 25% working interest in the core
acreage of the Paradox project from Rockies Standard Oil
Company LLC (“RSOC”).
The total consideration payable for the working interest is up to
US$3 million, payable by way of the issue of new Ordinary
Shares of 0.1 pence each in the capital of the Company at a
price of 6.05 pence per new Ordinary Share, representing a circa
11% premium to the Company’s mid-market closing share price
on 20 December 2022.
•• A first tranche of 13,483,095 new Ordinary Shares was issued
to RSOC on the completion of the acquisition; and
•• A second tranche of 26,966,189 new Ordinary Shares will be
issued upon Zephyr’s final investment decision with respect to
the contract award to a primary contractor to commence
construction activities to make the Powerline Road gas
processing plant operational.
The acquisition provided an immediate opportunity for Zephyr
to consolidate its working interest in the core acreage of the
Paradox project and includes the following assets:
•• The remaining 25% interest in the State 16-2 well (with an
estimated NPV-10 of US$3.1 million);
•• The remaining 25% interest in the State 36-2 well; and
•• Zephyr retains its 100% ownership in the infrastructure assets
acquired in 2022.
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Zephyr Energy plc Annual Report and Financial Statements 2023 Strategic report Chief Executive Officer’s report and operating review
The acquisition was also immediately accretive across all reserve
and resource categories. Zephyr’s technical team estimated that
the acquisition adds:
•• Over 450,000 barrels of oil equivalent (“boe”) in 2P Reserves;
•• Over 7 million boe in 2C Contingent Resources; and
•• Over 67 million boe of 2U unrisked Prospective Resources.
In late 2022, the Group announced the acquisition of additional
Paradox Basin acreage adjacent to its WSU deemed by the
Board to have immediate development potential.
The acquired acreage was largely covered by Zephyr’s existing
3D seismic, and directly bordered the Zephyr lease on which the
State 36-2 and State 36-2R wells are located, and with access to
pre-existing surface infrastructure which Zephyr subsequently
acquired.
A portion of the acquired acreage was envisioned to be added
to the WSU, subject to approval from the U.S. Bureau of Land
Management (the “BLM”) for which the Group applied in early
2023. In July 2023, Zephyr announced that this approval was
granted as part of larger expansion/contraction amendment of
the WSU. As part of the approval, 5,000 high-graded acres with
near-term development potential were added to the WSU, and
roughly 5,395 acres deemed by the Group to be less suitable for
future development were relinquished.
These actions are part of the Group’s active and ongoing portfolio
management of its project position. The Board is pleased with its
ongoing BLM interactions which resulted in an amended federal
unit with an upgraded and manageable acreage position - a position
increasingly difficult to replicate in today’s regulatory and
political environment.
In August 2023, the Group announced an agreement to increase
its land position through the targeted acquisition of an additional
640 leased acres deemed by the Group to be prospective for
mid to long-term development.
The new acreage is on Utah School and Institutional Trust Lands
Administration (“SITLA”) lands and was secured during a SITLA
auction. The acreage is close to the Group’s existing WSU and
gas export infrastructure.
Greentown wells
In July 2023, the Group announced that it had commenced an
assessment of five existing wellbores (located in the WSU)
acquired as part of a larger acquisition of infrastructure assets in
2022. Several of the existing wells are former producers of
hydrocarbons and were subsequently shut-in due to lack of
operating infrastructure. Others were deemed to have potential
future use as salt water disposal wells or as producers of salt
water brine for potential extraction of lithium resources.
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Zephyr Energy plc Annual Report and Financial Statements 2023 Strategic report Chief Executive Officer’s report and operating review
As part of this assessment, Zephyr commenced production
from the Greentown Federal 28-11 well (the “28-11 well”) in order
to understand the well’s potential contribution to overall field
production when ongoing field infrastructure work has been
completed. Hydrocarbons were produced from the well, with
condensate volumes collected for sale and natural gas volumes
being flared within mandated limits.
Historically, the 28-11 well produced over 0.36 billion cubic feet
(“bcf”) of gas and 93,000 barrels of oil prior to being shut-in due
to a pipeline shut-down.
Farm-in to Salt Wash helium field
In October 2023, the Group announced that it had opted to
farm-in to the Salt Wash Field to increase the Group’s oil and gas
resource potential, and to achieve exposure to the U.S. industrial
helium market. The farm-in is to a minimum 75% working interest
in a 1,047-acre leasehold position in the Salt Wash Field which
lies three miles to the south of the Group’s WSU. The Board
views the farm-in as a natural extension to the Paradox project.
The field has an already discovered, proven helium resource in the
Leadville Formation, with further opportunity for upside through
two deeper helium exploration targets.
The Group’s management forecasts the Salt Wash project to include:
•• Net helium discovered resource potential of 0.07 to 0.19 bcf
(Lower Leadville Formation only);
•• Net helium un-risked, prospective resource of a further 0.04
to 0.66 bcf (including exploration targets); and
•• An estimated net present value at a 10% discount rate
(“NPV-10”) of circa US$58 million with the risked upside case
having an NPV-10 of circa US$120 million (using US$650 per
thousand standard cubic feet (“mscf”) and US$750/mscf
pricing, respectively).
Under the terms of the farm-in agreement, payments totalling
US$0.6 million were made to the incumbent leaseholder and it is
the Group’s intention that the dual-purpose Leadville Formation
delineation well (the “Commitment Well”) will be drilled. The
Commitment Well would also test the two additional helium
exploration targets and other potential hydrocarbon bearing
reservoirs. The Group expects to partner with industry participants
to help finance the Commitment Well and appraise and fund the
potential of this resource while also taking advantage of our
regional knowledge, existing operations and asset platform.
Dominion pipeline availability
In September 2023, the Group was notified by Dominion that its
gas supply pipeline from the Northwest Gas Pipeline system to
the Green River area was operational.
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Zephyr Energy plc Annual Report and Financial Statements 2023 Strategic report Chief Executive Officer’s report and operating review
Williston project – non-operated asset
Overview
In 2021, Zephyr stated that one of its key goals was to establish
production and positive cashflow either through its existing
portfolio (the Paradox project), via acquisition, or through a
combination of both. The Williston project, following 14 discrete
acquisitions, continues to deliver on this goal with 2023 production
of circa 1,040 boepd, net to Zephyr, and corresponding revenues of
circa US$25 million for the year.
At 31 March 2024, Zephyr had working interests in 230 wells that
were available for production. The working interests are in prime
locations, and the majority of the wells are operated by Chord
Energy Corporation, a leading Williston Basin producer.
The Group’s non-operated portfolio continues to perform above
the Board’s initial expectations, and the cashflow from the portfolio
proved to be critical in 2023 as the Group managed the fallout from
the well control issue on the State 36-2 well.
The Group will continue to develop and grow its non-operated
portfolio through opportunistic acquisitions.
2023 summary and outlook
2023 production from the non-operated portfolio averaged circa
1,040 boepd net to Zephyr, down from 1,410 boepd in 2022. 2023
full-year production was lower than in the previous year due to
the standard decline of the portfolio and delays to the six Slawson
wells coming online in which Zephyr has significant working interests.
2023 revenues were US$25.2 million, compared to US$41.1
million in 2022, impacted by the aforementioned decline as well
as a substantially lower commodity price environment. The
average realised price per barrel of oil was US$78 in 2023, with
a fully blended realised price of circa US$65 per boe (including
gas and NGLs). Average operating expenditure in 2023 was
US$19.93 per barrel demonstrating the high margins available on
the Williston project production in the recent pricing environment.
At 31 December 2023, 225 wells in the portfolio were available
for production, and net working interests across the Williston
Basin non-operated portfolio averaged 8% per well, equivalent
to 15.1 total wells net to Zephyr, all of which utilised horizontal
drilling and modern, hydraulically stimulated completions.
The Slawson wells are expected to give a boost to production
in 2024. The average daily production rate from the portfolio in
March 2024 was 1,212 boepd (versus 1,053 boepd in the fourth
quarter of 2023), reflecting the impact from the Slawson wells
being online, albeit not at full capacity. At the date of this report,
production information indicates that the wells remain partially
curtailed, likely due to gas infrastructure constraints.
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Zephyr Energy plc Annual Report and Financial Statements 2023 Strategic report Chief Executive Officer’s report and operating review
Slawson wells
In December 2022, Zephyr announced the acquisition of working
interests in the six Slawson wells (equivalent to 1.1 total well) near
to Zephyr’s existing non-operated working interests for a total
consideration of US$2.9 million. In addition, Zephyr paid the
US$8.9 million capital expenditure (“CAPEX”) associated with
the working interests to bring the wells into production.
The wells are operated by Slawson, a top-tier operator and one of
the largest private companies in the Williston Basin. Slawson was
an early pioneer of horizontal development in the Williston Basin
and has excellent access to oilfield service companies and
infrastructure.
Zephyr’s working interest in the six new wells ranges from 11% to
32% and management estimates 2P Reserves acquired are circa
550,000 boe, net to Zephyr.
These new wells were originally expected to provide a sizeable
production boost to the Group in the 2023 financial year (having
been spud in November 2022 and expected online in the first half
of 2023). However, delays were experienced due to issues with
the completion of surface facilities on the well pad. The wells
eventually came online on 1 November 2023 with initial flow rates
exceeding management expectations, with production data
adjusted for uptime showing an average flow rate of 897 boepd,
net to Zephyr during the wells initial month of production.
Production from the Slawson wells was subsequently temporarily
curtailed in mid-December 2023 due to adverse weather conditions
and infrastructure constraints, and production resumed in late
January 2024. At the date of this report, the wells are currently
producing albeit not at full capacity as they remain partially
curtailed likely due to gas infrastructure constraints.
While the delays in production from the Slawson wells has been
frustrating, management believes that performance from the
wells will ultimately meet expectations, with an increase to the
Group’s overall production expected in 2024 as a result of
production from the wells
Further production additions
During February 2024, ten wells in which Zephyr holds working
interests and which are operated by Continental Resources
(Harms Federal and Quale Federal) were placed in production.
Early production data shows these wells performing ahead of
management expectations, adding initial production rates, net
to Zephyr, of circa 75 boepd.
Hedging
In May 2023, the Board elected to enter into additional oil hedge
agreements given that most of the hedges acquired in 2022 had
since crystallised. Volumes hedged for the nine months ending
31 December 2023 were increased from 94,000 barrels (“bbls”)
to 137,000 bbls, at an average hedged production price of
US$84.76 per barrel of oil, with BP Energy Company (“BP”), one
of the world’s leading energy trading houses, continuing to serve
as the counterparty.
At 31 December 2023, the Group had hedged 27,000 barrels of
oil over the first quarter of 2024 at a weighted-average price of
US$82.20 per barrel of oil. In April 2024, a further 76,000 barrels
of oil were hedged over the remainder of 2024. 40,500 barrels
of oil were hedged at a price of US$80.91, with the remaining
35,500 barrels of oil being hedged by way of financial collars
which enable the Group to lock-in a minimum price for these
barrels. Of these, 26,500 will give the Group a minimum price
of US$74 per barrel of oil with the remaining 9,000 guaranteeing
a floor price of US$69 per barrel of oil.
Corporate
In June 2023, the Company raised gross proceeds of US$3.9 million
(£3.2 million) by way of a placing of 90 million new Ordinary
Shares of 0.1 pence each in the Company at a price of 3.5 pence
per new Ordinary Share which was supported by a range of
existing institutional and other investors, including Premier Miton.
During the period the Group strengthened its team in the U.S.
through the appointment or promotion of several key individuals
including:
•• Andy Lee - appointed Chief Financial Officer (U.S.)
•• Heather Hatfield - appointed Chief Accounting Officer
•• Ryan Walter - promoted to Vice President - Operations
All three officers are based in Denver, Colorado.
In April 2024, the Company issued a total of 61,503,028 share
options to Directors, certain employees and consultants of
Zephyr, either to reflect historic awards under the Company’s
Long-Term Incentive Plan, bonuses for performances achieved
in 2021 and 2022, to satisfy employee contractual commitments
or commitments in lieu of deferred remuneration and fees from
2020, during the COVID-19 pandemic.
In May 2024, the Company retired US$3.88 million of existing
debt through the issuance of US$3.88 million of equity
comprised of 64,045,768 new Ordinary Shares of 0.1 pence
each in the Company at a price of 4.85 pence per new Ordinary
Share. The issue price of the Ordinary shares was the
undiscounted mid-market closing price of the Company’s
Ordinary Shares on 2 May 2024.
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Zephyr Energy plc Annual Report and Financial Statements 2023 Strategic report Chief Executive Officer’s report and operating review
The Ordinary Shares were issued to SGR Investments LLC (“SGRI”),
a US-based institutional investor. In December 2022, SGRI
provided debt funding to Zephyr Williston LLC, one of the Group’s
subsidiaries, to enable it to acquire the Slawson wells.
In May 2024, the Group announced that it had been awarded an
additional US$250,000 of non-dilutive grant funding from the
U.S. Department of Energy (the “DOE”) for operations on the
State 36-2R well. This brings the total DOE grant funding made
available to the Group to US$3.65 million in recent years.
The grant is administered by the University of Utah’s Energy &
Geoscience Institute (“EGI”). Zephyr’s technical team continues
to work closely with the EGI, the Utah Geological Survey and
other Utah-based partners in utilising DOE research funds to fully
evaluate the potential overall productivity of the Paradox Basin.
In June 2024, the Group announced a new $5.6 million term
loan. The new term loan will amortise monthly over four years
and has an interest rate of 10% per annum. Proceeds from the
new term loan were used to repay the 12% SGRI loan, which has
now been fully repaid.
Significant decisions made
During the period under review, the Directors made several discrete
commercial decisions to ensure the continued growth of the
business and, particularly, the advancement of the Paradox project.
The most significant decisions were the approvals required in
respect of the State 36-2R well drill, the equity fundraise in
June 2023 and the debt for equity exchange in May 2024. All key
decisions were unanimously deemed by Board members to be
in the best interests of the Group. Details of these items can be
found in the relevant sections of this Annual Report.
Outlook
We are off to a strong start in the 2024 financial year with the
successful drilling operation at the 36-2R well and the increased
production performance from the Williston project now that the
Slawson wells are online.
Over the last few months, we have witnessed the value and
benefit of our two-tiered operating model with our non-operated
asset portfolio providing essential funds for growth of the Group
as a whole, and we look forward to the rest of the year with
confidence.
We would like to thank all Shareholders for their continued support.
JC Harrington
Chief Executive Officer
26 June 2024
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Zephyr Energy plc Annual Report and Financial Statements 2023 Strategic report Environmental, Social and Governance (“ESG”)
Robust management of ESG matters is at the heart of what we
do and how we work. The Board is unanimously committed to
ensuring that every action and investment decision the Group
makes is in line with our core values of being responsible
stewards of investors’ capital and responsible stewards of the
environment.
This includes the following points of focus:
•• Protecting the Group, safeguarding its existing asset base and
positioning it for attractive growth opportunities;
•• Seeking creative and beneficial funding opportunities to
unlock value from our existing asset portfolio, as evidenced by
the U.S. Government funding we received for our drilling
programme on the Paradox project;
•• Adopting a disciplined focus on growth via the acquisition of
producing or near-term development opportunities in the
Rocky Mountain region. In the current economic climate, we
believe that attractive, value-additive acquisitions are available
and may be acquired using non-traditional funding structures;
Environmental
Protection of the environment and robust environmental
management are of primary importance to the Board. The
Company is committed to minimising its environmental impact
through positive actions and to protect the surroundings in
which we operate.
We are committed to:
•• Limit our own carbon emissions through our VERs credit
programme with a goal to mitigate all Scope 1 carbon
emissions;
•• Comply with applicable environmental laws, regulations and
standards of the U.S. where we operate;
•• Operate in a safe manner to avoid spills, leaks or accidental
discharges of polluting materials;
•• Evaluate and utilise new technologies, such as solar and
battery powered control systems at our operated projects;
•• Minimise our land footprint by utilising efficient pad design
•• Tight financial controls and cash preservation which will enable
and co-location of wells;
the Group to continue trading effectively; and
•• Continuing to ensure management and the Board are aligned
with our Shareholders through significant ownership of shares.
•• Promote efficiency in our use of energy and water with the
aim of conserving natural resources;
•• Ensure that environmental accidents, incidents, near misses
and non-compliances are reported and investigated, and that
corrective and preventive actions are implemented as rapidly
as possible;
•• Monitor and evaluate our own and contractor proficiency and
conduct periodic audits to ensure our controls are effective
and that environmental standards are being achieved; and
•• Reporting transparently on our environmental performance
and the status of our environmental objectives and targets.
The Board is proud of how Zephyr conducted its operations in
the period under review, and particularly the response to the well
control issue on the State 36-2 well, and we will always strive to
adhere to our core values.
A major milestone was achieved when Zephyr announced its
intention to achieve carbon-neutrality across its Scope 1
operational footprint in 2021 and the Group continues to
strive for this throughout the 2023 financial year.
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Zephyr Energy plc Annual Report and Financial Statements 2023 Strategic report Social
Contributing to the communities in which we work is important to
the Board. It is essential that the Group conducts its operations in
such a way as to minimise the potential impact from our
activities and deliver positive outcomes in the communities
in which we operate.
We are committed to:
•• Complying with applicable social laws, regulations, and good
international industry practices;
•• Be active participants in our local communities and, in
particular, to be supporters of land and grassland conservation
projects in those communities;
•• Establishing suitable platforms to share all requisite information
regarding our operations with different stakeholders, including
local communities, and promoting dialogue and constructive
engagement;
•• Devising and implementing transparent and fair grievance
mechanisms for the communities in which we operate and for
our workforce, ensuring that grievances are recorded,
investigated and responded to in a timely manner; and
•• Supporting our colleagues in creating an inclusive and safe
environment for them to work.
Health and safety
Zephyr has a zero-harm safety culture focused on continuous
improvement to achieve an injury-free and safe work environment.
It is the Group’s policy to provide working environments which
are safe and without risk to health and provide information,
instruction, training and supervision to ensure the health and
safety of its employees. The Board is proud to report that during
the period there were no Lost Time Injuries (“LTIs”).
Environmental, Social and Governance (“ESG”)
As an integral part of this undertaking, Zephyr is collaborating
with Prax, a British multinational independent oil refining, trading,
storage, distribution and retail conglomerate dealing in crude oil,
petroleum products and bio-fuels. Prax, which is headquartered
in London and also has trading offices in Singapore and the
U.S., has worked with Zephyr to measure, reduce and mitigate
greenhouse gas emissions across Zephyr’s businesses, with
mitigation efforts primarily focused on the purchase of VERs
from reputable pre-vetted developers of sustainable projects.
This exercise includes Zephyr’s non-operated production assets
in the Williston Basin, North Dakota, U.S., and Paradox project
activity.
An excellent example of the type of mitigation project
supported by Zephyr is through the Group’s purchase of VERs
from a landfill gas capture / combustion project in South Jordan,
Utah. The project is overseen by third-party verifier NSF
Certification LLC.
The South Jordan Landfill is a 200-acre sanitary municipal solid
waste landfill in the Salt Lake area of Utah which has been in
operation for 50 years. The landfill gas capture and combustion
project commenced in 2005 and utilises a sophisticated gas
collection and control system (“GCCS”) which in turn fuels three
1.6MW generator engines. The new system replaced an open
flare process which had been utilised as the previous product
destruction process at the site.
In addition to a significant reduction in greenhouse gas
emissions resulting from the project’s methane capture
processes, the project provides the following multi-faceted
co-benefits:
•• Increased safety by avoiding methane migration, an issue that
many older landfills encounter;
•• Controls of odours and destroys toxic compounds that can
exist in landfills;
•• Reduction of emissions of volatile organic compounds and
other local pollutants;
•• Reduction of methane levels in groundwater are reduced,
resulting in cleaner water and air;
•• Conversion of waste into energy, and is a top renewable
energy source; and
•• Creation of construction, operations and maintenance jobs in
the state of Utah, the state in which Zephyr conducts all of its
operations.
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Zephyr Energy plc Annual Report and Financial Statements 2023 Strategic report Financial review
The 2023 financial year was characterised by further
investment in both the Paradox and the Williston projects.
Profitability and liquidity were down from the prior year primarily
due to delays in the Slawson wells coming online, the State 36-2
well drilling costs and the associated well control issue.
With the Slawson wells now online, profitability is expected to
increase again in the 2024 financial year.
Income statement
During the year ended 31 December 2023, the Group generated
revenue of US$25.2 million (2022: US$41.1 million), and reported
a gross profit of US$7.2 million (2022: US$22.4 million), which
includes a gain of US$0.4 million (2022: US$1.8 million) in respect
of the Group’s hedging programme.
Administrative expenses for the year were US$6 million (2022:
US$4.8 million). The increase from the 2022 financial year
highlights the expansion of the Group’s operational footprint to
provide it with the capacity and capability to develop, manage
and grow its operated and non-operated asset portfolios. The
increase also reflects expenditure incurred in appraising new
opportunities and other business development costs.
The Group reports foreign exchange losses of US$2.8 million for
the year (2022: gain of US$6.1 million) which is predominantly in
respect of unrealised losses on the restatement of intercompany
loans between the Company and its subsidiaries. These losses
arise due to the strength of sterling against the U.S. dollar at the
end of 2023.
Finance charges of US$3.5 million (2022: US$2.2 million) have
been charged in respect of interest charges and associated costs
relating to the Group’s borrowings and unwinding of discount on
decommissioning. See note 7.
During the year ended 31 December 2023, the Group has
recognised a deferred tax credit, and a corresponding reduction in
its net deferred tax liability, of US$1.6 million relating to unrelieved
tax losses and temporary timing differences arising in the U.S.
businesses (2022: US$2 million)
The Group reports a net loss after tax of US$3.5 million or
a loss of 0.21 cents per Ordinary Share for the year ended
31 December 2023 (2022: net profit US$19.3 million or a profit
of 1.26 cents per Ordinary Share).
Balance sheet
Total investment in the Group’s exploration and evaluation assets
as at 31 December 2023 was US$50 million (2022: US$38 million)
reflecting the ongoing investment in the Paradox project.
Total investment in property, plant and equipment as at 31 December
2023 was US$50.8 million (2022: US$51.8 million) reflecting
depreciation, depletion and amortisation, decommissioning
obligations and a working-interest disposal on the non-operated
asset portfolio.
At 31 December 2023, the Group has recognised US$0.3 million
(2022: 1.3 million) outstanding derivative contracts in respect
of its hedging programme at fair value, of which US$ nil (2022:
US$0.2 million) has been recognised in non-current assets and
US$0.3 million (2022: US$1.1 million) in current assets.
Trade and other receivables have increased by US$3.3 million,
primarily due to a provision of US$2.9 million in respect of
insurance recoveries relating to the well incident which had not
yet been recovered at 31 December 2023. These proceeds have
subsequently been received since the year end. See note 17.
Cash and cash equivalents as at 31 December 2023 were
US$3.6 million (2022: US$9 million). During the year, the Company
raised gross proceeds of US$3.9 million (2022: US$17.4 million)
through the placing of new Ordinary Shares in the Company.
The Group’s borrowings as at 31 December 2023 were
US$35.4million (2022: US$25.4 million). The increase in
borrowings over the year reflects the CAPEX for drilling
operations on the Paradox project. The rise in borrowings was
necessitated by the delay in the Slawson wells coming online.
Subsequent developments
In April 2024, the Company issued a total of 61,503,028 share
options to Directors, certain employees and consultants of
Zephyr, either to reflect historic awards under the Company’s
Long-Term Incentive Plan, bonuses for performances achieved
in 2021 and 2022 (the “Bonus Scheme”), to satisfy employee
contractual commitments or commitments in lieu of deferred
remuneration and fees from 2020, during the COVID-19 pandemic.
