Discovery? We will know within 72 hours

Disclosure: S3 Consortium Pty Ltd (the Company) and Associated Entities own 3,692,102 IVZ shares and 1,217,101 options and the Company’s staff own 60,000 shares and 10,845 options at the time of publishing this article. The Company has been engaged by IVZ to share our commentary on the progress of our Investment in IVZ over time.

Not long to go now.

In less than 72 hours we will know if our 2020 Energy Pick Of The Year Invictus Energy (ASX:IVZ) has made a basin opening discovery in Zimbabwe.

One final step is required for IVZ to declare a rare and coveted oil & gas “discovery” - IVZ needs to bring a hydrocarbon sample to the surface.

This would confirm the presence of “moveable” hydrocarbons.

And with that, we will know if IVZ can declare a “discovery”.

IVZ expects to know within the next three days.

This upcoming result has been years in the making so even for those sitting out of IVZ it will be an interesting one to watch this week.

IVZ has already proven a working hydrocarbon system and encountered multiple zones of fluorescence and elevated gas shows.

IVZ is now running a wireline logging program with the ultimate aim of bringing an oil/gas (hydrocarbon) sample to surface.

Yesterday we got a clear timeline in the ASX announcement, with IVZ confirming this will be completed in 1-3 days from today.

Our hope is that if IVZ can declare a basin opening “discovery”, the market will respond in a similar way to how it responded to Africa Oil’s basin opening “discovery” in Kenya back in 2012.

As long time readers will know, around ten years ago Africa Oil drilled a basin opening well, confirmed a discovery, and saw its share price rise from $1.50 to a high of $12.50.

Moveable hydrocarbons brought to surface and the declaration of a “discovery” was the key announcement that started Africa Oil’s share price run and gained widespread media attention in Kenya and the global oil & gas industry.

Below is an image from a Kenyan Newspaper on 27 March 2012, a day after Africa Oil declared a “discovery” on its basin opening well.

The photo is of the Kenyan Energy Minister holding the movable hydrocarbon sample that was brought to surface, which allowed the declaration of Kenya’s first ever oil discovery:

Source: Kenya Nation News (print copy)

Such is the importance placed on attaining that movable hydrocarbon sample and declaring a discovery — we are hoping and praying that IVZ can achieve this in the next 3 days.

The best case is that we will soon see photos of IVZ Managing Director Scott Macmillan and various Zimbabwe government officials showing off that precious little vial containing movable hydrocarbons, and that elusive D-word peppered through various media.

Our view is that Africa Oil’s re-rate from $1.50 to a high of $12.50 was because it successfully announced a basin opening discovery, combined with multiple other identified targets in the same basin, meaning that the first discovery implied all other targets would likely be successful too.

This is IVZ’s first well in the basin and it still has ~13 other targets, so there is potential for the market to apply similar kind of logic if IVZ can declare a discovery.

Of course, there’s no guarantee that IVZ will deliver an Africa Oil type of discovery on its maiden well.

Even if IVZ does announce a discovery, the share price might react in a different and disappointing way, depending on how much a “discovery” has already been priced into the IVZ share price AND how many funds and large investors are actually waiting on the sidelines to invest in IVZ on a confirmed discovery.

Or, the share price could go nuts and re-rate like Africa Oil did on its confirmed discovery, pricing in assumed success on the many other targets in the basin based on success in the first well.

Or it might even just deliver a low to modest share price re-rate, which does not meet expectations of impatient investors hoping for a quick, large profit.

In our opinion, the following factors set a good base for the IVZ share price to materially re-rate on a discovery this week:

• The pre-discovery market cap of IVZ is $250M, similar to where Africa oil was pre-discovery... and this was all the way back in 2012.
• Drill delays and issues have shaken out a lot of pre-result short term speculators and traders. Many will remember 88 Energy running to over $1 billion market cap on speculation BEFORE a discovery was announced. This left no room for the 88E price to run if they had announced a discovery (spoiler: they didn’t). Even if 88 Energy had declared a discovery, it was already priced in and then some, giving the share price no room to react positively.

So in our view IVZ’s modest pre-discovery market cap, and drill delays that have shaken out traders, sets IVZ up for a share price re-rate upwards on successful discovery. We are holding our current position accordingly.

However, this is the small cap exploration markets where anything can happen and market reaction to positive announcements can often be confusing and unexpected - we simply don’t know how the IVZ share price will react IF it announces a discovery this week.

In any case, within 72 hours we will know.

We are holding a relatively large IVZ position into the result. We have our fingers crossed for a discovery and significant share price reaction to usher in the holiday season... and to relive the experience we had with Africa Oil in 2012.

Read our full comparison of IVZ to Africa Oil and its previously successful drill campaign.

