Invictus Energy (ASX) - Largest undrilled O&G prospect onshore Africa 8.2 Tcf

Synopsis: Invictus Energy is an Australian Listed (ASX) upstream oil and gas exploration company that currently has 80% commercial ownership in an exploration project, SG 4571, being undertaken in the Cabora Bassa Basin, Zimbabwe. The main asset target, the Muzarabani prospect, has 5 stacked targets that were independently assessed to contain an elephant size estimate of 8.2Tcf and 249 mmbbls. The License also contains the Msasa Lead which is estimated to contain 1.05Tcf and 44 mmbbls. It is referred to as one of the largest untapped oil and gas deposits in the world.

SG 4571 License Prospect: The SG 4571 license is held by Geo Associates Ltd which is partially owned by Invictus Energy (80%) and a local partner in Zimbabwe, One-Gas Resources (20%). The agreement allows One-Gas to participate in upstream, midstream and downstream segments of the oil and gas industry.

Location: The license area covers approximately 250,000 acres (101,000 hectares or roughly the size of King Island, Australia) in Northern Zimbabwe and runs along the border with Mozambique. The project site is roughly 4 hours North of Zimbabwe’s capital, Harare and access to the site is via a sealed road that goes until 1km from the proposed well site.

1990s Mobil Exploration: During the 1990s, Mobil conducted an extensive exploration program of the Mzarabani anticline in Africa, which extended from Victoria Falls to the Cabora Bassa Basin. The region of Muzarabani was selected for further analysis due to its favourable depths to host a conventional gas target. US$30 million was spent to acquire surface and subsurface data, including gravity surveys and over 1600 line kilometres of 2D seismic data.

The studies determined that the Cabora Bassa Basin had all the required ingredients of a working petroleum system yet they relinquished the acreage when their studies revealed that the basin had a higher potential for gas than oil. Mobil at the time was exploring oil due to the lack of a structured gas market in the region and globally. Additionally, the Zimbabwean government in the 90s was under the regime of Robert Mugabe, a highly chaotic politician, so the sovereign risk was extremely high.

The prospect was left dormant until 2018 not because of the technical issues but more because of the above-ground commercial issues (the previous government was overthrown). Additionally, Mobil’s 1990s exploration program was during the pre-internet days so the dataset was not available in the public domain and just lay dormant and unknown. Invictus Energy was able to acquire the dataset due to the company’s competitive advantage of their presence in Zimbabwe (thanks Scott!)

Reprocessing of Mobil Data - 2018: Having acquired ownership of Geo Associates Ltd in 2018, Invictus sought to engage an independent party, Sewell and Associates, Inc, to reprocess Mobil’s original dataset from the 1990s using updated processing techniques, basin modelling and industry classifications of source rock types. Invictus also contracted independent global geoscience and geospatial services firm, Getech, to estimate the resource potential from the interpreted data. In 2019, Getech estimated an elephant size estimate of 8.2Tcf and 249 mmbbls.

The Mzarabani prospect is estimated to have a total of 8.2tcf and 249mmbbls. The Msasa prospect is estimated to have 1tcf and 44mmbbls. It is important to note that Invictus has an 80% claims to the resources and this is expected to decrease if they bring in a farm-in partner. Getech also stated that “The Best Estimates reported represent that there is a 50% probability that the actual resource volume will be in excess of the amounts reported.”

To put this resource size in perspective, the Pluto Gas Field Australia which has been a major cash-generating asset for Woodside has only half of Invictus’ estimated resources.

The most exciting opportunity of this project is that 5 of the reservoir targets can be drilled with only 1 well, significantly reducing the capital costs required. Also, drilling a duster on one target doesn’t necessarily mean that the others are dusters.

Geochemical Analysis of Source Rock - 2019: In 2019, Invictus conducted a geochemical analysis from an outcrop source rock sampling program. The analysis was made by Geomark Research. A total of 19 samples were obtained for source rock analysis, with 7 of these samples undergoing saturate/aromatic, biomarker and isotope analysis.