In May 2024 the Company retired US$3.88 million of existing
debt through the issuance of US$3.88 million of equity comprised
of 64,045,768 new Ordinary Shares of 0.1 pence each in the
Company at a price of 4.85 pence per new Ordinary Share.
The issue price of the Ordinary Shares was the undiscounted
mid-market closing price of the Company’s Ordinary Shares
on 2 May 2024.
In June 2024, the Group announced that it had fully repaid the
remaining US$6 million of the loan that it had with SGRI. This
was achieved largely through utilising proceeds from a new
US$5.6 million amortising term loan with First International Bank
& Trust (“FIBT”).
At 18 June 2024, the Group had cash and cash equivalents of
US$2.5 million.
23
Zephyr Energy plc Annual Report and Financial Statements 2023 Strategic report
Financial review
Key performance indicators
As part of Zephyr’s ongoing development of the Paradox project and the build-out of the non-operated portfolio in the Williston
Basin, the Board tracks its performance against indicators that reflect the strategic, operational and financial progress, as well as our
impact on society and the environment. These indicators allow the Board, management and stakeholders to compare Zephyr’s
performance to its goals.
Safety performance
Why we measure
Performance
••
••
The Group has a zero-harm safety
culture focused on continuous
improvement to achieve an injury-free
and safe work environment
••
••
We require employees and contractors
to work in a safe and responsible
manner and provide them with the
training and equipment to do so
There were no reported LTIs during the 2023
financial year (2022: nil)
The Group experienced a well control issue in the
2023 financial year while drilling the State 36-2
well. The incident was professionally managed and
did not result in any LTIs or long-term damage to
the environment
Adjusted EBIDA
Profit before tax adjusted
for DD&A, finance costs,
unrealised foreign exchange
gains / losses and unrealised
hedge gains / losses
Net production
••
Indicator of the Group’s cash
generation to fund expenditures and/
or return capital to Shareholders
••
••
Indicator of revenue generation
potential
Measure of progress towards
achieving production forecasts and
driving profitable production growth
Growth of Paradox project
reserve / resource play
••
Indicator of economic viability and
long-term production potential of
projects
••
••
••
••
••
••
••
••
••
2023 Adjusted EBITDA was US$11.8 million
2022 Adjusted EBITDA was US$28.7 million
The difference between the Adjusted EBITDA for
2023 and the prior year was primarily the result of
the standard production decline of the non-operated
asset portfolio, lower commodity prices in the year
and delays to the six Slawson wells coming online
2023 production of 407,600 boe.
21% decrease in production from 2022 production
of 514,650 boe
Decrease primarily the result of the standard
production decline of the non-operated asset
portfolio, lower commodity prices in the year and
delays to the six Slawson wells coming online
No changes to the Paradox reserves / resources
during the year
It is expected that a revised Competent Persons
Report on the Paradox project will be prepared in
the second half of 2024
At 31 December 2023, the Group had Paradox
Basin 2P reserves of 2.6 mmboe, 2C resources of
circa 34 mmboe and 2U resources of 270 mmboe
Carbon emissions
••
Zephyr Energy is committed to
sustainable and responsible oil and
gas production
••
••
Pursued Scope 1 carbon-neutrality from both
operated and non-operated assets
VERs credit partnership with Prax which aims
to mitigate all Scope 1 carbon emissions
CJ Eadie
Group Finance Director
26 June 2024
24
Zephyr Energy plc Annual Report and Financial Statements 2023 Strategic report
Principal risks and uncertainties
There are a number of key potential risks and uncertainties
which the Board believes could have a material impact on
Zephyr’s long-term performance and could cause actual
results to differ from expected and historical results. The Board
considers these risks during its regular meetings and discussions.
The principal risks and uncertainties that the Group faces are:
Non-financial risks
•• Changes in government law or regulatory policy in the U.S.
could materially affect the rights and title to the interests held
by the Group, and the operations and financial condition of the
Group could be adversely affected. The Group is in continual
proactive dialogue with both its UK and U.S. regulators to
ensure ongoing compliance with its obligations.
• Climate related issues remain at the forefront of Board
conversations and decisions. While climate-related opportunities
continue to emerge in this rapidly evolving area, the Board
recognises that these issues also present a risk to Zephyr that
environmental regulations, climate change concerns, and
investor driven change may result in (i) increases to the cost
of doing business, (ii) hinder our ability to continue executing
our strategy, or (iii) restrict access to certain markets or investors.
•• Zephyr is dependent on the continued services and
performances of its core management team. The loss of key
personnel could have an impact on our ability to meet our
strategic objectives. The Remuneration Committee reviews
the employment terms for executives and key operational
management with the aim of attracting, motivating and
retaining key personnel for the Group. The Committee has also
engaged an external, independent consultant to benchmark
compensation against similarly sized industry group peers.
•• Potential impacts from a lack of adherence to health and
safety policies may result in fines and penalties, serious injury
or death, environmental impacts, statutory liability for
environmental redemption and other financial and reputational
consequences that could be significant. Effectively managing
Health and Safety Risk exposure is the top priority for the Board
and management team which regularly review health and
safety programmes and mitigations. Health and safety training
is included as part of all staff and contractor inductions.
Detailed training on our field manual procedures has been
provided to key stakeholders to ensure processes and procedures
are embedded throughout the organisation and all operations.
•• The results from the ongoing drilling campaign and
production testing on the Paradox project will have a
significant impact for the Group. Poor results from the wells
could have wider implications on the future development of
the project. The Board is ensuring that all activities are
appropriately planned and the technical team has undertaken
a thorough review of geological and technical risks.
•• There is execution and geological risk on the Paradox wells.
The wells are deep, drilled in over pressured reservoirs, and will
at times be hydraulically stimulated to deliver commercial
production. The well control incident experienced in 2023 was
a stark reminder of the complexity of drilling in the Paradox
Basin and of the associated execution risk. The Group’s technical
team has considerable experience of working on this project.
In addition, the service industry is very well developed in the
U.S. and the Group will only engage experienced contractors
and service providers with detailed knowledge of relevant
hydraulic stimulation techniques.
•• There is operational risk associated with the availability
of transportation, processing and marketing services for
hydrocarbons produced from the Paradox wells. The Group’s
wells are located in a relatively remote area with limited
midstream infrastructure and few service providers. The
unavailability of any given service or the availability of service
at uneconomic terms could have material implications for the
scale and timing to develop the project. The Group’s technical
team is actively engaged in discussions with service providers
and evaluating alternative solutions.
•• Cybersecurity risks for companies have increased significantly
in recent years due to the mounting threat and increased
sophistication of cybercrime. A cybersecurity breach, incident
or failure of our IT systems could disrupt our businesses, put
employees at risk, result in the disclosure of confidential
information, damage our reputation and create significant
financial and legal exposure. Employees are our first line of
defence against these attacks and we promote secure
behaviours to help mitigate this growing risk. We engage with
key technology partners and suppliers to ensure potentially
vulnerable systems are identified and secured.
Financial risks
•• There is a risk that the carrying value of the Group’s assets
will not be recovered through future revenues, leading to
impairment losses. The Group manages the recoverability of
its assets and assesses the economic viability throughout the
exploration, development and production phases.
•• Commodity risk. The activities of the Group are subject to
fluctuations in prices and demand for commodities, which are
volatile and cannot be controlled. Fluctuating commodity prices
could have a significant impact on the Group’s operations.
During 2022, the Group implemented a hedging programme
to manage the potential downside risks in fluctuating commodity
pricing. This hedging programme is expected to enable the
Group to meet its ongoing funding obligations.
•• Currency risk. Funds are maintained by the Group in Great Britain
Pounds sterling (“GBP”) and United States dollars (“US$”). There is
a risk that purchasing power in the U.S. is lost through foreign
exchange translation. The Group considers its foreign exchange
risk to be a normal and acceptable business exposure and does
not hedge against the risk at present.
•• Funding risk. There is a risk that there will be insufficient access
to funding to meet all corporate, development and production
obligations and activities. The Group manages liquidity risk by
maintaining adequate cash reserves and carefully monitoring
forecast and actual cashflows. The Board reviews the Group’s
cashflow projections and forecasts on a monthly basis. The
Board has a strong track record in capital market fundraisings
and has excellent relationships with its debt providers.
• Borrowing risk. There is a risk that the Group will not meet the
terms of the covenant as required under the terms of its
borrowings from FIBT and this could impact upon the Group’s
borrowing capacity. The Group was in full compliance with the
terms of the covenant in the periods reported.
25
Zephyr Energy plc Annual Report and Financial Statements 2023 Strategic report
S172(1) statement
Statement by the Directors in performance of their statutory duties in
accordance with S172(1) and 414CZA of the UK Companies Act 2006
The Board of Directors of Zephyr Energy plc, both individually
and together, have acted in good faith, in a way they consider
would be most likely to promote the success of the Company
for the benefit of its members as a whole (having regard to the
stakeholders and matters set out in S172 of Companies Act 2006).
The Board defines its stakeholders as the many individuals and
organisations that are affected by our operations and with whom
we seek to proactively and positively engage on a regular basis.
We strive to maintain productive, mutually beneficial relationships
with each stakeholder group by treating all stakeholders with
fairness and respect and by providing timely and effective
responses and information.
Engaging our stakeholders informs our decision-making,
including consideration of our long-term strategic objectives
and the activities that support these aims.
Our engagement with stakeholders includes personal contact
via face-to-face or telephone conversation, email exchange,
social media, company reports, press releases, investor
presentations or conference participation and other company
engagement.
As the operator of long-life assets, we naturally make decisions
that consider the long-term success of Zephyr and value
creation for our stakeholders.
The following is a summary of stakeholder engagements
from 2023 and the period since.
Stakeholder engagement
Equity and debt investors
The Board seeks to understand and meet investor needs and
expectations. It has established a strategy and business model
which it believes will promote long-term value to investors. The
Company’s details are displayed on its website allowing investors
to contact the Company if they so wish. The Board attaches
great importance to providing investors with clear and transparent
information on the Group’s activities and strategy. Details of all
communications are provided on the Company’s website,
including historical annual reports, press releases, company
presentations and governance related material.
The major interests in the Company’s Ordinary Shares are set
out in the Directors’ report. Through our regulatory updates
and the publication of our half and full year financial reports,
we inform Shareholders regarding the status of their Company.
Further Shareholder engagement includes the Annual General
Meeting (“AGM”) and discussions with investors when questions
are asked.
Employees
Our employees are essential to the Group’s success and growth.
We recognise that we need a skilled and committed workforce,
with a diverse range of experience and perspectives, and we
value the diversity and the contribution that it affords.
The Board believes that the Group’s success is reliant on the
commitment of our employees. We pride ourselves on our
friendly and safe working environment. Employee feedback is
sought through formal review processes and via the head of
each department. Training is provided where necessary.
Governments and regulators
Executive and operational management engage with federal,
state and local regulators to address legislative, regulatory and
operational matters important to our business and our industry.
We also proactively engage with regulatory agencies throughout
the year to keep them appraised of our operational and well
retirement activities and to provide objective and measurable
progress indicators.
Our transparency in engagement and delivering on expectations
were two key considerations in the state of Utah when dealing
with the well control incident that we experienced in April 2023.
Communities
We actively seek to support sustainable socio-economic
development in the communities in which we live and work and aim
to minimise any potential negative impacts from our operations.
Environment
The Group fully recognises its obligation to minimise its impact
on the environment and to be responsible in all its activities.
This is currently achieved by complying with regulatory standards
and support of certain environmentally focussed charities.
More information on how the Company considers and discharges
its obligations in respect of S172 Companies Act 2006 in respect
of its stakeholders can be found in the Governance section of
this document (page 27) and in respect of the environment at
the relevant section above.
The Strategic report on pages 1 to 26 was approved by the
Board on 26 June 2024.
On behalf of the Board,
JC Harrington
Chief Executive Officer
On a monthly basis we provide financial and operational updates
to our primary commercial debt provider.
26 June 2024
26
Zephyr Energy plc Annual Report and Financial Statements 2023 Strategic report Zephyr Energy plc Annual Report and Financial Statements 2023
Governance
28
Board of Directors
29
Senior management
30
Corporate governance statement
Directors’ report
35
Statement of Directors’ responsibilities 39
40
Independent auditor’s report
“ As a Board we strive to
ensure that our governance
standards meet best
practice, and it is a privilege
to work with this Board
which is committed to
maintaining high standards
of corporate governance. “
2727
Board of Directors
Rick Grant
NON-EXECUTIVE
CHAIRMAN
Rick 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”). OCE makes
US$2-US$20 million
foundational investments
in the domestic U.S. energy
sector. The firm’s capital is
provided by its partners and
two affiliated family offices.
Prior to OCE, Rick was CEO
of Suez North America LNG
and then served as CEO of
Suez Global LNG. During
his career, Rick has had
significant success
managing multi-billion
dollar organisations and
developments, and has been
involved in a number of
profitable corporate exits.
Colin Harrington
CHIEF EXECUTIVE
OFFICER
Colin began his career in
energy finance in 1998, and
previously worked in New
York, London, Washington
DC and San Francisco. Over
the course of his investment
banking and investment
management career, he has
had significant experience
executing recapitalisations
and turnarounds at natural
resource companies.
Prior to Zephyr, Colin served
as CEO of OCE, a special
situations investor in the
onshore US oil and gas
sector. Prior to that, Colin
was Managing Partner of
the Wellford Energy Group
and former CEO of
Wellford Capital Markets, a
FINRA-registered broker
dealer boutique which
specialised in the energy
markets.
Chris Eadie
GROUP FINANCE
DIRECTOR AND
COMPANY SECRETARY
Chris is an experienced
Finance Director with
extensive corporate finance
experience within both public
and private companies in
the natural resources sector.
Chris qualified as a
Chartered Accountant with
PricewaterhouseCoopers
after which he held a number
of senior finance positions
at Cable and Wireless PLC.
Prior to joining Zephyr, Chris
was, amongst other things,
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.
Gordon Stein
NON-EXECUTIVE
DIRECTOR
Tom Reynolds
NON-EXECUTIVE
DIRECTOR
Tom is a chartered Chemical
Engineer with 25 years
experience in the energy
sector spanning executive
management of private
and public E&P companies,
private equity investment
and advising early stage
companies. He is currently
the CEO of Scirocco Energy.
Tom led two public E&P
companies between
2008-2016 – Bridge Energy
ASA and Iona Energy Inc.
– providing him with a
broad range of North Sea
experience including cross
border mergers, IPOs,
acquisitions & disposals,
the Nordic bond market,
debt restructuring and
investor relations in London,
Oslo and Toronto.
Gordon is a commercial
CFO with over 30 years
of expertise in the energy,
natural resources and other
sectors. A member of the
Chartered Institute of Public
Finance & Accountancy,
Gordon is currently CFO of
CleanTech Lithium plc, an
exploration and development
company advancing the next
generation of sustainable
lithium projects in Chile.
Previously, Gordon was the
CFO and an Executive
Director of Columbus Energy
Resources plc, an AIM-traded
oil and gas company, CFO
of AIM-traded Madagascar
Oil Limited and has also been
CFO of Cadogan Petroleum
plc an independent oil and
gas exploration, development
and production company
with onshore gas and
condensate assets in Ukraine.
Prior to that, Gordon held a
number of other roles in the
energy sector at start-ups
to major companies.
28
Zephyr Energy plc Annual Report and Financial Statements 2023 Governance Senior management
Andy Lee
CHIEF FINANCIAL
OFFICER (U.S.)
Andy has over 25 years of
energy experience and
began his career as a drilling
engineer for ExxonMobil
working in Wyoming, West
Texas, Gulf of Mexico, and
Norway. He later moved to
the finance side of the
industry where he worked in
roles such as public equity
analyst, private equity
investor and M&A principal.
Most recently, Andy was
President and co-founder
of Cat Canyon Resources,
where he raised investment
funds to acquire and
develop a heavy oil field.
Under his tenure, Cat
Canyon commenced an
active horizontal drilling
programme and grew from
California’s 19th largest oil
company to the 10th largest
in less than three years.
Andy holds a BS degree in
Mechanical Engineering and
Political Science from MIT
and an MBA from The
Wharton School.
Gregor Maxwell
CHIEF OPERATING
OFFICER
Gregor has a PhD in
Reservoir Geology, with
25 years experience
spanning production to
new ventures roles.
Previously Gregor has
worked with Apache,
Rocksource and Chevron.
He is now responsible for
spearheading ZPHR analytics
and technical approach.
Ryan Walter
VP OF OPERATIONS
Ryan holds a Bachelor of
Science in Mechanical
Engineering from Purdue
University and has over a
decade of experience in
the oil and gas industry.
Prior to Zephyr, Ryan served
as a Senior Operations
Engineer and Joint Interest
Supervisor at Whiting
Petroleum, where he
supported operations in
both the Williston Basin
and DJ Basin.
Jorge Gutierrez
EVP GENERAL
COUNSEL
Heather Hatfield
CHIEF ACCOUNTING
OFFICER
Jorge has oversight of the
Company’s legal affairs.
He previously worked for
over 15 years in private
practice in Dallas, Texas
with an emphasis in
representing private and
publicly traded companies
operating in the upstream
and midstream sectors of
the energy industry. He is
admitted to practice law
in the State of Texas.
Prior to joining Zephyr
Heather served as the Chief
Accounting Officer at Cat
Canyon Resources, LLC. from
June 2019 to October 2023.
She served as Controller at
Elk Petroleum from 2018 to
2019. From 2014 to 2018 she
served as Chief Accounting
Officer at Venoco, LLC and
from 2013 to 2014 she
served as Internal Audit
Director at Venoco. Heather
began her career in public
accounting and worked at
Grant Thornton from 2008
until 2013 in various roles,
including, Advisory Services
Senior Manager.
Heather is a certified public
accountant and holds a
Bachelor of Arts degree in
business and accounting
from Western State College
of Colorado and a Masters
of Accountancy from the
University of Denver.
29
Zephyr Energy plc Annual Report and Financial Statements 2023 Governance Corporate governance statement
As a Board we strive to ensure that our governance standards
meet best practice, and it is a privilege to work with a Board
committed to maintaining high standards of corporate
governance. As Chairman of Zephyr, my role is to provide
leadership, ensuring that the Board performs its role effectively
and has the capacity, ability, structure, corporate governance
systems and support to enable it to continue to do so.
The Group’s success is directly linked to sound and effective
governance and we remain committed to achieving high
standards in everything we do.
The Directors recognise the importance of strong corporate
governance and have developed a corporate governance framework
and policies appropriate to the size of the Group. As the Group
grows, the Directors and management will continue to review and
adjust our approach and make ongoing improvements to the
Group’s corporate governance framework and policies and
procedures as part of building a successful and sustainable company.
Good governance creates the opportunity for appropriate decisions
to be made by the right people at the right time to support the
delivery of our strategy and manage any risks associated with
delivery of that strategy.
Zephyr follows the requirements of the QCA Corporate Governance
Code (the “Code”) published by the Quoted Companies Alliance
in April 2018, a full version of which is available at
http://www.theqca.com.
The QCA launched an updated version of the Code in November
2023. The revised Code gives greater prominence to themes which
are increasingly relevant to business practices and investor focus
such as Director remuneration, succession and contingency planning,
risk management and Board independence and composition.
The QCA has recommended that companies start applying the
revised Code in respect of accounting periods commencing on or
after 1 April 2024. So, while the revised Code will not apply to
Zephyr until the 2025 financial year, the Board is fully cognisant of
the revised Code and will be looking to implement the new
aspects of the Code over the coming months where appropriate.
All members of the Board believe strongly in the value and
importance of good corporate governance and in our accountability
to all of Zephyr stakeholders, including Shareholders, staff, clients,
suppliers and the Governments and regulators of the countries
in which we operate.
The corporate governance framework which the Group operates,
including Board leadership and effectiveness, Board remuneration,
and internal control is based upon practices which the Board believes
are proportional to the size, risks, complexity and operations of
the business and is reflective of the Group’s values.
The Board continually assesses its corporate governance processes
to ensure that Zephyr continues to comply with best practice as
outlined in the Code. No major corporate governance issues arose
during the year under review.
The Code is constructed around ten broad principles and a set of
disclosures. The Code states what it considers to be appropriate
arrangements for growing companies and asks companies to
provide an explanation about how they are meeting the principles
through the prescribed disclosures. We have considered how we
apply each principle to the extent that the Board judges these to be
appropriate in the circumstances, and we provide an explanation
of the approach taken in relation to each principle on our website
and a summary is set out below.
RL Grant
Non-Executive Chairman
26 June 2024
30
Zephyr Energy plc Annual Report and Financial Statements 2023 Governance Corporate governance statement
The Board and its committees
The Board is responsible for the direction and overall
performance of the Group with an emphasis on policy and
strategy, financial results and major operational issues.
Formal Board meetings are scheduled, on average, every four to
six weeks with regular contact between meetings as required.
During the year there were ten formal Board meetings, in addition
to regular informal Board discussions, and each of the formal
meetings was attended by every Director. The meetings are held
to monitor and implement strategy, to review performance
(including cash forecasts and ESG compliance), potential
acquisitions, fundraising activity and to consider communications
to the London Stock Exchange and Shareholders.
During the year, the matters reserved for the Board’s decision
have been reviewed and reaffirmed. Specific matters for the
Board’s consideration include:
•• Approval of the Group’s strategic plan;
•• Review of the performance of the Group’s strategy, objectives,
business plans and budgets;
•• Review and assess the Group’s sustainability and ESG goals,
including the Group’s carbon neutral programme;
•• Approval of the Group’s operating and capital expenditure
budgets and any material changes to them;
•• Review of material changes to the Group’s corporate structure
and management and control structure;
•• Review of changes to governance and business policies;
•• Monitoring efforts related to community and stakeholder
engagement;
•• Ensuring an effective system of internal control and risk
management;
•• Ensure that appropriate succession planning procedures
are in-place;
•• Approval of annual and interim reports and accounts, and
preliminary announcements of year-end results; and
•• Review of the effectiveness of the Board and its committees.
There is also an established procedure for all Directors to take
independent professional advice, if necessary, at the Group’s
expense. Additionally, all Directors have access to the advice
of the Group’s advisers. The Group maintains Directors’ and
Officers’ liability insurance.
The Board members are mindful of the need to keep skills
and experience up to date which is done through a combination
of training, continuing professional development through
professional bodies, reading and on the job experience.
All Directors are expected to devote such time as is necessary
for the proper performance of their duties. Directors are
expected to prioritise and attend Board meetings and any
additional meetings wherever possible.
Details of Directors who served during the year are set out in
the Directors’ Report. The Board is currently comprised of two
Executive Directors and three Non-Executive Directors, one
of whom acts as Chairman. There are separate roles for the
Chairman and the Chief Executive Officer.
The Board has established an Audit Committee, which comprises
of two Non-Executive Directors. The Audit Committee meets
two or three times a year and the Group’s external auditor is
invited to meetings where appropriate. The main responsibilities
of the Audit Committee are to review and report to the Board on
matters relating to:
•• The integrity of the financial statements of the Group,
including its annual and interim accounts;
•• The effectiveness of the Group’s internal controls and risk
management systems;
•• The accounting policies and practices of the Group;
•• Audit plans and Auditor’s Report, including any significant
concerns the external auditor may have arising from their audit
work; and
•• The terms of appointment, remuneration and independence
of the auditor.
