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ASX:IVZ

Invictus Energy

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ASX:IVZ
- Invictus Energy
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$0.056

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Investment Memo:

Invictus Energy (ASX:IVZ)

- LIVE

Opened: 13-Jul-2023

Shares Held at Open: 5,893,666


What does IVZ do?

Invictus Energy (ASX: IVZ) is an oil and gas exploration company looking to confirm a discovery in Zimbabwe, Africa - one of the few underexplored basins remaining in the world.

IVZ is also developing a carbon offset project in Zimbabwe which could see it develop the world’s first carbon neutral gas project.

What is the macro theme?

Natural gas demand is set to increase in Africa as it replaces existing coal power generation.

As governments around the world look to phase out ageing coal generation, gas will play a critical role in providing a lower carbon footprint. Gas is a more cost-effective alternative to base-load energy generation.

A potential discovery by IVZ has the potential to supply both Zimbabwe and the gas hungry South African market.

IVZ’s carbon offset project also provides a rare ASX listed exposure to the “carbon credits” markets which is expected to grow by ~500% by 2030.

Our Big Bet for IVZ Big Bet Tooltip

To see IVZ go on and 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.

Why did we invest in IVZ?

“Basin Master” position in Zimbabwe

IVZ holds an interest in the entire Cabora Bassa basin. In the event the company officially declares a discovery, any major company looking for exposure to the basin will need to negotiate a deal with IVZ.

Basin margin ‘String of pearls’ play

IVZ holds ~90km of basin margin fairway with a prospective resource of 1.17 billion barrels across five drill ready targets.

IVZ’s basin margin is analogous to the Lokichar basin where Africa Oil made its discovery and re-rated by over 10x. For context, the Lokichar basin saw >0.8 billion barrels of oil discovered with an 88% success rate after the first discovery was made.

De-risked project

IVZ has already confirmed a working conventional hydrocarbon system at its project. All the company needs to do to declare an official discovery is bring an oil/gas sample to surface.

With the data and lessons learnt from its first well, we hope IVZ will deliver this milestone.

Strategic Location bordering South Africa

IVZ’s project is located in Zimbabwe which borders energy hungry South Africa. The project benefits from immediate access to well developed energy markets servicing ~230 million people.

South Africa in particular needs more natural gas supply with significant shortages expected by the year 2030 as the country looks to transition away from coal powered generators.

Experienced management team to lead project development

IVZ recently brought on board John Bentley as Chairman and Robin Sutherland as a Non-Executive Director. John grew the small cap company Energy Africa before selling the company to Tullow for US$500M.

Robin led the Tullow exploration team through multiple discoveries, including the ones made in the Lokichar Basin in Kenya (the basin we always compare to IVZ).

Rare ASX exposure to a blue sky carbon offset project

Concurrent with its gas project, IVZ is developing a carbon offset project on a 50:50 partnership basis with the Forestry Commission of Zimbabwe.

Carbon credits are expected to trade for up to US$80-150/tonne by 2035 - once IVZ’s project is verified as eligible to generate carbon credits this could produce a second revenue source for the company.

What do we expect IVZ to deliver?

Objective #1: Drilling of the Mukuyu-2 appraisal well

We want to see IVZ drill the Mukuyu-2 appraisal well and officially declare a new discovery.

Milestones

complete Long lead items ordered

complete Well design completed - location finalised

complete Drill rig mobilised (warm stacked rig)

complete Drilling starts

complete Drilling finishes

complete Drill results

Objective #2: Financing for the Mukuyu-2 well

IVZ’s well is now funded having raised $35.4M in cash over the last 6 months. There is also a possibility IVZ looks to bring in an offtake partner for the project which may help with future funding rounds.

Milestones

complete Capital raise 1.1 - Placement at 12c

complete Capital raise 1.2 - SPP at 12c

complete Capital raise 1.3 - Placement at 12c

complete Offtake MOU/agreement

Objective #3: Identify and confirm the first basin margin well

We want to see IVZ firm up its first drilling target across its basin margin fairway. At this stage, it looks like IVZ will drill the Baobab prospect but given the company is looking to acquire more 2D seismic data this could change.

