Executive Summary / Key Takeaways

• Zion Oil & Gas (ZNOG) is a pure-play oil and gas exploration company focused exclusively on Israel, holding the New Megiddo Valleys License 434 (NMVL 434) covering approximately 75,000 acres.
• The company's core activity is currently centered on the high-risk, high-potential re-completion and testing of the MJ-1 well, where recent operations have observed gas at the surface during early flowback.
• ZNOG has no revenue-generating operations and relies entirely on equity and debt financing, primarily through its Dividend Reinvestment and Stock Purchase Plan (DSPP), facing substantial doubt about its ability to continue as a going concern without securing additional funds.
• Operational progress at MJ-1 has been hampered by significant challenges, including downhole issues, logistical hurdles exacerbated by regional conflict, and rig crew visa complexities, leading to delays.
• The investment thesis hinges entirely on achieving commercial hydrocarbon production from its exploration activities, a binary outcome facing intense operational, financial, and geopolitical risks in a competitive landscape dominated by larger, producing entities.

A Quarter Century Quest: Zion Oil & Gas's Israeli Exploration Journey

For over two decades, Zion Oil & Gas has pursued a singular mission: the discovery of commercially viable hydrocarbon reserves in Israel. Incorporated in 2000 and going public in 2007, the company has dedicated its efforts exclusively to exploration within the geological formations of the Eastern Mediterranean. Unlike diversified energy majors or even mid-cap producers, ZNOG operates as a focused explorer, channeling all its resources and capital into unlocking potential beneath the Israeli landscape. This long-standing commitment defines its business model – one of high-stakes, capital-intensive exploration with no current revenue streams.

The company's strategic focus is currently concentrated on the New Megiddo Valleys License 434 (NMVL 434), a significant onshore area covering approximately 75,000 acres. Approved in September 2023 and valid through September 2026 with potential extensions, this license is the cornerstone of ZNOG's current activities. The company's geological studies suggest this area possesses the necessary ingredients for an active petroleum system, driving the strategic decision to prioritize exploration here.

Within this license area, ZNOG's most critical undertaking is the re-completion and testing of the MJ-1 well. This project represents the culmination of years of geological study and operational planning. The strategic objective is clear: to re-enter the existing wellbore and utilize specialized techniques to potentially unlock hydrocarbon flows from identified target zones. The company has invested in owning its drilling rig, the I-35, acquired for $5.6 million, and established subsidiaries like Zion Drilling Services, Inc., with the potential to offer drilling services to others when not engaged in its own exploration, although this remains a non-revenue activity currently.

In the broader energy landscape, ZNOG operates as a small, highly specialized player. Its competitive positioning is unique due to its exclusive focus on onshore Israel. This grants it a degree of regulatory familiarity and a niche market position distinct from larger, more diversified competitors like Energean plc (ENOG), which has significant offshore production in the Eastern Mediterranean, or global explorers like Kosmos Energy Ltd. (KOS) and VAALCO Energy, Inc. (EGY). While ZNOG's onshore focus might imply potentially lower per-unit drilling costs compared to deep-water operations, the competitive analysis indicates that larger players like Energean and Kosmos Energy benefit from significant economies of scale, more advanced technology, and established production cash flows that ZNOG lacks. ZNOG's exploration technology is described as deploying "new technologies and stimulation methods" for the MJ-1 re-entry with the goal of "potentially unlocking hydrocarbon flows." However, information available does not detail the specific nature of these technologies or offer any quantifiable benefits or performance metrics compared to industry standards or competitor capabilities. Quantifiable tech benefits are not evident from available information, and competitors may possess more advanced or efficient operational technologies. ZNOG's primary competitive advantage, therefore, rests on the potential of its licensed acreage and its dedicated focus on this specific geological prospect, rather than a proven technological edge or operational scale.

Operational Hurdles and the MJ-1 Testing Phase

The narrative of ZNOG's recent operations is one of determined progress punctuated by significant challenges. Following the acceptance of the MJ-1 re-completion work plan in February 2024, the company commenced operations, including moving its rig from the MJ-2 site to MJ-1. The initial phase involved drilling out plugs and re-conditioning the wellbore, a task complicated by the well's six years of inactivity and apparent casing issues, including elastic and partial collapse. This led to a critical operational hurdle: the bottom hole assembly (BHA) became stuck over 4,000 meters downhole. An unsuccessful attempt to retrieve it resulted in over 500 meters of BHA remaining in the well.

Compounding these downhole difficulties were external factors, notably the ongoing geopolitical conflict in the region. This conflict has created logistical challenges, impacting shipping routes for necessary equipment and complicating travel for the specialized rig crews, who are not available locally in Israel. Further delays arose from rig crew visa issues, requiring resets under changing Israeli regulations. These combined factors necessitated a temporary pause in active operations during Q4 2024 to ensure safety and allow for proper engineering and tool sourcing.

Operations resumed in Q1 2025 with the rig crew arriving in February. The team completed critical maintenance on the rig and preparatory work at the well site. Key operational milestones were achieved: drilling out a temporary plug, setting a permanent plug to isolate target zones, and successfully completing perforation and stimulation operations. Crucially, gas was observed at the surface during early flowback. As of the filing date, the well is in the fluid recovery and cleaning phase. ZNOG is actively sourcing additional equipment required to continue flowback testing and conduct volumetric analysis, which is essential to evaluate reservoir characteristics and assess the well's production potential. The company anticipates progressing through these critical completion and testing operations during Q2 2025.