The analysis confirmed that at least two source rock facies are present in the Cabora Bassa Basin. The Mkanga Formation consists of a high-quality oil-prone lacustrine source rock, and the Angwa Alternations Member consisting of good quality gas and liquid prone source rock. The analysis also confirmed the ability of the source rock to generate significant quantities of hydrocarbons. The source rock analysis also correlates with source rock data from other African and West-Australian Basins where billions of barrels and multiple TCF gas volumes have been discovered. This has provided management with great confidence over the prospect and they believe this correlation is the most substantial element of the project.

New Seismic Data Acquisition - 2021: The 2018 prospect estimates and basin modelling have all been calculated from the 90s raw legacy dataset. Exploration data acquisition methods, equipment and analysis have significantly improved since then, therefore allowing for more accurate interpretations. In April 2021, Invictus engaged Polaris Natural Resources, Canada’s longest-standing seismic company, to provide acquisition services for a 2D seismic program. The aim of this seismic campaign is to acquire refined seismic surveying lines that will assist in selecting the drilling site location that will efficiently and effectively hit all the 5 stacked targets with one well. Plus, Invictus also hopes to unveil additional resource. The 1990s dataset from Mobil had seismic lines of 15km however with the new data captured by Polaris, Invictus intends to refine the seismic lines to 2km (providing greater accuracy and clarity)

The Polaris team behind the operation have recently completed the ReconAfrica prospect in Namibia, which demonstrated a substantial working petroleum system. From late May, it is expected that seismic surveying campaign work will take between 6-8 weeks and 1-2 months for analysis and interpretation afterwards. Invictus and Polaris are looking to employ and educate some 80 local personnel for the project, which bodes well for local sentiment towards the project.

Chance of Success: The estimated chance of discovery from the primary Upper Angwa target in the Mzarabani Prospect is 11%. The secondary Pebbly Arkose target has an estimated chance of success of 7%. The Dande, Forest and Lower Angwa have an estimated chance of success of 5%. The Msasa prospect has an estimated chance of success of 5-6% for all stratigraphic levels.

However, it is important to note that this project is in Wildcat territory meaning that there are no close-by oil and gas projects that have confirmed the presence of reserves. This alone increases the risk significantly. Invictus Energy will be the first mover into the region, therefore this prospect carries a greater unknown as to whether reserves are there or not.

From a technical perspective, Invictus has been able to utilise the knowledge and data from successful prospects in East Africa to compare their own datasets against, which they say indicates very positive results. Commercially, Invictus has used the comparable operations as case studies to help determine what is required to make their own project viable.

Chance of Success is calculated by combining all the data of a prospects reservoir, seal, traps, source rocks and migration. For the geology and mining nerds out there, the below documents are definitely worth reading as it details the above aspects in great detail.

PLEASE NOTE that I don’t work within the oil and gas industry nor have any technical knowledge to interpret the information presented. I have spoken with two friends that work within the exploration industry and they are quite excited about the project’s prospects. A similar sentiment can be found from industry professionals on forums.

Project Timeline: Previously completed
Apr 2018: Invictus Deal & Share Placement
Sep 2018: Oil potential and source rock study
Nov 2018: Independent Prospective Resource Estimate
Feb 2019: Key Seismic data received
May 2019: Gas Sales MOU with Sable Chemicals
Jun 2019: Independent Prospective Resource Upgrade
Jul 2019: Dr Stuart Lake appointment
Nov 2019: Geochemical analysis of source rock type
Dec 2019: Gas Sales MOU
Jan 2020: Project received priority status from the Government
Aug 2020: Environmental Impact Assessment approved
Nov 2020: Invictus receives non-binding farm-in agreement
Mar 2021: Invictus signs Petroleum Development Production Agreement with government
Apr 2021: Invictus awards seismic contract to Polaris

Future (expected)
Jul 2021: Production Sharing Agreement (PSA) with the government signed
Jul 2021: Potential Farm-In agreement awarded
Aug/Sep 2021: Conclude seismic program and release results
Oct 2021 - Early 2022: Drilling Campaign (time variation due to long lead items) (drill time 60 days)
2022: Drilling of second well on Msasa prospect

PSA - A contract between the Zimbabwean Government and Geo Associates Ltd that states how much of the prospective resource each party will receive. The PSA is said to be agreed upon and is currently being reviewed by an independent 3rd party consulting firm, so an official signature has not been achieved. Note this is the first Oil and Gas PSA in Zimbabwe so all future contracts will be dependent on this one.

