Years in the making: IVZ first drill now months away

Disclosure: The authors of this article and owners of Next Investors, S3 Consortium Pty Ltd, and associated entities, own 6,825,290 IVZ shares and 65,072 IVZ options at the time of writing this article. S3 Consortium Pty Ltd has been engaged by IVZ to share our commentary on the progress of our investment in IVZ over time.

Our 2020 Energy Pick of the Year Invictus Energy (ASX:IVZ) is getting closer to drilling the largest seismically defined, undrilled oil & gas structure in onshore Africa - Zimbabwe.

After an almost two year wait, IVZ’s big drilling event is scheduled for June this year - 4 months from now.

This is high risk, frontier style exploration with the potential to unlock an entirely new oil & gas province, our favourite kind of exploration.

Regular readers know that with oil & gas exploration our strategy is to:

• Take a position a long time before a big drilling event
• Patiently hold in the lead up to drilling (almost two years now with IVZ)
• Free carry and take some profit in the usual price rise leading up to the drilling event
• Hold a significant position for the drill result

It’s been a long time coming, but IVZ is now months away from drilling the well we have been waiting for.

We invested in IVZ as our third ever “Energy Pick of the Year”. So far all of our energy investments have performed well.

Our first ever Top Energy Pick was Africa Oil Corp, which was up 1,200% on a discovery (this was nearly 10 years ago so we don't show it in our current portfolio, but older subscribers may remember it - shout out to anyone who has been with us since 2011, reply to this email to say hello).

Our more recent Energy “Pick of the Year” in 2019 Elixir Energy is currently up 362%.

88 Energy has been an excellent performer for us too, after trading at 0.6c for most of 2020, we all remember the 1,000% plus spike it had in the lead up to its drilling before settling back down, now trading at around 600% above its 2020 levels.

Keep in mind that this past performance is certainly no guarantee of any future success.

When we make investments in the oil & gas space, we like to invest in high risk companies that are taking huge swings for the fence, in previously unexplored regions. IVZ fits nicely into our investment framework.

While we also invest heavily in the transition to clean energy, we also believe that the world has been too hasty to pull investment dollars from traditional energy sources like oil & gas.

Put simply, renewable technologies are progressing, but can’t replace traditional energy quick enough to satisfy the world’s energy demand - you can see it happening now with price surges in gas and oil.

So while we are very bullish on Electric Vehicles (EVs), battery metals, solar, wind and even nuclear power, Oil & Gas are two sources of energy that we believe aren’t going to leave the mix anytime soon.

This is why we maintain a small portfolio of traditional oil & gas companies.

IVZ is doing the type of exploration which brings with it the potential for “company making” discoveries. This type of discovery is generally higher risk, however, there are also outsized returns on success.

We made our first investment in IVZ in September 2020 at 3.8¢ and then averaged up our holdings in the placement done in March 2021 at 11¢ after IVZ announced the Production Sharing Agreement with the Zimbabwean government.

IVZ just raised a total of $8M at 10c via a placement and SPP to shore up the balance sheet ahead of drilling, which is now scheduled to begin in June.

We recently added to our IVZ holdings at 10c.

Our application for SPP shares got scaled back heavily, and IVZ stated that the $4M SPP received a total of $9.4M in applications which resulted in a scale back of 42%. Clearly, we are not the only shareholders eager to see IVZ drill this long awaited well.

As always keep in mind that oil & gas exploration results are usually binary so are very high risk. Make sure you fully understand the risks, have an investment strategy that works for you and never invest more than you are happy to lose.

The long wait for IVZ’s first ever drill looks to be coming to an end with drilling expected in June this year, and with traditional energy prices on the rise, we look forward to seeing if the pre-drill speculation will lead to a share price for IVZ - and beyond - if IVZ can hit a giant discovery...

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

To read our IVZ Investment Memo simply click on the button below:

[READ THE INVESTMENT MEMO]

From our investment memo, you can see that this year IVZ is expected to achieve our most important investment objective:

Also here is reminder from the memo on why we originally invested in IVZ:

A look at share price movement for oil & gas explorers

We launched our investment in IVZ as our 2020 Energy “Pick of the Year” in September 2020, almost 18 months ago.

In line with our investment strategy for oil & gas explorers, we timed our entry so that we were as early as possible before any of the exploration work started - and then began the waiting game... lots of waiting.

At the time we had just seen a similar oil & gas explorer called ReconAfrica get the ball rolling on its drilling program in Namibia and realised that IVZ was well placed to (hopefully) emulate whatever success ReconAfrica could produce.

Back in March 2021 we analysed ReconsAfrica’s 2,150% share price rise prior to its drilling event versus where IVZ was in terms of its progress towards drilling - you can read this analysis here.

We think given IVZ is only a few months out from drilling, it's the right time to look at how the share prices move for explorers gearing up for highly anticipated drilling programs.

Below is a share price chart of ReconAfrica.

ReconAfrica completed a CAD$23M capital raise a similar amount of time before its maiden drilling program (raise done in ~August 2020, drilling started in January 2021).

