CND: Serge Hayon joins as MD, lots of targets and plenty of blue sky.

Disclosure: S3 Consortium Pty Ltd (the Company) and Associated Entities own 33,040,455 CND Shares and 11,925,000 CND Options at the time of publishing this article. The Company has been engaged by CND to share our commentary on the progress of our Investment in CND over time.

Our 2023 Energy Pick Of The Year Condor Energy (ASX:CND) holds a giant 4,858km^2 of oil & gas acreage offshore in Peru.

We Invested back in 2023 because we expected the CND share price to progressively rise over the next couple of years in the lead up to a “swing for the fence” drill campaign.

(in early stage oil & gas, the share price often rises as a company completes pre-drill work)

Since we first Invested, CND has identified three primary target areas it could drill.

These target areas are from CND’s recent work to reprocess ~1,000km^2 of 3D seismic data.

Which successfully mapped out ~20 different leads.

Prospective resource estimates are pending across two of the three target areas.

Meaning we will soon find out how much oil & gas CND will be going after.

Depending on how big these are, this is where the blue sky, swing for the fence exploration program could come from.

We also Invested in CND because IVZ’s Scott Macmillan joined as CND chairman.

We have seen Scott deliver multiple “swing for the fences” drill campaigns at IVZ, and deliver some solid share price re-rates in the lead up to drilling.

In a sign that CND is getting serious about drilling, they recently appointed a new Managing Director, Serge Hayon.

Serge spent 20 years at $7BN NYSE listed Murphy Oil Corporation where he was in charge of Murphy’s Vietnam operations.

There, Serge led the company’s entry into and Final Investment Decision (FID) on the Lac Da Vang offshore oilfield.

(which has gross recoverable resources of 100 million BOE).

This was Murphy Oil Corp’s first offshore project to get into development.

(Sources)

We also noted director performance rights in the announcement of Serge’s appointment as MD.

These are bonuses paid to management on achieving certain milestones.

The first two milestones are CND achieving a share price of:

1. higher than 8c
2. higher than 12c

(measured over a 20-day share price average known as a VWAP)

CND has been trading at around 3c for the last few months.

That’s a ~$17M market cap, which we think has plenty of room to grow in the lead up to CND's major drilling events.

(Source)

With CND we are following a similar strategy to the one on our 2020 Energy Pick Of The Year - IVZ

IVZ shares a common director with CND - Scott Macmillan.

With IVZ our Initial Entry Price was ~3.5c back in September 2020.

Over the years IVZ acquired seismic data, defined prospective resources and then drilled out a discovery - at its peak IVZ’s share price was up >1,000% from our Initial Entry Price:

The past performance is not and should not be taken as an indication of future performance. Caution should be exercised in assessing past performance. This product, like all other financial products, is subject to market forces and unpredictable events that may adversely affect future performance.

Hopefully, when it comes time to drill, Serge is able to trigger his third and biggest performance milestone - a “petroleum discovery”.

We are long term backers of CND and look forward to seeing what Serge can do.

Energy Super major TotalEnergies moves in next door to CND...

Total moved in next door AFTER CND acquired acreage

(in fact, Total almost completely surrounded CND):

We also know that $72BN Occidental Petroleum is active offshore Peru.

(Source)

So clearly there’s plenty of interest in Peru’s offshore potential, and CND moved in at the right time as this interest looks set to ramp up.

We think Peru is one of the last major frontiers for big oil and gas exploration projects.

CND already has a Discovery and 8.2 mmcf per day flow rate... wait what?

As early stage oil & gas Investors, we have been chasing oil & gas discoveries and commercial flow rates for over 20 years.

With the associated emotional (and financial) high and lows.

CND ALREADY has a discovery and material flow rate on their acreage

A “development ready” gas asset.

That discovery (Piedra Redonda) was made in 1978 (when gas was way out of favour) AND it has already been flow tested at 8.2 million cubic feet per day from 36m of net pay.

CND also says that “ A significant amount of pay in the C-18X well was not tested due to program constraints and presents additional deliverability upside”

At the moment the project has a contingent resource of 404 Bcf and a prospective resource of 2.2 Tcf.

An important thing to note is that the discovery drill hole and flow rate was “down dip” on the structure.

Because gas by its nature “wants to move upwards” AND there is confirmed gas down-dip, we think it’s highly likely there is more gas up-dip.

The previous owners DID initially try to drill up-dip but experienced mechanical problems so it wasn’t completed or flow tested, as you can see in the image at drill hole C-13X)

So our read here is that there is lower risk upside that can be included in the resource with more up-dip drilling in the future.

CND is working on upgrading this resource right now.

We also note Serge’s experience in commercialising offshore oil & gas discoveries.

Oil & Gas Junior explorers - Share price rises in lead up to drilling

Over the last 12 months CND, has moved from 1.9c to ~3c off the back of pre drill work done by the company, including:

• Selecting its three key target areas
• Reprocessing ~1,000km of 3D seismic data
• Defining ~20 leads across the three key target areas
• Reviewing historical data from the Piedra Redonda discovery

Now we have a new experienced MD at the helm, the next phase of work is underway, which we hope will continue to re-rate the share price in the lead up to drilling, including:

• Prospective resource estimates on the Raya and Bonito targets
• Upgrading the resource at Piedra Redonda
• More technical studies to rank high priority drill targets (AVO studies, geological studies, structural analysis etc.)

