New Year, New Drill: What is happening with IVZ?

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.

Our 2020 Energy Pick of the Year Invictus Energy (ASX:IVZ) was just a “movable fluid sample” away from formally declaring a maiden oil & gas discovery in Zimbabwe.

IVZ has all but unlocked an entirely new oil and gas basin in Africa. They were excruciatingly close - but were thwarted by tool and drilling equipment failures at the final step.

Today we will run through all that's happened since IVZ’s maiden well, including some impressive new board appointments, and what we expect to happen next.

On its first well, IVZ hit gas shows 135 times above background levels, up to 13 different potentially hydrocarbon bearing reservoir units and, most importantly, identified a working conventional hydrocarbon system.

That’s everything except that one final step of bringing a hydrocarbon sample to surface — all because of equipment and tool failures. Very frustrating — especially when you consider that in 95 out of 100 of these types of drilling events nothing is found.

The good news is that IVZ has clearly established a new hydrocarbon province. Whilst not an ‘official discovery’, the results have set the scene for future drilling events, substantially de-risking IVZ’s wider acreage from a geological perspective.

We are now waiting for a forward plan from IVZ - specifically when and where it will drill its next high impact exploration well.

After a decent share price run to as high as 40c leading into the first drill result in December, the price came off after the final result wasn’t able to be “formally” declared a “discovery”. The share price now seems pretty happy bouncing around 16c.

We held a bigger position than we usually would have into the result, and continue to hold that position now.

We are happy to hold as we expect a similar price run in the lead up to the next drill and drill result. This time we expect a higher likelihood of success - given the knowledge gained and lessons learned from the first drill that was so painfully close to declaring a discovery.

In a two hour podcast interview, IVZ MD Scott Macmillan says that not being able to declare a “discovery” was not a geological issue, it was because of tool and equipment issues. But the market seems to have priced the outcome as a failure.

We listened to the whole interview and the key highlights are summarised later in this note.

This week IVZ sent a direct signal on how confident it is in making a future discovery, appointing two new board members with experience in taking small African oil & gas explorers to developers, eventually leading to takeovers by much larger companies.

John Bentley joins IVZ as chairman

John built Energy Africa from the ground up, listed it on the Johannesburg and Luxembourg stock exchanges and eventually sold the company to Tullow for US$500M.

As CEO, over a five year period, John helped Energy Africa set up operations across 12 different African countries with several major discoveries across the continent.

Robin Sutherland joins IVZ as a Non-Executive Director

Robin was also at Energy Africa before Tullow got involved.

After the Tullow acquisition, Robin led the Tullow Oil exploration team through multiple discoveries, including the ones made in the Lokichar Basin in Kenya, where Tullow was the joint venture partner in our first ever oil & gas Investment success Africa Oil Corp (the one we always compare to IVZ).

Our view is that board members like this would not have joined unless they thought there was potential to build IVZ into a developer and eventual acquisition target, and it seems that the results from the initial drill campaign have given them that confidence.

So while the market masses punished the IVZ share price on the result delivered, two highly successful oil & gas experts seem to think it was good enough to join the board.

We expect IVZ founder and MD Scott Macmillan is busy getting the new board members across the drill results and jointly coming up with a forward exploration and drilling plan that will put IVZ in the best position for success. Now with the added learnings of the new board members’ previous successes, networks and relationships feeding into IVZ’s strategy.

So we wait to hear from IVZ when it will drill next, and where.

Once IVZ’s forward plan is released to the market we will create a new IVZ Investment Memo to track how well it executes on this plan, potential risks (no drilling delays please), and our Investment plan.

At that point we will share our “report card” on how well IVZ performed against our first Investment Memo — rating IVZ’s achievement of objectives, which risks materialised, and how we did on sticking to our Investment plan.

Quick Recap - what happened in the first drill?

IVZ drilled the first well in one of the few remaining unexplored basins in the world and discovered the following:

• ✅ Gas readings 135x above background levels
• ✅ Multiple (up to 13 in the sidetrack well) potential gas-bearing reservoir units.
• ✅ ~900m gross interval (225m in potential hydrocarbon bearing zones in one of the primary target areas (upper Angwa target).
• ✅ Multiple seals identified with several hundred-metre thicknesses above the deeper primary targets. This was a key risk going into drilling.
• ✅ Elevated (100%) fluorescence, indicating condensate or light oil.
• ✅ Elevated Logging While Drilling resistivity.
• ✅ Most importantly 🛢️A working conventional hydrocarbon system declared. 🛢️

IVZ was just a fluid sample away from announcing a maiden discovery and potentially unlocking an entirely new oil and gas basin in Africa.

