The result that stops a nation

“Discoveries” in oil & gas exploration are rare.

The majority of attempts fail.

...but a rare few are lucky enough to declare an official “discovery”.

On the occasions when a new discovery happens - It’s a big deal.

Investing in just ONE of these oil & gas drilling results is stressful and exciting enough.

And by some outrageous twist of fate, after years of us being Invested in IVZ and NHE...

BOTH are expected to announce whether or not they have made a basin opening “discovery” in the first couple of days of this coming week.

A couple of weeks ago we joked about IVZ and NHE potentially announcing final results on the same day, thinking that this surely would be an impossibly unlikely coincidence.

And now (based on timing guidelines given by both companies) it’s actually a very real possibility that we could know both results on Monday...

Due to the muted “pre-result share price run up” on both stocks, there wasn’t an opportunity to Free Carry while still retaining enough of a position into the result to keep it interesting.

So we are holding significantly larger positions in both companies into the results that we usually would and have not Free Carried... otherwise known as “mad-dogging into the result”.

(This is a high but acceptable risk for us given that IVZ and NHE make up only a part of our broader diversified small cap portfolio. A failure on both will certainly sting, but it won’t destroy our overall Portfolio. This risk-reward tolerance is appropriate for us but may not be right for everyone. Oil and gas exploration is high risk)

In the HIGHLY unlikely event that both IVZ and NHE both declare a discovery on Monday, it’s probably time for us to retire given it will be very hard to top that as a small cap investing experience.

If neither of them declare a discovery then it will certainly be a rough day for us...

Why are new discoveries such a big deal?

Because new discoveries are rare and hard to deliver.

According to the Energy Institute the success rate of new onshore exploration is just 10.6%.

(Source)

So when a discovery IS declared (especially a “basin opening” discovery like we are hoping for from IVZ or NHE) it’s a big deal.

It will certainly get markets and industry media attention.

...and should get global media attention too.

All we need to declare a discovery is that precious fluid sample to surface, like Africa Oil delivered in 2012:

This is what we saw in global mainstream media when the first ever oil discovery was announced in Kenya back in 2012 (by Africa Oil and JV partner Tullow):

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So we have seen the difference in the attention an exploration company gets when a discovery is declared versus yet another failed drilling attempt (no one wants to hear about those).

IVZ and NHE are both attempting to declare discoveries that will open new basins and be a first for each country they are exploring in (IVZ for Zimbabwe’s first ever gas/oil discovery, NHE for Tanzania’s first ever helium discovery).

Just need to get through the weekend and then we should find out.

So what happens if a discovery is announced?

We all know the feeling of opening a drill results announcement and praying to see that magical “the company is pleased to announce” line...

But what kind of information might we expect to see in an oil & gas “discovery” announcement?

And what does it actually mean?

We will explain the key information investors look for in a discovery announcement, specifically “gross” and “net” pay, and why it matters.

Today we are also going to look at five different “discovery” announcements from the past:

• Africa Oil (2011-2013) - Ngamia-1 net pay of ~20m & a discovery was declared. Africa Oil’s market cap went on to re-rate to >$1BN.
• Hardman Resources (2006) - Mputa-1 wildcat well hit gross pay of ~10m, declared a discovery and was taken over ~8 months later for ~$1.5BN.
• Strike Energy (2019) - Wagina-1 well initially hit net pay of ~2.5m (upgraded to ~10m later) and a discovery was declared - Strike’s share price went from ~15c to >70c per share.
• Norwest Energy (2021) - Lockyer-1 Deep well hit net pay of ~20m and declared a gas discovery. Norwest’s share price went from a low before drilling at 0.3c to a takeover offer by Mineral Resources of ~7.41c per share in the years after the discovery.
• Carnarvon Energy (2018) - Dorado-1 well delivered an oil discovery with net pay of ~132m. Off the back of the discovery, Carnarvon’s share price went from ~15c to highs above 70c per share.

Remember, just because these companies performed in a certain way, doesn’t mean any future companies will do the same, early stage exploration is high risk and many things can and do go wrong.