The share price then went from ~CAD$0.70 to almost ~CAD$5 even before the drill rig started turning, on anticipation of a discovery:

Another example of this is with one of our other portfolio companies 88 Energy which is gearing up to drill an appraisal well following up a discovery it made last year.

Although it is an appraisal well, which is when a company drills into an already discovered hydrocarbon accumulation to get a better understanding of its extent and size, the share price is behaving similarly of late.

With a $32M raise locked away at 3.5c the share price is still trading at around ~4.1c, and the drill rig hasn't even arrived on site or started drilling yet.

Below is 88 Energy’s chart:

Although past performance cannot be relied on for future performance, to us it looks to us like the share price action of oil & gas explorers gearing up for a major drilling event always tends to trend in an upwards direction.

As rig contracts get executed, drill rigs arrive on site and the drilling begins, speculators start to remember why they liked a company and likely just can't stop themselves from buying even more shares on market.

So where is IVZ now?

Now let's look at where IVZ is in comparison to these other explorers.

The key difference between the companies mentioned above and IVZ is that the big re-rates came around the time drilling programs were taking place.

IVZ has instead been busy with licensing work and a 2D seismic acquisition program (also reprocessing a US$30M dataset leftover by Mobil).

We think that the usual pre drilling newsflow is right around the corner and expect the share price to creep higher as anticipation for the drilling program builds.

With rig contracts being executed and drilling locations being finalised, we think the market will all of a sudden become really interested in what IVZ is doing.

Our investment strategy for IVZ

REMINDER: We have a very clear investment plan for these types of investments:

1. We invest early in first movers who are able to secure the best acreage on the best terms.
2. We will then patiently hold onto our investment as the company matures or nears a drilling event that could be a big catalyst for a re-rate.
3. We will then take back our initial investment and take some profit as the share price increases on the speculation of positive drilling results.
4. The final stage is when we ‘free carry’ the majority of our investment into the drilling results.

We are currently in between stage 2 and 3 of our investment plan for IVZ, with a significant amount of newsflow yet to come between now and June, we will continue to hold the majority of our position but look to “free carry” closer to the drilling program.

We will then hold onto the rest of our investment and If drilling is successful, it will be transformational for IVZ and we would expect to make multiples on our investment.

We want to reiterate again that investing in stocks like IVZ suits our investment strategy - but it might not be right for everyone - seek professional advice before investing in small cap speculative stocks like IVZ.

What’s next for IVZ?

Extended licence area and production sharing agreement 🔄

In March 2021, IVZ managed to sign a Petroleum Exploration Development and Production Agreement (PEDPA) which gave the company a right to enter into a 25 year production sharing agreement following the initial exploration periods.

In yesterday’s IVZ announcement, the company said that “progress was being made” with respect to the signing of the production sharing agreement which will grant IVZ a 25-year production right over the licenced area.

IVZ also announced that it was in discussions to licence an extended part of the project, which we hope to see some newsflow about in the near future.

Rig Contract to be finalised 🔄

Also in yesterday’s announcement, IVZ confirmed the mobilisation date for the rig as May.

Previously IVZ had until yesterday (15th Feb 2022) to make a decision on whether or not it would commit to a second well, but this has now been extended to give IVZ time to conclude its licencing/permitting process.

2D Seismic Data 🔄

IVZ are currently working on reprocessing the US$30M in datasets leftover by Mobil from the 1990s and overlaying the recently shot 2D seismic program to finalise drilling locations.

IVZ expects the final results to lead to an updated independent prospective resource estimate which we hope will make the project more attractive to potential offtake partners.

Fresh seismic data plus an updated independent prospective resource would also give any other interested farm in partners a complete view of what the risk/reward profile of the project is.

So if IVZ is going to entertain other approaches then it will be in the strongest position AFTER the seismic data is fully processed.

Farm in option to be exercised 🔄

Under the terms of the non binding agreement with Cluff Energy Africa, the option needs to be exercised and converted into a binding farm in agreement by 31/03/2022.

Risks: what could go wrong with IVZ?

When putting together our investment memos for companies we invest in, we like to challenge our investment thesis and ask ourselves “what could go wrong”. (Scroll down to check out the memo).

It can be easy to get carried away with a big drilling event like IVZ’s, because the upside potential is so high. However, investors need to accept that there is a real risk IVZ finds nothing, which would spell disaster for the shareholders.

Here are the main risks we came up with in our 2022 IVZ investment memo when challenging our IVZ investment thesis:

Another risk right now for IVZ is financing.

In our most recent note, we wrote about the farm in agreement IVZ had signed with Cluff Energy Africa for a 25% interest in the project.

In that note, we mentioned that under the existing terms of that farm in agreement IVZ would need ~US$8M to fund its share of the expected ~US$12M drilling program.

In the absence of any competing farm on offer, this was the minimum for which IVZ would be on the hook for when the drill rigs started turning in Zimbabwe.

We plan to hold a position in IVZ into the drilling results and beyond, so with $9M in the bank ideally IVZ raise some more cash in the lead up to drilling results at higher levels than the last raise, so they have cash in the bank in case the well doesn’t deliver a positive result.

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
• Our investment plan

To access the IVZ Investment Memo simply click on the button below:

[READ THE INVESTMENT MEMO HERE]