With IVZ’s ground covering the entire basin, it is in a position of being the main point of contact for any larger oil and gas companies who may want exposure to the basin.

With a working conventional hydrocarbon system, IVZ has de-risked its project to the point where we hope that its next drill program can lead to an official discovery.

More detail on the two new IVZ board members

To help the company get to an official discovery, as we mentioned above, IVZ has added two directors to its team who have been there and done it all before in the African oil and gas industry.

New non-executive chairman John Bentley and non-executive director Robin Sutherland have over ~75 years of combined experience in the African oil and gas exploration space.

Both John and Robin have been involved in taking small cap companies with oil and gas projects in Africa from explorers to developers and eventually into takeovers by much larger companies.

John was the CEO of the exploration and production of the South African oil company Engen and helped form Energy Africa before listing the company on the Johannesburg and Luxembourg stock exchanges.

As CEO, over a five year period, John led Energy Africa to increase production by >400% and helped set up operations across 12 different African countries with several major discoveries across the continent.

Eventually, Energy Africa was taken over by Tullow Oil for US$500M in 2004.

Robin was also a part of the Energy Africa team, playing a role in several oil and gas discoveries across several African countries.

In 2004, after Tullow acquired Energy Africa, Robin led the Tullow exploration team through multiple discoveries, including the ones made in the Lokichar Basin in Kenya.

Having worked on the Lokichar Basin is just an added bonus for IVZ.

For those interested, we have highlighted the similarities between IVZ’s ground and the Lokichar in Kenya in several of our notes before.

After Africa Oil (our first Investment in the African oil and gas exploration space) delivered a basin opening discovery in the Lokichar, we have always hoped that IVZ can do something similar and open up the Cabora Bassa Basin in Zimbabwe.

To see our detailed write up on the comparison between the two basins, check out the following note: IVZ to drill any day now - What a past successful exploration campaign looks like.

With the new board appointments, IVZ is looking to prepare for its upcoming drill program.

The first step of this process is to build a strong team that can execute IVZ’s plan. Next is working out where to drill and get the rig turning.

IVZ is considering drilling one of two wells:

Option 1 - Appraisal well at Mukuyu-2

IVZ could go back and drill the Mukuyu prospect again.

The difference this time would be that IVZ would be drilling based on all of the findings from the Mukuyu-1 well, AND it would be drilling an appraisal well, meaning drilling into an already established prospect instead of a completely blind one.

With IVZ having confirmed a ‘working hydrocarbon system,’ Mukuyu-2 would be a relatively lower risk well for IVZ.

Option 2 - Basin margin well at Baobab-1

At Baobab-1, IVZ would be drilling the first of its five basin margin targets that has a gross unrisked prospective resource of ~1.2 billion barrels of oil.

Ultimately these drilling programs form the basis for our IVZ “Big Bet”, which is to see the company officially declare a discovery.

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" - click the image to see it in full:

The latest from IVZ Managing Director

Yesterday we listened to a two-hour interview with IVZ Managing Director Scott MacMillan discussing just how close IVZ came to officially declaring a discovery.

Below are some of the key takeaways from that interview:

2:20 - New board member appointments

Scott touches on the appointment of John Bentley as the company’s chair and his over 40 years of experience in Africa’s upstream oil and gas industry since 1993.

The following comment from Scott neatly summarises John’s experience and what he brings to IVZ - “He has a history of taking companies from where they are, building them up, making them attractive until people come knocking”.

Scott also mentions that a new board member would be announced later in the week but was cautious about revealing too much (given that the interview was done before the announcement).

We now know that the second appointment is Robin Sutherland who also worked with Energy Africa and then at Tullow with several African oil and gas discoveries in his CV.

12:00 all the way through to ~26:00 = Scott’s commentary on the Mukuyu-1 well.

Scott comments on the risks and technical difficulties associated with drilling a ‘wildcat’ well - a first drill in a completely untouched basin.

Putting aside the commentary by Scott on all of the technical difficulties, Scott set the context for the success rate of these types of drill programs by mentioning that “95/100 of these type wells usually end in nothing being found”.

Fortunately, IVZ identified a working conventional hydrocarbon system, over 900m of gross pay and up to 13 potential hydrocarbon-bearing reservoir units.

We highly recommend everyone listen to this section where Scott gives an almost minute-by-minute explanation of the rollercoaster of emotions that he went through during the drill program.

29:20 - Warm stacking the Exalo Rig

Scott touches on the cost benefits of signing a 12-month warm stacking agreement with Exalo for the 202 Rig.

Scott said IVZ is cost-neutral from an expense perspective, compared to if IVZ had to demobilise and remobilise a rig.