Potential Farm-in - A farm-in partnership will derisk Invictus’ exposure however at the same time reduce our percentage ownership in the prospect. Having ownership of an asset that is one of the largest and final under-explored interior rift basins in Africa, Invictus can leverage its position in the negotiations to get better terms. They have previously received a farm-in offer but it is expected that a decision will be made on the farm-in contract after the PSA has been signed due to the requirement of a stable legal and fiscal framework that gives the farm-in investor confidence. Invictus also has the potential to go alone in the project, leveraging funds from investors and institutions. The recent capital raising was heavily oversubscribed and after 3 hours from opening was closed. Will increase the risk however Invictus will retain larger percentage ownership.

Impact of COVID - Due to the lack of oil and gas operations being undertaken in Africa during 2020, the service (surveying and drilling) costs were reduced significantly and Invictus now has access to a diverse range of equipment that was once difficult to come by.

Dr Stuart Lake - Non-Executive Chairman

  • 35+ years in the Petroleum industry, having operated assets in 20 countries worldwide, including 10+ in African countries, and has lead 9 country entries
  • Has a 90% exploration success rate from over 300 wells (270/300)
  • Strong operational experience and in-depth expertise in all aspects of subsurface/surface evaluation and risk analysis
  • $90,000 per annum & 9,000,000 shares options exercisable during July 2022. Low remuneration and high amount of share options. Likely has a lot of belief in the prospect being successful
  • Former President and CEO for Castle Petroleum, CEO of AGM Petroleum, Senior Advisor to Aker Energy, Former CEO of African Petroleum Corporation, Former Vice President of Exploration in the Hess Corporation,Non-Executive Director of CapterioBased in London, England
  • Ownership: 0.35% or $262,700 (But has a lot of performance shares)

Joe Mutizwa - Non-Executive Director and Deputy Chairman

  • Highly respected Zimbabwean businessman and has connections to the Zimbabwean government and key industries
  • Currently sits on the Presidential Advisory Council, a body appointed by Zimbabwe’s President to advise and assist in formulating key economic policies and strategies (this is massive)
  • Current chairman of Mangwana Capital, who is a major shareholder of Invictus and is a director of the Company’s 100% owned local subsidiary Invictus Energy Resources Zimbabwe Pty Ltd
  • 10 years as Chief Executive of Delta Corporation, one of Zimbabwe`s largest listed companies
  • Ownership: unknown (appointment on 19/05)

Scott Macmillan – Managing Director

  • 14+ years in exploration, field development planning, reserves and resources assessment, reservoir simulation, commercial valuations and business development
  • Zimbabwean National. Can take full advantage of his local relationships, understanding of business climate and how to ‘get things done’.
  • Previously Senior Reservoir Engineer at Woodside Energy, Business Advisor in the African Global New Ventures team, Senior Reservoir Engineer for AWE
  • Extremely professionally in his presentations
  • Based in Perth, Western Australia and is on $250,000 per annum
  • Ownership 13.1% or $9.9m. Fantastic Sign

Brent Barber - Country Manager & Technical Director

  • Exploration geologist with 40+ years of experience
  • Involved in the exploration and evaluation of mineral prospects and mining ventures throughout Africa, South America and SE Asia
  • Focussing on the acquisition, assessment, design and management of IVZ’s exploration prospects
  • Head of 1990s Mobil Hydrocarbon Exploration in Zimbabwe (wants to prove himself)
  • Based in Harare, a 4-hour drive from the prospect site
  • Ownership: Not within Top 20 Holders

Barnaby Egerton-Warburton - Non-Executive Director

  • Ownership: 1.71% or $1.4m

Gabriel Chiappini - Secretary & Non-Executive Director

  • Provides guidance on capital raisings, investment and divestment
  • Ownership: 0.83% or $674k