The Board also has an established Remuneration Committee,
which comprises the Non-Executive Chairman and one Non-
Executive Director. The Remuneration Committee meets at
least twice a year and reviews the performance of the Executive
Directors and the scale and structure of their remuneration
having due regard to the interests of our Shareholders. The
Committee is also responsible for awards under the Group’s
share option plans. No Director is involved in any decision
relating to their own remuneration.
The remuneration of the Non-Executive Directors is determined
by the Board.
Communication with Shareholders
The Board encourages regular and transparent dialogue with the
Group’s Shareholders. All Shareholders are invited to the Annual
General Meeting at which Directors are available for questioning.
The notice of AGM is sent to all Shareholders at least 21 clear
days before the meeting. The number of proxy votes received
for and against each resolution is disclosed at the AGM and a
separate resolution is proposed on each item. Financial and
other information about the Group is available on the Group’s
website www.zephyrplc.com.
Internal controls
The Board is responsible for establishing the Group’s system of
internal controls and for reviewing its effectiveness. Reflecting
the size of the Group, a key control procedure is the close
day-to-day supervision of the business by the Executive
Directors, supported by the senior management with
responsibility for key tasks and operations.
31
Zephyr Energy plc Annual Report and Financial Statements 2023 Governance Corporate governance statement
The key procedures that have been established, and which are
designed to provide effective internal control are as follows:
•• Each of the Group’s subsidiaries is managed by an Executive
Director and there is a management reporting process in place
to enable the Board to monitor the performance of the Group
on a regular basis;
•• Monthly cash forecasts are prepared and formally reviewed
by the Board;
•• The Board reviews the major business risks faced by the Group
and determines the appropriate course of actions required to
manage those risks;
•• The Board approves proposals for the acquisition of assets or
new businesses and sets guidelines for the development of
new properties. Capital expenditure is regulated and written
proposals must be submitted to the Board for any
expenditure above specified levels;
•• Consolidated management information is prepared on
a regular basis; and
•• The Board has regular briefings from the Company’s
Nominated Adviser and Legal Counsel.
The Board reviews the effectiveness of the system of internal
controls and the control environment. No significant control
deficiencies were reported during the year and no weaknesses in
internal controls have resulted in any material losses, contingencies
or uncertainty which would require disclosure as recommended
by the guidance for Directors on reporting on internal controls.
The Board has reviewed the need for an independent internal
audit function and has concluded that, at the current time, the
Group is not yet large enough to warrant this.
As outlined above, the Board adopted the Code in April 2018.
An overview of the extent of the Group’s compliance with the
ten principles that comprise the Code, are set out below.
Extent
of current
compliance
Fully
Compliant
Fully
Compliant
Principle
Establish a strategy
and business model
which promote
long-term value for
Shareholders
Seek to understand
and meet
Shareholder needs
and expectations
Commentary
A summary of the Group’s business model and strategy can be found in the
Strategic report within this Annual Report
Key risks and mitigating actions are detailed in the Principal risks section of the
Strategic report within this Annual Report
Further
disclosure(s)
Strategic report
The Group remains committed to listening and communicating openly with its
Shareholders to ensure that its strategy, business model and performance are
clearly understood. Understanding what stakeholders think about the Group, and
in turn, helping these audiences understand our business, is a key part of driving
our business forward and we actively seek dialogue with all stakeholders. We do
so via regular reporting, investor roadshows, presenting at investor conferences/
webinars and at the Group’s Annual General Meeting. The Group also makes
regular operational announcements to keep Shareholders and the market
updated on operational activity and progress. The Group also makes available
corporate presentations on the ‘Investors’ area on the Group’s website.
The CEO is primarily responsible for Shareholder liaison
www.zephyrplc.com;
Regulatory updates,
Annual General
Meeting, Investor
presentations and full
contact details on
the Group’s website
Fully
Compliant
Directors and employees adopt a broad view during decision making to take
meaningful account on of the impact of the business on all key stakeholder
groups. The Board recognises that Zephyr’s long-term success is reliant on
good relationships with its key stakeholders
See section on
stakeholder
engagement in the
Strategic report
Fully
Compliant
The Board operates a comprehensive system of internal controls designed (to the
extent considered appropriate) to safeguard the Group’s assets and protect the
business from identified risks, including reputational risk
As well as tight oversight exercised by the Executive Directors, and appropriately
trained and qualified staff, the Board engages appropriate auditors and consultants
to assist in identifying and managing risk
Principal risk section
of the Strategic
report within the
Annual Report
Take into account
wider stakeholder
and social
responsibilities and
their implications for
long-term success
Embed effective risk
management,
considering both
opportunities and
threats, throughout
the organisation
32
Zephyr Energy plc Annual Report and Financial Statements 2023 Governance Corporate governance statement
Extent
of current
compliance
Fully
Compliant
Principle
Maintain the Board
as a well-functioning,
balanced team led
by the Chair
Fully
Compliant
Ensure that between
them the Directors
have the necessary
up-to-date
experience, skills
and capabilities
Fully
Compliant
Evaluate Board
performance based
on clear and relevant
objectives, seeking
continuous
improvement
Promote a culture
that is based on
ethical values and
behaviours
Fully
Compliant
Commentary
The Board comprises the Non-Executive Chairman, two Executive Directors and
two Non-Executive Directors (both of which are considered by the Board to be
independent). One of the Non-Executive Directors, GB Stein, acts as the Group’s
Senior Independent Director
The Board is constantly reviewing its make up to ensure that it has a sufficient
blend between independence on the one hand, and knowledge of the Group on
the other, to enable it to discharge its duties and responsibilities effectively
All Directors are encouraged to use their independent judgement and to
challenge all matters, whether strategic or operational. The Chairman holds
regular update meetings with each Director to ensure they are performing as
they are required. Board meetings take place, on average, every 4 to 6 weeks,
normally held by telephone conference owing to the diverse geographic
locations of the Board members
The Board is satisfied that, between the Directors, it has an effective and
appropriate balance of skills and experience, including in the areas of exploration,
development and production of oil and gas assets. All Directors receive regular
and timely information on the Group’s operational and financial performance.
Relevant information is circulated to the Directors in advance of meetings. All
Directors retire by rotation at regular intervals in accordance with the Group’s
Articles of Association
The Board makes decisions regarding the appointment and removal of Directors,
and there is a formal, rigorous procedure for appointments. The Group’s Articles
of Association require that one-third of the Directors must stand for re-election
by Shareholders annually in rotation; that all Directors must stand for re-election
at least once every three years; and that any new Directors appointed during the
year must stand for election at the AGM immediately following their
appointment
All Directors are able to take independent professional advice in the furtherance
of their duties, if necessary, at the Group’s expense. In addition, the Directors
have direct access to the advice and services of the Company Secretary and
Finance Director
The Chairman continually assesses the contribution of each member of the
Board to ensure that:
• Their contribution is relevant and effective
•
That they have a commitment to progressing the Group’s objectives in order
to increase Shareholder value
• Where relevant, they have maintained their independence
Given the Group’s ongoing expansion, the Board (led by the Chair) is constantly
reviewing the performance and structure of the team as a unit and to ensure
that the members of the Board collectively function in an efficient and
productive manner
Further
disclosure(s)
See Governance
section of Annual
Report for full details
on the Board
structure
See Governance
section of Annual
Report for full details
on the Board
structure
Key Performance
Indicators in the
Strategic report
The Board aims to lead by example and do what is in the best interests of
the Group
The Board spends a significant amount of time formulating and agreeing on
the core principles and values under which Zephyr will operate. In short, Zephyr’s
team will always strive to be responsible stewards of its investors’ capital and
responsible stewards of the environment in which we work. We believe that
good environmental performance, together with good governance practices,
will translate into good business performance and therefore are focused on
delivering strong economic returns in the most environmentally responsible
manner practical
Chairman’s
statement
Strategic report
Corporate
governance
statement
33
Zephyr Energy plc Annual Report and Financial Statements 2023 Governance Corporate governance statement
Extent
of current
compliance
Fully
Compliant
Principle
Maintain governance
structures and
processes that are
fit for purpose and
support good
decision-making by
the Board
Fully
Compliant
Communicate how
the Group is
governed and is
performing by
maintaining a
dialogue with
Shareholders and
other relevant
stakeholders
•
JC Harrington
Chief Executive Officer
26 June 2024
34
Further
disclosure(s)
Corporate
governance
statement
Commentary
The Board meets regularly for both formal Board meetings and for informal
discussions
The Board sets direction for the Group through a schedule of matters reserved
for its decision. The Board and its Committees receive appropriate and timely
information prior to each meeting; a formal agenda is produced for each
meeting, and Board and Committee papers are distributed several days before
meetings take place. Any Director may challenge the Group’s proposals and
decisions are taken democratically after discussion. Any Director who feels that
any concern remains unresolved after discussion may ask for that concern to be
noted in the minutes of the meeting, which are then circulated to all Directors.
Any specific actions arising from such meetings are agreed by the Board or
relevant Committee and then followed up by the Group’s management
The Executive Team consists of the Chief Executive Officer and the Financial Director
with input from the other Directors. They are responsible for formulation of the
proposed strategic focus for submission to the Board, the day-to-day management
of the Group’s businesses and its overall trading, operational and financial performance
in fulfilment of that strategy, as well as plans and budgets approved by the Board of
Directors. It also manages and oversees key risks, management development and
corporate responsibility programmes. The Chief Executive Officer reports to the plc
Board on issues, progress and recommendations for change. The controls applied
by the Executive Team to financial and non-financial matters are set out earlier in
this document, and the effectiveness of these controls is regularly reported to the
Audit Committee and the Board
The Board is supported by the Audit and Remuneration Committees. Each
Committee has access to such resources, information and advice as it deems
necessary, at the cost of the Group, to enable the committee to discharge its duties
The Audit Committee is Chaired by the Senior Independent Director, GB Stein.
The Non-Executive Director, TH Reynolds, is the other member of the Committee
The Remuneration Committee is Chaired by the Senior Independent Director, TH
Reynolds. The Non-Executive Chairman, RL Grant, is the other member of the Committee
The Group communicates with Shareholders through the Annual Report, full-year
and half-year announcements, the AGM and one-to-one meetings with large existing
or potential new Shareholders. The Group also keeps Shareholders updated on
progress and developments through its regular market announcements. The
CEO remains a key part of encouraging Shareholder interaction and listening to
feedback. A range of corporate information (including all group announcements
and presentations) is also available to Shareholders, investors and the public on
the Company’s website;www.zephyrplc.com
The Board receives regular updates on the views of Shareholders through briefings
and reports from the Chief Executive Officer, Group Finance Director and the
Group’s brokers. The Group communicates with institutional investors frequently
through briefings with management. In addition, analysts’ notes and brokers’
briefings are reviewed to achieve a wide understanding of investors’ views
The Group’s website includes the following:
•
Disclosure of any instances where a significant proportion of votes (e.g. 20%
of independent votes) have been cast against a resolution at any general
meeting, an explanation of what actions the Group intends to take to
understand the reasons behind that vote result, and, where appropriate, any
different action it has taken, or will take, as a result of the vote
Historical annual reports and other governance-related material, including
notices of all general meetings over the last five years
www.zephyrplc.com
Zephyr Energy plc Annual Report and Financial Statements 2023 Governance
Directors’ report
The Directors present the Annual Report and financial
statements of the Group for the year ended 31 December 2023.
Dividends
The Directors do not recommend the payment of a dividend for
the year ended 31 December 2023 (2022: nil).
Directors
The Directors who held office during the year, and since the year
end are as follows:
JC Harrington
RL Grant
TH Reynolds
GB Stein
CJ Eadie
Directors’ remuneration
In late 2021 and into early 2022, Zephyr’s independent Directors
commissioned an independent third-party review of Executive
Directors’ compensation. The purpose of engaging an independent
subject matter expert was to conduct a detailed review of the
remuneration arrangements to ensure that they are appropriate
in light of the performance of the business and our current
strategy. The Remuneration Committee therefore engaged
Focussed Independent Tailored Remuneration Consultants
(“FIT”) to advise on the Company’s remuneration strategy and
make any recommendations on any changes to the
previous practices.
Of particular importance was the need to ensure that compensation
structures are capable of delivering competitive rewards in the
U.S., where the majority of Zephyr’s executives and employees
are based, whilst meeting the expectations of our UK investor
base in terms of the design and structure of the arrangements
and ensuring the interests of our Shareholders and executives
are aligned.
FIT compared Zephyr’s Executive Director remuneration policies
with around a dozen peer group oil and gas companies (as agreed
by the Remuneration Committee) in each of the UK and U.S.,
reviewing base salary, pensions, medical expenses, bonuses and
other long-term incentivisation schemes. This was then presented
to the Remuneration Committee who discussed and agreed to
implement various recommendations to address differences
between current remuneration practices at Zephyr and the
relevant peer group companies.
The key conclusions of the independent third-party review were that:
•• The levels of total remuneration for the Executive Directors,
specifically with respect to the CEO and CFO, were competitive
with industry market peers (of the same size) in the UK, but
were below the lowest quartile in talent markets in the U.S.; and
•• Market base salary levels in the UK and U.S. are broadly
comparable and so the key differentiator is levels of variable
pay opportunity, which is higher in the U.S.
In addition to the review, the Independent Directors also noted
that whilst there is no intention to match U.S. levels of remuneration
for our Executive Directors, the compensation structure may
prevent us from being able to attract candidates with the skills
and experience necessary to continue the Group’s success in the
U.S. in the future. Continuing efforts will be made to ensure the
remuneration of our Executive Directors remains competitive
with market peers in the U.S. while meeting the expectations of
our UK investor base and, if future increases in total remuneration
are warranted, those increases should be primarily delivered
through long-term incentive structures.
The Executive Directors also recently undertook a review of
Non-Executive Director (“NED”) fees in conjunction with FIT.
FIT compared the fees paid at other peer group companies
recognising the time incurred by Zephyr’s NEDs who were
involved in a significant number of Board Meetings and Board
update calls, the many Merger and Acquisition (“M&A”) transactions
which the Board reviewed and approved in 2022, as well as the
Committee Meetings required to address various matters. NED
fees were therefore amended in early 2023 to reflect the
findings of the study and the extra time involvement for the
NEDs in carrying out their duties on the Zephyr Board.
35
Zephyr Energy plc Annual Report and Financial Statements 2023 Governance Directors’ report
Remuneration paid to Directors during the year was as follows:
Executive Directors
JC Harrington
CJ Eadie
Non-Executive Directors
RL Grant
TH Reynolds
GB Stein
1 Salaries include benefits-in-kind
2 Discretionary bonuses relating to performance in FY 2022, paid in January 2023
Executive Directors
JC Harrington
CJ Eadie
Non-Executive Directors
RL Grant
TH Reynolds
GB Stein
1 Salaries include benefits-in-kind
2 Discretionary bonuses relating to performance in FY 2021, paid in January 2022
Directors’ interests in shares and share options
The Directors who held office at 31 December 2023 had the
following interests, including family interests, in the Ordinary
Shares of the Company as follows:
36
2023
Salaries1
taken
US$’000
522
230
100
81
81
Bonus2
US$’000
Pension
US$’000
Total
US$’000
250
109
-
-
-
50
22
-
-
-
822
361
100
81
81
1,014
359
72
1,445
2022
Salaries1
taken
US$’000
Bonus2
US$’000
Pension
US$’000
Total
US$’000
500
217
65
44
44
870
207
93
25
25
25
375
34
13
1
-
-
48
741
323
91
69
69
1,293
CJ Eadie
JC Harrington
TH Reynolds
GB Stein
RL Grant
Number of Ordinary Shares
31 December
2023
1 January 2023
7,229,640
6,775,095
160,408,4821
138,590,3001
1,000,000
2,350,000
1,500,0001
1,000,000
2,350,000
1,500,0001
1 JC Harrington is indirectly the controlling shareholder of Origin Creek Energy
LLC (“OCE”) which was the beneficial owner of 158,954,546 shares at 31
December 2023. RL Grant is a 19% shareholder of OCE
Zephyr Energy plc Annual Report and Financial Statements 2023 Governance Directors’ report
Directors’ interests in share options of the Company, including family interests, as at 31 December 2023 were as follows:
CJ Eadie
CJ Eadie
CJ Eadie
CJ Eadie
JC Harrington
TH Reynolds
TH Reynolds
RL Grant
RL Grant
GB Stein
GB Stein
Date of grant
13 Feb 2015
24 Mar 2017
6 April 2018
29 May 2020
29 May 2020
29 May 2020
29 May 2020
29 May 2020
29 May 2020
29 May 2020
29 May 2020
No. of
shares
100,000
500,000
1,300,000
6,000,000
12,000,000
2,000,000
818,181
3,000,000
1,353,363
2,000,000
545,455
Exercise
price
182.5p
14.0p
3.5p
0.6p
0.6p
0.6p
0.1p
0.6p
0.1p
0.6p
0.1p
Option exercise period
13/03/16 to 12/03/25
24/04/17 to 23/04/27
06/04/19 to 05/04/28
29/05/21 to 28/05/31
29/05/21 to 28/05/31
29/05/21 to 28/05/31
29/05/21 to 28/5/27
29/05/21 to 28/05/31
29/05/21 to 28/5/27
29/05/21 to 28/05/31
29/05/21 to 28/5/27
Third party indemnity provision for Directors
The Company currently has in place, and had for the year ended
31 December 2023, Directors and Officers liability insurance for
the benefit of all Directors of the Company.
Governance
Governance matters are set out on pages 27 to 46.
Substantial shareholdings
Other than the Directors’ interests shown above, the Company
has been notified of the following substantial interests as at 24
June 20241:
Number
of shares
Percentage
of issued
share capital
Tyndall Investment Management 195,293,650
Origin Creek Energy LLC
158,954,546
SGR Investments LLC
64,045,768
11.2%
9.1%
3.7%
1 As per most recent notification to the Company
Going Concern
The Directors have prepared cashflow forecasts for the Group and
the Parent Company for the period to 31 December 2025 based
on their assessment of both the discretionary and the non-
discretionary cash requirements of the Group during this period
and based on a range of sensitivities and scenarios.
These cashflow forecasts include the forecast revenues from, and
the operating costs of, the Group’s operations, together with all
committed development expenditure and cashflows related to
the drilling of the State 36-2R well and the expected insurance
recoveries from the drilling operations. As disclosed in note 13, a
well incident happened during the year which led to the drilling of
the new State 36-2R well. The Group has comprehensive well
control insurance coverage and the Board expects to recover
insurance proceeds from the well incident for the cost of drilling
the new State 36-2R well. Should the insurance proceeds be
delayed or lower than expected, the Group could require further
funding to meet its commitments within the going concern
assessment period.
In addition, as at 31 December 2023, the Group and the Parent
Company had existing borrowings that are payable within 12
months (current) from the end of the reporting period. To meet this
obligation, the Group and the Parent Company will require debt
refinancing of existing borrowings or raising of additional funding.
As such, the Group and the Parent Company’s ability to continue
as going concerns is dependent on securing insurance proceeds
and debt refinancing of existing borrowings or raising additional
funding which are not guaranteed. This indicates the existence of
a material uncertainty which may cast significant doubt over the
Group and the Parent Company’s ability to continue as going
concerns, and therefore, the Group and the Parent Company may
be unable to realise their assets and discharge their liabilities in the
normal course of business.
Following detailed discussions, the Directors are confident that the
Group and the Parent Company will be able to secure insurance
recoveries as per above, refinance their existing borrowings and
raise additional funding to enable the Group and the Parent
Company to continue in operation for at least the next twelve
months from the date of approval of the financial statements. The
Directors have extensive experience in raising capital for projects
and ventures and remain confident in the Group and the Parent
Company’s ability to raise the capital needed to maintain and
deliver on its commitments and continue as a going concern.
The Directors continue to adopt the going concern basis in
preparing the financial statements. The financial statements do
not include any adjustments that would be required should the
going concern basis of preparation no longer be appropriate.
37
Zephyr Energy plc Annual Report and Financial Statements 2023 Governance Directors’ report
Post balance sheet events
Auditor
Events after the balance sheet date have been disclosed in note
29 to the financial statements.
BDO LLP served as the Group’s external auditor throughout the
year under review.
Financial instruments
During the year the Company and its subsidiary undertakings
applied financial risk management policies as disclosed in note
27 to the financial statements.
Disclosure of information to the auditor
The Directors who held office at the date of approval of this
Directors’ report confirm that, so far as they are each aware,
there is no relevant audit information of which the Company’s
auditor is unaware; and each Director has taken all the steps that
he ought to have taken as a Director in order to make himself
aware of any relevant audit information and to establish that the
Company’s auditor is aware of that information.
The Directors resolved that BDO LLP be re-appointed as auditor.
BDO LLP has indicated its willingness to continue in office.
On behalf of the Board,
CJ Eadie
Group Finance Director
26 June 2024
38
Zephyr Energy plc Annual Report and Financial Statements 2023 Governance Statement of Directors’ responsibilities
in respect of the Strategic report, the Directors’ report
and the financial statements
The Directors are responsible for preparing the Strategic report
and the Directors’ report and the financial statements in
accordance with applicable law and regulations.
Company law requires the Directors to prepare group and company
financial statements for each financial year. The Directors have
elected under company law and the AIM Rules of the London
Stock Exchange to prepare group financial statements in
accordance with UK-adopted International Accounting Standards
in conformity with the requirements of the Companies Act 2006
and have elected under company law to prepare the Company
financial statements in accordance with International Accounting
Standards in conformity with the requirements of the
Companies Act 2006 and applicable law.
The Group and the Company financial statements are required
by law and International Accounting Standards in conformity
with the requirements of the Companies Act 2006 to present
fairly the financial position of the Group and the Company and
the financial performance of the Group. The Companies Act 2006
provides in relation to such financial statements that references
in the relevant part of that Act to financial statements giving a
true and fair view are references to their achieving a fair presentation.
Under company law the Directors must not approve the financial
statements unless they are satisfied that they give a true and fair
view of the state of affairs of the Group and the Company and
of the profit or loss of the Group for that period.
In preparing each of the Group and Company financial statements,
the Directors are required to:
a. Select suitable accounting policies and then apply them
consistently;
b. Make judgements and accounting estimates that are
reasonable and prudent;
c. State whether they have been prepared in accordance with
UK-adopted International Accounting Standards in
conformity with the requirements of the Companies Act
2006; and
d. Prepare the financial statements on the going concern basis
unless it is inappropriate to presume that the Group and the
Company will continue in business.
The Directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the Group’s and
the Company’s transactions and disclose with reasonable accuracy
at any time the financial position of the Group and the Company
and enable them to ensure that the financial statements comply
with the Companies Act 2006. They are also responsible for
safeguarding the assets of the Group and the Company and
hence for taking reasonable steps for the prevention and
detection of fraud and other irregularities.
The Directors are responsible for the maintenance and integrity
of the corporate and financial information included on the
Zephyr Energy plc website. Legislation in the United Kingdom
governing the preparation and dissemination of financial
statements may differ from legislation in other jurisdictions.
39
Zephyr Energy plc Annual Report and Financial Statements 2023 Governance Independent auditor’s report
to the members of Zephyr Energy plc
Opinion on the financial statements
Material uncertainty related to going concern
In our opinion:
•• The financial statements give a true and fair view of the state
of the Group’s and of the Parent Company’s affairs as at 31
December 2023 and of the Group’s loss for the year then
ended;
•• The Group financial statements have been properly prepared
in accordance with UK-adopted international accounting
standards;
•• The Parent Company financial statements have been properly
prepared in accordance with UK- adopted international
accounting standards and as applied in accordance with the
provisions of the Companies Act 2006; and
•• The financial statements have been prepared in accordance
with the requirements of the Companies Act 2006.
