IVZ declares second discovery

Disclosure: S3 Consortium Pty Ltd (the Company) and Associated Entities own 5,715,563 IVZ shares and 2,837,289 IVZ options and the Company’s staff own 161,667 IVZ shares and 51,679 IVZ 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.

Another great result from Invictus Energy (ASX:IVZ).

A second discovery.

Net pay across two reservoirs is now a “conservative” 34.9m and likely to get bigger once the lab results come in.

A massive new frontier basin opened up, the biggest in East Africa in a decade.

~5.5bn barrels of oil equivalent prospective resource and multiple targets to follow up on over the coming years.

Discovery day, the day we have all been waiting for.

And it’s a double discovery.

And in typical bear market fashion of the last 12 months for most stocks...

For some reason the share price opened down on the day on positive news...

Not the opening result any of us were hoping for OR expecting, but it’s still very early days.

Much like we have seen with many of our other stocks in what has been a shocking market for small caps this year, great news was sold into.

We think there is still a lot more to come from IVZ once the news is fully digested and the washout of short term holders and speculators finishes.

We are still holding our pre-result IVZ position, because the share price response to what we believe is incredible news just doesn’t make sense to us.

We think today’s positive news will EVENTUALLY become priced in.

We are going to wait for the dust to settle and hopefully see IVZ re-rate and reward the progress announced over the last two weeks accordingly.

The next couple of weeks of share price activity should be quite interesting, once all the panic selling is out of the way.

🎓 If you want to learn more read: Why do shares go down on good news?

There are plenty more targets and lots more to uncover in this massive basin, even deeper drilling in just the Mukuyu-2 well.

We wonder what IVZ’s double discovery would have delivered in a more bullish market like we had 2 years ago... or even just a normal market.

IVZ MD Scott Macmillan delivered a webinar to discuss the results, for those who missed it here is a recording:

There were two key points that stood out to us the most.

1. Scott touched on this being a basin opening discovery and compared it to the Lokichar/Albertine-Graban/Perth basins.

Scott mentioned on the call that once a basin was opened up it just got bigger and better as companies drilled more wells.

Scott mentioned the Perth Basin as an analogue where there has been ~3 trillion cubic feet in discoveries and the valuation of companies/M&A deals across the basin has gone over and above $4BN.

IVZ’s current market cap is $206M. (at a 16c share price)

We think the analogues are particularly important when you consider IVZ owns 80% of the entire Cabora Bassa Basin & has a prospective resource across its targets of ~20 trillion cubic feet + 845m barrels of gas condensate...

IVZ will also be the main player when it comes time to negotiate with anyone looking for exposure to the basin in any particular way.

1. Scott mentioned that the basin opener was drilled using 2D seismic and that 3D seismic would change the game for its project.

Scott touched on how 3D seismic changed the game for the Lokichar Basin in Kenya.

Scott gave the analogues of how the initial targets in the Lokichar basin (based off 2D seismic) were for ~50m barrels of oil equivalent but eventually after 3D seismic came into the basin over 300m barrels were discovered.

Scott mentioned how IVZ would look to run 3D seismic across Mukuyu and hopefully achieve a similar result for its project.

What happens next?

• Production liner to be run - IVZ will now run a 7 inch production liner so that it can be flow tested in 2024.
• Analyse data and plan next move - IVZ can then decide where to go next - there are so many prospects and targets to go after in the basin
• Flow test in 2024 - This is when we can start to get an idea of what a development pathway looks like.

What the discovery means for IVZ:

In last week's note we summarised what we think a discovery could mean for IVZ.

In that note we specifically touched on:

• The follow up exploration potential across the basin
• Implications of its 80% ownership in the discovery and the entire basin.
• The $ multiples paid for discoveries across other African oil & gas projects.

(Source)

Below are some of the key reasons and our previous coverage of why we think IVZ’s basin opening discovery is a major milestone for the company.