One-Gas Resources Management (20% owner of SG 4571)
The director, Paul Chimbodza, has 25 years of experience in mineral exploration and evaluation in Zimbabwe and the sub-Saharan region. Current member of the Zimbabwe Mining Affairs Board, Chamber of Mines of Zimbabwe’s executive committee and also sits on the board on a number of public and private companies in Zimbabwe. Has highly valuable contacts with the government to get the deal moving. There are also 4 other executives within One-Gas that have not been revealed. All that was disclosed was that they have been in the mining industry for a long time.

CAPEX: Invictus recently raised $8M (60-70% institutional investors which is positive to see for an oil and gas exploration company) from a capital raise and the funds will be used for

  • The seismic surveying campaign
  • Basis of well design
  • Long lead drilling items for the Mzarabani-1 exploration well
  • Drilling rig tender preparation (lots of equipment lying around due to not being used in COVID)

Invictus cash balance as of the end of March 21 was $8.17M and is expected to have around $2M cash after all the above items have been filled. Also has share options @6c where the majority are yet to be exercised. This leaves the main capital expense being the drilling program expected in October. On-shore drilling campaigns are significantly lower in cost than offshore campaigns and Invictus has estimated that the well cost will be US$10M (dry hole cost).

Zimbabwean Government: One of the biggest commercial risks to Invictus Energy is the sovereign risk of operating within Zimbabwe which has a history of a corrupt government through the reign of Robert Mugabe, 1980-2017. With the overthrow of the government in 2018, the newly appointed President Emmerson Mnangagwa has taken dramatic steps to overhaul the political atmosphere and has begun to openly invited foreign investment into the country through investor-friendly reforms. President Mnangagwa is renowned for wanting to attract foreign investment and even addressed the Invictus’ Energy project in his Independence day speech. The current mines minister, Winston Chitando, was a former resource industry executive and understands the needs of the resources sector. Numerous Special Economic Zones Legislations have been established and include

  • 100% foreign ownership of assets
  • Guarantee of investor rights
  • 100% remittance of earnings
  • 5-year tax holiday and 15% corporate tax rate thereafter
  • Zero Capital Gains Tax
  • Customs duty exemption on raw materials and capital equipment
  • Offshore banking and transacting outside local financial system safeguards against local currency effects

If Zimbabwe were to somehow stuff up the Invictus project… essentially there would be no foreign investment in the country for the next 20 years. As a nation that is heavily reliant on industry and mining, the costs of having no foreign investment are significant and will dampen its transition into a fast-developing nation. One of the reasons I was attracted to IVZ was the potential impact that the project could have on the economy of Zimbabwe and the wellbeing of its people. Zimbabwe is currently experiencing significant power outages which are having dramatic effects on businesses and industry. Establishing a domestic and low-cost energy source through gas could have profound flow-on effects on living standards, health, education etc. With such upside for Zimbabwe, I believe the government will do everything in their power to get this project going and this can clearly be seen through Invictus’ project being given priority status from the government in January 2020.

Southern-Africa Energy Shortage: The region of Southern Africa, which hosts the Southern African Power Pool, is currently experiencing a dramatic energy crisis where the demand is far outweighing the supply. This issue is fueled by significant population growth, growing industry and minimal foreign investment in power generation over the past few decades. The Power Pool supplies over 230 million people across 12 different countries and the power outages are having a dramatic effect on industry development, investment and the livelihoods of the populations.

Currently, the majority of power for Southern Africa is generated through coal and hydroelectricity. Notably, South Africa’s coal power plants, which supply 20% of power, are being retired in the coming years and there is currently widespread drought within the region making hydropower inefficient. The gas fields in Mozambique which are currently supplying 80% of the power supply to South Africa are expected to plateau in 2025.