Where is CND relative to our Oil and Gas Investment Strategy right now?

One of the main reasons we announced CND as our 2023 Energy Pick Of The Year was because of where the company sat relative to our tried and tested Oil and Gas Investment Strategy.

For those who have been following our Investments for a while with oil and gas explorers we tend to follow a five step investment plan.

Of course, before we show you our plan, we need to stress that there’s never a guarantee of success with speculative oil and gas investing.

We recommend consulting with a professional financial advisor before choosing to invest in small cap stocks like CND.

Our general plan is to Invest early, and eventually, as a drilling event draws closer over the coming years we expect to see broader investor interest increase, and with that, growth in the company’s valuation.

Our plan is usually to:

1. Invest early, as the company is in the early exploration work stage.
2. Increase our Investment, as the company de-risks the project through permitting, geophysics and target generation.
3. Top Slice, if the share price runs in anticipation of exploration results
4. Free Carry, into results while still maintaining a large position to be leveraged for a discovery
5. Evaluate our position post-drilling.

Our broader thinking is that as an oil and gas explorer gets closer to a major catalyst like a drilling event, investor interest increases in the stock and the company’s valuation starts to move higher as expectations get baked into its share price.

We made CND our 2023 Pick Of The Year at 1.9c per share - at the time CND’s market cap was ~$7M.

Now, after 11 months, CND’s market cap is $17M and the company is ~14 months into its 24 month TEA.

Which means it is starting to approach a point where CND will need to make a decision on a drilling program OR do a deal to have its share of the drilling funded.

So we know there is at least another 10 months before a drilling program and CND’s market cap is just $17M now.

In terms of market interest/excitement we think CND currently sits here:

Ultimately, we are hoping that as CND puts out prospective resources and outlines a development/drilling timeline the company’s valuation re-rates in line with our Big Bet which is as follows:

Our CND Big Bet

“CND defines a multi-billion barrel prospective resource and sees its market cap re-rate by 20x prior to drilling”

NOTE: our “Big Bet” is what we HOPE the ultimate success scenario looks like for this particular Investment over the long term (3+ years). There is a lot of work to be done, many risks involved - just some of which we list in our CND Investment Memo. Success will require a significant amount of luck. There is no guarantee that our Big Bet will ever come true.

What’s next for CND?

🔄 - (Target #1) Bonito-Volador prospect - Maiden Prospective Resource

At Bonito, CND just completed ~250km^2 of 3D seismic reprocessing.

Next, we want to see CND define a maiden prospective resource for the target area.

🔄 - (Target #2) Raya prospect - Maiden Prospective Resource

At the Raya prospect, CND just completed ~400km^2 of 3D seismic reprocessing.

CND picked Raya as one of its three main targets primarily because this part of its project had the potential for similar “stratigraphic and structural traps” to the two nearby discoveries.

The two discoveries are - Barracuda and Delfin, which were both confirmed oil discoveries.

Here we want to see CND announce a maiden prospective resource estimate.

🔄 - Target #3 (Piedra Redonda)

At Piedra Redonda CND just completed ~400km^2 of 3D seismic reprocessing.

As mentioned earlier, CND already has a 404 billion cubic feet of gas (Bcf) contingent resource and a 2.2 trillion cubic feet (TCF) prospective resource for Piedra Redonda (on a 100% basis).

That resource comes from only a small part of the overall area covered in Piedra Redonda.

Now with the 3D seismic data reprocessed we are hoping CND is able to increase the estimates from this project.

See below how much more of the project the reprocessed seismic covers relative to the resource:

What could go wrong?

Every speculative oil and gas investment carries risk. CND is no different.

Given that CND operates under a two-year “Technical Evaluation Agreement”, the company faces no short-term exploration risk as it is not required to drill test its asset quickly.

In the short term we think the main risks for CND is “Market Risk” and “Funding Risk”.

CND had $2M cash in the bank at 30 June 2024.

While that should be enough for the company to operate under its two year TEA, it's possible that the company needs to raise capital before the company’s cash balance gets too low.

The other pathway to shoring up CND’s balance sheet that we often see with junior oil & gas explorers could involve commercial partner funding in exchange for a chunk of the assets.

However these kinds of deals can take time, if they ever happen at all.

In the short term, a capital raise could put a bit of a cap on the share price.

Fluctuations in market sentiment/oil & gas prices could impact CND’s share price.

To see more risks to our Investment Thesis, check out our CND Investment Memo here.

Our CND Investment Memo

In our CND Investment Memo, you can find:

• CND’s macro thematic
• Why we Invested in CND
• Our CND “Big Bet” - what we think the upside Investment case for CND is
• The key objectives we want to see CND achieve
• The key risks to our Investment thesis
• Our Investment Plan