Invictus Energy Fireside Chat: Time-stamped Companion Summary
Depressed share price aside, Invictus remains on track to expand and develop its Cabora Bassa discoveries (which look to be massive).
tl;dr:
Invictus Energy (IVZ.AX) - despite objective and exciting success in unlocking its Cabora Bassa basin - wallows near 52 week lows. MD Scott Macmillan joins me once again to try to reconcile what Invictus has accomplished with its current market valuations. Updates on financings (past, present, and future), the PPSA, flow testing and 2024 exploration all made it into this long, 2 hour chat. Scott's conviction remains firm that good things are coming soon for Invictus and you can understand why.
Given the lengthy nature of these, I find that timestamped summaries are useful tools - so use my timestamped summary below to help you navigate my most recent conversation with Scott.
Intro
Conventional wisdom surrounding investing emphasises the need to be patient in your positions. The ups and downs of small cap/resource investing means you need to maintain a sense of stability internally to make up for the fact you are investing in one of the most volatile sectors in the whole market.
This is of course easy to say, and not so easy to do once you’re faced with the challenge of downward volatility. But sentiment and share price are not always an effective barometer of value, and in these gaps are simultaneously the true opportunities and tests of being an investor.
Invictus Energy remains for me an excellent example of this, as it continues to release positive news even while its share price languishes.
Joining me to discuss recent Invictus developments is Managing Director Scott Macmillan. My Fireside Chats with him at this point are expected events and I give Scott constant credit for continuing with these as he has, as I expect very few executives would put themselves in front of the firing line in such a fashion.
This interview covers a series of topics:
Predatory financings
Future financing options
Market reaction to the news
PPSA and Sovereign Risk
JVs and Partnerships
Flow testing
Net pay and Data disclosure
3D seismic and data acquisition
Hydraulic stimulation
Future events and pilot project planning
Because of the lengthy and intensely-detailed nature of these conversations, having a time-stamped summary to work from is especially important. With this in mind, I tried to curate a list of important benchmark moments and include them as time-stamped moments in my written summary below.
I hope you enjoy the conversation. I always learn an immense amount when I sit down with Scott and this time was no different. Invictus remains a top 3 holding for me, and I benefit from these chats as much as anyone else. I continue to patiently await the day for my conviction to be rewarded here, as I believe it no doubt will be soon.
Timestamped Summary
02:36 Discussion Overview
The conversation will have a less technical, more qualitative focus, addressing Invictus Energy's share price struggles despite its successes. Scott Macmillan is appreciated for his willingness to engage with investor concerns. The discussion is framed by investor feedback, with an aim to explore financials, funding strategies, and the future of Invictus Energy.
04:52 Share Price Concerns
Scott Macmillan shares his frustration over the company's low share price, contrasting it with the significant achievements in the Cabora Bassa Basin. He reflects on the dichotomy between the company's operational success and its market valuation, emphasizing the unexpected negative market reaction following discovery announcements.
07:05 Market Reaction and Funding
Macmillan discusses the shock and disappointment over the poor market response to discovery announcements, suggesting factors like timing, funding concerns, and the sidetrack necessity due to overpressure gas. He delves into the difficulties reconciling the company’s achievements with its share price and outlines the negative impact of a rights issue on sentiment.
10:52 Addressing Shareholder Concerns
The focus shifts to identifying reasons behind the share price discrepancy. Sovereign risk, project-specific challenges, and funding needs are considered. Macmillan reflects on shareholder feedback and the stark difference between expectations and reality following discovery announcements.
13:18 Strategies for Recovery and Growth
Discussion on strategies to recover shareholder confidence and grow the company, including financing options, partnership potentials, and engagement with development banks. Macmillan emphasizes the long-term value of Invictus Energy's gas discoveries, despite current market challenges.
Macmillan expresses a commitment to communicate the value of Invictus Energy's discoveries and to explore diverse financing avenues, including joint ventures, debt financing, and partnerships with service companies and midstream/downstream partners.
17:46 Overview of Financing Options
22:30 Addressing Financing and Market Reactions
Scott Macmillan discusses alternative financing strategies, aiming to reduce reliance on equity markets. This includes partnerships with companies seeking equity as a hedge against commodity prices. Macmillan shares efforts to mitigate impacts from predatory institutional investors by excluding them from future raises.