What is net and gross pay?

“Net pay” basically means the sections of the drill hole, measured in metres, that meet the criteria (permeability etc) to potentially flow/produce oil/gas.

Net pay in metres is the magic number we are watching for.

(Source)

The gross pay number can be pretty large, but it’s the much smaller net pay number we are watching for.

This week both Invictus Energy (ASX:IVZ) and Noble Helium (ASX:NHE) hit TD (Total Depth) on their wells.

Both of them also kicked off wireline logging and sampling programs (to identify gross and net pay and try to bring a sample to surface).

Both companies are now in the final stage of an oil & gas drilling event.

The last few days where the company either makes a discovery or hits a duster.

The typical announcement story arc for any oil & gas drilling event is as follows,

The final stages before a discovery can be declared are:

What we will be looking for:

If (and it’s still a big IF) either IVZ or NHE declare a discovery, here is what we will be looking out for.

What we look for from well results always depends on the initial design of a well.

Depending on the objectives for that particular drill program we will look for a varying level of detail in the results announcement.

For example:

If the well is a wildcat exploration well (the first in a previously untested basin), then all we want to see is whether or not a discovery can be declared.

If the well is a follow-up appraisal well, then it becomes all about flow tests and confirming/improving on what we saw in the first well.

It isn’t always a black or white outcome - sometimes the outcome can be very simple, other times it can get very technical.

Luckily, this time around, for IVZ and NHE the outcomes we are looking for are relatively similar:

For IVZ, it is the second well in the basin and the ultimate objective is to make a discovery.

As a result we will be looking out for:

1. Gross/Net pay numbers - this would tell us how big the reservoir structures could be, and combined with the information from the first well (Mukuyu-1) can be used to understand where to find the most optimal parts of the broader prospect.
2. Some technical reservoir characteristics - porosity/permeability/resistivity etc, give us an idea of how likely the reservoirs are to be commercially viable and how well they might perform in future flow tests.
3. Discovery declaration - we want to see IVZ bring a fluid sample up to surface and declare a discovery.

IVZ’s Mukuyu prospect has a prospective resource of ~20 tcf gas and ~845m barrels of gas condensate.

For NHE, it is the first well in the basin and will be the precursor for an appraisal well straight off the back of this one.

As a result, we will be looking for:

1. Gross/Net pay numbers - this would tell us how big the reservoir structures targeted with NHE’s first well could be, but NHE’s plan has always been for the bigger pay to come in the deeper targets in their next well Mbelele-2,~4km away from this current shallower well.
2. Sample the reservoirs and confirm helium grades - this would tell us if NHE’s theory on the whole system is correct, and there is helium in the reservoirs.
3. Declare a discovery - this is the main thing we want to see, a discovery on the first drill will prove NHE’s theory on all the other prospects and de-risk all the other basin margin fault targets NHE has.

NHE’s has a prospective helium resource of ~15.7 bcf.

Both IVZ and NHE have many more targets in their basins for follow up.

At the end of the day for both of them it is about proving whether or not some of that prospective resource is where the company thinks it is and whether or not new discoveries can be declared.

With the aim for both IVZ and NHE being discoveries it’s important to really understand what a NEW discovery announcement looks like and the impact it can have on a company’s share price.

A look at previous discovery announcements:

Before we get into these examples, remember, just because these companies performed in a certain way, doesn’t mean any future companies will do the same, early stage exploration is high risk and many things can and do go wrong.

Africa Oil’s basin opening discovery in Kenya (2012) -

(can’t remember if we have ever mentioned Africa Oil or not...)

Back in 2012 Africa Oil drilled its basin opening Ngamia-1 well.

The initial results from the well came in with net pay of ~20m and a discovery was declared.

(Source)

After this announcement, Africa Oil’s share price rose +1,000%, hundreds of millions of $ were raised, and the company went on to deliver several more consecutive discoveries in the basin.

During that period, Africa Oil’s market cap rallied to >$1BN.