• IVZ holds the key to the basin, if a discovery is made (Basin Master position) - IVZ holds ~80% of its project and if a discovery is made it gets to decide what happens with the project post-discovery.
• Oil and gas majors have paid multiples of IVZ’s current valuation for discoveries across East Africa - some transactions were done at 12x to 224x of IVZ’s implied working interest % on its project.
• Basin Margin ‘String Of Pearls Play’ undrilled - IVZ has ~1.2Bn barrel oil equivalent prospective resources across basin margin targets. Basin Margin targets in the East African Rift System have an exploration success rate of 100% - 14 discoveries from 14 wells.
• Directors who have had success in the East African Rift System -After drilling its first well in 2022, IVZ appointed John Bentley as its chairman and Robin Sutherland as its non-executive director. John built from the ground up and sold Energy Africa to Tullow Oil for US$500M and Robin worked for both Energy Africa and Tullow Oil.
• IVZ is looking to do what Africa Oil has done before - back in 2012, Africa Oil Corp (TSX.V:AOI) drilled a string of successful wells and delivered a 1,000% share price run and sustained re-rate. We are hoping IVZ does the same thing.
• Carbon offset projects to generate carbon credit revenues - IVZ is in the early stages of building out a carbon offset business that could generate revenues from carbon credits. IVZ is a unique small cap exposure to global carbon credit prices.
• One of the biggest conventional oil and gas prospects globally - IVZ has a gross unrisked prospective resource of ~5.5 billion barrels of oil equivalent making it one of the largest conventional oil and gas targets in the world.
• The Zimbabwe Sovereign Wealth Fund is aligned with IVZ - Back in March 2022, IVZ signed a head of agreement with the Zimbabwe Sovereign Wealth Fund which would see the fund take an interest in the project - this aligns the government and the people of Zimbabwe’s interests with IVZ.
• US$30M in work done by Mobil before IVZ acquired the project -The project had US$30M in legacy data leftover by Mobil from the 1990’s. Interestingly Mobil had never drilled the project before IVZ took control of it.
• Strategically located next to South Africa - IVZ’s project sits next to South Africa which is one of Africa’s biggest energy consumers and is expected to be structurally short of energy supplies over the next decade.

What are the risks?

In the short-term we see two key risks to our IVZ Investment - “Commercialisation Risk” & “Funding Risk”.

The next stage of works for IVZ is to show its discovery can be developed commercially.

In 2024 IVZ will be running a flow test to prove its discovery can produce oil/gas at commercially viable rates.

The flow test will ultimately determine whether or not the discovery can be developed in the future.

There is always a risk the first flow test doesn't come off for IVZ and “Commercialisation Risk” materialises.

The second risk for IVZ over the coming 3-6 months is “Funding Risk”.

IVZ has just finished a big drill program which means a cash burn to pay for it.

As a small cap junior that does not generate any revenue itself, “funding risk” is always apparent for companies like IVZ.

IVZ had $15.4M in cash at the end of the September quarter and received ~$7.5M from the 2nd tranche of its 15c placement in November meaning the company would have had ~$23M cash going into the Mukuyu-2 drill program.

It is likely that IVZ has spent a large chunk of it in the subsequent months, especially on the sidetrack hole and so there is always a chance IVZ has to raise more funds through equity raises in the short term.

To see a full list of the IVZ risk see our July 2023 IVZ Investment Memo.

Final Word

So we have the IVZ result we were hoping for and now a huge amount of potential still to unlock in the basin.

Small cap stocks can appear to act irrationally at times, but at the end of the day the sellers today have their reasons and it’s their decision.

We are holding (not advice, it’s our own strategy that is right for our risk profile), and once the reactive sellers are finished, we are looking forward to see where the IVZ share price settles over the next few weeks - we are hoping for a gradual rerate upwards.

And finally a big congratulations to Scott and the IVZ team for delivering the discovery!

Over a decade of hard work and a long time in the making, well done team.

Our IVZ Investment Memo

In our IVZ Investment Memo, you can find the following:

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