24:51 Market Dynamics and Strategic Adjustments
The conversation transitions to financing challenges and the negative impact of predatory financing on the company's value. Macmillan acknowledges the difficulty of balancing market demands with company needs, especially in high-risk ventures like wildcatting in Zimbabwe.
26:46 Predatory Financing Partners
28:41 Reflecting on Past Challenges and Future Strategies
Macmillan reflects on the company’s history, comparing current challenges to those faced during COVID-19 and emphasizing the need to move away from market reliance. He outlines plans to secure alternative funding to strengthen the company’s position.
33:00 PPSA and Sovereign Risk
Discussion on progress with government agreements, emphasizing the importance of proper legal processes to ensure stability and legitimacy. Macmillan reassures shareholders about permit renewals and addresses concerns regarding sovereign risk and financing.
37:55 Share Price Sentiment and Financing Options
Macmillan expresses confidence in the company's future, emphasizing ongoing efforts to secure non-dilutive financing and reduce market dependence. He addresses the poorly received Share Purchase Plan (SPP), attributing it to timing and market conditions.
39:53 Rights Offering and the Recently-Completed Financings and Insider Participation
42:20 Director Participation and Shareholder Alignment
The conversation touches on director investments and shareholder alignment, with Macmillan highlighting the directors' significant personal investments and ongoing support for the company’s vision.
Macmillan reinforces the directors' commitment to the company, suggesting that their substantial holdings demonstrate their belief in the company’s future. He hints at potential for addressing the shortfall from the rights issue, maintaining a positive outlook despite recent challenges.
46:35 Exploring Non-Dilutive Financing Opportunities
Scott Macmillan discusses pursuing various non-dilutive financing avenues, including joint ventures (JVs), debt financing, service companies, and midstream/downstream partnerships. Confidential talks are in progress across these channels, with developments expected to materialize in the near to medium term. Macmillan emphasizes a phased approach to project development, aiming to demonstrate viability and scalability to potential partners and financiers.
53:00 What are JVs and other partners waiting on before they sign on, and pilot project revenue options
1:01:00 PPSA and Project Development Updates
The discussion shifts to the Production Sharing Agreement (PPSA), essential for establishing fiscal terms and facilitating project financing. Macmillan explains the separation of the PPSA from the PEDPA, which governs production, indicating that the fiscal framework of the PPSA is under review and nearing completion. This agreement is crucial for ensuring a fair distribution of resources and establishing a stable and transparent operational framework for decades.
1:05:56 Government Relations and Sovereign Wealth Fund
Macmillan provides insight into the role of the newly constituted Mutapa Investment Fund in the PPSA process, representing the government's equity share and profit distribution. The involvement of this fund adds a layer to the negotiation process but is a step towards finalizing the agreement.
1:09:00 Flow Test and Data Disclosure
Addressing queries about the flow test and data disclosure, Macmillan clarifies that the completion of the PPSA and the flow test are independent processes, both contributing to the project's advancement. While some data remains proprietary, significant updates that materially affect the project's valuation or operational strategy will be disclosed to the market.
Macmillan emphasises the strategic importance of finalizing the PPSA for unlocking financing options and advancing the project. Macmillan reassures stakeholders of the company's commitment to transparency and material disclosure, within the bounds of practicality and strategic considerations.
1:10:44 Advanced Data Analysis and Flow Test Planning
Data Interpretation Challenges:
Scott Macmillan addresses the limitations and challenges in interpreting core data, noting that core plugs provide a minimal representation and are sometimes damaged, affecting data quality. This leads to a range in reported results, with material changes in fluid composition being particularly critical to disclose.
Flow Test Strategy:
The conversation shifts to the eagerly awaited flow test, with Macmillan highlighting the complexity of designing the test for two major reservoirs and the possibility of drilling a six-inch hole to test the lower Angua. A variety of testing permutations are being considered to ensure the most efficient use of resources.
Service Contract Renegotiations:
Post Makuyu 2 campaign, Invictus Energy is in a better position to negotiate service contracts due to the long-term potential of the basin. This strategic move aims to reduce costs and improve efficiency for future wells.