We have audited the financial statements of Zephyr Energy plc
(the “Parent Company”) and its subsidiaries (the “Group”) for the
year ended 31 December 2023 which comprise the consolidated
income statement, the consolidated statement of
comprehensive income, the consolidated balance sheet, the
consolidated statement of changes in equity, the consolidated
cash flow statement, the Company balance sheet, the Company
statement of changes in equity, the Company cash flow
statement and the notes to the financial statements, including a
summary of material accounting policies.
The financial reporting framework that has been applied in their
preparation is applicable law and UK adopted international
accounting standards and, as regards the Parent Company
financial statements, as applied in accordance with the
provisions of the Companies Act 2006.
Basis for opinion
We conducted our audit in accordance with International
Standards on Auditing (UK) (ISAs (UK)) and applicable law.
Our responsibilities under those standards are further described
in the Auditor’s responsibilities for the audit of the financial
statements section of our report. We believe that the audit
evidence we have obtained is sufficient and appropriate to
provide a basis for our opinion.
Independence
We remain independent of the Group and the Parent Company
in accordance with the ethical requirements that are relevant to
our audit of the financial statements in the UK, including the
FRC’s Ethical Standard as applied to listed entities, and we have
fulfilled our other ethical responsibilities in accordance with
these requirements.
We draw your attention to note 3 of the financial statements,
which explains that the Group’s and the Parent Company’s ability
to continue as going concerns is dependent on securing
insurance proceeds and debt refinancing of existing borrowings
or raising additional funding which are not guaranteed. As stated
in note 3, these events or conditions, along with other matters
as set forth in note 3 indicate that a material uncertainty exists
that may cast significant doubt on the Group’s and the Parent
Company’s ability to continue as going concerns. Our opinion is
not modified in respect of this matter.
We have determined going concern to be a key audit matter as a
result of the judgements and estimates made by the Directors
and significance of this area. Our evaluation of the Directors’
assessment of the Group’s and the Parent Company’s ability to
continue to adopt the going concern basis of accounting and
our response to this key audit matter is set out below:
•• Obtaining and evaluating the Board papers assessing going
concern for the forecast period, the assessment of risks and
uncertainties and the supporting cashflow forecasts prepared
by Directors. We formed our own assessment of risks and
uncertainties based on our understanding of the business
and the oil and gas sector;
•• Reviewing evidence on the planned borrowings, including
related correspondences;
•• Assessing the appropriateness of the period over which going
concern is being assessed against the requirements of the
applicable standard;
•• Assessing Directors’ base case cash flow forecast and the
underlying key assumptions which have been approved by the
Board and the mathematical accuracy of such. In doing so, we
considered metrics affecting the future cash flows, such as
operating costs, production, forecast oil prices and capital
expenditure commitments approved by the Board against
actual performance for the year 2023 and the forecasts
prepared by Directors;
•• Agreeing the recent available cash position to bank account
statements;
•• Obtaining and assessing the sensitivity analysis reflecting
adverse scenarios by applying a lower than forecast oil price or
lower than forecast production;
•• Reviewing correspondence after the reporting date regarding
the expected insurance recoveries related to the drilling of
State 36-2R well to assess the recoverability;
•• Reviewing post year end press releases, Regulatory News
Services announcements and Board minutes for any indicators
of obligations or significant adverse issues; and
•• Reviewing and evaluating the adequacy and completeness of
disclosures in the financial statements in respect of going
concern based on the evidence obtained through the
procedures as per above.
40
Zephyr Energy plc Annual Report and Financial Statements 2023 Governance Independent auditor’s report
In auditing the financial statements, we have concluded that the
Directors’ use of the going concern basis of accounting in the
preparation of the financial statements is appropriate.
Our responsibilities and the responsibilities of the Directors with
respect to going concern are described in the relevant sections
of this report.
Overview
Coverage
99% (2022: 100%) of Group loss before tax
100% (2022: 100%) of Group revenue
100% (2022: 100%) of Group total assets
Key audit
matters
Carrying value of oil
and gas properties
Going concern
2023
4
2022
4
4
4
Materiality
Group financial statements as a whole
US$1.7 million based on 1.5% of total assets as
at year end (2022: US$1.5 million based on 1.5%
of total assets)
An overview of the scope of our audit
Our Group audit was scoped by obtaining an understanding of
the Group and its environment, including the Group’s system of
internal control, and assessing the risks of material misstatement
in the financial statements. We also addressed the risk of
management override of internal controls, including assessing
whether there was evidence of bias by the Directors that may
have represented a risk of material misstatement.
Identification of significant components
The Group’s exploration and producing assets are based in the
states of North Dakota and Montana, U.S. Our Group audit
scope focused on the Group’s producing and exploration assets
to gain sufficient coverage over the Group’s total assets, total
revenue and profit before tax while considering the audit risks
identified.
As a result, we determined two significant components which
were subjected to a full scope audit by the Group audit team:
Zephyr Energy plc and the U.S. based subsidiary Rose Petroleum
(US) LLC.
The financial information of the remaining non-significant
components was principally subject to analytical review
procedures performed by the Group audit team.
41
Zephyr Energy plc Annual Report and Financial Statements 2023 Governance
Independent auditor’s report
Key audit matters
Key audit matters are those matters that, in our professional
judgement, were of most significance in our audit of the
financial statements of the current period and include the most
significant assessed risks of material misstatement (whether or
not due to fraud) that we identified, including those which had
the greatest effect on the overall audit strategy, the allocation of
resources in the audit, and directing the efforts of the
engagement team. These matters were addressed in the
context of our audit of the financial statements as a whole, and
in forming our opinion thereon, and we do not provide a
separate opinion on these matters. In addition to the matter
described in the material uncertainty related to going concern
section above, we determined the matter below to be the key
audit matter to be communicated in our report.
Key audit matter
Carrying value
of oil and gas
properties
Refer to
notes 3 and 14.
The oil and gas development
and producing assets form a
significant part of the Group’s
statement of financial position.
Management is required to
consider if there are any facts
or circumstances (potential
impairment indicators) that
would suggest that the oil and
gas producing properties would
be impaired in accordance with
IAS 36, “Impairment of assets”.
Where indicators of impairment
are identified, impairment testing
is required to ensure that the
Group’s assets are carried at
no more than their recoverable
amount. Following their
assessment, management have
not identified any impairment
indicators on its oil and gas
properties.
How the scope of our audit addressed the key audit matter
Our audit procedures in this regard included:
• Reviewing and assessing management’s allocation of assets to the
cash-generating unit (“CGU”) for the purpose of the impairment
indicators assessment;
• Examining management’s assessment of impairment indicators against
the requirements of IAS 36 “Impairment of assets”;
• Assessing the forecast as per economic model for the oil and gas
properties, included in the CGU by reviewing the pricing information,
production volumes, operating and transportation costs against the
forecasts prepared as part of Competent Person’s Report (“CPR”) as
issued by independent qualified reservoir engineers as management’s
expert;
• Performing a review of management’s economic model assumptions,
challenging the appropriateness of estimates with reference to
historical data and external evidence where available and assessing the
related key estimates for potential management bias;
• Checking the consistency of the reserves and related future cashflows
with the economic forecasts as per the latest CPR and assessing
whether the discounted cashflow forecast as per the CPR is consistent
with the management’s impairment indicators assessment; and
• Assessing the management’s experts preparing the CPR on the oil and
gas reserves, particularly focused on the competence and objectivity
of the expert and the scope of their work to check the CPR was prepared
under the required guidelines and is appropriate for its intended purpose.
Key observations
Based on procedures performed we found the judgements and estimates applied by management in assessing the oil and gas
properties for indicators of impairment were appropriate and that their conclusion that there was no impairment as of
31 December 2023 to be reasonable.
Our application of materiality
We apply the concept of materiality both in planning and
performing our audit, and in evaluating the effect of
misstatements. We consider materiality to be the magnitude by
which misstatements, including omissions, could influence the
economic decisions of reasonable users that are taken on the
basis of the financial statements.
In order to reduce to an appropriately low level the probability
that any misstatements exceed materiality, we use a lower
materiality level, performance materiality, to determine the
extent of testing needed. Importantly, misstatements below
these levels will not necessarily be evaluated as immaterial as we
also take account of the nature of identified misstatements, and
the particular circumstances of their occurrence, when
evaluating their effect on the financial statements as a whole.
42
Zephyr Energy plc Annual Report and Financial Statements 2023 Governance Independent auditor’s report
Based on our professional judgement, we determined materiality for the financial statements as a whole and performance materiality
as follows:
Group financial statements
Parent Company financial statements
2023
US$ million
Materiality
1.7
2022
US$ million
1.5
2023
US$ million
0.8
2022
US$ million
0.8
Basis for determining
materiality
Rationale for the
benchmark applied
Performance
materiality
Basis for determining
performance
materiality and
rationale for the
percentage applied
1.5% of total assets
1.5% of total assets
1.5% of total assets
1.8% of total assets
Given the asset-based
focus of the business
with its significant
exploration asset
base we considered it
appropriate to adopt
a total assets-based
measure of materiality.
Given the asset-based
focus of the business
with its significant
exploration asset
base we considered it
appropriate to adopt
a total assets-based
measure of materiality.
Given the asset-based
focus of the business
as a holding company
we considered it
appropriate to adopt
a total assets-based
measure of materiality.
Given the asset-based
focus of the business
as a holding company
we considered it
appropriate to adopt
a total assets-based
measure of materiality.
1.1
0.7
0.6
0.6
70% of materiality (2022: 70%).
Performance materiality was set at 70% based on consideration of factors including the level of historical
errors and nature of activities.
Component materiality
Component materiality for the U.S. based component Rose
Petroleum (US) LLC, which represented the only significant
component other than the Parent Company, was set at US$1.5
million (2022: US$1.3 million) based on 1.5% of the component’s
total assets. In the audit of that component, we further applied
performance materiality levels of 70% of the component
materiality to our testing to ensure that the risk of errors
exceeding component materiality was appropriately mitigated.
Reporting threshold
We agreed with the Audit Committee that we would report to
them all individual audit differences in excess of US$34,000
(2022: US$30,000). We also agreed to report differences below
this threshold that, in our view, warranted reporting on
qualitative grounds.
Other information
The Directors are responsible for the other information. The
other information comprises the information included in the
Annual Report other than the financial statements and our
Auditor’s report thereon. Our opinion on the financial statements
does not cover the other information and, except to the extent
otherwise explicitly stated in our report, we do not express any
form of assurance conclusion thereon. Our responsibility is to
read the other information and, in doing so, consider whether
the other information is materially inconsistent with the financial
statements or our knowledge obtained in the course of the
audit, or otherwise appears to be materially misstated. If we
identify such material inconsistencies or apparent material
misstatements, we are required to determine whether this gives
rise to a material misstatement in the financial statements
themselves. If, based on the work we have performed, we
conclude that there is a material misstatement of this other
information, we are required to report that fact.
We have nothing to report in this regard.
43
Zephyr Energy plc Annual Report and Financial Statements 2023 Governance Independent auditor’s report
Other Companies Act 2006 reporting
Based on the responsibilities described below and our work performed during the course of the audit, we are required by the
Companies Act 2006 and ISAs (UK) to report on certain opinions and matters as described below.
Strategic report
and Directors’
report
In our opinion, based on the work undertaken in the course of the audit:
• the information given in the Strategic report and the Directors’ report for the financial year for which the
financial statements are prepared is consistent with the financial statements; and
• the Strategic report and the Directors’ report have been prepared in accordance with applicable legal
requirements.
In the light of the knowledge and understanding of the Group and the Parent Company and its environment
obtained in the course of the audit, we have not identified material misstatement in the Strategic report or
the Directors’ report.
Matters on which
we are required
to report by
exception
We have nothing to report in respect of the following matters in relation to which the Companies Act 2006
requires us to report to you if, in our opinion:
• adequate accounting records have not been kept by the Parent Company, or returns adequate for our audit
have not been received from branches not visited by us; or
• the Parent Company financial statements are not in agreement with the accounting records and returns; or
• certain disclosures of Directors’ remuneration specified by law are not made; or
• we have not received all the information and explanations we require for our audit.
44
Zephyr Energy plc Annual Report and Financial Statements 2023 Governance Independent auditor’s report
Responsibilities of Directors
As explained more fully in the Statement of Directors’
responsibilities, the Directors are responsible for the preparation
of the financial statements and for being satisfied that they give
a true and fair view, and for such internal control as the Directors
determine is necessary to enable the preparation of financial
statements that are free from material misstatement, whether
due to fraud or error.
In preparing the financial statements, the Directors are
responsible for assessing the Group’s and the Parent Company’s
ability to continue as going concerns, disclosing, as applicable,
matters related to going concern and using the going concern
basis of accounting unless the Directors either intend to
liquidate the Group or the Parent Company or to cease
operations, or have no realistic alternative but to do so.
Auditor’s responsibilities for the audit of the
financial statements
Our objectives are to obtain reasonable assurance about
whether the financial statements as a whole are free from
material misstatement, whether due to fraud or error, and to
issue an Auditor’s report that includes our opinion. Reasonable
assurance is a high level of assurance, but is not a guarantee that
an audit conducted in accordance with ISAs (UK) will always
detect a material misstatement when it exists. Misstatements
can arise from fraud or error and are considered material if,
individually or in the aggregate, they could reasonably be
expected to influence the economic decisions of users taken on
the basis of these financial statements.
Extent to which the audit was capable of
detecting irregularities, including fraud
Irregularities, including fraud, are instances of non-compliance
with laws and regulations. We design procedures in line with our
responsibilities, outlined above, to detect material misstatements
in respect of irregularities, including fraud. The extent to which
our procedures are capable of detecting irregularities, including
fraud is detailed below:
Non-compliance with laws and regulations
We obtained an understanding of the legal and regulatory
frameworks that are applicable to the Group. We determined
that the most significant which are directly relevant to specific
assertions in the financial statements are those related to the
reporting framework (UK-adopted international accounting
standards, the Companies Act 2006, the AIM rules and the
QCA Corporate Governance Code), local taxation legislation
in the countries where the Group operates, and the terms
and requirements included in the Group’s operating and
exploration licences.
Our procedures included the following:
•• We gained an understanding of how the Group is complying
with those legal and regulatory frameworks by making inquiries
of management, and those responsible for legal and
compliance procedures. We corroborated our inquires through
our review of Board minutes and other supporting
documentation; and
•• We reviewed the financial statement disclosures and tested to
supporting documentation to assess compliance with relevant
laws and regulations noted above.
Fraud
We assessed the susceptibility of the financial statements to
material misstatement, including fraud. Our risk assessment
procedures included:
•• Enquiry with management and those charged with
governance regarding any known or suspected instances of
fraud;
•• Obtaining an understanding of the Group’s policies and
procedures relating to:
- Detecting and responding to the risks of fraud; and
- Internal controls established to mitigate risks related to fraud.
•• Review of minutes of meeting of those charged with
governance for any known or suspected instances of fraud;
•• Discussion amongst the engagement team as to how and
where fraud might occur in the financial statements; and
•• Performing analytical procedures to identify any unusual or
unexpected relationships that may indicate risks of material
misstatement due to fraud.
45
Zephyr Energy plc Annual Report and Financial Statements 2023 Governance Independent auditor’s report
Based on our risk assessment, we considered the areas most
susceptible to fraud to be management override of controls
and revenue recognition.
Our procedures in respect of the above included:
•• Holding discussions with the audit engagement team as to
how and where fraud might occur in the financial statements
and where any potential indicators of fraud may arise in the
Group in order to consider how our audit strategy should
reflect our considerations;
•• Testing a sample of journal entries throughout the year, which
met a defined risk criteria, by agreeing to supporting
documentation;
•• Testing a random sample of journal entries throughout the
year for unpredictability, by agreeing to supporting
documentation;
•• In addition to the key audit matters as per above we assessed
and challenged key areas of judgement and estimation made
by management to identify potential management’s bias,
including management’s assumptions and key estimates
related to decommissioning liabilities;
•• Agreeing revenue to supporting documentation of monthly
operators’ revenue statements/joint interest billings to confirm
volume and pricing, together with evidence regarding the
receipt of cash;
•• Performing cut-off testing on revenue around the year-end to
ensure that revenue is recognised in the correct period. This
included obtaining revenue statements from the operator post
year-end and verifying the related revenue was recorded in the
correct period;
•• Inquiring of management and the Audit Committee of known
or suspected instances of fraud, potential litigation and claims.
We read minutes of meetings of those charged with
governance, and reviewed correspondence with local tax and
regulatory authorities; and
•• Obtaining an understanding of the design and implementation
of relevant controls surrounding the financial reporting close
process such as controls over the posting of journals and the
consolidation process and obtained an understanding of the
segregation of duties in these processes.
We also communicated relevant identified laws and regulations
and potential fraud risks to all engagement team members who
were all deemed to have appropriate competence and
capabilities and remained alert to any indications of fraud or
non-compliance with laws and regulations throughout the audit.
Our audit procedures were designed to respond to risks of
material misstatement in the financial statements, recognising
that the risk of not detecting a material misstatement due to
fraud is higher than the risk of not detecting one resulting from
error, as fraud may involve deliberate concealment by, for
example, forgery, misrepresentations or through collusion. There
are inherent limitations in the audit procedures performed and
the further removed non-compliance with laws and regulations
is from the events and transactions reflected in the financial
statements, the less likely we are to become aware of it.
A further description of our responsibilities is available on the
Financial Reporting Council’s website at: www.frc.org.uk/
auditorsresponsibilities. This description forms part of our
Auditor’s Report.
Use of our report
This report is made solely to the Parent Company’s members,
as a body, in accordance with Chapter 3 of Part 16 of the
Companies Act 2006. Our audit work has been undertaken so
that we might state to the Parent Company’s members those
matters we are required to state to them in an auditor’s report
and for no other purpose. To the fullest extent permitted by law,
we do not accept or assume responsibility to anyone other than
the Parent Company and the Parent Company’s members as a
body, for our audit work, for this report, or for the opinions we
have formed.
Jack Draycott (Senior Statutory Auditor)
For and on behalf of BDO LLP,
Statutory Auditor London, United Kingdom
26 June 2024
46
Zephyr Energy plc Annual Report and Financial Statements 2023 Governance Zephyr Energy plc Annual Report and Financial Statements 2023
Financial statements
Consolidated income statement
Consolidated statement of
comprehensive income
Consolidated balance sheet
Consolidated statement of
changes in equity
Consolidated cash flow statement
Company balance sheet
Company statement of changes
in equity
Company cash flow statement
Notes to the financial statements
48
49
50
51
52
53
54
55
56
“ The Board remains fully committed
to the primary goal of opening up
the next prolific onshore U.S. oil
and gas play.”
4747
Notes
2023
US$’000
6
25,225
2022
US$’000
41,062
(4,458)
(3,318)
(12,666)
1,781
22,401
(4,834)
(210)
6,102
3
(6,964)
(1,878)
(9,607)
412
7,188
(5,997)
(6)
(2,776)
-
(3,472)
(2,236)
(5,063)
21,226
1,560
(3,503)
(1,955)
19,271
(0.21)
(0.21)
1.26
1.18
14
15
8
7
8
11
12
12
Consolidated income statement
For the year ended 31 December 2023
Revenue
Operating and transportation expenses
Production taxes
Depreciation, depletion and amortisation
Gain on derivative contracts
Gross profit
Administrative expenses
Share-based payments
Foreign exchange (losses)/gains
Finance income
Finance costs
(Loss)/profit on ordinary activities before taxation
Taxation credit/(charge)
(Loss)/profit for the year attributable to owners of the parent company
(Loss)/profit per Ordinary Share
Basic, cents per share
Diluted, cents per share
The notes on pages 56 to 85 form part of the financial statements
48
Zephyr Energy plc Annual Report and Financial Statements 2023 Financial statements
Consolidated statement of comprehensive income
For the year ended 31 December 2023
(Loss)/profit for the year attributable to owners of the parent company
Other comprehensive income/(loss)
Items that may be subsequently reclassified to profit or loss
Foreign currency translation differences on foreign operations
Total comprehensive (loss)/income for the year attributable to owners of the parent company
The notes on pages 56 to 85 form part of the financial statements
2023
US$’000
2022
US$’000
(3,503)
19,271
2,772
(731)
(6,205)
13,066
49
Zephyr Energy plc Annual Report and Financial Statements 2023 Financial statements Consolidated balance sheet
As at 31 December 2023
Company No 04573663
Non-current assets
Exploration and evaluation assets
Property and equipment
Derivative contracts
Current assets
Trade and other receivables
Cash and cash equivalents
Derivative contracts
Total assets
Current liabilities
Trade and other payables
Borrowings
Lease liabilities
Non-current liabilities
Borrowings
Lease liabilities
Deferred tax
Provisions
Total liabilities
Net assets
Equity
Share capital
Share premium account
Shares to be issued
Warrant reserve
Share-based payment reserve
Cumulative translation reserve
Accumulated deficit
Equity attributable to owners of the parent company
Notes
2023
US$’000
2022
US$’000
13
14
15
17
18
15
19
20
20
21
22
23
25
25
24
25
25
25
49,941
50,840
-
37,986
51,805
175
100,781
89,966
7,897
3,611
278
4,637
8,996
1,133
11,786
14,766
112,567
104,732
(6,983)
(28,950)
(39)
(12,520)
(14,572)
-
(35,972)
(27,092)
(6,401)
(10,821)
(31)
(395)
(5,067)
(11,894)
(47,866)
64,701
42,568
71,735
-
1,557
3,270
(13,212)
(41,217)
64,701
-
(1,955)
(4,138)
(16,914)
(44,006)
60,726
42,412
66,847
539
1,557
3,284
(15,984)
(37,929)
60,726
The financial statements on pages 48 to 55 were approved by the Directors and authorised for issue on 26 June 2024 and are signed
on its behalf by,
CJ Eadie
Group Finance Director
The notes on pages 56 to 85 form part of the financial statements
50
Zephyr Energy plc Annual Report and Financial Statements 2023 Financial statements
Consolidated statement of changes in equity
For the year ended 31 December 2023
Share
capital
US$’000
Share
premium
account
US$’000
Shares to
be issued
US$’000
Warrant
reserve
US$’000
Share-
based
payment
reserve
US$’000
Cumulative
translation
reserve
US$’000
Accumu-
lated
deficit
US$’000
Total
US$’000
As at 1 January 2022
42,065
52,875
89
3,065
(9,779)
(57,721)
30,594
Transactions with owners in their
capacity as owners:
Issue of equity shares
Exercise of warrants
Expenses of issue of equity shares
Warrant exercise extension
Grant of warrants
Share-based payments
Transfer to accumulated deficit
in respect of lapsed options
Transfer to accumulated deficit
in respect of expired warrants
-
-
347
17,023
-
-
-
-
-
-
-
-
-
539
(122)
(1,461)
(33)
(1,557)
-
-
-
-
-
-
-
-
-
-
33
1,557
-
-
-
-
-
408
-
-
210
(387)
(12)
Total transactions with owners in their
capacity as owners
Profit for the year
Other comprehensive loss:
Currency translation differences
Total other comprehensive loss for the year
Total comprehensive income for the year
347
13,972
539
1,468
219
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
17,370
122
539
-
-
-
-
(1,053)
-
-
210
387
12
-
-
521
17,066
19,271
19,271
(6,205)
(6,205)
-
-
(6,205)
(6,205)
(6,205)
19,271
13,066
As at 31 December 2022
42,412
66,847
539
1,557
3,284
(15,984)
(37,929)
60,726
Transactions with owners in their
capacity as owners:
Issue of equity shares
Exercise of warrants
Expenses of issue of equity shares
Share-based payments
Transfer to accumulated deficit
in respect of expired options
156
5,318
-
-
-
-
-
-
(539)
(430)
-
-
-
-
-
Total transactions with owners in their
capacity as owners
156
4,888
(539)
Loss for the year
Other comprehensive income:
Currency translation differences
Total other comprehensive income for
the year
Total comprehensive loss for the year
-
-
-
-
-
-
-
-
As at 31 December 2023
42,568
71,735
The notes on pages 56 to 85 form part of the financial statements
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
195
6
(215)
(14)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
215
5,474
(539)
(235)
6
-
215
4,706
(3,503)
(3,503)
2,772
2,772
2,772
-
-
2,772
2,772
(3,503)
(731)
1,557
3,270
(13,212)
(41,217)
64,701
51
Zephyr Energy plc Annual Report and Financial Statements 2023 Financial statements Consolidated cash flow statement
For the year ended 31 December 2023
Operating activities
(Loss)/profit for the year before taxation
Adjustments for:
Finance income
Finance costs
Depreciation and depletion of property and equipment
Share-based payments
Unrealised foreign exchange losses/(gains)
Operating cash inflow before movements in working capital
Increase in trade and other receivables
Unrealised loss/(gain) on derivative contracts
Increase in trade and other payables
Cash generated from operations
Income tax paid
Net cash generated from operating activities
Investing activities
Additions to exploration and evaluations assets
Business combination
Acquisition of oil and gas properties
Additions to oil and gas properties
(Decrease)/increase in capital expenditures related payables
Proceeds on disposal of oil and gas properties
Insurance proceeds received in respect of exploration and evaluation assets
Grant funds received in respect of exploration and evaluation assets
Interest received
Net cash used in investing activities
Financing activities
Net proceeds from issue of shares
Exercise of warrants
Proceeds from borrowings
Repayment of borrowings
Repayment of lease liabilities
Interest and fees paid on borrowings
Net cash generated from financing activities
Net (decrease)/increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Effect of foreign exchange rate changes
Cash and cash equivalents at end of year
The notes on pages 56 to 85 form part of the financial statements
52
2023
US$’000
2022
US$’000
(5,063)
21,226
-
3,472
9,630
6
2,772
10,817
(403)
1,029
191
(3)
2,236
12,668
210
(5,672)
30,665
(2,850)
(1,308)
723
11,634
27,230
-
-
11,634
27,230
(21,643)
-
-
(13,297)
(37,880)
(3,362)
(10,467)
(10,482)
(5,754)
9,300
2,262
7,712
302
-
-
-
-
3
(27,588)
(55,718)
3,700
16,317
-
13,260
(4,244)
(7)
(2,140)
10,569
(5,385)
8,996
-
3,611
539
30,500
(8,931)
-
(2,218)
36,207
7,719
1,811
(534)
8,996
Zephyr Energy plc Annual Report and Financial Statements 2023 Financial statements Company balance sheet
As at 31 December 2023
Company No 04573663
Non-current assets
Investments
Property and equipment
Current assets
Trade and other receivables
Cash and cash equivalents
Total assets
Current liabilities
Trade and other payables
Lease liabilities
Non-current liabilities
Lease liabilities
Total liabilities
Net assets
Equity
Share capital
Share premium account
Shares to be issued
Warrant reserve
Share-based payment reserve
Cumulative translation reserve
Accumulated deficit
Total equity
Notes
2023
US$’000
2022
US$’000
16
14
17
18
19
23
25
25
24
25
25
25
52,414
43,850
60
6
52,474
43,856
96
40
136
82
118
200
52,610
44,056
(450)
(39)
(489)
(31)
(520)
(459)
-
(459)
-
(459)
52,090
43,597
42,568
71,735
-
1,557
3,270
(10,968)
(56,072)
52,090
42,412
66,847
539
1,557
3,284
(13,427)
(57,615)
43,597
As permitted by section 408 of the Companies Act 2006, the Parent Company’s Income statement and Statement of comprehensive
income have not been included in these financial statements.
