Cheap Oil Spells Opportunity to Some
The price of oil on the commodity exchange has plummeted from about $100 a barrel at the first of July 2014 to a recent low about $44 a barrel. The bankers of cheap loans to those in the shale business are as nervous as a long-tail cat in a room full of rocking chairs. The shale wells already in production are locked into full production but due to the rapid depletion of shale wells, they are losing money hand over fist. There is no drilling to replace them.
A medium term price under $60 a barrel would literally kill shale oil at least in the US. Should the losses in oil derivatives and junk bonds issued by underfinanced shale producers prove too high or go on for too long, there is the potential for a black swan event that could bring down the entire financial system.
But oil production is still the biggest business in the world with about 87 million barrels produced and used daily. Even at $50 a barrel, that's $4.5 billion a day in revenue to someone. It doesn't really matter what the price of it, it's going to remain the most important business in the world and someone somewhere is going to figure out how to profit from the production of oil.
I talked to an interesting company a couple of weeks ago. I can't say the company is doing everything 100% perfectly, however I can say that they are doing things exactly how I would do them. The company is Jericho Oil (JCO-V) and they focus on both cash flow and profit. As does any company that actually intends to make money.
Jericho focuses on the 20% of US oil that comes from stripper wells. Those are wells that still hold 2/3 of the potentially recoverable oil in mature fields that have been neglected or abandoned. They are shallow and low cost to drill. Most produce less than 10 bopd. By their focus on basins rather than just wells, Jericho can achieve economies of scale in their projects in both Oklahoma and Kansas.
In Eastern Kansas Jericho has a financial interest in 29 leases located within an hour of each other. As of December of 2014 the company had a 50% working interest in wells producing 125 bopd. Their plan is two staged. In phase 1 they intend to do work overs and reactivations and to upgrade infrastructure. In many of these leases the existing operators acquired at higher prices for oil and simply couldn't afford to maintain the fields properly.
Insiders own about 21% of the float with 45.5 million shares outstanding. The company holds $4.5 million Canadian with zero debt. Due to their successful execution of their business plan, Jericho was able to raise $4.2 million in Q4-2014 with no fees or commissions. While sub-10 bopd sounds small, Jericho shows all in costs of below $35 a barrel. The company began trading in Q1-2014 and has increased production by 150% in less than one year.
Jericho hit the ground running in 2014 with 118 shallow low cost production wells drilled and an additional 63 water injection wells completed. Using a 2.5 acre optimized drill program their land position would support an additional 1,000 production wells. As their excellent presentation shows, even at $50 a barrel oil, production wells costing $35,000 apiece to drill show a 42% margin with a life of about 14 years. With $80 oil Jericho can make $42 netback for a 53% margin.
The decline in oil prices over the past 8 months has pushed many marginal producers to the edge of bankruptcy and beyond. Fields that made money at $105 a barrel may well have gone negative below $50 a barrel. Every silver lining has its cloud and to be kind, there are a lot of “motivated” sellers in Kansas and Oklahoma. Jericho spent most of 2014 advancing fields and bringing up production. They are using the economic opportunity provided by the decline in oil prices to pick up more and better acreage.
Management wages are low compared to any junior I follow. The CEO takes $10,000 a month and total management salaries are less than $250,000 a year. I like it a lot when management plans on making their fortunes through stock appreciation rather than through bloated salaries. Shareholders are far better served when their interests are aligned with those of management.
If oil hasn't bottomed, it soon will. Given that Jericho has spent their cash and time over the last year drilling and bringing marginal wells back up to par, they are perfectly positioned to profit by picking up other wells and property that hasn't been properly managed. I would expect them to end 2015 with production nearing 250 bopd. The market won't take them real seriously until they near 1,000 bopd but with this management team and business plan I think they will achieve that a lot sooner than people realize.
Jericho is an advertiser. I really like the business plan and management team. The longer the price of oil stays low, the more opportunity they will have. I am biased and as always, you are responsible for your own due diligence.
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June 2nd, 2020
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