Hardman Resources discovery in Uganda (2006) -

Back in 2006 Hardman resources drilled its first wildcat well (Mputa-1) in Kenya.

On the 17th of January 2006 Hardman hit ~10m of gross pay, and a discovery was officially declared.

(Source)

Hardman’s share price had started running before that discovery was made, BUT the discovery was one of a few events that lead to the eventual ~$1.5BN takeover of Hardman by Tullow Oil.

By September that year Tullow’s takeover offer was accepted and Hardman shareholders walked away with ~$1.5BN - which at the time was a serious amount of money.

Especially considering oil and gas prices were a lot lower back then AND Hardman’s share of the Ugandan assets was only 50%.

(Source)

Strike Energy’s discovery in WA (2019) -

Strike started drilling its Wogina well back in early 2019.

By July 2019 Strike declared a discovery from ~2.5m of net pay where porosities were ~14.2%.

A few weeks later, the net pay was upgraded to ~10m. and in the two months after the discovery, Strike’s share price went from ~6c per share to ~30c per share.

(Source)

Norwest Energy’s discovery in WA -

In July 2021, Norwest Energy started drilling its Lockyer-1 deep well.

By September, the company had declared a discovery with net pay of ~20.2m and very high porosity levels (averaging ~16%).

(Source)

Pre-drilling NWE’s share price had traded as low as ~0.3c per share.

After the discovery, in April 2022, the company raised ~$18M at 3.3c per share - ~11x higher than its pre-drill share price.

Then, in December 2022, Norwest’s project partner Mineral Resources made a takeover offer for Norwest at 6c per share.

By the end of Jan 2023, Mineral Resources had upped the offer to an implied ~7.4c per share, which was enough to get the deal done.

Anyone who was holding from 0.3c per share back in 2020-2021 would have walked away with a ~25x return.

(Source)

Canarvon’s discovery in Offshore WA (2016) -

In early June 2016, Canarvon started drilling its Dorado-1 well.

By mid-July Canarvon declared an oil discovery with net oil paying zones of ~79.6m.

(Source)

Then, in August, Carnarvon added ~40m, taking the total net pay for the discovery to ~132m.

(Source)

By the end of August - only a few months after drilling had begun - Carnarvon had gone from a pre-drill share price of ~15c to a high of >70c per share.

In Summary:

• Africa Oil (2011-2013) - Ngamia-1 net pay of ~20m & a discovery was declared. Africa Oil’s market cap re-rated to >$1BN.
• Hardman Resources (2006) - Mputa-1 wildcat well hit gross pay of ~10m, declared a discovery and was taken over ~8 months later for ~$1.5BN.
• Strike Energy (2019) - Wagina-1 well initially hit net pay of ~2.5m (upgraded to ~10m later) and a discovery was declared - Strike’s share price went from ~15c to >70c per share.
• Norwest Energy (2021) - Lockyer-1 Deep well hit net pay of ~20m and declared a gas discovery. Norwest’s share price went from a low before drilling at 0.3c to a takeover offer by Mineral Resources of ~7.41c per share in the years after the discovery.
• Carnarvon Energy (2018) - Dorado-1 well delivered an oil discovery with net pay of ~132m. Off the back of the discovery, Carnarvon’s share price went from ~15c to highs above 70c per shares.

We are now hoping IVZ and NHE can deliver similar discoveries with similar share price re-rates (fingers crossed):

• Invictus Energy (ASX:IVZ) (2023) - Mukuyu-2.....?
• Noble Helium (ASX:NHE) (2023) - Mbelele-1....?

Good luck to all NHE and IVZ holders:

Hopefully, this week we get some good news.

Remember, results for big oil and gas drilling events are binary in nature.

Even results on good news may be different to what is expected.

Share prices can swing either way in a big way, quickly.

Going into binary results, position sizing becomes very important - investors need to be comfortable holding a position that isn't big enough to blow up a portfolio.

We have a very specific Investment Strategy for big oil & gas drilling events like this.

1. We like to Invest early way before any drilling event.
2. We hold on until the major catalyst is nearby.
3. We look to free carry our position going into the final results from the drill.