Milestones

complete Review targets

complete 2D Seismic acquisition program

in-progress Prospective resource update

not done First basin margin well location finalised

Objective #4: Progress the development of its carbon offset project

We want to see IVZ progress its carbon offset project to the point where it becomes accredited under Vera’s Verified Carbon Standard (VCS) program so that the carbon credits can be sold in the open market.

Milestones

in-progress Results from the pilot program

not done Financing/partnership agreement on the project

not done Accreditation under Vera’s Verified Carbon Standard (VCS) program

What could go wrong?

Exploration risk

IVZ is planning two wells, the first is an appraisal well and the second is a new exploration well.

While the appraisal well is somewhat derisked (because it is targeting a known hydrocarbon system) there is still a risk that nothing commercial is found.

There is also a risk of technical failure while exploring.

Commercialisation risk

If gas is found it doesn't guarantee that it can be economically produced, there is a risk that the water content of the gas flows is too high making it uneconomic to extract.

Flow-rates will need to prove that any gas found can be economically produced.

Commodity Price Risk

Ultimately demand for gas and its price will dictate the economic viability of IVZ’s project.

Market risk

If the broader market sells off there is a chance that investors shy away from high risk investment opportunities like oil and gas explorers.

IVZ is a pre-revenue explorer and may be impacted by these market wide sell offs.

Funding risk

IVZ does not generate any revenues and so is reliant on fresh funding for its exploration programs.

This means IVZ is reliant on access to capital, if the markets are unwilling to finance IVZ’s exploration programs the company may need to go slow on its operations or offer large discounts to its share price when raising capital.

Geopolitical Risk

The project is located in Zimbabwe which has a history of political and economic instability, there is always a risk that geopolitical issues make it difficult to advance the gas project.

IVZ has a preliminary Production Sharing Agreement Finalised but the second half is not completed, there is a risk that the agreement is delayed or that IVZ gives up a portion of the project as part of the agreement.

What is our investment plan?

As with all our early stage oil and gas Investments, we Invest early, well before the main drilling event and will aim to be free carried and have taken some profit before the drill result comes in.


Disclosure: Disclosure: S3 Consortium Pty Ltd (the Company) and Associated Entities own 5,893,666 IVZ shares and 2,675,435 IVZ options and the Company’s staff own 101,667 IVZ shares and 31,679 IVZ options at the time of publishing this memo. The Company has been engaged by IVZ to share our commentary on the progress of our Investment in IVZ over time.

Investment Memo:

Invictus Energy (ASX:IVZ)

- CLOSED

Opened: 16-Feb-2022

Closed: 16-Feb-2023

Shares Held at Open: 6,706,980

Shares Held at Close: 3,692,102

Reason Memo Closed: Drill Campaign Complete


What does IVZ do?

IVZ is a gas exploration company drilling one of the largest un-tested gas prospects in Zimbabwe.

What is the macro theme?

Natural Gas demand in Africa to replace existing coal and oil energy generation. As governments around the world look to phase out ageing coal-generation, gas will play a critical role in providing a green and more cost-effective alternative to base-load energy generation.

[Memo Assessment - 16-Feb-2023]: Sentiment = Strong

While a large part of our macro focus was on the domestic continental need for gas, in 2022 we also saw a worldwide supply crisis break out after Russia invaded Ukraine.

African energy markets still need more gas supply (specifically the South African market) and so we think the macro theme behind IVZ has actually improved from the time we put out our Investment Memo.

Our Big Bet for IVZ Big Bet Tooltip

To see IVZ go on and 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.

Why did we invest in IVZ?

