CND: Share price up on IVZ mega deal? CND director Scott Macmillan suddenly very well connected…

Disclosure: S3 Consortium Pty Ltd (the Company) and Associated Entities own 31,060,455 CND Shares and 13,675,000 CND Options and the Company’s staff own 1,538,462 CND shares 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. This information is general in nature about a speculative investment and does not constitute personal advice. It does not consider your objectives, financial situation, or needs.

Why is our 2023 Energy Pick of the Year Condor Energy (ASX:CND) up over 28% in the last 7 trading days?

No news has been released by CND...

But, CND does share a common director with Invictus Energy (ASX: IVZ) - Scott MacMillan.

(this was one main of the reasons we Invested in CND back in 2023 - when Scott first joined the CND board)

IVZ is up nearly 500% in the last 7 days after they announced one of the best deals we have ever seen - a major financing agreement with members of the Qatar ruling Royal Family:

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.

IVZ has essentially been given a blank cheque to build an African oil & gas producer on behalf of the Qataris...

(to achieve this Scott is going to build some pretty serious connections in the oil & gas world)

AND IVZ’s own project is also (conditionally) fully funded (up to US$500M) through development and into production.

Scott (on the right in the above photo) is also on the board of CND:

The market really likes what Scott’s (and the rest of the IVZ team of course) managed to pull off with that IVZ deal...

We think the market might be starting to price in Scott potentially using his new and future contacts, networks and connections in helping CND pull off some type of deal of its own...

With essentially a blank cheque from the Qataris to build a new African oil & gas producer, we’d imagine Scott is going to find himself in a lot of very interesting rooms with some very serious oil & gas people over the coming years...

And maybe casually drop in conversation that CND is running a “farmout process” for a giant, highly prospective, block offshore in Peru?

The key point is we think Scott’s contacts list is going to look pretty wild over the coming years and we are hoping some introductions may come to CND...

CND holds 80% of a 1 TCF discovered gas field and ~3BN barrels of undrilled prospective oil resources in offshore Peru.

Oil and gas supermajor - $220BN Total Energies has picked up the blocks surrounding CND.

$70BN Occidental Petroleum and $504BN Chevron have also recently entered the region.

All while CND has commenced a “Farmout process” on its block “with multiple parties in (the) data room”.

CND’s block sits in the middle of a PROVEN hydrocarbon system.

There is the Barracuda oil discovery that was made in 1972 and the Delfin oil discovery made in 1973 (both of which sit inside CND’s acreage)...

AND there is the Corvina Field (excluded from CND’s block), which is currently producing oil.

The two wider basins that CND’s block sits within have produced ~1.7BN barrels of oil historically.

So CND’s acreage is in a part of the world where discoveries have been made and projects have been brought into production...

AND where there is still a lot of unfinished business on the exploration front.

CND picked up the block ~24 months ago and has spent most of that time reprocessing 3D seismic data, and putting together a portfolio of drill targets.

CND is now at the stage where it is ready to either go down the route of drilling one of its targets OR bringing in a partner to fund whatever drilling/development plan the company has.

It’s hard to predict with so many different possibilities, but we think any of the following could be a big catalyst for CND’s share price:

1. CND deals out its gas asset - maybe some of the proceeds that come from this can go toward drilling an exploration well? Maybe CND gets a free carried interest in an asset that could generate revenues in a reasonable timeframe?
2. CND deals out oil exploration assets - CND gets a free carried interest in a well that would be fully funded by a farm-in partner. This means less dilution going into a big drilling event for existing shareholders...
3. Maybe a combination of the two? - CND could bring someone in that is interested in both...

As mentioned earlier, Occidental, Total and Chevron are active in the region and there have been some big deals done on assets in this part of the world before.

Back in 2009, KNOC (South Korean National Oil Corporation) and Ecopetrol (Colombian National Oil Company) signed a deal worth US$900M for projects to the south of CND’s block.

(Source)

We like that CND has two parts of its project it can deal out and with a current market cap at $18.6M we think CND is leveraged to a big drilling event OR a deal that sets the basis for developing its gas asset.

CND reminds us a lot of IVZ in the early days...

CND is currently capped at $18.6M which was almost identical to the market cap of IVZ when we first Invested in the company back in 2020.

We Invested in IVZ back in 2020, when it had a $20M market cap (3.5c).

At the time, IVZ had a lot of work to do before their drilling event - IVZ’s first drill event was still a couple of years away.

But the early Investment and patient wait saw the IVZ share price gradually rerate from $20M to $134M BEFORE their first drill rig was mobilised.

IVZ’s share price during their first drill went as high as ~41c per share - more than 11x our Initial Entry Price.

During the first drill program IVZ’s market cap hit ~$360M.

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.

As we noted above, CND has gone through ~24 months of pre-drill prep work and is now at the stage where it’s looking to partner with a bigger partner to fund drilling.

IVZ managed to self fund drilling via capital raises, but the macro environment is a lot more difficult now for oil and gas, and CND’s project is offshore which is usually harder to fund as a small cap.

Which means CND hasn't had its big share price run in anticipation of a big drilling event.

Typically with oil and gas small cap stocks we see an increase in interest and excitement as drilling gets closer - it usually looks something like this:

It’s important to note that increased excitement/interest shown on our chart below does NOT necessarily correlate to share price increases, which depends on many other factors and broader market conditions.

It worked that way for IVZ.

And we think CND is somewhere here on the excitement scale:

Note: We are not saying CND will do the same as IVZ or any other early stage explorers, lots can go wrong and small cap investing is high risk. Past performance of other companies is not an indicator of the future performance of CND.

The two key reasons why we think CND is “deal ready”

We covered the two key reasons in detail in our last CND note, here is a quick overview (click on the hyperlinks to see our deep dive on the two reasons):

1) We think the oil prospects are big enough to warrant drilling AND IF someone gets lucky and discovers something there are plenty of other leads that can be followed up over CND’s blocks.

AND

2) Because a development scenario was considered for the gas asset back in 2006. Now with more demand for gas locally (in both Peru and Ecuador) as well as internationally, we think the chances someone relooks at that old development plan is much higher...

What are the risks?

In the short term, the key risks for CND are 1) funding risk and 2) commodity risk.

Funding risk because CND have completed most of the desktop studies on their project.

Drilling an offshore target will cost a lot of money which CND’s current market cap wouldn't be able to support.

CND will therefore need to raise capital to fund drilling OR sign a deal with a funding partner to pay for the drill program.

A deal is never a guarantee and any delays could mean CND’s share price drifts lower as the market starts to price in a deal not being completed.

Funding risk

CND does not generate any revenues and so is reliant on raising capital to fund its exploration programs. If the markets are unwilling to finance CND’s exploration programs the company may need to go slow on its operations or offer large discounts to its share price when raising capital.

Source: “What could go wrong?” - CND Investment Memo 5 December 2023

“Commodity risk” because appetite for CND’s shares are loosely correlated to the oil price.

Over the last few days the oil price has come off a fair bit. Lower oil prices inevitably mean there is less incentive for companies to drill for new supply.

Usually for offshore exploration to be considered attractive we would need to see oil prices above ~US$80-90 barrel.

With oil prices now trading sub US$60 barrel, it could mean market appetite to finance a drill program OR major partners to farm-in will be diminished.

Commodity risk

CND’s project is leveraged to the price and demand for oil & gas. As the world looks to move away from fossil fuels, hydrocarbon projects may be phased out.

Source: “What could go wrong?” - CND Investment Memo 5 December 2023

To see more risks read 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