The profit for the Company for the year ended 31 December 2023 is US$1.3 million (2022: loss US$0.5 million).
The financial statements on pages 48 to 55 were approved by the Directors and authorised for issue on 26 June 2024 and are signed
on its behalf by,
CJ Eadie
Group Finance Director
The notes on pages 56 to 85 form part of the financial statements
53
Zephyr Energy plc Annual Report and Financial Statements 2023 Financial statements
Company statement of changes in equity
For the year ended 31 December 2023
Share
capital
US$’000
Share
premium
account
US$’000
Shares
to be
issued
US$’000
Warrant
reserve
US$’000
Share-
based
payment
reserve
US$’000
Cumulative
translation
reserve
US$’000
Accumu-
lated
deficit
US$’000
Total
US$’000
As at 1 January 2022
42,065
52,875
89
3,065
(8,247)
(57,654) 32,193
Transactions with owners in their
capacity as owners:
Issue of equity shares
Exercise of warrants
Expenses of issue of equity shares
Warrant exercise extension
Grant of warrants
Share-based payments
Transfer to accumulated deficit
in respect of lapsed options
Transfer to accumulated deficit
in respect of expired warrants
347
17,023
-
-
-
-
-
-
-
-
-
539
(122)
(1,461)
(33)
(1,557)
-
-
-
-
-
-
-
-
-
-
33
1,557
-
-
-
-
-
408
-
-
210
(387)
(12)
Total transactions with owners in their
capacity as owners
Loss for the year
Other comprehensive loss:
Currency translation differences
Total other comprehensive loss for the year
Total comprehensive loss for the year
347
13,972
539
1,468
219
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
As at 31 December 2022
42,412
66,847
539
1,557
3,284 (13,427)
(57,615) 43,597
Transactions with owners in their
capacity as owners:
Issue of equity shares
Exercise of warrants
Expenses of issue of equity shares
Share-based payments
Transfer to accumulated deficit
in respect of expired options
Total transactions with owners in their
capacity as owners
Profit for the year
Other comprehensive income:
Currency translation differences
Total other comprehensive income
for the year
Total comprehensive income for the year
156
5,318
-
-
-
-
-
-
(539)
(430)
-
-
-
-
-
156
4,888
(539)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
195
6
(215)
(14)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
215
5,474
(539)
(235)
6
-
215
1,328
4,706
1,328
2,459
2,459
2,459
-
-
1,328
2,459
2,459
3,787
1,557
3,270 (10,968) (56,072) 52,090
As at 31 December 2023
42,568
71,735
The notes on pages 56 to 85 form part of the financial statements
54
-
-
-
-
-
-
-
-
-
-
-
17,370
122
539
-
-
-
-
(1,053)
-
-
210
387
12
-
-
521
17,066
(482)
(482)
(5,180)
(5,180)
(5,180)
-
-
(5,180)
(5,180)
(482)
(5,662)
-
-
-
-
-
-
-
Zephyr Energy plc Annual Report and Financial Statements 2023 Financial statements Company cash flow statement
For the year ended 31 December 2023
Operating activities
Profit/(loss) before taxation
Adjustments for:
Finance income
Finance costs
Depreciation of property and equipment
Share-based payments
Unrealised foreign exchange gains
Operating cash outflow before movements in working capital
Increase in trade and other receivables
(Decrease)/Increase in trade and other payables
Net cash used in operating activities
Investing activities
Loans to subsidiary undertakings
Net cash used in investing activities
Financing activities
Net proceeds from the issue of shares
Proceeds from exercise of warrant
Repayment of lease liabilities
Repayment of borrowings
Interest paid on borrowings
Net cash generated from financing activities
Net decrease in cash and cash equivalents
Cash and cash equivalents at beginning of year
Effect of foreign exchange rate changes
Cash and cash equivalents at end of year
The notes on pages 56 to 85 form part of the financial statements
2023
US$’000
2022
US$’000
1,328
(482)
(2,595)
(1,215)
-
23
6
(18)
(1,256)
(14)
(9)
272
2
210
(1,407)
(2,620)
(17)
16
(1,279)
(2,621)
(2,493)
(2,493)
(11,330)
(11,330)
3,700
16,317
-
(7)
-
-
3,693
(79)
118
1
40
539
-
(4,060)
(287)
12,509
(1,442)
1,574
(14)
118
55
Zephyr Energy plc Annual Report and Financial Statements 2023 Financial statements Notes to the financial statements
For the year ended 31 December 2023
1. Corporate information
Zephyr Energy plc (the “Company” and, together with its
subsidiaries, the “Group”) is a public company limited by shares,
domiciled and incorporated in England and Wales under the
Companies Act 2006. The address of the registered office is
20-22 Wenlock Road, London, N1 7GU.
The Company’s Ordinary Shares are approved to trade on the
OTCQB Venture Market (“OTCQB”) in the U.S. under the ticker
ZPHRF. The ability to trade in the Company’s Ordinary Shares
on AIM is not affected by the OTCQB facility.
Zephyr Energy plc is a technology-led Exploration & Production
(“E&P”) company focused on the delivery of superior economic
returns through responsible resource development from its
portfolio of operated and non-operated assets in the Rocky
Mountain region of the U.S.
2. Adoption of new and revised standards
Standards adopted during the year
The Group has adopted all of the new or amended Accounting
Standards and interpretations issued by the International
Accounting Standards Board (“IASB”) that are mandatory and
relevant to the Group’s activities for the current reporting period.
The following new and revised Standards have been adopted but
have not had any material impact on the amounts reported in
these financial statements:
•• Amendments to IFRS 17 - Insurance contracts
•• Amendments to IFRS 17 - Initial application of IFRS 17 and
IFRS 9 - comparative information
•• Amendments to IAS 1 and IFRS practice statement 2 -
Disclosure of accounting policies
•• Amendments to IAS 8 - Definition of accounting estimates
•• Amendments to IAS 12 - Deferred tax related assets and
liabilities arising from a single transaction
•• Amendments to IAS 12 - International tax reform - pillar two
model rules
Standards issued but not yet effective
Any new or amended Accounting Standards or interpretations
that are not yet mandatory (and in some cases, had not yet been
endorsed by the UK Endorsement Board) have not been early
adopted by the Group for the year ended 31 December 2023.
They are as follows:
•• Amendments to IAS 1 - Classification of liabilities as current
or non-current
•• Amendments to IFRS 16 - Lease liability in a sale and
leaseback
•• Amendments to IAS 1 - Non-current liabilities with covenants
•• Amendments to IAS 7 and IFRS 7 - Supplier finance
arrangements
•• Amendments to IAS 21 - Lack of exchangeability
•• Amendments to IFRS 10 and IAS 28 - Sale or contribution of
assets between an investor and its associate or joint venture
•• IFRS S1 - General requirements for disclosure of sustainability
- related financial information
•• IFRS S2 - Climate-related disclosures
The Directors do not expect that the adoption of these Standards
or Interpretations in future periods will have a material impact on
the financial statements of the Company or the Group.
3. Material accounting policies
Basis of preparation
The financial statements have been prepared in accordance with
UK-adopted International Accounting Standards and with the
requirements of the Companies Act 2006 as applicable to
companies reporting under those standards.
The financial statements have been prepared on the historical
cost basis, other than certain financial assets and liabilities, which
are stated at fair value. Historical cost is generally based on the
fair value of the consideration given in exchange for assets.
The consolidated and the Company financial statements are
presented in United States dollars (“US$”). All amounts have
been rounded to the nearest thousand unless otherwise indicated.
The functional currency of the Company is pounds sterling (“£”)
and that of the U.S. subsidiaries is US$.
As described below, the Directors continue to adopt the going
concern basis in preparing the consolidated and the Company
financial statements.
The accounting policies set out below have, unless otherwise
stated, been applied consistently to all periods presented in
these financial statements.
The preparation of the financial statements in compliance with
UK-adopted international accounting standards requires
management to make estimates and the Directors to exercise
judgement in applying the Group’s accounting policies. The
significant judgments made by the Directors in the application
of these accounting policies that have significant impact on the
financial statements and the key sources of estimation
uncertainty are disclosed in note 4.
Going concern
The Directors have prepared cashflow forecasts for the Group
and Parent Company for the period to 31 December 2025 based
on their assessment of both the discretionary and the non-
discretionary cash requirements of the Group during this period
and based on a range of sensitivities and scenarios.
56
Zephyr Energy plc Annual Report and Financial Statements 2023 Financial statements Notes to the financial statements
3. Material accounting policies continued
These cashflow forecasts include the forecast revenues from, and
the operating costs of, the Group’s operations, together with all
committed development expenditure and cashflows related to
the drilling of the State 36-2R well and the expected insurance
recoveries from the drilling operations. As disclosed in note 13, a
well incident happened during the year which led to the drilling of
the new State 36-2R well. The Group has comprehensive well
control insurance coverage and the Board expects to recover
insurance proceeds from the well incident for the cost of drilling
the new State 36-2R well. Should the insurance proceeds be
delayed or lower than expected, the Group could require further
funding to meet its commitments within the going concern
assessment period.
In addition, as at 31 December 2023, the Group and the Parent
Company had existing borrowings that are payable within 12 months
(current) from the end of the reporting period. To meet this
obligation, the Group and the Parent Company will require debt
refinancing of existing borrowings or raising of additional funding.
As such, the Group and the Parent Company’s ability to continue
as going concerns is dependent on securing insurance proceeds
and debt refinancing of existing borrowings or raising additional
funding which are not guaranteed. This indicates the existence of
a material uncertainty which may cast significant doubt over the
Group and the Parent Company’s ability to continue as going
concerns, and therefore, the Group and the Parent Company may
be unable to realise their assets and discharge their liabilities in the
normal course of business.
Following detailed discussions, the Directors are confident that
the Group and the Parent Company will be able to secure
insurance recoveries as per above, refinance their existing
borrowings and raise additional funding to enable the Group and
the Parent Company to continue in operation for at least the next
twelve months from the date of approval of the financial
statements. The Directors have extensive experience in raising
capital for projects and ventures and remain confident in the
Group and the Parent Company’s ability to raise the capital
needed to maintain and deliver on its commitments and continue
as a going concern.
The Directors continue to adopt the going concern basis in preparing
the consolidated financial statements. The financial statements do
not include any adjustments that would be required should the
going concern basis of preparation no longer be appropriate.
Basis of consolidation
The consolidated financial statements incorporate the financial
statements of the Company and its subsidiary undertakings
(together, “the Group”) made up to 31 December each year.
Subsidiary undertakings are those entities controlled directly or
indirectly by the Company. Control is achieved when the
Company is exposed to, or has rights to, variable returns from its
involvement with the entity and has the ability to affect those
returns through its power over the entity.
The results of subsidiaries acquired or disposed of during the
year are included in the income statement from the date on
which control is transferred to the Group or, up to the date that
control ceases, as appropriate. Where necessary, adjustments
are made to the financial statements of subsidiaries to bring
accounting policies used into line with those used by the Group.
The Group applies the acquisition method to account for business
combinations. The consideration for each acquisition is measured
at the aggregate of the fair values (at the date of exchange) of
assets given, liabilities incurred or assumed, and equity instruments
issued by the Group in exchange for control of the acquire.
All intra-group transactions, balances, income and expenses are
eliminated on consolidation.
Business combinations and asset acquisitions
In accordance with the requirements of IFRS 3 Business
combinations, the Group performs an assessment of each
acquisition to determine whether the acquisition should be
accounted for as an asset acquisition or a business combination.
For each transaction, the Group may elect to apply the concentration
test as permitted by the amendment to IFRS 3 to determine if
the fair value of assets acquired is substantially concentrated in
a single asset (or a group of similar assets). If this concentration
test is met, the acquisition qualifies as an acquisition of a group
of assets and liabilities, and not of a business.
The requirements of IFRS 3 are applied once it is determined
that a business has been acquired. Under IFRS 3, a business is
defined as an integrated set of activities and assets conducted
and managed for the purpose of providing a return to investors.
A business generally consists of inputs, processes applied to
those inputs, and resulting outputs that are, or will be, used to
generate revenues.
When less than the entire interest of an entity is acquired, the
choice of measurement of the non-controlling interest, either at
fair value or at the proportionate share of the acquiree’s identifiable
net assets, is determined on a transaction by transaction basis.
The Group does not recognise a liability for contingent
consideration in respect of asset acquisitions until the related
activity occurs.
Investments in subsidiary undertakings
Long-term investments representing interests in subsidiary
undertakings are stated at cost less any provision for impairment
in the value of the non-current investment.
Exploration and evaluation assets
The Group applies the full cost method of accounting for Exploration
and Evaluation (“E&E”) costs, having regard to the requirements
of IFRS 6 Exploration for and Evaluation of Mineral Resources.
Under the full cost method of accounting, costs of exploring for
and evaluating mineral resources are accumulated by reference
to appropriate cost centres being the appropriate licence area but
are tested for impairment on a cost pool basis as described below.
57
Zephyr Energy plc Annual Report and Financial Statements 2023 Financial statements Notes to the financial statements
3. Material accounting policies continued
E&E assets comprise costs of (i) E&E activities that are on-going
at the balance sheet date, pending determination of whether or
not commercial reserves exist and (ii) costs of E&E that, whilst
representing part of the E&E activities associated with adding to
the commercial reserves of an established cost pool, did not
result in the discovery of commercial reserves.
Costs incurred prior to having obtained the legal rights to
explore an area are expensed directly to the income statement
as they are incurred.
All costs of E&E are initially capitalised as E&E assets. Payments
to acquire the legal right to explore, costs of technical services
and studies, seismic acquisition, exploratory drilling and testing
are capitalised as E&E assets.
Costs include directly attributable overheads together with the
cost of other materials consumed during the exploration and
evaluation phases.
Treatment of E&E assets at conclusion of
appraisal activities
E&E assets related to each exploration licence/project are carried
forward until the existence (or otherwise) of commercial reserves
has been determined. If commercial reserves have been discovered,
the related E&E asset are assessed for impairment on a cost pool
basis as set out below and any impairment is recognised in the
income statement. The carrying value, after any impairment loss,
of the relevant E&E assets is then reclassified as development
and production assets.
E&E assets that related to E&E activities that are determined not
to have resulted in the discovery of commercial reserves remain
capitalised as E&E assets at cost, subject to meeting a pool-wide
impairment test in accordance with the accounting policy for
impairment of E&E assets set out below.
Impairment of exploration and evaluation
assets
E&E assets are assessed for impairment when facts and
circumstances suggest that the carrying amount may exceed its
recoverable amount. Such indicators include, but are not limited to,
those situations outlined in paragraph 20 of IFRS 6 Exploration
for and Evaluation of Mineral Resources and include the point at
which a determination is made as to whether or not commercial
reserves exist.
Where there are indications of impairment, the E&E assets
concerned are tested for impairment. Where the E&E assets
concerned fall within the scope of an established full cost pool,
the E&E assets are tested for impairment together with all
development and production assets associated with that cost
pool, as a single cash-generating unit.
The aggregate carrying value is compared against the expected
recoverable amount of the pool, generally by reference to the
present value of the future net cashflow expected to be derived
58
from production of commercial reserves. Where the E&E assets
to be tested fall outside the scope of any established cost pool,
there will generally be no commercial reserves and the E&E
assets concerned will generally be written off in full.
If the recoverable amount of a cash-generating unit is estimated
to be less than its carrying amount, the carrying amount of the
cash-generating unit is reduced to its recoverable amount. An
impairment loss is recognised immediately in profit or loss.
When an impairment loss subsequently reverses, the carrying
amount of the cash-generating unit is increased to the revised
estimate of its recoverable amount, but so that the increased
carrying amount does not exceed the carrying amount that
would have been determined had no impairment loss been
recognised for the cash-generating unit in prior years. A reversal
of an impairment loss is recognised immediately in profit or loss.
The Group considers each area of oil and gas exploration, on a
geographical basis to be a separate cost pool and therefore
aggregates all specific assets for the purposes of determining
whether impairment of E&E assets has occurred.
Property and equipment
Oil and gas properties
Oil and gas properties are stated at cost, less accumulated
depreciation and any accumulated impairment losses. The initial
cost of an asset comprises its purchase price or construction cost,
any costs directly attributable to bringing the asset into operation,
and the initial estimate of the asset retirement obligation. The
purchase price or construction cost is the aggregate amount paid
and the fair value of any consideration given to acquire the asset.
Oil and gas properties are depleted using the unit-of-production
method based on production for the period divided by the Group’s
estimated total proved and probable reserve volumes (before
royalties) of the geographic region concerned. Production and
reserves volumes for natural gas are converted at the energy
equivalent of six thousand cubic feet of natural gas to one barrel
of oil. Estimates of future development costs for developing the
proved and probable reserves are included in the depletion base.
Office equipment and right-of-use assets
Office equipment and right-of-use assets are stated at cost less
accumulated depreciation and any accumulated impairment
losses. The cost of an item of office equipment and right-of-use
assets comprises its purchase price and any costs directly
attributable to bringing the asset into use.
Depreciation is recognised so as to write off the cost of assets
less their residual values over their useful lives at the following rates:
Office equipment
straight-line over 5 years
Right-of-use assets
straight-line over the shorter of the
lease term and the useful life of
the underlying asset
The estimated useful lives, residual value and depreciation method
are reviewed at the end of each reporting period, with the effect
of any changes in estimate accounted for on a prospective basis.
Zephyr Energy plc Annual Report and Financial Statements 2023 Financial statements Notes to the financial statements
3. Material accounting policies continued
An item of office equipment and right-of-use asset is derecognised
upon disposal or when no future economic benefits are expected
to arise from the continued use of the asset. Any gain or loss
arising on the disposal or retirement is determined as the difference
between the sales proceeds and the carrying amount of the
asset and is recognised in profit or loss.
Impairment of property and equipment
In accordance with the requirements of IAS 36 Impairment of
assets, at each reporting date, the Directors assess whether
indications exist that the carrying value of an asset may be
impaired. If there are indicators of impairment the Directors
estimate the asset’s recoverable amount. An assets recoverable
amount is the higher of an asset’s, or cash-generating unit’s, fair
value less costs to sell and its value-in-use, and is determined on
a portfolio basis, based on geographical location.
Where the carrying amount of an asset or cash-generating unit
exceeds its recoverable amount, the Directors consider the asset
impaired and writes it down to its recoverable amount. In assessing
value-in-use, the Directors discount the estimated future
cashflows to their present value using a pre-tax discount rate
that reflects current market assessments of the time value of
money and the risks specific to the asset. In determining fair
value less costs to sell, the Directors consider recent market
transactions, if available. If no such transactions can be identified,
the Directors will utilise an appropriate valuation model.
Joint arrangements
The Company is party to a joint arrangement when there is a
contractual agreement that sets out the terms of the relationship
over the relevant activities of the Company and at least one
other party.
Management has a legal degree of control over these joint
operating arrangements through Joint Operating Agreements.
The Company classifies its interests in joint arrangements as joint
operations where the Company has both the right to assets and
obligations for the liabilities of the joint arrangement. It accounts
for its interests in joint operations by recognising its share of
assets and liabilities, revenues and expenses in accordance with
its contractually conferred rights and obligations.
The Company accounts for its own assets, liabilities and cashflows
measured in accordance with the terms of the Joint Operating
agreement and the accounting treatment reflects the
agreement’s commercial effect.
Where the percentage ownership in joint arrangements changes
during a reporting period, the arrangement is reassessed to ensure
it is still appropriately classified, and the Company’s share of income
and expenses is adjusted prospectively from the date of change.
Foreign currencies
For the purpose of the consolidated financial statements, the
results and financial position are expressed in United States dollar,
which is the presentation currency for both company and
consolidated financial statements.