Financial Lifeline: Funding Exploration in a Cash-Consuming Venture

As a company solely engaged in exploration, ZNOG has no operational revenue. Its financial health and ability to continue operations are entirely dependent on its capacity to raise external capital. This reliance is starkly highlighted by its history of operating losses and negative cash flows. For the three months ended March 31, 2025, the company reported a net loss of $1.68 million, a slight improvement from the $1.76 million loss in the same period of 2024. Operating costs and expenses saw a modest decrease of 4.2%, totaling $1.70 million, primarily driven by a 6.3% reduction in general and administrative expenses ($1.10 million) due to lower stock option grants.

The company's liquidity position at March 31, 2025, showed cash and cash equivalents of $5.06 million, an increase from $2.27 million at December 31, 2024. Restricted cash, primarily held for Israeli bank guarantees related to drilling operations, remained stable at $1.06 million. Working capital improved significantly to $5.39 million from $1.70 million at the end of 2024.

Cash flow analysis underscores the capital-intensive nature of ZNOG's business. Cash used in operating activities increased to $2.46 million in Q1 2025 from $2.00 million in Q1 2024. Investing activities consumed $798,000 in Q1 2025, up from $324,000 in Q1 2024, reflecting ongoing investment in oil and gas properties and equipment. The critical offset to these outflows comes from financing activities, which provided $6.04 million in Q1 2025, primarily from the Dividend Reinvestment and Stock Purchase Plan (DSPP). This represents a significant increase from the $2.84 million raised through financing in Q1 2024. Post-quarter, the DSPP continued to be a vital funding source, raising approximately $6.82 million between April 1 and May 7, 2025.

Despite the recent success in raising funds, the company's financial statements include a going concern warning, indicating substantial doubt about its ability to continue operations for the next year without securing additional financing or achieving profitable operations. Management explicitly states the need to raise further funds through equity or debt. The estimated monthly expenditures of approximately $600,000 when not actively drilling, escalating to an additional minimum of $2.5 million per month when drilling, highlight the rapid cash burn associated with exploration activities. Management believes that existing cash and anticipated DSPP proceeds will be sufficient to finance operations through December 2025, but this is subject to significant qualifications and the inherent uncertainty of capital markets and operational success. The company is planning to increase its authorized shares during the 2025 proxy season, a strategic move to potentially facilitate future equity raises.

Compared to its producing competitors, ZNOG's financial metrics are starkly different. While companies like Energean, Kosmos Energy, and VAALCO Energy report positive revenues, gross margins (ranging from 34% to 60% TTM), operating margins (15% to 30% TTM), and often positive net income and cash flow, ZNOG has zero revenue, negative margins across the board (e.g., -316% TTM operating margin), and consistently negative operating and free cash flow. Its debt-to-equity ratio (0.02 TTM) appears low, but this reflects a reliance on equity financing rather than debt, and the company's total liabilities still require significant capital to manage. This financial disparity underscores the high-risk nature of ZNOG's pure exploration model relative to the established production bases of its peers.

Outlook and the Path Forward

The immediate outlook for ZNOG is focused squarely on the MJ-1 well. The company anticipates completing the current fluid recovery and cleaning phase and progressing through further flowback testing and volumetric analysis during Q2 2025. The observation of gas at the surface is a positive indicator, but the critical next steps involve quantifying the potential reserves and determining commercial viability.

The strategic path remains dependent on exploration success. If the MJ-1 well proves commercially viable, it would fundamentally alter ZNOG's trajectory, potentially transitioning it from an explorer to a producer. However, the path is fraught with risk. The operational challenges encountered to date, particularly the downhole issues and logistical complexities tied to regional instability, could lead to further delays and increased costs. The geopolitical environment, while not directly impacting the well site with combat, creates significant uncertainty for logistics, personnel, and overall operational continuity. New environmental regulations in Israel are also expected to increase expenditures and potentially require additional cash reserves, adding another layer of financial burden.

The company's ability to fund its operations through December 2025 relies heavily on continued success with the DSPP. While recent fundraising has been strong, there is no guarantee that this will continue, especially if operational progress faces further setbacks or market sentiment shifts. The planned increase in authorized shares provides flexibility for future fundraising but also signals the ongoing need for external capital.

In the competitive arena, ZNOG's outlook is tied to demonstrating value in its specific niche. Success at MJ-1 would validate its geological model and potentially attract partnerships or investment that could help it compete on a larger scale. However, without production, it remains vulnerable to the financial strength and operational efficiencies of its established competitors. Customer and supplier dynamics, while not detailed extensively, include vendor concentration risk, which could impact costs and operational timelines if key suppliers face disruptions, a risk potentially amplified by the regional geopolitical situation.

Conclusion

Zion Oil & Gas represents a high-conviction, high-risk investment proposition centered on the potential for a significant hydrocarbon discovery in Israel. The company's 25-year journey has led to the current critical juncture at the MJ-1 well, where recent operational progress, including the observation of gas, offers a glimmer of potential amidst numerous technical and logistical challenges.

The investment thesis is binary: success at MJ-1 could unlock substantial value, while failure would necessitate continued reliance on dilutive financing or potentially lead to the curtailment of operations. The company's financial position, characterized by a lack of revenue, consistent losses, and dependence on equity raises, underscores the substantial going concern risk. Geopolitical instability in the region and operational complexities add further layers of uncertainty to an already challenging exploration endeavor. For investors, ZNOG is a speculative play on exploration success, requiring close monitoring of the ongoing MJ-1 testing results, the company's ability to secure necessary funding, and the evolving operational and geopolitical landscape in Israel.