Zephyr Energy’s crypto venture offers novel and exciting revenue opportunity

The promise of early production will get most small-cap oil and gas investors somewhat giddy, so it’s no surprise that Zephyr Energy Plc’s (AIM:ZPHR, OTCQB:ZPHRF) latest venture has caught attention.

Zephyr this week confirmed it is just a matter of weeks away from hooking up a gas well at the Paradox project, in Utah, into a new on-site cryptocurrency mining facility.

It’s a novel development for the AIM-quoted firm, albeit the Zephyr team has researched other similar ventures in the US.

For Zephyr, it provides a beneficial problem-solving catalyst.

Gas will be fed from the well into a generator to power a self-contained, modular cryptocurrency mining facility. Importantly, routing the gas to power units, means that the recently drilled well can be flowed continuously without the need for gas flaring, which is a polluting and wasteful practice which is increasingly frowned upon amidst the upsurge in ESG awareness.

Strategically, the big picture is that Zephyr can gather more data from what will effectively become a longer-term phase of test production. It will also act as something of a beta test of the crypto facility and its economic credentials.

At transaction level, Zephyr will book gas sales and will also benefit from the sale of Bitcoins. It adds cash flows to Zephyr, in addition to its North Dakota where non-operated interests in producing wells generated some US$11.5mln of revenue in the first quarter.

It’s another tick in the box for Zephyr in Utah, as it continues to advance Paradox where planning is currently underway for a new phase of drilling, ahead of a potential connection to gas export infrastructure.

“For us, it [the crypto project] is additive,” chief executive Colin Harrington told Proactive.

“We’re going to have economics from selling the gas to the crypto facility, we’ll have economics from selling the liquids, that will come alongside the gas, and we’ll also be selling Bitcoin as it is produced.

“It should improve economics significantly, and, it allows us to do this extended production test run.

“We’ll see where it takes us and whether we should expand it or not.”

Harrington added: “We try to do things judiciously, we’re stepping into this [crypto business] and we’ll see what the future holds.”

Zephyr’s initial investments to enable the crypto project will allow the company to scale up significantly, at lower cost, potentially lifting generation capacity from 1MW to 4MW – in turn ramping up the yield of gas, liquids, Bitcoin.

Harrington reassured investors that crypto won’t become a distraction from the core energy business and that in time the operation will likely be separated.

“It will likely be spun out in some way so that shareholders can benefit from it, without it without it taking more of our [Zephyr’s] capital expenditure,” he added.

“But, we fully want to unlock thar value for shareholders and look forward to doing it soon.”

In a statement on Tuesday, Zephyr told investors that the crypto facility could be operational in as little as eight to 12 weeks, in tandem with the start of production from the State 16-2LN-CC well.

It is expected that Zephyr will fund the initial investment for the planned 1MW facility from existing cash resources or via third party investment. The CAPEX bill is estimated to be under US$2mln and Zephy reckons the crypto facility will achieve capital payback in less than two years, based on current crypto values.

Liquid production from the well will be sold to local refineries in Utah, the company added, meanwhile, longer-term and higher volume gas production from the Paradox project is envisaged to supply into gas infrastructure that was recently purchased by Dominion Energy, from 2023 onwards.

Zephyr told investors it is now in the advanced stages of planning for a slated three-well drill programme at the Paradox project, where work is slated to start in the second half of 2022.