On top of this, Scott explained how, as well as the cost neutrality, IVZ would reduce the chances of delays in moving the rig around the continent (which was a problem with Mukuyu-1).

40:30 - Lessons from the Mukuyu-1 well

Scott touches on the technical difficulties and all of the equipment failures experienced.

The main learning here is that IVZ can take on the learnings from Mukuy-1 and plan ahead of time so as to avoid them with the next well.

47:20 - Market response to Mukuyu-1

This section was particularly interesting to us.

We have seen the company’s share price decrease from a high of ~40c per share to now trade at ~16c per share. Clearly, the market didn't take the results well.

Scott discusses the success of the drill program and the clear identification of a conventional working hydrocarbon system.

He says, “what we had was a failure of equipment” and that to prove an official discovery, a company needs to prove MOVEABLE hydrocarbons.

Scott touches on how investors are interpreting the lack of a fluid sample as a failure, saying the problem “is not a geological issue, it is a tools issue”.

At a high level, Scott is saying that he thinks the market is pricing in a failed drill program.

In contrast, the results show a working hydrocarbon system that was equipment failures away from an official discovery.

53:30 - Scott discusses the pending lab results

Scott says the sampling done at the Mukuyu-1 well only recently arrived at the lab.

He was reluctant to give any guidance on timelines for the results but said IVZ may look to put out conservative “net pay” estimates from ~11 reservoir intervals from the samples.

59:40 - Scott answers technical geology questions

For those wanting a deeper dive into the more technical geological questions that were asked during the interview, Scott answers those here.

It can get a bit technical, but they are all really good questions, and we think Scott’s explanations are well worth listening to.

What’s next for IVZ?

Final lab results from Mukuyu-1 🔄

IVZ is still waiting on the final lab results from the wireline logging program.

All of this data will be fed into the company’s existing geological model and then integrated with the company’s existing seismic data and basin models to help inform the design of future drill programs.

After the data is analysed, IVZ will have a much stronger understanding of its project from a geological and technical point of view.

Drilling of a second well 🔄

In its most recent quarterly report, IVZ confirmed that it plans on drilling one of two possible wells. At this stage, IVZ hasn't given any guidance on timing.

We hope at least one of the two wells will be drilled before the end of the year.

IVZ has flagged the two wells:

(1) Mukuyu-2 appraisal well

This one is straightforward.

As mentioned, IVZ would go back and drill the same target Mukuyu-1 has already identified a working hydrocarbon system.

The difference this time would be that IVZ would now be drilling a de-risked “appraisal well” which means IVZ is drilling an already identified Oil & Gas prospect.

Instead of being a complete wildcat well where the company is drilling an area where it could potentially find nothing, IVZ already has a working conventional hydrocarbon system and over 900m of potential gross hydrocarbon intervals.

We also note the recent pre-drill vs post-drill comparison of key exploration risks IVZ put out on the Mukuyu prospect.

In that announcement, IVZ ran through the five key risks facing oil and gas drilling events that could impact whether a commercial discovery can be made.

With one risk mitigated, three of the five risks are now considered “low risk” and only one is considered “moderate risk”, the Mukuyu-2 well would be a relatively lower risk well to drill.

(2) Baobab-1 (Basin Margin) well

Here, IVZ plans to drill its first basin margin well.

Across the ‘Basin Margin Play, ’ IVZ has an estimated 1.2 billion barrels of oil (gross mean unrisked) at five drill ready prospects.

The first of those IVZ plans to test is the Baobab-1 prospect.

IVZ had initially planned to drill the Baobab-1 well right after the Mukuyu-1 well, but given the technical success at Mukuyu-1, the company is now in a position where it may be better ‘value for money’, drilling an appraisal well at Mukuyu.

Nonetheless, IVZ had already started well pad construction at Baobab-1, so the company can quickly shift focus to here if it wants to for whatever reason.

Whatever IVZ chooses to do next, as IVZ investors we still like the Baobab-1 well opportunity and will look forward to that eventually being drilled (if it’s not the next well).

We note that Africa Oil Corp, the company we have mentioned several times when writing about IVZ, hit its discovery drilling the first of its ‘Basin Margin’ targets.

Our IVZ Investment Memo

In our last IVZ note, we said we would look to put out a new IVZ Investment Memo (Memo #2) in the coming weeks and months.

Before then, we want to see the final results from the Mukuyu-1 well and for IVZ to put forward a forward exploration program.

Once IVZ’s forward plan is released to the market we will create a new IVZ Investment Memo to track how well it executes on this plan, potential risks (no drilling delays please), and our Investment plan.

At that point, we will also share our “report card” on how well IVZ performed against our first Investment Memo, including achievement of objectives, which risks materialised and how we did on sticking to our investment plan.