Typically, we like to be Free Carried going into the drill programs.

With NHE and IVZ, there was not a pre drill price run that warranted a Free Carry, so we are holding much larger positions than we would have otherwise held going into a binary result (you can see all our holdings at any time here, under “our holdings”), BUT accept this risk and we are doing so as part of a diversified portfolio of Investments.

Large losses in NHE and IVZ would hurt, but it wouldn't totally destroy our portfolio as a whole.

If the results are positive and share prices re-rate then it will be a meaningful boost to our portfolio overall.

No matter what happens, we are comfortable with our position sizes going into the results.

Good luck to all holders, and fingers crossed for us all.

What we wrote about this week 🧬 🦉 🏹

NHE Reaches Total Depth: Announcement Explained

This week our helium Investment, Noble Helium (ASX:NHE) reached Total Depth at its maiden helium well in Tanzania. The announcement was a bit tricky to understand, so we wrote a note to break down the key bits of information.

TYX drilling for lithium now - spodumene already hit

Our Angolan lithium Investment, Tyranna Resources (ASX: TYX) has just started drilling again - this time 30 shallow holes, approx 200m deep (total 6,000m) with the aim of extending its first discovery, and making a new one. There’s plenty of spodumene, and we await assays in January 2024.

Quick Takes 🗣️

88E: 88E to confirm an oil & gas discovery off the back of Hickory-1?

EMD: Emryria receives endorsement from NHMRC ethics committee

EMN: EMN completes Land Access Agreement with CEZ

EXR: EXR to drill its QLD gas project early next week

IVZ: IVZ hits total depth TD. Wireline logging underway...

LCL: LCL finds a repeat of its Kusi gold project?

LCL: LCL to drill PNG’s biggest nickel anomaly in Q1-2024

MEG: MEG finding more carbonatites at its US rare earths project

NHE: Noble Helium CEO Justyn Wood on Positive Progress

OKR: OKR’s WA lithium project?

TYX: TYX kicks off second phase of lithium drilling in Angola.

SGA: SGA to scale up its graphite processing flowsheet

Macro News - What we are reading 📰

Energy

As Wind Industry Struggles, Investors Brace for Orsted Losses (Bloomberg)

Oil and gas

Despite net-zero pledges, LNG eyes post-2050 market as transition stalls (AFR)

Uranium

Top Hedge Funds Are Doubling Down on Uranium Stocks (The New Money)

Lithium

MinRes takes big stake in WA lithium play Wildcat (AFR)

⏲️ Upcoming potential share price catalysts

Updates this week:

• IVZ: Drilling oil & gas target in Zimbabwe, Mukuyu-2 (Q3, 2023)
  • IVZ hit TD (Total Depth) and started wireline logging at its Mukuyu-2 well. See our Quick Take on the news here.
• NHE: Scheduled to drill two targets at its helium project in Tanzania (Q3 2023).
  • NHE also hit TD and started wireline logging at its Mbelele-1 well. See our note on the news here.
• EXR: Daydream-2 appraisal well, QLD
  • EXR confirmed it would start drilling its Daydream-2 well early next week. See our Quick Take on the news here.
• TYX: Second round of drilling at its lithium project in Angola.
  • TYX is already three holes into its 6,000m RC drill program. See our note on the news here.
• TMR: Maiden JORC resource for its gold project in Canada.
  • TMR put out its maiden JORC resource for its Elizabeth gold project in Canada. See the ASX announcement here.
• 88E: Flow test well, Alaska (Q4, 2023)
  • 88E appointed consultants to estimate a contingent resource for its Project Phoenix. See our Quick Take on the news here.

No material news this week:

• PUR: Drilling its Argentine lithium project in Q4-2023.
• SLM: Assay results from drilling at its Brazilian Lithium project.
• LYN: Assay results from its Bow River nickel-copper-PGE project in WA.
• DXB: Interim Analysis of Phase III Clinical Trial on FSGS (March 2024)

Have a great weekend,

Next Investors