In preparing the financial statements of the individual companies,
transactions in currencies other than the functional currency of
each group company (“foreign currencies”) are translated into
the functional currency at the rates of exchange prevailing on
the dates of the transactions. At each reporting date, monetary
assets and liabilities that are denominated in foreign currencies
are retranslated into the functional currency at the rates prevailing
on the reporting date. Non-monetary assets and liabilities carried
at fair value that are denominated in foreign currencies are
translated at the rates prevailing at the date when the fair value
was determined. Non-monetary items that are measured in
terms of historical cost in a foreign currency are not retranslated.
Foreign exchange differences are recognised in the profit or loss
in the period in which they arise, except for foreign exchange
differences on monetary items receivable from or payable to a
foreign operation for which settlement is neither planned nor
likely to occur and which, therefore, form part of the net
investment in the foreign operation. Foreign exchange differences
arising on the translation of the Group’s net investment in foreign
operations are recognised as a separate component of Shareholders’
equity via the statement of other comprehensive income. On
disposal of foreign operations and foreign entities, the cumulative
translation differences are recognised in the income statement
as part of the gain or loss on disposal.
For the purpose of presenting company and consolidated
financial statements, the assets and liabilities of the Company,
and the Group’s subsidiaries, which have a functional currency
other than United States dollar, are translated using exchange
rates prevailing at the end of each reporting period. Income and
expense items are translated at the average exchange rates for
the period, unless exchange rates fluctuate significantly during
that period, in which case the exchange rates at the date of
transactions are used. Foreign exchange differences arising are
recognised in other comprehensive income and accumulated in
equity. Equity items are translated at the exchange rates at the
date of transactions and foreign exchange differences arising
are accumulated directly in equity.
On the disposal of a foreign operation (i.e. a disposal of the
Group’s entire interest in a foreign operation, a disposal involving
loss of control over a subsidiary that includes a foreign operation or
loss of joint control over a jointly controlled entity that includes
a foreign operation), all of the accumulated exchange differences
in respect of that operation attributable to the Group are reclassified
to profit or loss. Where there is no change in the proportionate
percentage interest in an entity then there has been no disposal
or partial disposal and accumulated exchange differences
attributable to the Group are not reclassified to profit or loss.
59
Zephyr Energy plc Annual Report and Financial Statements 2023 Financial statements Notes to the financial statements
3. Material accounting policies continued
Fair value adjustments arising on the acquisition of a foreign
operation are treated as assets and liabilities of the foreign operation
and translated at the rate of exchange prevailing at the end of
each reporting period. Exchange differences arising are
recognised in equity.
Taxation
The tax expense represents the sum of the tax currently payable
for the year and deferred tax.
The tax currently payable is based on taxable profit for the year.
Taxable profit differs from profit as reported in the income
statement because it excludes items of income or expense that
are taxable or deductible in other years and items that are never
taxable or deductible. The Group’s liability for current tax is calculated
using tax rates that have been enacted or substantively enacted
by the reporting date.
Deferred tax is recognised on temporary differences between
the carrying amounts of assets and liabilities in the consolidated
financial statements and the corresponding tax bases used in the
computation of taxable profit. Deferred tax liabilities are generally
recognised for all taxable temporary differences and deferred
tax assets are generally recognised for all deductible temporary
differences to the extent that it is probable that taxable profits
will be available against which those deductible temporary
differences can be utilised. Such deferred tax assets and liabilities
are not recognised if the temporary difference arises from
goodwill or from the initial recognition (other than in a business
combination) of other assets and liabilities in a transaction which
affects neither the taxable profit nor the accounting profit.
Deferred tax liabilities are recognised for taxable temporary
differences associated with investments in subsidiaries and
interests in joint ventures, except where the Group is able to
control the reversal of the temporary difference and it is probable
that the temporary difference will not reverse in the foreseeable
future. Deferred tax assets arising from deductible temporary
differences associated with such investments and interest are
only recognised to the extent that it is probable that there will be
sufficient taxable profits against which to utilise the benefits of
the temporary differences and they are expected to reverse in
the foreseeable future.
The carrying amount of deferred tax assets is reviewed at each
reporting date and reduced to the extent that it is no longer
probable that sufficient taxable profits will be available to allow
all or part of the assets to be recovered.
Deferred tax liabilities and assets are measured at the tax rates
that are expected to apply in the period in which the liability is
settled or the asset realised, based on tax rates that have been
enacted or substantively enacted at the reporting date.
Current and deferred tax are recognised in profit or loss,
except when they relate to items that are recognised in other
comprehensive income or directly in equity, in which case, the
60
current and deferred tax are also recognised in other comprehensive
income or directly in equity respectively. Where current tax or
deferred tax arises from the initial accounting for a business
combination, the tax effect is included in the accounting for
the business combination.
Deferred tax assets and liabilities are offset when there is a
legally enforceable right to set off current tax assets against
current tax liabilities and when they relate to income taxes levied
by the same taxation authority and the Group intends to settle
its current tax assets and liabilities on a net basis.
Investments and other financial instruments
Recognition of financial assets and financial liabilities
Financial assets and financial liabilities are recognised on the
Group’s balance sheet when the Group becomes a party to the
contractual provisions of the instrument, and are initially
measured at fair value. Transaction costs are included as part of
the initial measurement, except for financial assets at fair value
through profit or loss.
Investments and other financial assets are subsequently
measured at either amortised cost or fair value depending on
their classification. Classification is determined based on both
the business model within which such assets are held and the
contractual cashflow characteristics of the financial asset unless
an accounting mismatch is being avoided.
Financial liabilities are subsequently measured at either amortised
cost or fair value.
Fair value measurement
Assets and liabilities recognised at fair value through the income
statement are measured at the price that would be received to
sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. The fair
value is based on assumptions that market participants would
use when pricing an asset or liability, including assumptions
about risk and risk inherent in valuation techniques and the
inputs to valuations. Fair value measurements are classified and
disclosed in one of the following categories:
Level 1: Fair value is based on actively quoted market prices,
if available.
Level 2: In the absence of actively quoted market prices, the
Group seeks price information from external sources including
broker quotes and industry publications. Substantially all of these
inputs are observable in the market place during the entire term
of the instrument, can be derived from observable data, or
supported by observable levels at which transactions are
executed in the market place.
Level 3: If valuations require inputs that are both significant to
the fair value measurement and less observable from objective
sources, we must estimate prices based on available historical
and near-term future price information and certain statistical
methods that reflect the Group’s market assumptions.
Zephyr Energy plc Annual Report and Financial Statements 2023 Financial statements Notes to the financial statements
3. Material accounting policies continued
Derecognition of financial assets and financial liabilities
The Group derecognises a financial asset only when the contractual
rights to cashflows from the asset expire, or it transfers the financial
asset and substantially all the risks and rewards of ownership of
the asset to another entity. If the Group neither transfers nor retains
substantially all the risks and rewards of ownership and continues
to control the transferred asset, the Group recognises its retained
interest in the asset and an associated liability for the amount it
may have to pay. If the Group retains substantially all the risks
and rewards of ownership of a transferred financial asset, the
Group continues to recognise the financial asset and also
recognises a collateralised borrowing for the proceeds received.
On derecognition of a financial asset and financial liability a gain
or loss is recognised in profit or loss.
Impairment of financial assets
The Group recognises a loss allowance for expected credit losses
on financial assets which are measured at amortised cost. The
measurement of the loss allowance depends upon the Group’s
assessment at the end of each reporting period as to whether
the financial instrument’s credit risk has increased significantly
since initial recognition, based on reasonable and supportable
information that is available without undue cost or effort to obtain.
Where there has not been a significant increase in exposure to
credit risk since initial recognition, a 12-month expected credit
loss allowance is estimated. This represents a portion of the asset’s
lifetime expected credit losses that is attributable to a default
event that is possible within the next 12 months. Where a financial
asset has become credit impaired or where it is determined that
credit risk has increased significantly, the loss allowance is based
on the asset’s lifetime expected credit losses. The amount of
expected credit loss recognised is measured on the basis of the
probability weighted present value of anticipated cash shortfalls
over the life of the instrument discounted at the original
effective interest rate.
Trade and other receivables
Trade and other receivables are measured at initial recognition at
fair value, and are subsequently measured at amortised cost using
the effective interest method, less any allowance for expected
credit losses.
The Group has applied the simplified approach to measuring
expected credit losses which uses a lifetime expected loss
allowance. To measure the expected credit losses, trade
receivables are grouped on the basis of days overdue.
Trade and other receivables include prepayments which were
previously presented as a separate line on the Balance Sheet.
The comparative for the year ended 31 December 2022 has
been adjusted accordingly for consistency.
Cash and cash equivalents
Cash and cash equivalents comprise cash-in-hand and on-
demand deposits.
Derivative contracts
The Group uses forward commodity contracts to hedge its
commodity price risks. The Group has not applied hedge accounting
and as a result, such derivative contracts are initially recognised
at fair value on the date on which a derivative contract is entered
into and are subsequently remeasured at fair value.
Derivative contracts are presented as financial assets when the
fair value is positive and as financial liability when the fair value is
negative. Net changes in fair value are recognised in profit or loss.
Trade and other payables
Trade and other payables are initially measured at their fair value,
and are subsequently measured at amortised cost using the
effective interest rate method.
Borrowings
Borrowings are recognised initially at fair value, net of any transaction
costs incurred. Borrowings are subsequently measured at amortised
cost. Any difference between the proceeds (net of transaction
costs) and the redemption value is recognised in the income
statement over the period of the borrowings using the effective
interest method, if applicable.
Amortised cost is calculated by taking into account any fees or
costs that are an integral part of the effective interest rate. The
effective interest rate amortisation is included as finance costs
in the income statement.
Interest on borrowing is accrued as applicable to each class of
borrowing.
Warrants
Warrants issued are classified within Shareholders’ equity and are
valued at fair value on issuance. The Group uses the Black-Scholes
model to estimate fair value. Upon exercise, the consideration
received is recorded as an increase in share capital.
Provisions
Provisions are recognised when the Group has a legal or constructive
obligation, as a result of past events, for which it is probable that
an outflow of economic resources will result and that outflow
can be reliably measured.
The amount recognised as a provision is the best estimate of the
consideration required to settle the present obligation at the end
of the reporting period, considering the risks and uncertainties
surrounding the obligation. When a provision is measured using
the cashflow estimated to settle the present obligation, its
carrying amount is the present value of those cashflows.
61
Zephyr Energy plc Annual Report and Financial Statements 2023 Financial statements Notes to the financial statements
3. Material accounting policies continued
Decommissioning
Where a liability for the retirement of a well, removal of production
equipment and site restoration at the end of the production life of
a well exists, the Group recognises a liability for asset retirement.
Provision for asset retirement is recognised in full when the related
assets are installed or acquired, and are then reassessed at the
end of each reporting period.
Revenue recognition
Natural Gas, NGLs and Oil
Revenue is comprised of the fair value of the consideration received
or receivable from the sale of natural gas and crude oil products
in the ordinary course of the Group’s activities and is recognized
when control is transferred to the purchaser. This is generally
met when title passes from the Group to its customer. Revenue
from oil and gas production represents the Group’s share.
The provision recognised is calculated as the net present value
of the Group’s share of the expenditure expected to be incurred
at the end of the life of the asset. The cost of recognising the
decommissioning provision is included as part of the cost of the
relevant asset and is, therefore, charged to the income statement
in accordance with the Group’s policy for depreciation of property
and equipment or for impairment of exploration and evaluation
assets, depending upon the stage of the assets at the time
of retirement.
The unwinding of the discount on the decommissioning liability
is included as accretion of the provision and is presented in finance
costs in the income statement.
The Group recognises changes in estimates prospectively, with
corresponding adjustments to the liability and the associated
non-current asset.
Share-based payments
The Group has applied the requirements of IFRS 2 Share-based
Payment for all grants of equity instruments.
The Group operates an equity-settled share option plan and a
share-based compensation plan in respect of certain Directors,
employees and consultants. The Group also issues warrants to
certain advisors which are classed as share-based payments.
Equity-settled share-based payments are measured at fair value
(excluding the effect of non-market based vesting conditions) at
the date of grant. The fair value of the service received in exchange
for the grant of options/warrants and equity is recognised as an
expense. The fair value determined at the grant date of equity-
settled share-based payment is expensed on a straight-line basis
over the vesting period, based on the Group’s estimate of shares
that will eventually vest and adjusted for the effect of non-
market based vesting conditions.
The fair value of option and warrant grants are measured using
the Black Scholes model for non-performance-based options.
The expected life used in the model has been adjusted, based on
management’s best estimate, for the effect of non-transferability,
exercise restrictions and behavioural considerations.
The grant by the Company of options and share-based compensation
plans over its equity instruments to the employees of subsidiary
undertakings in the Group is treated as a capital contribution.
The fair value of employee services received, measured by reference
to the grant date fair value, is recognised over the vesting period
as an increase to investment in subsidiary undertakings, with a
corresponding credit to equity in the parent entity accounts.
62
The Group sells its petroleum and natural gas revenue pursuant
to variable-price contracts with terms of generally one year or
less. The transaction price is based on the commodity index price
at the point of title transfer and may include adjustments for quality,
location or other factors depending on the contract terms. The
Group delivers volumes of petroleum and natural gas product to
the respective counterparty throughout the contract period. The
Group evaluates its arrangements with third parties and partners
to determine if the Group acts as the principal or as an agent. In
making this evaluation and concluding that it acts as a principal,
management considers if the Group obtains control of the
product delivered, which is indicated by the Group having the
primary responsibility for the delivery of the product, having the
ability to establish prices or having inventory risk.
Revenue is recognized when a customer obtains legal title to the
product, which is when volumes are physically transferred to the
contract counterparty at a point of sale.
Verified emission reductions (“VERs”)
VERs are purchased in increments corresponding to the Groups
estimated production forecasts and are subsequently retired in
accordance with actual monthly production levels. Once retired
the VERs are recognised in the Group’s income statement and
presented within operating and transportation expenses.
Segmental reporting
Operating segments are reported in a manner consistent with
the internal reporting provided to the chief operating decision
maker. The chief operating decision maker, who is responsible
for allocating resources and assessing performance of the
operating segments and making strategic decisions, has been
identified as the Board of Directors.
4. Critical accounting judgements and key
sources of estimation uncertainty
In the application of the Group’s accounting policies, which are
described in note 3, the Directors are required to make judgements,
estimates and assumptions about the carrying amounts of the
assets and liabilities that are not readily apparent from other
sources. The estimates and associated assumptions are based
on historical experience and other factors that are considered to
be relevant. Actual results may differ from these estimates.
Zephyr Energy plc Annual Report and Financial Statements 2023 Financial statements Notes to the financial statements
4. Critical accounting judgements and key
sources of estimation uncertainty continued
The estimates and underlying assumptions are reviewed on an
ongoing basis. Revisions to accounting estimates are recognised
in the period in which the estimate is revised if the revision affects
only that period or in the period of the revision and future periods
if the revision affects both the current and future periods.
The following are the critical judgements and estimations that the
Directors have made in the process of applying the Group’s and
Company’s accounting policies and that have the most significant
effect on the amounts recognised in the financial statements:
Critical judgements
Exploration and evaluation assets - Group
The decision to transfer assets from exploration and evaluation
assets to property and equipment is based on the estimated
proved and probable reserves which are in part, used to determine
a project’s technical feasibility and commercial viability.
There has been no transfer of exploration and evaluation assets
during the year ended 31 December 2023.
Business combination and asset acquisitions - Group
During the year ended 31 December 2023, the Group acquired
the remaining 25% working interest in the WSU in the Paradox
Basin, Utah from RSOC.
The determination of whether a transaction is a business
combination or an asset acquisition is based on management’s
assessment of each individual transaction based on the criteria
of IFRS 3 Business combinations.
If the initial concentration test is met, then the acquisition is
accounted for as an asset acquisition and no further analysis is
required. If the initial test is not met, the acquisition is further
analysed to determine whether the acquisition meets the
definition of a business under IFRS 3. If the acquisition meets
the criteria and is, therefore, considered to be a business
combination, the Group applies the acquisition method to
account for the recognition and measurement of identifiable
assets acquired, the liabilities assumed, any non-controlling
interest and, if applicable, goodwill or a gain on the transaction.
The Directors consider that the acquisition meets the requirements
of the concentration test under IFRS 3 based on the fact that
the fair value of the assets acquired is concentrated in a single
identifiable asset or group of similar identifiable assets. The
acquisition has, therefore been accounted for as an acquisition
of assets and is presented within exploration and evaluation
assets. See note 13.
Estimations
Impairment and impairment reversals - Group
The recoverable amounts of CGUs and individual assets have
been determined based on the higher of value-in-use calculations
and fair values less costs to dispose. These calculations require
the use of estimates and assumptions including information on
forecasted oil and gas commodity prices, expected production
volumes, quantity of reserves, discount rates, as well as future
development costs, operating costs and royalty costs. Key
assumptions in the determination of cashflows from reserves
include reserves estimated by the Group’s independent third
party reserve evaluators. It is possible that any or all of these key
assumptions may change, which may then impact the estimated
values of the oil and gas properties and then require a material
adjustment to the carrying value of E&E assets and property and
equipment. Significant management judgement is required to
analyse internal and external indicators of impairment or historical
impairment reversals. The Group monitors internal and external
indicators of impairment relating to its non-current assets.
Recoverability of loans to subsidiary undertakings -
Company only
The Company has outstanding loans from its directly held subsidiary
which has then made a number of loans to indirectly held
subsidiaries as the primary method of financing the activity of
those subsidiaries. The principal loans are shown in the Company
balance sheet on the basis that the loans incur interest at a
commercial rate according to the Group’s inter-company loan
policy, which is being rolled up until such time as the subsidiaries
are in a position to settle.
In accordance with IFRS 9 Financial instruments, as the subsidiary
undertakings cannot repay the loans at the reporting date, the
Board has made an assessment of expected credit losses (“ECL”).
The Group has not made any provision for impairment of its U.S.
non-current assets and is expecting to generate profits in the
future. As a result, the Board do not consider that any further
provision for ECL is required and, therefore, subject to the
recognition of exchange differences, a cumulative lifetime ECL
of US$29.9 million has been recognised at 31 December 2023
(2022: US$28.4 million).
At 31 December 2023, the Company has total loans in its directly
held subsidiaries of US$82.8 million (2022: US$72.3 million). See
note 16.
Reserve estimates
Reserves are estimates of the amount of natural gas, NGLs and
oil product that can be economically and legally extracted from the
Group’s properties. To calculate the reserves, significant estimates
and assumptions are required about a range of geological, technical
and economic factors, including quantities, production techniques,
recovery rates, production costs, transport costs, commodity
demand, commodity prices and exchange rates.
Estimating the quantity and/or grade of reserves requires the
size, shape and depth of fields to be determined by analysing
geological data, such as drilling samples. This process may
require complex and difficult geological judgments and
calculations to interpret the data.
Given the economics used to estimate reserve changes from
year to year and, because additional geological data is generated
during the course of operations, estimates of reserves may
change from time to time.
63
Zephyr Energy plc Annual Report and Financial Statements 2023 Financial statements Notes to the financial statements
4. Critical accounting judgements and key sources of estimation uncertainty continued
Decommissioning
Decommissioning costs will be incurred by the Group at the end of the operating life of certain facilities and properties. The ultimate
decommissioning costs are uncertain and cost estimates can vary in response to many factors including changes to relevant
regulatory requirements, the emergence of new restoration techniques or experience at other production sites. The expected timing
and amount of expenditures can also change, for example in response to changes in reserves or changes in laws and regulations or
their interpretation. In addition, the Group determines the appropriate discount rate at the end of each reporting period. The Group
uses a risk-free discount rate to determine the present value of the estimated future cash outflows to settle the obligation and this
may change in response to numerous market factors. As a result, there could be significant adjustments to the provisions
established which would affect future financial results. See note 22.
Derivative contracts
Derivative contracts are presented as financial assets when the fair value is positive and as financial liabilities when the fair value is
negative. Net changes in fair value are recognised in profit or loss.
The fair value of derivative contracts is based on published market prices as at 31 December and the actual gains and losses realised
on eventual cash settlement can vary due to subsequent fluctuations in commodity prices.
5. Segmental information
When considering the requirements of IFRS 8 Operating segments, the Board of Directors have determined that the Group has one
main operating segment, the exploration, development and production of oil and gas resources based in the U.S. As a result, no
segmental information is presented.
6. Revenue
Petroleum and natural gas revenue earned by the Group in the U.S. is disaggregated by commodity, as follows:
2023
US$’000
2022
US$’000
22,609
35,257
1,657
959
3,040
2,765
25,225
41,062
2023
US$’000
2022
US$’000
2,888
215
369
3,472
1,880
236
120
2,236
Crude oil
Natural gas liquids
Natural gas
7. Finance costs
Loan interest and fees
Amortisation of debt costs
Unwinding of discount on decommissioning
64
Zephyr Energy plc Annual Report and Financial Statements 2023 Financial statements Notes to the financial statements
8. (Loss)/profit on ordinary activities before taxation
The (loss)/profit before taxation for the year has been arrived at after charging/(crediting):
Gains on derivative contracts
Depreciation and depletion of property and equipment
Staff costs excluding share-based payments
Share-based payments
Expense relating to short-term leases
Foreign exchange losses/(gains)1
2023
US$’000
2022
US$’000
(412)
(1,781)
9,630
2,664
6
30
12,668
1,830
210
31
2,776
(6,102)
1 Foreign exchange losses/(gains )include a loss of US$2.7 million (2022: gain US$5.6 million) in respect of the translation of GBP designated loans between the Company
and its U.S. subsidiary entities at 31 December 2023. See note 16.
9. Auditor’s remuneration
Amounts payable to the external auditors and their associates in respect of audit services:
Audit of these financial statements
10. Staff costs
The average monthly number of employees (including Executive Directors) was:
2023
US$’000
2022
US$’000
207
161
Office and management
Operations
Their aggregate remuneration comprised:
Wages and salaries
Social security costs
Other pension costs
Share-based payments
Group
Company
2023
Number
2022
Number
2023
Number
2022
Number
2
4
6
2
1
3
1
1
2
1
1
2
Group
Company
2023
US$’000
2022
US$’000
2023
US$’000
2022
US$’000
2,106
1,380
150
119
5
91
106
19
2,380
1,596
668
84
44
2
798
640
81
44
10
775
Included within Company wages and salaries is US$0.4 million (2022: US$0.4 million) which relates to the activities of its subsidiary
entities.
Refer to the Directors’ Report for details regarding the remuneration of the highest paid Director and the total amounts for Directors’
remuneration in accordance with Schedule 5 to the Accounting Regulations.
65
Zephyr Energy plc Annual Report and Financial Statements 2023 Financial statements Notes to the financial statements
11. Taxation
Current tax:
Current year
Deferred tax:
Origination and reversal of temporary differences
Adjustment in respect of prior years
Tax (credit)/charge on (loss)/profit for the year
The (credt)/charge for the year can be reconciled to the (loss)/profit per the income statement as follows:
(Loss)/profit before tax
(Loss)/profit multiplied by applicable tax rate - 25% U.S. (2022: 25% U.S.)