First mover on an Elephant Scale Target

Our primary reason for investing in IVZ was for it to go and replicate our previous success with Africa Oil back in 2012. IVZ's Oil & Gas project in Zimbabwe has a prospective resource (100% Gross Basis) of 9.25 TcF Gas + 294m barrels of Conventional Gas-Condensate. Drilling program expected to cost US$12m which is cheap considering the size of the target being tested.

[Memo Assessment - 16-Feb-2023]: Grade = A

We think IVZ’s first mover status in the Cabora Bassa Basin is what led to the interest in IVZ’s maiden drill program.

While the company didn't officially declare a discovery, during the drilling program, positive newsflow was enough to take the company’s share price to ~40c per share.

Strategic Location bordering South-Africa

Zimbabwe over-looked in the past due to geopolitical issues & rampant inflation. With political climate improving & it's location bordering the Energy hungry South-Africa the project has immediate access to energy markets & direct to industrial users who are looking to transition energy consumption at there projects to a more green source.

[Memo Assessment - 16-Feb-2023]: Grade = A

We think this is still a key part of the IVZ story. We also think that with countries all around the world looking to secure local energy supplies, the regional importance of IVZ’s project is a whole lot higher now.

We like big oil & gas exploration drilling events

We have been investing in early stage oil & gas exploration for many years, and three of our most successful investments have been in "swing for the fence" high impact drilling, especially if it is a "basin opening" drill. These are high risk but high potential reward. Big, basin opening, exploration wells (like IVZs) take a long time to prepare, but the share price usually runs up in the lead up to commencement of the drilling.

[Memo Assessment - 16-Feb-2023]: Grade = A

IVZ delivered a “swing for the fence” drill program. With the share price moving up by ~400% during drilling, it demonstrated why these type drill events are interesting to us as Investors.

What do we expect IVZ to deliver?

Objective #1: Detailed interpretation of seismic survey recently conducted.

We are hoping to see the results from the seismic survey form a major part of the planning process for the upcoming maiden drilling program.

Milestones

complete Shoot seismic programs

complete Analyse/reprocess data

complete Refine drill targets and finalise well locations

[Memo Assessment - 16-Feb-2023]: Grade = A

IVZ ran a ~315km 2D seismic program adding to the existing US$30M in Mobil data. The company then ran detailed modern processing of the data to finalise the drilling location for the Mukuyu-1 well. While the programs took a little longer than we would have liked, the company did manage to execute our key objective.

Objective #2: Drilling rig contracted and permitting completed

We are hoping to see all of the permitting process completed & drill-rigs contracted before the company needs to raise to finance drilling.

Milestones

complete Drilling permits

complete Drill rig contracting

complete Drill rig mobilisation

[Memo Assessment - 16-Feb-2023]: Grade = A

IVZ contracted the Exalo 202 rig, signed a well services contract with Baker Hughes (one of the world’s biggest oil and gas exploration contractors) and also managed to secure a drill permit for the Mukuyu-1 well.

We also note that the company signed an agreement with the Zimbabwe Sovereign Wealth Fund for the exploration rights covering the basin margin of the Cabora Bassa Basin. This came unexpectedly to us.

Objective #3: Financing for drilling

Potential farm-out to secure drilling financing

Milestones

complete Capital raise 1

complete Capital raise 2

complete Farm out “memorandum of understanding” (MOU)

cancelled Binding farm out agreement

[Memo Assessment - 16-Feb-2023]: Grade = B

IVZ failed to sign a binding farm out agreement. Leading up to drilling, we wanted to see IVZ de-risk its position by getting a joint venture partner to finance most of the drilling. Instead IVZ decided to go it alone and funded the drilling from shareholders with a number of capital raises.

In hindsight this was a good call given the company has now identified a “working conventional hydrocarbon system” but in judging the financing objectively, we have decided a B is appropriate.

Objective #4: This is the most important: We want to see the first drill.