Timeline and Funding for Flow Test:
The flow test is targeted as early as June, with the exact timing depending on service provider selections. Financing and procurement for necessary equipment are in progress, emphasizing the company’s strategic planning for this critical phase.
1:18:00 Will it flow?
Hydraulic Stimulation and Reservoir Variability:
Addressing concerns about the need for hydraulic stimulation, Macmillan clarifies that the decision to stimulate is based on economic rather than technical necessities. The company is exploring all options to maximize resource extraction economically.
Laboratory Results and Subsurface Data:
Additional laboratory work, including PVT analysis and core data processing, is ongoing. The interpretation of formation micro images (FMI) and log data is crucial for understanding the depositional environment and reservoir characteristics.
Valuation and External Validation:
Macmillan reflects on past experiences where external validation, such as M&A activities, significantly impacted company valuation. For Invictus, potential validation could come from service companies, JV partners, or development banks, offering an external perspective on the project's value.
1:30:00 Will the lab data increase net pay? Conversation about M1 and M2 data.
1:32:17 Potential for Resource Estimate Increase
Macmillan clarifies that Invictus Energy has not yet established reserves, indicating that adjustments to net pay criteria based on new lab data could refine the understanding of the reservoir's potential. Initial arbitrary cutoffs for net pay might be re-evaluated with further data, particularly from well testing, which could significantly influence the perceived volume and quality of the resource.
1:34:14 Flow Test Planning and Financing
Discussion on the flow test reveals a meticulous approach, considering various strategies to maximize data yield and economic efficiency. The mobilization of well services and equipment poses logistical challenges, emphasizing the need for strategic contract renegotiation to leverage the basin's long-term potential. Financing considerations are crucial, with Invictus carefully balancing the allocation of resources between immediate testing needs and broader exploration activities like 3D seismic surveys.
1:36:41 Hydraulic Stimulation and Reservoir Variability
Addressing hydraulic stimulation, Macmillan suggests it's a potential method to exploit the reservoir more fully, depending on economic viability. The natural variability within the reservoir could mean that different areas require distinct approaches to maximize gas extraction.
1:37:00 3D Seismic Update
The plan for 3D seismic is to enhance the understanding of the Mokuyu field's subsurface characteristics, improving the accuracy of resource estimates and operational planning. This step is considered crucial for delineating the reservoir more effectively and guiding future drilling locations.
1:40:03 Financials and Future Planning
Macmillan addresses a discrepancy in reported liabilities, explaining that it largely relates to the contractual obligations for rig demobilization. This detail highlights the financial complexities of large-scale exploration projects and the strategic decisions necessary to manage costs while advancing the project's objectives.
1:45:00 Future Events and Operational Plans
Flow Test and 3D Seismic Planning:
Macmillan outlines the primary objectives for the remainder of 2024, emphasizing the importance of conducting a flow test and completing 3D seismic work. These activities are crucial for proving the field's gas production capability and refining the understanding of its subsurface characteristics, respectively. He highlights the balance between ideal operational goals and the practical constraints posed by financing and equipment availability.
Strategic Focus and Resource Base Development:
The conversation shifts to the strategic approach towards developing a minimum resource base for early monetization and setting the stage for full-field development. This involves a methodical appraisal drilling campaign informed by 3D seismic data, aiming to secure significant debt financing for large-scale development efforts.
Exploration Campaign and Hydrocarbon Plays:
Macmillan shares insights into the promising prospects in the east and the basin margin play, suggesting upcoming news on these fronts. The discussion touches on the geological model that predicts richer liquid hydrocarbons to the south of the Makuyu field, supported by recent fluid composition results and evidence of hydrocarbons in both the Dandy and Pepe Arcos plays.
Non-Dilutive Funding Opportunities:
The potential for non-dilutive funding options is discussed, with Macmillan noting that such opportunities could arise independently of the flow test and 3D seismic results. The completion of the Production Sharing Agreement (PPSA) is identified as a significant catalyst for attracting joint venture partners and other forms of investment.
1:52:30 Timeline of events moving forward
1:56:30 Pilot Plant Timeline
As always, thank you for reading. I am humbled that I have a following and strive to create work to deserve it.
-Matthew from JRI