Effects of:
Share-based payments
Prior year U.S. tax losses now recognised
Deferred tax not previously recognised
Unrelieved tax losses carried forward
Adjustments in respect of prior years
Tax (credit)/charge on (loss)/profit for the year
12. (Loss)/profit per ordinary share
2023
US$’000
2022
US$’000
-
-
(1,601)
1,955
41
(1,560)
(1,560)
-
1,955
1,955
2023
US$’000
(5,063)
(1,266)
2
-
(337)
-
41
2022
US$’000
21,226
5,307
52
(3,400)
(85)
81
-
(1,560)
1,955
Basic (loss)/profit per Ordinary Share is calculated by dividing the net (loss)/profit for the year by the weighted average number of
Ordinary Shares in issue during the year. Diluted (loss)/profit per Ordinary Share is calculated by dividing the net (loss)/profit for the
year by the weighted average number of Ordinary Shares in issue during the year adjusted for the dilutive effect of potential Ordinary
Shares arising from the Company’s share options and warrants.
At 31 December 2022, 2.4 million share options and 89.6 million warrants were excluded from the diluted number of shares based on
their market share price and exercise price.
The calculation of the basic and diluted (loss)/profit per Ordinary Share is based on the following data:
(Losses)/profits
(Losses)/profits for the purpose of basic and diluted (loss)/profit per Ordinary Share
being net (loss)/profit for the year
(3,503)
19,271
2023
US$’000
2022
US$’000
66
Zephyr Energy plc Annual Report and Financial Statements 2023 Financial statements Notes to the financial statements
12. (Loss)/profit per ordinary share continued
2023
Number
’000
2022
Number
’000
Number of shares
Weighted average number of shares for the purpose of basic (loss)/profit per Ordinary Share
1,644,490
1,533,110
Weighted average number of shares for the purpose of basic (loss)/profit per Ordinary Share
1,644,490
1,533,110
Dilutive share options
Dilutive warrants
-
-
42,526
55,721
Weighted average number of shares for the purpose of diluted (loss)/profit per Ordinary Share
1,644,490
1,631,357
(Loss)/profit per Ordinary Share
Basic, cents per share
Diluted, cents per share
(0.21)
(0.21)
1.26
1.18
Due to the losses incurred from continuing operations in the year ended 31 December 2023, there is no dilutive effect from the
existing share options or warrants.
13. Exploration and evaluation assets
Cost
At 1 January 2022
Additions
At 1 January 2023
Additions
Decommissioning - change in estimates
Insurance proceeds
Funds received in lieu of grants
At 31 December 2023
US$’000
22,773
15,213
37,986
22,643
177
(10,563)
(302)
49,941
Paradox acquisition
On 21 December 2022, the Group announced that it would acquire the remaining 25% working interest in the WSU in the Paradox
Basin, Utah from Rockies Standard Oil Company LLC (“RSOC”). As a result, the Group now holds a 100% working interest in the WSU.
Under the term of the acquisition agreement, total consideration of up to US$3 million is payable by the issue of up to 40,449,284
new Ordinary Shares of 0.1 pence each in Zephyr Energy plc, at a price of 6.05 pence per new Ordinary Share.
The new Ordinary Shares would be issued in two tranches:
•• A first tranche of 13,483,095 new Ordinary Shares to be issued in settlement of loan notes of US$1 million, on completion of the
acquisition.
•• A second tranche of 26,966,189 new Ordinary Shares to be issued in settlement of loan notes of US$2 million, upon Zephyr’s final
investment decision with respect to the commencement of operations at the Powerline Road gas processing plant which was
acquired in August 2022. If the final investment decision is not made by 1 January 2029 the Group has no further obligation to
issue the second tranche.
On 10 February 2023, the Group announced that it had completed the acquisition and issued 13,483,095 new Ordinary Shares of 0.1
pence each in Zephyr Energy plc, at a price of 6.05 pence per new Ordinary Share, in respect of the first tranche. See notes 23 and 26.
67
Zephyr Energy plc Annual Report and Financial Statements 2023 Financial statements
Notes to the financial statements
13. Exploration and evaluation assets continued
State 36-2 well control incident
On 7 April 2023, as workover operations were being completed on State 36-2, the well experienced a significant control issue. All
relevant authorities were notified and a specialist well control team recommended by the Group’s insurers was deployed to bring the
well under control as quickly as possible. Well control efforts were successful and remediation and clean-up operations were completed.
A third-party confirmatory environmental survey found no evidence of lingering environmental impact. The Group also received
confirmation from the State of Utah’s Division of Oil, Gas and Mining that the remediation work performed on the well site was
completed in accordance with the State’s requirements.
The Group has comprehensive well control insurance coverage and the Board expects to recover substantially all costs associated
with the incident. The Group’s policy covers expenses up to the policy limit of US$20 million for clean-up, remediation, plugging and
abandonment of the original well, and the cost of a new well of similar design up to the point at which the incident occurred.
At 31 December 2023, a total of US$7.7 million had been recovered from the Group’s insurer. A receivable of US$2.9 million has been
recognised in respect of expenditure not yet recovered at 31 December 2023, which has been recovered in full since the year end.
See note 17.
Acquisition of additional acreage
On 15 August 2023, the Group announced that it had acquired an additional 640 leased acres in the Paradox Basin at a cost of US$7,230.
Following the acquisition, the Group now operates a total of over 46,000 gross acres in the Paradox Basin, the majority of which it
holds as operator with a 100% interest.
Salt Wash project
On 18 October 2023, the Group announced a proposed farm-in to a minimum 75% working interest in a 1,047-acre leasehold position in
the Salt Wash Field, a previously producing asset with proven oil, gas and helium reserves, located three miles to the south of the
Group’s WSU.
The key terms of the farm-in which completed on 6 September 2023, were as follows:
•• An initial payment of US$0.3 million due within 30 days of the transaction completing.
•• A second payment of US$0.3 million due within 60 days of the transaction completing.
•• The Group is committed to drill, log and case one vertical delineation well, with spudding prior to 30 June 2024 to obtain a 100%
share in the leasehold.
•• The seller has the option to back-in to the lease holding at a 25% working interest, with no historic cost exposure, once the
delineation well is drilled and a field development plan has been proposed by Zephyr. Thereafter, the seller would become a fully
paying 25% working interest partner.
The total consideration of US$0.6 million has been treated as an acquisition of assets at 31 December 2023.
In June 2024, the Group announced that the drilling deadline had been extended to 1 September 2024.
U.S. Department of energy funding
On 9 December 2022, the Group announced that it had secured additional US$1 million research grant funding from the University of
Utah’s Energy and Geoscience Institute (“EGI”), to be utilised for data gathering during the drilling of the State 36-2 LN-CC well. The
grant was not concluded during the year ended 31 December 2023 and the Group received US$0.3 million for historical expenditure
in lieu of this award. The carrying value of the Group’s exploration and evaluation assets have been presented net of the funds received.
Impairment
The Directors assessed the indicators of impairment as set out in IFRS 6 and no indicators or impairment were identified. On this
basis the Directors have satisfied themselves that there was no requirement to perform an impairment test at 31 December 2023
and, as a result, no provision for impairment has been made in respect of these assets at 31 December 2023 (2022: nil). See note 4.
68
Zephyr Energy plc Annual Report and Financial Statements 2023 Financial statements Notes to the financial statements
14. Property and equipment
Group
Company
Oil and gas
properties
US$’000
Office
equipment
US$’000
Right-of-use
assets
US$’000
Total
US$’000
Office
equipment
US$’000
Right-of-use
assets
US$’000
Total
US$’00
Cost
At 1 January 2022
Business combination
Acquisitions
Additions
Exchange differences
At 1 January 2023
Additions
Disposals
Decommissioning -
change in estimates
Exchange differences
At 31 December 2023
Accumulated depreciation
At 1 January 2022
Charge for the year
Exchange differences
At 1 January 2023
Charge for the year
Disposals
Exchange differences
At 31 December 2023
Carrying amount
At 31 December 2023
At 31 December 2022
At 1 January 2022
12,902
40,199
3,362
9,757
-
66,220
10,468
(2,792)
463
-
74,359
1,755
12,666
-
14,421
9,607
(449)
-
23,579
50,780
51,799
11,147
27
-
-
-
(3)
24
-
-
-
1
25
18
2
(2)
18
2
-
1
21
4
6
9
-
-
-
-
-
-
77
-
-
-
12,929
40,199
3,362
9,757
(3)
66,244
10,545
(2,792)
463
1
77
74,461
-
-
-
-
21
-
-
21
56
-
-
1,773
12,668
(2)
14,439
9,630
(449)
1
23,621
50,840
51,805
11,156
27
-
-
-
(3)
24
-
-
-
1
25
18
2
(2)
18
2
-
1
21
4
6
9
The Group depreciation and depletion charge has been allocated to the income statement as follows:
Depreciation, depletion and amortisation
Administrative expenses
-
-
-
-
-
-
77
-
-
-
27
-
-
-
(3)
24
77
-
-
1
77
102
-
-
-
-
21
-
-
21
56
-
-
18
2
(2)
18
23
-
1
42
60
6
9
2023
US$’000
9,607
23
9,630
2022
US$’000
12,666
2
12,668
Impairment
At 31 December 2023, the Directors considered the requirements of IAS 36 Impairment of assets in respect of its oil and gas
properties. They have satisfied themselves that there were no indicators of impairment and, therefore, there was no requirement to
perform an impairment test. As a result, no provision for impairment has been made in respect of these assets at 31 December 2023
(2022: nil). See note 4.
69
Zephyr Energy plc Annual Report and Financial Statements 2023 Financial statements Notes to the financial statements
15. Derivative contracts
During the year ended 31 December 2023, the Group entered into the following derivative contracts to mitigate its exposure to
fluctuations in commodity prices.
Fair value
31 December
2023
US$’000
Term
Oil
Contracts
Swap
Swap
Swap
Swap
Swap
Swap
Swap
Swap
Swap
Volume
Bbl
7,000
7,000
5,000
5,000
5,000
4,000
4,000
3,000
3,000
Pricing point
WTI NYMEX
WTI NYMEX
WTI NYMEX
WTI NYMEX
WTI NYMEX
WTI NYMEX
WTI NYMEX
WTI NYMEX
WTI NYMEX
Strike price
per bbl
US$
81.50
81.33
80.81
80.17
79.49
1 April 2022 to 30 April 2023
1 May 2023 to 31 May 2023
1 June 2023 to 30 June 2023
1 July 2023 to 31 July 2023
1 August 2023 to 31 August 2023
78.72 1 September 2023 to 30 September 2023
78.05
77.40
76.74
1 October 2023 to 31 October 2023
1 November 2023 to 30 November 2023
1 December 2023 to 31 December 2023
Settled
Settled
Settled
Settled
Settled
Settled
Settled
Settled
Settled
At 31 December 2023, the Group had the following outstanding derivative contract:
Oil
Contracts
Volume
Bbl
Pricing point
Strike price
per bbl
US$
Fair value
31 December
2023
US$’000
Term
Swap
27,000
WTI NYMEX
82.20
1 January 2024 to 31 March 2024
278
The fair value of the outstanding contracts at 31 December 2023 has been recognised as follows:
Non-current assets
Current assets
2023
US$’000
2022
US$’000
-
278
278
175
1,133
1,308
The fair value measurement of derivative contracts has been categorised as Level 1 in the fair value hierarchy as the measurement
inputs are quoted prices in active markets for identical assets at the measurement date.
The recognised gain on derivative contracts was as follows:
2023
US$’000
2022
US$’000
1,441
(1,029)
412
473
1,308
1,781
Realised gain
Change in fair value
70
Zephyr Energy plc Annual Report and Financial Statements 2023 Financial statements Notes to the financial statements
16. Investments
Cost
At 1 January 2022
Additions
Exchange differences
At 1 January 2023
Additions
Exchange differences
At 31 December 2023
Impairment
At 1 January 2022
Exchange differences
At 1 January 2023
Exchange differences
At 31 December 2023
Carrying amount
At 31 December 2023
At 31 December 2022
Company
Shares in
subsidiary
undertakings
US$’000
Loans to
subsidiary
undertakings
US$’000
Total
US$’000
72,114
12,790
(7,933)
76,971
6,089
4,233
66,851
12,790
(7,375)
72,266
6,089
3,983
82,338
87,293
31,788
(3,372)
28,416
1,508
29,924
37,051
(3,930)
33,121
1,758
34,879
5,263
-
(558)
4,705
-
250
4,955
5,263
(558)
4,705
250
4,955
-
-
52,414
43,850
52,414
43,850
Company
The Company has outstanding loans made to its subsidiaries which incur interest at a rate of 1% above the UK base rate. The loans
are due for repayment once the subsidiaries are generating surplus cash flows from their revenue-generating activities, having met
their operating, administrative and capital expenditure. This is not anticipated to happen within the next twelve months and,
therefore, the loans are presented within non-current assets. The Board has assessed the recoverability of the loans and investments
based on the expected future cashflows arising to the Company from its subsidiary entities and consider that no additional provision
(2022: nil) should be recognised in the period.
71
Zephyr Energy plc Annual Report and Financial Statements 2023 Financial statements Notes to the financial statements
16. Investments continued
The Company had investments in the following subsidiary undertakings as at 31 December 2023:
Directly owned:
VANE Minerals (UK) Limited
Rose Petroleum (UK) Limited
Indirectly owned:
Rose Petroleum (US) LLC
Rose Petroleum (Utah) LLC
Zephyr Bakken LLC
Zephyr Williston LLC
Zephyr Hawk LLC
Zephyr Salt Wash LLC
Place of
incorporation
(or registration)
and operation
Proportion
of ownership
interest
Proportion of
voting power
held
UK
UK
U.S.
U.S.
U.S.
U.S.
U.S.
U.S.
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
Principal activity
Dormant
Holding company
Holding company
Exploration and development
Production and development
Production and development
Dormant
Exploration and development
During the year Zephyr Salt Wash LLC was formed in the U.S. and has not yet commenced trading.
The registered office address for all companies incorporated in the United Kingdom is 20-22 Wenlock Road, London, N1 7GU.
The registered office address for all companies registered in the U.S. is 7310 W 52nd Avenue, Suite A116, Arvada, Colorado, 80002.
17. Trade and other receivables
Trade receivables
VAT recoverable
Other receivables
Prepayments
Group
Company
2023
US$’000
4,577
32
3,119
169
7,897
2022
US$’000
3,919
41
330
347
4,637
2023
US$’000
2022
US$’000
-
32
-
64
96
-
41
-
41
82
Trade receivables are due from third-party working interest operators. The Group consistently assesses the collectability of these
receivables and at 31 December 2023 do not consider that any allowance for credit losses is required.
At 31 December 2023, other receivables include the sum of US$0.2 million (2022: US$0.3 million) in respect of amounts due in
respect of settled derivative contracts.
At 31 December 2023, other receivables include the sum of US$2.9 million (2022: nil) in respect of insurance recoveries relating to
the well incident which took place during the year, and which had not yet been recovered. All insurance proceeds have been
recovered in full since 31 December 2023. See note 13.
The Directors consider that the carrying amount of trade and other receivables approximates to their fair value, and represents the
Group’s maximum exposure to credit risk.
72
Zephyr Energy plc Annual Report and Financial Statements 2023 Financial statements Notes to the financial statements
18. Cash and cash equivalents
Cash and cash equivalents held by the Group and the Company as at 31 December 2023 were US$3.6 million and US$40,000
respectively (2022: US$9 million, US$0.1 million). The Directors consider that the carrying amount of these assets approximate to
their fair value and do not believe that the Group is exposed to any significant credit risk on its cash.
19. Trade and other payables
Trade payables
Taxes and social security
Other payables
Accruals
2023
US$’000
5,115
26
112
1,730
6,983
Group
2022
US$’000
8,881
21
110
3,508
12,520
2023
US$’000
Company
2022
US$’000
85
26
-
339
450
121
21
1
316
459
Trade payables and accruals principally comprise amounts outstanding for trade purchases and ongoing costs.
Other payables primarily represent the potential liability due to the German licencing authorities in respect of historical, relinquished
hydrocarbon licences in south-western Germany. The Group has continued to recognise the remaining potential liability although it
continues to negotiate further reductions with the German licencing authorities.
No interest is generally charged on balances outstanding.
The Group has financial risk management policies to ensure that all payables are paid within the credit time frame.
The Directors consider that the carrying amount of trade and other payables approximates to their fair value.
20. Borrowings
FIBT facility
Term loan
Revolving credit
Capitalised debt issue costs
SGRI
Revolving credit
Capitalised debt issue costs
Promissory note
Loan
Total borrowings
2023
US$’000
Group
2022
US$’000
10,943
15,000
15,129
8,000
(119)
(239)
25,824
22,890
9,494
(56)
9,438
2,580
(77)
2,503
89
-
35,351
25,393
73
Zephyr Energy plc Annual Report and Financial Statements 2023 Financial statements Notes to the financial statements
20. Borrowings continued
Current borrowings
Non-current borrowings
Group
2023
US$’000
28,950
6,401
35,351
2022
US$’000
14,572
10,821
25,393
Remaining contractual maturity analysis
The following table details the Group’s remaining maturity for its borrowings. The table has been drawn up based on the undiscounted
cash flows based on the earliest date on which the borrowings are required to be paid. The table includes both principal and interest
cash flows.
Maturity analysis
Maturity analysis
Less than 6 months
6 months to 1 year
1 year to 2 years
2 years to 5 years
Group
2023
US$’000
2022
US$’000
13,109
18,103
5,086
1,699
37,997
2,543
14,037
5,086
6,782
28,448
First International Bank & Trust (“FIBT”)
On 16 February 2022, the Group entered into credit facility agreements with FIBT through its U.S. subsidiaries. Under the terms of the
agreements the Group received a term loan of US$18 million, repayable by 48 monthly instalments, and a 12-month revolving credit
facility of US$10 million, both of which incurred interest at a rate of 6.74%.
The revolving credit facility has a standard redetermination every six months and was increased to a commitment of up to US$13
million in October 2022, incurring interest at a rate of 9.74%.
In October 2023, the repayment term of the revolving credit facility was extended to 16 October 2024, and the interest charge was
adjusted to a variable rate equal to the Wall Street Prime Rate plus 2.5% subject to a minimum rate of 6.74%.
On 21 December 2023, the revolving credit facility was increased to a commitment of up to US$15.2 million with the same
repayment and interest terms.
At 31 December 2023, the Group had drawn US$15 million in respect of the facility.
In June 2024, the Group completed its semi-annual redetermination of the existing revolving credit facility and entered into a new
facility agreement with FIBT. Under the terms of the agreement, the Group received a new term loan of US$5.6 million. The new term
loan will amortise monthly over four years and has an interest rate of 10% per annum.
The revolving credit is subject to a covenant which is measured on an annual basis. The Group was in full compliance with the terms
of the covenant in the periods reported.
FIBT has a lien on the assets of the Group’s U.S. subsidiaries, Zephyr Bakken LLC and Rose Petroleum (Utah) LLC.
74
Zephyr Energy plc Annual Report and Financial Statements 2023 Financial statements Notes to the financial statements
20. Borrowings continued
SGRI
On 19 December 2022, the Group entered into a facility agreement with an experienced U.S. based institutional investor through its
U.S. subsidiary Zephyr Williston LLC. Under the terms of the agreement the Group received a 12-month revolving credit facility of up
to US$8 million incurring interest at a rate 12%.
On 13 October 2023, the revolving credit facility was increased to US$8.6 million and the repayment term was extended to 19 March 2024.
Interest and fees have been added to the loan and are due for repayment on the same terms as the facility.
On 30 April 2024, the repayment term of the revolving credit facility was further extended to 31 May 2024, on which date, it was
further extended to 30 June 2024.
On 3 May 2024, the Group announced that it had retired US$3.88 million of the facility through the issuance of US$3.88 million of
equity comprised of 64,045,768 new Ordinary Shares of 0.1 pence each in Zephyr Energy plc at a price of 4.85 pence per new
Ordinary Share. See note 29.
In June 2024, the Group announced that it had fully repaid the remaining US$6 million of the facility.
Promissory note
On 1 August 2023, the Group entered into an agreement for a principal sum of US$160,000 repayable in six monthly instalments of
US$16,500 and a final payment of US$75,000 due in February 2024. The note was related to oilfield equipment and the lender held
collateral over that equipment until the principal was repaid.
The movement in total borrowings during the year was:
At 1 January
Net cashflows - financing activities - net additions to borrowings
Non-cash movements - movement in capitalised interest and loan costs
At 31 December
21. Deferred tax
At 1 January
(Credit)/charge
At 31 December
Represented by:
U.S. tax losses
Oil and gas property
Decommissioning
Unrealised foreign gain
Mark to Market adjustments
Temporary timing differences
Net deferred tax liability
2023
US$’000
25,393
9,016
942
35,351
2022
US$’000
4,060
21,569
(236)
25,393
2023
US$’000
2022
US$’000
1,955
(1,560)
395
-
1,955
1,955
2023
US$’000
(12,586)
14,887
(1,267)
730
70
(1,439)
395
2022
US$’000
(9,511)
10,764
(1,034)
1,409
327
-
1,955
Unrelieved tax losses arising in the UK of US$4.9 million (2022: US$6.2 million) have not been recognised as a deferred tax asset as
there is currently insufficient evidence that the asset will be recoverable in the foreseeable future. The losses can be carried forward
indefinitely but must be utilised in relation to the same operations.
75
Zephyr Energy plc Annual Report and Financial Statements 2023 Financial statements Notes to the financial statements
22. Provisions
At 1 January
Business combinations
Additions
Disposal
Change in estimates
Accretion interest
At 31 December
Non-current provision
Group Decommissioning
2023
US$’000
2022
US$’000
4,138
-
268
(80)
372
369
5,067
5,067
508
2,319
2,146
-
(955)
120
4,138
4,138
In accordance with the Group’s environmental policy and applicable legal requirements, where a liability for the retirement of a well,
removal of production equipment and site restoration at the end of the production life of a well exists, the Group recognises a
liability for decommissioning.
During the year ended 31 December 2023, the Group recognised a provision for the decommissioning liability in respect of wells
where a change of status indicated the requirement for decommissioning provisions and any changes in estimates in respect of all
relevant assets at 31 December 2023. See note 4.
The relevant rates used by the Group in calculating the provision for decommissioning are:
Inflation factor
Risk free rate
The cost of decommissioning assets is included as part of the relevant asset as follows:
Exploration and evaluation assets
Oil and gas properties
31 December
2023
%
31 December
2022
%
3.35
4.20
2.36
4.14
2023
US$’000
2022
US$’000
2,167
2,408
4,575
1,990
2,021
4,011
76
Zephyr Energy plc Annual Report and Financial Statements 2023 Financial statements Notes to the financial statements
23. Share capital
Authorised
Ordinary Shares of 0.1 pence each
Deferred Shares of 9.9 pence each
Allotted, issued and fully paid
Ordinary Shares of 0.1 pence each
Deferred Shares of 9.9 pence each
Group and Company
2023
Number
‘000
US$’000
2022
Number
‘000
7,779,297
9,911
7,779,297
227,753
28,725
227,753
8,007,050
38,636
8,007,050
1,686,502
2,263
1,560,746
227,753
40,305
227,753
1,914,255
42,568
1,788,499
US$’000
9,411
27,278
36,689
2,107
40,305
42,412
The Deferred Shares are not listed on AIM, do not give the holders any right to receive notice of, or to attend or vote at, any general
meetings, have no entitlement to receive a dividend or other distribution or any entitlement to receive a repayment of nominal
amount paid up on a return of assets on a winding up nor to receive or participate in any property or assets of the Company. The
Company may, at its option, at any time redeem all of the Deferred Shares then in issue at a price not exceeding £0.01 from all
Shareholders upon giving not less than 28 days’ notice in writing.
Due to the difference in functional and presentation currencies of the Parent Company, foreign exchange differences can arise
between the authorised share capital which is restated at each period end, and the allotted, issued and fully paid share capital which
is presented at historical rates of exchange.
