IVZ’s Drill Rig Now on its Way - Elephant Scale Gas Target to be Pierced in July

  Email Sent On: 08-06-2022 14:49 p.m.

11 minute read


Share price when sent: $0.180  

Disclosure: The authors of this article and owners of Next Investors, S3 Consortium Pty Ltd, and Associated Entities, own 5,175,145 IVZ shares and 65,072 IVZ Options and the Company’s staff own 60,000 IVZ shares and 10,845 options at the time of publication. S3 Consortium Pty Ltd has been engaged by IVZ to share our commentary and opinion on the progress of our Investment in IVZ over time.

The price of gas is soaring all across the world.

The EU is on the brink of a full blown gas supply crisis.

And our 2020 Energy Pick of the Year Invictus Energy (ASX:IVZ) is finally preparing to drill the largest seismically defined, undrilled gas structure in onshore Africa.

Drilling could result in a regionally significant gas discovery - one big enough to build an entirely new oil and gas industry in Zimbabwe, or even supply gas hungry South Africa.

IVZ is targeting a prospective resource of 9.25 tcf gas + 294 million barrels of Conventional Gas-Condensate (on a 100% gross basis).

Drilling is expected to commence in July.

If IVZ is successful in its drilling, we could see the company re-rate to many multiples of its current value. We also think speculators might come in pre drill which will cause the share price to move upwards before drilling begins.

At the same time, this is a high risk exploration stock - there is always the possibility that the drill won’t be successful - in this case we could see IVZ’s share price move significantly lower.

IVZ will be testing this prospective resource with a two well drill programme.

Today, IVZ announced that mobilisation of the Exalo 202 drill rig had commenced heading from Tanzania to the Cabora Bassa Basin in Zimbabwe.

IVZ expects all of the equipment to arrive on site in Zimbabwe over the course of June, leading up to the planned two well drilling program expected to commence in July.

Effectively, the ball is now in motion and it is looking like IVZ has timed its drilling program to perfection, considering the global appetite for new gas discoveries.

Here you can see the equipment getting ready to be transported from its current job to IVZ’s project:

IVZ’s drilling program will be made up of two wells, with the first being the Mukuyu-1 well targeting a prospective resource of 9.25 tcf Gas + 294 million barrels of Conventional Gas-Condensate (on a 100% gross basis).

A new discovery in this part of Africa has “basin opening” potential - meaning that it opens up an entirely new oil and gas province in a part of Africa where no previous hydrocarbon discovery has been made.

That well is expected to cost ~US$16.5M (of which US$4M has already been paid) and the second well is expected to cost ~US$10M (of which US$2M has already been paid).

To partially fund some of this, IVZ recently completed a $12M capital raise at 20c per share and raised a further $3.3M through the exercising of in-the-money unlisted options.

This comes in addition to the ~$7.3M in cash IVZ had at the end of the March quarter which should mean IVZ has enough cash in the bank to fund a large portion of the first well.

This doesn't mean the well is fully funded yet though - and this is where the pending farm-out negotiations come into play.

IVZ has “multiple bids from potential farm-in partners” and after the capital raise in late May announced that “as part of a final farm-in agreement, the Company anticipates having a significant portion of the drilling program funded by a farm-in partner(s)”.

We are hoping that whatever farm in agreement is signed, IVZ maximises the amount of ownership it will retain whilst getting the farm-in partners to fund as much of the drilling as possible.

Ideally, we would see IVZ retain a relatively larger % ownership going into the first well given the risk/reward would be the highest for that drilling program.

With drilling only a month away, we suspect the delays in getting a farm-in partner onboard is as a result of the recent expansion in IVZ’s acreage by over 700%.

We think that the signing of the deal to expand its acreage would have meant that any previous negotiations that were done with any interested parties would need to be restarted and re negotiated based on the bigger project area (with a much larger exploration upside).

We last wrote about IVZ in late April, since our last update IVZ has:

  • Put out results of additional seismic analysis which optimised the drilling location for the Mukuyu-1 well.
  • Completed a $12M capital raise at a 20c share price and raised ~$3.3M via option exercises.
  • Started mobilising its drill rig to the Mukuyu-1 well site.

All of this brings IVZ one step closer to the maiden drilling event which we set as key objective #4 in our 2022 IVZ Investment Memo.

We are hoping that the drilling program results in a large basin opening gas discovery which re-rates IVZ’s share price significantly.

We are mindful of these type exploration events having a binary outcome though, so whilst the upside is significant the drilling program will also be high risk and there is no guarantee of a discovery being made.

Invictus Energy
ASX:IVZ

What’s happened since our last update?

$12M capital raise + $3.3M raised via option exercises ✅

A few weeks ago IVZ raised $12M via a placement to sophisticated and institutional investors.

The capital raise saw the issuance of the following:

  • 60,026,165 shares at 20c per share.
  • 30,013,083 unlisted options, exercisable at 35c per share with a 12 month expiry.

Interestingly, since the end of the March quarter, IVZ has also raised another ~$3.3M through the exercising of unlisted options.

Below we summarise the outstanding options which show that there is potential for a further $9.8M to be raised, should the IVZ share price stay above the option exercise prices (which vary from 6c to 17c).

It is worth noting however that the majority of these options have very long dated expiry (into 2024-2025 which may mean the holders of these choose not to exercise them in the short term.

Our view on this is that if in the lead up to the drilling program the share price moves significantly higher than the exercise price of these options some of the holders will convert them into shares and look to de-risk their holding.

The positive for IVZ is that it means more cash in the bank in and around drilling time, the positive for holders being they get to monetise their illiquid unlisted options.