Milestones

complete Drilling commencement

complete Drilling results

[Memo Assessment - 16-Feb-2023]: Grade = B

IVZ delivered its first drill program before the year ended, fortunately for us and all IVZ shareholders the drill program didn’t deliver a duster. While it did not deliver the fairytale “discovery on first hole in basin opening well”, it did deliver a working hydrocarbon system.

The grade here is based on IVZ successfully delivering the drilling and the result, not the actual result itself, so we have marked this down from A to B, for delays and technical issues during drilling.

What could go wrong?

Exploration Risk

IVZ will be doing a maiden drilling program at its gas project, there is a chance the drilling finds no gas which could mean the project is stranded.

[Memo Assessment - 16-Feb-2023]: Risk = Decreased

This risk was somewhat mitigated as IVZ successfully identified a “working conventional hydrocarbon system” with multiple potential reservoir intervals.

While this is unrelated, IVZ did encounter a number of technical difficulties and equipment failures. In hindsight we should have listed this as a potential risk to the drill program.

Economic Production Risk

If gas is found it doesn't guarantee that it can be economically produced, there is a risk that the water content of the gas flows is too high making it uneconomic to extract. Flow-rates will need to prove that any gas found can be economically produced.

[Memo Assessment - 16-Feb-2023]: Risk = Unchanged

If gas is found it doesn't guarantee that it can be economically produced, there is a risk that the water content of the gas flows is too high making it uneconomic to extract. Flow-rates will need to prove that any gas found can be economically produced.

Geopolitical Risk

IVZ didn't run a production test over its project so this risk remains unchanged for IVZ’s project.

[Memo Assessment - 16-Feb-2023]: Risk = Decreased

IVZ has to date managed to sign an agreement with the Zimbabwe Sovereign Wealth Fund and also had the Minister of Mines on site during the drill program.

IVZ is yet to sign a final Production Sharing Agreement, so this risk will carry into our next IVZ Investment Memo.

Overall we feel the company has managed this risk well to date.

Commodity Price Risk

Ultimately demand for Gas and its price will dictate the economic viability of the project.

[Memo Assessment - 16-Feb-2023]: Risk = Unchanged

This is a general sector wide risk that wasn't an issue for IVZ in 2022.

There is always a risk that a recession occurs and energy prices all over the world start to fall.

We are confident that the energy supply problems are structural and that any fall will be temporary BUT we will still carry this risk over into our next IVZ Investment Memo.

What is our investment plan?

As with all early stage oil and gas investments we invest early, well before the main drilling event and will aim to be free carried and have taken profit before the drill result comes in. We look to hold at least 40% of our initial position into the first result, this is a ~3 year strategy.

[Memo Assessment - 16-Feb-2023]: Grade = C

We give ourselves a “C” on this on execution of our Investment plan.

While we did execute our plan to the point of free carrying before the result, we decided not to take any profit (against our plan) in the hopes that IVZ might announce a discovery.

In this instance we held more into the result that we usually would have (and still hold it now) and the result did not go our way (share price went from high of 40c down to trade at ~12c).

Our larger than usual hold into results was probably due to the emotional attachment to replicating the result we had holding a larger than usual position into Africa Oil Corp’s successful discovery result in Kenya 10 years ago.


Disclosure: The authors of this article and owners of Next Investors, S3 Consortium Pty Ltd, and associated entities, own 6,706,980 IVZ shares and 140,989 IVZ options at the time of writing this article. S3 Consortium Pty Ltd has been engaged by IVZ to share our commentary on the progress of our investment in IVZ over time.

Our Investment Summary

Date of Initial Coverage

18-Sep-20

Inital Entry Price

$0.035

Returns from Initial Entry

60%

High Point

1057%

The result that stops a nation

Nov 4, 2023

The result that stops a nation

Next Cap Raise - for Sophisticated Investors

Oct 14, 2023

Next Cap Raise - for Sophisticated Investors

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Oct 4, 2023

Mid Week Oil & Gas Update: EXR, IVZ, NHE

Share price catalysts we expect in the next 12 weeks

Sep 23, 2023

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