Issued ordinary share capital
On 1 February 2022, the Company issued 66,500,000 Ordinary Shares of 0.1 pence each at a price of 5 pence per Ordinary Share,
raising gross proceeds of US$4.5 million (£3.3 million).
On 11 February 2022, the Company issued 189,500,000 Ordinary Shares of 0.1 pence each at a price of 5 pence per Ordinary Share,
raising gross proceeds of US$12.9 million (£9.5 million).
On 3 January 2023, the Company issued 22,272,726 Ordinary Shares of 0.1 pence each in respect of warrants which were exercised
on 29 December 2022 at a price of 2 pence per Ordinary Share, raising gross proceeds of US$0.5 million (£0.45 million) in the year
ended 31 December 2022. See note 24.
On 10 February 2023, the Company issued 13,483,095 Ordinary Shares of 0.1 pence each at a price of 6.05 pence per Ordinary Share
in respect of the acquisition by the Group of the remaining 25% working interest in the WSU in the Paradox Basin, Utah from RSOC.
This has been treated as a share-based payment transaction. See notes 13 and 26.
On 12 June 2023, the Company issued 90,000,000 Ordinary Shares of 0.1 pence each at a price of 3.5 pence per Ordinary Share,
raising gross proceeds of US$3.9 million (£3.2 million).
At 1 January 2022
Allotment of shares
At 1 January 2023
Allotment of shares
At 31 December 2023
Ordinary
Shares
Number
‘000
Deferred
Shares
Number
‘000
1,304,746
227,753
256,000
-
1,560,746
227,753
125,756
-
1,686,502
227,753
77
Zephyr Energy plc Annual Report and Financial Statements 2023 Financial statements Notes to the financial statements
24. Warrant reserve
In February 2022, the Company undertook a fundraise which resulted in the issue of 256,000,000 Ordinary Shares of 0.1 pence each.
Subscribers were granted warrants to subscribe for 64,000,000 new Ordinary Shares, representing one warrant for every four placing
shares. The warrants are exercisable at a price of 7.5 pence per Ordinary Share for a period of three years from the date of issue.
The fair value of the warrants granted to subscribers was US$1.6 million and this was recognised as a movement between equity
reserves.
On 29 December 2022, 22,272,726 warrants were exercised at a price of 2 pence per Ordinary Share, raising gross proceeds of
US$0.5 million (£0.45 million). See note 23.
The fair value of the warrants exercised was US$0.12 million and this was recognised as a movement between equity reserves.
There have been no further grants or exercise of warrants during the year ended 31 December 2023.
At 1 January 2022
Granted
Exercised
At 1 January 2023 and 31 December 2023
25. Reserves
Warrants
Number
‘000
22,273
64,000
(22,273)
64,000
The share premium account represents the sum paid, in excess of the nominal value, of shares allotted, net of the costs of issue.
The shares to be issued reserve represents equity funds received for which shares have not yet been issued.
The warrant reserve represents accumulated charges made in respect of the issue of warrants to Shareholders. See note 24.
The share-based payment reserve represents accumulated charges made under IFRS 2 in respect of share-based payments.
The cumulative translation reserve represents foreign exchange differences arising on the translation of foreign operations. The
cumulative translation reserve also represents the net effect of the fact that the functional currency of the parent undertaking is
GBP, whilst its reporting currency is US$, resulting in exchange differences on translation of the parent undertakings equity.
The accumulated deficit includes all current and prior period retained profits/(losses).
26. Share-based payments
Equity settled share option plan
The Company has a Share Option Plan, 2013 Share Option Plan Part A (employees) and 2013 Share Option Plan Part B (non-
employees), under which options to subscribe for the Company’s shares have been granted to certain Directors and to selected
employees and consultants.
At 31 December 2023, 45 million share options had been granted under the terms of the Share Option Plans and not exercised.
The Company has no legal or constructive obligation to repurchase or settle the options in cash. The latest date for exercise of the
options is 28 May 2030 and, unless otherwise agreed, the options are forfeited if the employee or consultant leaves the Group
before the options vest, or if those options which have vested are not exercised within three months of leaving.
78
Zephyr Energy plc Annual Report and Financial Statements 2023 Financial statements Notes to the financial statements
26. Share-based payments continued
Details of the share options outstanding at the end of the year were as follow:
Outstanding at 1 January
Expired
Lapsed
Outstanding at 31 December
Exercisable at 31 December
2023
2022
Number of
options
‘000
Weighted
average
exercise price
pence
Number of
options
‘000
Weighted
average
exercise price
pence
45,031
(267)
-
44,764
44,764
4.8
85.92
-
4.3
4.3
45,281
-
(250)
45,031
34,365
5.57
-
145.4
4.8
6.1
The options outstanding at 31 December 2023 had an estimated weighted average remaining contractual life of 6 years (2022: 7
years), with an exercise price ranging between 0.1 pence and 342.5 pence.
There were no options issued during the year ended 31 December 2023 (2022: nil).
Share-based payment transaction
On 10 February 2023, the Company issued 13,483,095 new Ordinary Shares of 0.1 pence each at a price of 6.05 pence per new
Ordinary Share in respect of the acquisition by the Group of the remaining 25% working interest in the WSU in the Paradox Basin,
Utah from RSOC. Under the structure of the acquisition agreement, the fair value of the shares issued could be measured directly,
and accordingly an addition to exploration and evaluation assets of US$1 million has been recognised during the year ended 31
December 2023. See notes 13 and 23.
Warrants
On 11 February 2022, the Company granted 17,066,667 warrants to TPI, in respect of broker services provided by them in relation to
the placing of the Company’s Ordinary Shares. The warrants permit the holder to subscribe for one new Ordinary Share of 0.1 pence
at a price of 7.5 pence per Ordinary Share and are exercisable at any time for a period of three years from the date of issue.
On 11 February 2022, the Company granted 8,500,000 warrants to TPI, in respect of broker services provided by them in relation to
the raising of bridge loan facilities. The warrants permit the holder to subscribe for one new Ordinary Share of 0.1 pence at a price of
7.5 pence per Ordinary Share and are exercisable at any time for a period of three years from the date of issue.
On 12 June 2023, the Company granted 10,388,571 warrants to TPI, in respect of broker services provided by them in relation to the
placing of the Company’s Ordinary Shares. The warrants permit the holder to subscribe for one new Ordinary Share of 0.1 pence at a
price of 4.375 pence per Ordinary Share and are exercisable at any time for a period of three years from the date of issue.
The fair value of the warrants issued during the year has been calculated using the Black-Scholes model. The significant inputs into
the model for the IFRS 2 valuation were as follows:
Exercise price (pence)
Expected volatility (%)
Expected life (years)
Risk free rates (%)
Expected dividends
Performance condition
Grants in year
10,388,571
Warrants
4.375
79
2.5 years
4.72
-
None
The fair value of the warrants granted during the year was US$0.2 million (2022: US$0.6 million). The share price of the Company’s
Ordinary Shares on the date of grant was 3.45 pence per Ordinary Share.
79
Zephyr Energy plc Annual Report and Financial Statements 2023 Financial statements Notes to the financial statements
26. Share-based payments continued
In accordance with the Group’s accounting policy, the costs of an equity transaction are accounted for as a deduction from equity to
the extent that they are incremental costs directly attributable to the equity transaction that would otherwise have been avoided. As
a result, the US$0.2 million (2022: US$0.4 million) fair value charge relating to the warrants issued in respect of services provided in
relation to the placing of the Company’s Ordinary Shares has been treated as a movement between equity reserves.
During the year ended 31 December 2022, 1,360,000 warrants expired. The fair value of the expired warrants was US$11,513 and this
was recognised as a movement between equity reserves. No warrants expired during the year ended 31 December 2023.
No warrants have been exercised during the year ended 31 December 2023 (2022: nil).
Details of the warrants included in share-based payments and outstanding at the end of the year were as follow:
At 1 January 2022
Granted
Expired
At 1 January 2023
Granted
At 31 December 2023
Warrants
Number
‘000
33,710
25,567
(1,360)
57,917
10,388
68,305
In the year ended 31 December 2023, the Company recognised a total expense of US$6,473 (2022: US$0.2 million) in respect of
share-based payments, being US$6,473 (2022: US$24,792) in respect of the share option plan and US$ nil (2022: US$0.2 million) in
respect of warrants.
In April 2024, the Company issued a total of 61,503,028 share options to Directors, certain employees and consultants of Zephyr,
either to reflect historic awards under the Company’s Long-Term Incentive Plan, bonuses for performances achieved in 2021 and
2022, to satisfy employee contractual commitments or commitments in lieu of deferred remuneration and fees from 2020, during
the COVID-19 pandemic.
27. Financial instruments
Financial risk management objectives
Management provides services to the business, co-ordinates access to domestic and international financial markets and monitors
and manages the financial risks relating to the operations of the Group. These risks include cashflow interest rate risk, foreign
currency risk, credit risk, liquidity risk, and commodity price risk.
The policies for managing these risks are regularly reviewed and agreed by the Board who aim to minimise potential adverse effects
on the Group’s financial performance on a continuous basis.
The Group does not enter into or trade financial instruments, including derivative financial instruments, for speculative purposes.
Capital risk management
The Group manages its capital to ensure that entities in the Group will be able to continue as going concerns while maximising the
return to Shareholders through the optimisation of the debt and equity balance. The Group’s overall strategy is to minimise costs and
liquidity risk.
The Group is not subject to externally imposed capital requirements.
The capital structure of the Group consists of cash and cash equivalents, interest bearing borrowings, lease liabilities and equity
attributable to owners of the Parent Company, comprising issued capital, reserves and retained earnings.
The Group plans its capital requirements on a regular basis and as part of this review the Directors consider the cost of capital and
the risks associated with each class of capital.
80
Zephyr Energy plc Annual Report and Financial Statements 2023 Financial statements Notes to the financial statements
27. Financial instruments continued
Material accounting policies
Details of the material accounting policies and methods adopted, including the criteria for recognition, the basis of measurement,
the basis on which income and expenses are recognised, in respect of each class of financial asset, financial liability and equity
instrument are disclosed in note 3.
Categories of financial instruments
Financial assets measured at amortised cost
Cash and cash equivalents
Trade receivables
Other receivables
Loans to subsidiary undertakings
Financial assets measured at fair value
Derivative contracts – hierarchy, Level 1
Financial liabilities measured at amortised cost
Trade payables
Other payables
Accruals
Borrowings
Lease liabilities
Group
Company
2023
US$’000
2022
US$’000
2023
US$’000
2022
US$’000
3,611
4,577
3,119
-
8,996
3,919
330
-
11,307
13,245
40
-
-
52,923
52,963
118
-
-
43,850
43,968
Group
Company
2023
US$’000
2022
US$’000
2023
US$’000
2022
US$’000
278
1,307
-
-
Group
Company
2023
US$’000
2022
US$’000
2023
US$’000
2022
US$’000
5,115
112
1,730
8,881
110
3,508
35,526
25,709
70
-
42,553
38,208
85
-
339
-
70
494
121
1
316
-
-
438
Fair value of financial instruments
The Directors consider that the carrying amount of its financial instruments approximates to their fair value.
Interest rate risk management
The Group’s policy on interest rate management is agreed at Board level and is reviewed on an on-going basis.
The Group is exposed to interest rate risk on cash held on deposit at banks but these accounts are held for liquidity rather than
investment and the interest rate risk is not considered material to the Group.
The Group’s main interest rate risk arises from borrowings that incur interest charges at a fixed rate above established parameters.
See note 20. However, the majority of the Group’s borrowings incur a fixed interest rate charge, and those that do not, are repayable
within the short term. As a result, the Directors do not consider that the Group has substantial exposure to fluctuating interest rates
on its liabilities and accordingly, no sensitivity analysis has been presented.
81
Zephyr Energy plc Annual Report and Financial Statements 2023 Financial statements Notes to the financial statements
27. Financial instruments continued
Foreign exchange risk and foreign currency risk management
The Group undertakes certain transactions denominated in foreign currencies, with the result that exposure to exchange rate
fluctuations arises.
Other than small amounts of cash balances and other payables that are held in currencies other than the functional currency of the
relevant entity, the majority of the Group’s monetary assets and monetary liabilities are denominated in the functional currency of
the relevant entity. As a result, there is limited exposure to fluctuations in exchange rates that would impact the income statement of
the Group.
The carrying amounts of the Group’s foreign currency denominated monetary assets and monetary liabilities at the reporting date
are as follows:
GBP
Liabilities
Assets
2023
US$’000
2022
US$’000
2023
US$’000
2022
US$’000
118
90
30
71
The Group has intercompany loans which are eliminated on consolidation. However, the loans are GBP denominated loans which are
recognised in U.S. subsidiaries as US$. As a result, the Group is exposed to exchange rate fluctuations on restatement of the loans at
the reporting date. As the loans have not been treated as net investment in foreign subsidiaries the impact of exchange rate
fluctuation is recognised in the income statement.
The financial statements of certain of the Group’s foreign subsidiaries are denominated in currencies that differ from the Group’s
presentation currency. As a result, the Group is exposed to movements in US$ in respect of foreign exchange differences arising on
the translation of recognised assets and liabilities, which may impact equity.
The Group does not normally hedge against the effects of movements in exchange rates.
Foreign currency sensitivity analysis
Sensitivity analysis has been performed to indicate how the profit or loss would have been affected by changes in the exchange rate between
GBP and US$. The analysis is based on the weakening and strengthening of US$ by 5%. A movement of 5% reflects a reasonably positive
sensitivity when compared to historical movements over a three to five-year timeframe. The sensitivity analysis includes only outstanding
foreign currency denominated monetary items and adjusts their translation at the period end for a 5% change in foreign currency rates.
The table below details the Group’s sensitivity to a 5% decrease in US$ against GBP. A positive number below indicates an increase in
profit where US$ strengthens 5% against GBP. For a 5% weakening of US$ there would be an equal and opposite impact on the
profit, and the balance below would be negative. The sensitivity calculated below is primarily attributable to the restatement of GBP
denominated intercompany loans in the Group’s U.S. subsidiaries.
Income statement
2023
US$’000
2022
US$’000
(3,105)
(2,616)
Liquidity risk management
Liquidity risk is the risk that the Group will not be able to meet its financial obligations when they fall due. Ultimate responsibility for
liquidity risk management rests with the Board of Directors, which has built an appropriate liquidity risk management framework for
the management of the Group’s short, medium and long-term funding and liquidity management requirements. The Group manages
liquidity risk by maintaining adequate cash reserves and by continuously monitoring forecast and actual cashflow.
With the exception of borrowings, see note 20, and lease liabilities, the Group’s financial liabilities mature within less than six months.
At 31 December 2023, the Group was compliant with all the terms of its borrowings.
The Group does not face a significant liquidity risk with regard to its lease liabilities, which are monitored by the Board.
82
Zephyr Energy plc Annual Report and Financial Statements 2023 Financial statements Notes to the financial statements
27. Financial instruments continued
At 31 December 2023, the maturity of undiscounted borrowings including interest was as follows:
Maturity analysis
Less than 6 months
6 months to 1 year
1 year to 2 years
2 years to 5 years
Group
Company
2023
US$’000
2022
US$’000
2023
US$’000
2022
US$’000
13,128
18,123
5,117
1,699
2,543
14,037
5,086
6,782
38,067
28,448
19
20
31
-
70
-
-
-
-
-
Credit risk management
Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the Group.
The maximum exposure to credit risk at the reporting date to recognised financial assets is the carrying amount, net of any
provisions for impairment of those assets. The Group does not hold any collateral. Generally, financial assets are written off when
there is no reasonable expectation of recovery.
The Group does not have any significant credit risk exposure on trade and other receivables, which are current and collectible.
The credit risk on liquid funds (cash) is considered to be limited because the counterparties are financial institutions with high and
good credit ratings assigned by international credit-rating agencies.
Commodity price management
The Group is exposed to commodity price risks relating to its ongoing business operations and uses derivative contracts to manage this risk.
The Group uses oil forward contracts to manage some of its transaction exposures and are intended to reduce the level of risk due to
fluctuations in oil price. The forward contracts are not designated as cashflow hedges and are entered into for periods consistent
with exposure of the underlying transactions.
28. Related party transactions
Amounts due from subsidiaries
Group
Other than foreign exchange losses and gains attributable to the restatement of GBP denominated intercompany loans in the
Company’s U.S. subsidiaries, balances and transactions between the Company and its subsidiaries which are related parties, have
been eliminated on consolidation and are not disclosed in this note. A foreign exchange loss of US$2.7 million (2022: gain US$5.6
million) has been recognised in the income statement for the year ending 31 December 2023.
Company
The Company has entered into a number of unsecured related party transactions with subsidiary undertakings. The most significant
transactions carried out between the Company and their subsidiary undertakings are management charges for services provided to
the subsidiary company and long-term financing. Details of these transactions are as follows:
Loans
Management charges
Interest (1% over UK base rate)
Capital contribution
2023
2022
Transactions
in the year
US$’000
Amounts
owing
US$’000
Transactions
in the year
US$’000
Amounts
owing
US$’000
2,824
669
2,595
-
64,973
11,042
58,952
6,901
9,860
603
533
1,215
-
5,902
6,839
573
83
Zephyr Energy plc Annual Report and Financial Statements 2023 Financial statements Notes to the financial statements
28. Related party transactions continued
Remuneration of key management personnel
The remuneration of key management personnel of the Group is set out below in aggregate for each of the categories specified in
IAS 24 Related Party Disclosures.
2023
2022
Purchase of
services
US$’000
Amounts
owing
US$’000
Purchase of
services
US$’000
Amounts
owing
US$’000
Short-term employee benefits
Post-employment benefits
Share-based payments
1,462
72
6
1,540
-
59
-
59
1,363
84
19
1,466
The amounts outstanding are unsecured and will be settled in cash. No guarantees have been given or received.
All transactions with related parties have been conducted on an arm’s length basis.
Directors’ pensions
The number of Directors to whom retirement benefits are accruing under money purchase schemes was
2023
No
2
-
67
-
67
2022
No
2
Services
During the year ended 31 December 2023, the Group received services from OCE which is a related party as JC Harrington is
indirectly the controlling shareholder and RL Grant is also a shareholder.
Office services
2023
US$’000
2022
US$’000
15
17
Directors warrants
On 3 January 2023, the Company issued 22,272,726 Ordinary Shares of 0.1 pence each in respect of warrants which were exercised
on 29 December 2022 at a price of 2 pence per Ordinary Share, raising gross proceeds of US$0.5 million (£0.45 million) in the year
ended 31 December 2022. See note 24.
84
Zephyr Energy plc Annual Report and Financial Statements 2023 Financial statements Notes to the financial statements
29. Post balance sheet events
Borrowings
SGRI
On 30 April 2024, the repayment term of the SGRI revolving
credit facility was extended to 31 May 2024, on which date, it
was further extended to 30 June 2024.
On 3 May 2024, the Group announced that it had retired
US$3.88 million of the facility through the issuance of US$3.88
million of equity comprised of 64,045,768 new Ordinary Shares
of 0.1 pence each in Zephyr Energy plc at a price of 4.85 pence
per new Ordinary Share. See note 20.
In June 2024, the Group announced that it had fully repaid the
remaining US$6 million of the facility. See note 20.
FIBT
In June 2024, the Group completed its semi-annual
redetermination of the existing revolving credit facility and
entered into a new facility agreement with FIBT. Under the terms
of the agreement, the Group received a new term loan of
US$5.6 million. The new term loan will amortise monthly over
four years and has an interest rate of 10% per. See note 20.
Hedging programme
In April 2024, the Group implemented an additional hedging
programming related to oil productions from its non-operated
asset portfolio in the Williston Basin over the period to 31
December 2024. The programme has been implemented with
BP Energy Company (“BP”) one of the world’s leading energy
trading houses, as the hedge counterparty.
Share-based payments
In April 2024, the Company issued a total of 61,503,028 share
options to Directors, certain employees and consultants of
Zephyr, either to reflect historic awards under the Company’s
Long-Term Incentive Plan, bonuses for performances achieved
in 2021 and 2022, to satisfy employee contractual commitments
or commitments in lieu of deferred remuneration and fees from
2020, during the COVID-19 pandemic.
8585
Zephyr Energy plc Annual Report and Financial Statements 2023 Financial statements Zephyr Energy plc Annual Report and Financial Statements 2023
Other information
Directors, advisers and officers
Glossary
87
88
“ Our goal for the next year
is to move the Paradox
project into commercial
production”
Zephyr Energy plc Annual Report and Financial Statements 2023
Other information
Directors, advisers and officers
Directors
RL Grant
TH Reynolds
GB Stein
JC Harrington
CJ Eadie
Secretary
CJ Eadie
Non-Executive Chairman
Non-Executive Director
Non-Executive Director
Chief Executive Officer
Group Finance Director
Registered office
20-22 Wenlock Road, London, N1 7GU
AUDITOR
BDO LLP
55 Baker Street
London
W1U 7EU
REGISTRAR
Link Group
29 Wellington Street
Leeds
LS1 4DL
BANKERS
Barclays Bank Plc
Level 27
1 Churchill Place
London
E14 5HP
PUBLIC RELATIONS
Celicourt Communications Limited
4 Bream’s Buildings
London
EC4A 1HP
SOLICITORS
RBG Legal Services Limited, trading as Memery Crystal
165 Fleet Street
London
EC4A 2DY
NOMINATED ADVISER
Allenby Capital Limited
5 St Helen’s Place
London
EC3A 6AB
JOINT BROKERS
Turner Pope Investments Ltd
3 Queen Street
London
W1J 5PA
Panmure Gordon (UK) Limited
40 Gracechurch Street
London
EC3V 0BT
87
Zephyr Energy plc Annual Report and Financial Statements 2023
Other information
Glossary
OTCQB
£ / GBP
2P
PDP
PNP
PRAX
PUD
ROIC
RSOC
Slawson
Sproule
U.S.
US$
2U
VERs
WSU
OTCQB Venture Market
Pound Sterling
Proved plus probable reserves
Producing well
Proved not producing well
Prax Group
Proved but undeveloped well
Return on invested capital
Rockies Standard Oil Company LLC
Slawson Exploration Company
Sproule International
United States
United States Dollar
Unrisked prospective resources
Verified emission reductions
White Sands Unit
AGM
bbls
BLM
bo
boe
boepd
2C
BP
Annual General Meeting
Barrels
U.S. Bureau of Land Management
Barrel of oil
Barrel of oil equivalent
Barrels of oil equivalent per day
Best estimate of contingent resources
BP Energy Company
CAPEX
Capital expenditure
CGU
Code
CPR
DOE
Cash Generating Unit
Corporate Governance Code
Competent persons report
U.S. Department of Energy
Dominion Energy Dominion Energy Utah, LLC
DUC
DSU
EGI
ESG
ECL
E&E
E&P
FIBT
HSRP
IFRS
IASB
KPI
<
LTI
M&A
Drilled but uncompleted well
Drilling spacing unit
Utah’s Energy and Geoscience Institute
Environmental, social and governance
Expected credit losses
Exploration and evaluation
Evaluation and production
First International Bank and Trust
Hydraulically stimulated resource play
International Financial Reporting Standards
International Accounting Standards Board
Key performance indicator
Less than
Lost time injuries
Merger & Acquisition
mmboe
Million barrels of oil equivalent
>
NED
OCE
More than
Non-Executive Director
Origin Creek Energy LLC
88
Zephyr Energy plc Annual Report and Financial Statements 2023
Design and production:
cbgtogether.com
together
Head Office:
First Floor, Newmarket House
Market Street, Newbury
Berkshire, RG14 5DP
www.zephyrplc.com
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