Here is everything we know from IVZ’s Mukuyu-1 well so far:

• ✅ A 10-15m interval indicative of potential hydrocarbons (oil and/or gas) was intersected across the first three of shallow targets.
• ✅ Seal was identified with several hundred-metre thicknesses above the deeper primary targets. This was a key risk going into drilling. This hopefully means there’s a geological seal that’s strong enough to trap oil and/or gas in the primary targets that IVZ is drilling for.
• ✅ Elevated gas shows up to 135x above background gas levels through the first of two primary targets.
• ✅ Elevated (100%) fluorescence, indicating condensate or light oil.
• ✅ Elevated Logging While Drilling resistivity.
• ✅ 🛢️A working conventional hydrocarbon system declared. 🛢️
• ✅ ~900m gross interval in one of the primary targets.
• ✅ Mukuyu-1 well drilled down to a depth of 3,923m.
• ✅ Mukuyu-1 Sidetrack well completed down to a depth of 3,603m. (NEW)

What is left before IVZ can declare a discovery?

• 🔄 Wireline logging of the sidetrack well - This logging programme will include formation pressure and fluid sampling, and will allow IVZ to identify any moveable hydrocarbons and any potential hydrocarbon pay.

So, the sidetrack well is now completed and a wireline logging program has commenced that will provide detailed geological information in order to confirm the presence of moveable hydrocarbons.

IVZ confirmed yesterday that wireline logging of the sidetrack well was expected to be completed in the coming 2-4 days, which means that results should be in this week.

Having already proven a working hydrocarbon system, IVZ’s ultimate aim this week is to bring an oil/gas sample to surface.

While the results from drilling so far have already exceeded our minimum expectations, bringing a hydrocarbon sample to the surface is what IVZ needs to be able to declare a new discovery.

It's been a long wait for us, having been Invested in IVZ for just under three years but we finally get to see the (hopefully) big news this week.

We also recognise that the delays have caused volatility in IVZ’s share price. The share price has declined when technical issues happen and then rising after IVZ reports good news.

The benefit is that the impatient holders, who were perhaps looking to sell out into a discovery announcement, have likely already sold.

While that’s just a theory, we hope this means fewer sellers on the day of the announcement, which should mean a more explosive move higher on positive news.

An update on our Investment Strategy for IVZ:

Since drilling started, IVZ’s share price has lifted from ~10c per share to a high of ~40c per share. In accordance with our trading policies, we took this opportunity to partially de-risk our position, selling down another ~11% of our total position.

We came into this drilling program holding a far bigger position in IVZ than we usually do with big oil and gas exploration events, hence why we took that opportunity to trim our position.

And still our current holding remains far and above what we usually hold going into drilling results.

We are currently holding a total of 3,692,102 shares and 1,217,101 listed options — our plan is to not sell any of our position until we see the results from the wireline logging program.

We are hoping for an ASX announcement with the word “discovery” on it as a Christmas present for us and all other IVZ shareholders.

This potential imminent news forms the basis for our IVZ “Big Bet”.

Our IVZ Big Bet

“To see IVZ make a basin opening oil/gas discovery in Zimbabwe and re-rate by over 1,000% - similar to the move Africa Oil experienced after making its basin opening discovery in Kenya.”

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 IVZ Investment Memo. Success will require a significant amount of luck. There is no guarantee that our Big Bet will ever come true

To monitor the progress IVZ has made since we first Invested and how the company is doing relative to our “Big Bet”, we maintain the following IVZ “Progress Tracker”:

See our IVZ Progress Tracker here:

Invictus Energy

ASX:IVZ

What happens after Mukuyu-1?

Drilling of the Baobab-1 (Basin Margin) well 🔄

In a previous note we explained that IVZ is taking a slightly different approach to Africa Oil.

Africa Oil drilled two basin margin wells before moving into the middle of the Lokichar Basin.

Taking the opposite approach, IVZ started by drilling the Mukuyu-1 well in the middle of the Cabora Bassa Basin.

This brings us to IVZ’s next well, which was scheduled to start drilling immediately after the Mukuyu-1 well was finished drilling, the Baobab-1 well.

Here, IVZ plans to drill its first basin margin well, regardless of the result from the Mukuyu-1 well.

The Basin Margin Play has an estimated 1.2 billion barrels of oil (gross mean unrisked) across five drill ready prospects that will be tested by the Baobab-1 well.

IVZ previously said that Baobab-1 well pad construction was underway and was scheduled to be completed before the Mukuyu-1 well was finished drilling.

IVZ had initially planned to drill Baobab-1 as soon as the Mukuyu-1 well was completed.

Based on the IVZ Investor Briefing given a few weeks back, we understand that IVZ’s drill rig will head off to drill UK-listed Helium One’s Tanzanian well after Mukuyu-1 next. We expect the Boabab-1 well to be drilled later in 2023, unless IVZ decide to bring in a completely new rig.

At this stage we will be waiting for some guidance from IVZ on the timing of the Baobab well - but for now, all eyes are on an outcome on the current drilling.

What could go wrong?

With results just days away, the biggest risk now is “exploration risk”.

While IVZ has identified a working hydrocarbon system and other technical findings that would on their own constitute a successful drilling program, a failure to officially declare discovery won't be well received by the market.

In that scenario, we think the market would likely sell off IVZ and lead to a fall in the company’s share price.

As such exploration risk was highlighted in our IVZ Investment Memo as one of things that could go wrong:

Our IVZ Investment Memo

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

In our IVZ Investment Memo, you’ll find:

• Key objectives we want to see IVZ achieve
• Why we Invested in IVZ
• What the key risks to our Investment thesis are
• Our Investment plan