Detailed seismic data analysis ✅

In early May, IVZ also put out the latest bit of analysis completed around all of the 2D seismic data that is available over its project area.

The analysis comes off the back of IVZ shooting ~840km of 2D seismic data and the reprocessed ~US$30M in legacy datasets left over by Mobil who ran some basin wide seismic surveys in the 1990s.

The first key takeaway for us from the seismic analysis was that IVZ located a section immediately below the shallow “Horizon 200” target which could be comprised of multiple stacked oil and gas bearing zones, ranging in thickness from 40m to 80m.

Importantly, all of the new analysis now correlates with the giant amplitude anomaly which significantly increases the probabilities of a discovery being made.

IVZ has now combined all of this data and looks to have refined the Mukuyu target to the extent that the company has a relatively decent idea of what it is targeting and where it expects to intercept gas bearing reservoirs.

The second key takeaway from all of this is that IVZ has managed to put together another key target that will be the focus of the upcoming Mukuyu-1 well, which sits outside of the current prospective resource and at a depth of ~850m.

The updated image of the good design really helped us visualise what all of this seismic data is telling us, with a clear breakdown of the different stacked targets.

Managing Director Scott Macmillan actually ran through all of this in a technical briefing which you can view here.

If you want to skip to the technical seismic stuff then click here:

Invictus Energy Shareholder Briefing 13 May 2022 - starting from seismic technical part

Well services contract awarded ✅

Late last month, IVZ also announced the signing of a well services contract with Baker Hughes - one of the world’s leading oilfield service providers, operating in more than 120 countries.

The agreement confirmed Baker Hughes would be involved in a two well drilling program which is another positive sign that IVZ are committed to getting two wells drilled this year.

The contract covers most of the services required during drilling programs, from project management to more technical things like wellhead supply and installation.

We think that the type of drilling program IVZ is looking to do requires experience and expertise so we really liked that the company managed to bring Baker Hughes onto the drilling team as a contractor.

What’s next for IVZ?

Updated prospective resource 🔄

After increasing the size of its project area by 700% and all of the new seismic analysis completed we are hoping to see what an updated prospective resource will look like for the expanded project area.

We are hoping this comes in before the drilling program starts given it will dictate the level of interest the company will receive going into the drilling program.

In a recent announcement, IVZ confirmed that it was “awaiting an updated Independent Prospective Resources Estimate” so we expect to see this very soon.

The current prospective resource of 9.25 tcf Gas + 294 million barrels of Conventional Gas-Condensate (on a 100% gross basis) is already huge in its own right - so we think that any upgrade to this figure is likely to get some attention from the market.

Production sharing agreement + Permitting on extended acreage 🔄

IVZ is currently waiting on formal governmental approvals for both the Production Sharing Agreement and the approval over the extended acreage position.

In today’s announcement, IVZ also confirmed that the pre-gazettal (approval) administration process to increase the SG 4571 permit area by 7x had been completed and was now pending final government approvals.

We are hoping to see both of these resolved before IVZ starts drilling - given that the production sharing agreement in particular will govern the ownership rights IVZ has over a commercial discovery (assuming a new discovery is made).

Wellpad construction for the Mukuyu-1 well to be completed 🔄

IVZ also confirmed that the wellpad construction was nearing completion.

The video below is a little bit outdated now but shows that works on the ground had started ~1 month ago.

Second well location to be finalised 🔄

We are still waiting on IVZ to confirm the drilling location for the second well.

With the expanded acreage covering the majority of the “basin margin” play we think that this will be finalised once all of the permitting is completed and the company can put in place a plan to drill one of the basin margin targets that is being picked up in the seismic data.

Binding Farm-in agreement to be signed 🔄

In late April, IVZ put out an update on the progress being made on the farm in front.

In that announcement IVZ confirmed that it had received three separate farm-in offers including an updated bid from Cluff Energy Africa.

It also confirmed that “ongoing due diligence and internal approvals are being undertaken by additional parties which may result in further bids being received”.

This suggests to us that the company is receiving a lot more interest now.

With the acreage position expanded by over 7x in terms of overall size and the Sovereign Wealth Fund of Zimbabwe now involved at the project level, we suspect those interested parties now see some more certainty around tenure hence the heightened level of interest.

We are now expecting a vastly improved offer than the one that Cluff Energy Africa had put in for the project in late 2021.

Fully financing the two well drilling program 🔲

In a recent investor presentation, IVZ put out updated cost estimates for both the Mukuyu-1 well and its follow up basin margin well.

The first well is expected to cost ~US$16.5M (of which US$4M has already been spent) and the second US$10M (of which US$2M has already been spent).

IVZ at the end of the March quarter had $7.3M in cash. Since then it raised ~$12M via a placement @ 20c per share and had ~$3.3M in options exercised.

This should mean IVZ is going into the drilling of the first well with enough cash to fund most of the first well, but ideally, we would like to see the company de-risk its cash commitment further either via a farm in agreement or through additional capital raises.

The major catalyst - DRILLING now expected in July 🔲

This one needs no explanation, all of the above milestones will lead to the all important drilling event which IVZ now expects to happen in July.

Our IVZ Investment Memo for 2022

Below is our 2022 Investment Memo for IVZ where you can find a short, high level summary of our reasons for investing.

The ultimate purpose of the memo is to record our current thinking as a benchmark to assess the company's performance against our expectations 12 months from now.

In our IVZ Investment Memo you’ll find:

  • Key objectives for IVZ in 2022
  • Why we invested in IVZ
  • What the key risks to our investment thesis are
  • Our investment plan

tags

GAS