Whilst the renewable energy sector is still underdeveloped but growing fast, there is a significant medium-term gap that needs to be filled. The current short-medium term supply gap is currently being filled through diesel fire powered generators, which is an extremely expensive operation. Therefore, the need for cheap and effective gas power is becoming increasingly important and is seen as a highly viable option for the monetisation of the Invictus prospect. The spine of the Southern African Power Pool runs directly through Zimbabwe providing Invictus with direct access to the power supply markets across the region.

Market Monetisation Options: Invictus has a multitude of options to monetise its oil and gas resources:

  • Power generation: through the Southern African Power Pool
  • Petrochemicals: through South Africa’s Sasol’s Secunda facility
  • Fertiliser: Zimbabwe is a largely agricultural-based economy. Currently importing costly fertiliser
  • Industrial: The top ten industrial gas users in South Africa turnover US$10 billion per annum and use 30Bcf per year
  • Mining: Off-grid mining operations are using diesel at 30-40c/kWh vs. grid cost of 10-15c/kWh. LNG can be trucked to an off-grid location reducing cost by 40%
  • Liquid fuel: South Africa generates synthetic fuel from coal with the remainder being imported. Can also export crude oil via the port of Beira, Mozambique

Current MOUs: Gas Sale MOU with Sable Chemicals - May 2019 Sable Chemicals is the sole manufacturer of ammonium nitrate fertiliser in Zimbabwe. Invictus has agreed to supply up to 70 mmscf/d over 20 years, which equated to a total of 510bcf. Sable Chemicals is currently operating well below capacity and the country has to import ammonia feedstock from South Africa.

Gas Sale MOU with Tatanga Energy - December 2019 Tatanga Energy is an Independent Power Producer in Zimbabwe. Invictus has agreed to supply up to 100 mmscf/d over 20 years, the total agreement is 730Bcf. This gas to power facility is expected to supply up to 500MW.

Routes to Markets: Surrounding the prospect area are multiple well-developed infrastructures facilities that would allow Invictus to transport the oil and gas to the relevant markets

  • Gas Pipeline: Twin Harare-Beira liquids pipeline (1960s) that connects to the ROMPCO pipeline (2004)
  • Power: Connects into Southern Africa Power Pool grid to export electricity domestically and regionally
  • Road: Beira Corridor Route is one of the major transit routes in Africa. Can transport Small Scale LNG by road to mining and industrial users
  • Rail: It is only 1,000kms from Harare to Johannesburg, South Africa by rail
  • Liquids Pipeline: Twin Harare-Beira liquids pipeline that enables export of crude oil through the Beira Port to international markets. Also has access to Indeni Ndola Refinery in Zambia

Share Price Prediction: This is just a mere prediction on my behalf but also has a basis from ReconAfrica.TSX, a similar company operating in Namibia, price movements. Being the first mover into a country/region can yield massive benefits for Invictus by securing the best acreage, with the best terms and access to the most profitable markets so there are multiple opportunities in the future after this prospect is drilled.

I believe that Invictus has the potential to be a multi-bag (10-30) holding overnight if the drilling campaign is successful. With a current Market Cap of $87 million, Invictus could easily transform into a multi-billion-dollar company. I believe a conservative price estimate would be $2 however this doesn’t include the effects of FOMO, so it could be higher.

A peer that Invictus is often compared to, ReconAfrica, transformed into a $1.3 billion company off the back of a successful drilling campaign (they are yet to extract the resources). ReconAfrica’s share price jumped massively prior to actual drilling and a similar comparison would place IVZ’s share price in the range of 40-50cents. Realistically, I believe the share price will be in the mid-30s after the PSA and farm-in partner have been signed as it significantly de-risks the project. The price doesn’t take into account the impact of FOMO, which can be seen through the aggressive share price of 88E.ASX.

I absolutely love the story of Invictus not only as a shareholder but also what the project can do for Zimbabwe as well as the region.

Big shoutout to all the fantastic users on the HotCopper forum that influenced this analysis. Really exciting things to come!

Original Hotcopper post

Some great resources if you wish to learn more:

Youtube Shareholder Briefing - March 2021

Youtube Shareholder Briefing - December 2020

Podcast Interview

Australian Investor forum where IVZ is discussed often