Dear Investors,
“When there’s blood on the streets… it’s time to buy assets at massive discounts!”
I know I’ve mentioned this saying a few times before, but I truly believe in it. This sentiment has not only served me well, but has done exceptionally well for many of my colleagues over the years, and I am sure the trend will continue for those with capital and time on their side. The oil sector seems to be falling apart and I see this as a massive buying opportunity – and I’m not alone. Bloomberg published an interesting article on December 8 which talked about how oil executives in the U.S. like Archie Dunham, Chairman of Chesapeake Energy Corp. ($CHK) are taking advantage of this sudden downturn in the oil market to buy massive positions in their own companies. According to the article, this is the biggest wave of insider buying across the sector since 2012. Dunham recently purchased 500,000 shares of Chesapeake (representing an investment of over $9 million) and he’s only one of the many execs in the industry that see the same opportunity and are following suit. I highly encourage all of you to take a look at the article here.
With some of the lowest prices we’ve seen since 2008, all investors alike seem to be in despair but there is hope…even with oil prices at historic lows, some companies are still able to generate profits from stripper wells. About 80% of the roughly 500,000 producing oil wells in the United States are classified as stripper wells. Despite their small volumes, this adds up.
An Untapped Market Under Our Feet
These stripper wells still represent over 75% of the U.S. well count, and comprise about 20% of U.S. oil and gas production. Many experts think that stripper wells in North America may be accessing a reservoir which still holds two-thirds of its potential value which can be unlocked through modern drilling techniques.The market for boosting output in aging wells currently sits at $14.8 billion and is expected to double by 2020. Companies that will excel in the market are those that have invested in the technology to retrieve what is left in the older, slower wells.
Bloomberg released another fantastic article the other day about Halliburton’s recent acquisition of Baker Hughes Inc. (BHI) . The article talked about how Halliburton Company (HAL) was buying Baker Hughes to gain access to a technology which recovers oil from aging wells more efficiently. Mature oil fields lose the pressure that forces oil to the surface and nodding donkeys are the best known type of artificial lift for bringing it up. However, the company has employed electronic submersible pumps that are installed at the bottom of wells and push oil up. They produce about 40,000 barrels a day compared to nodding donkey pumps that produce less than 6,000 barrels a day. However, nodding donkeys are best for low-flow wells because electronic submersible pumps must be completely submerged in crude for the systems to function.
The LEAP systems (linear electromagnetically actuated pumps), can be used on wells that are producing as little as a single barrel a day making them a potential replacement for the nodding donkey. With oil prices at all-time lows, using artificial lifts is a much cheaper way to maintain production from older wells. There are many companies starting to use some of these modern techniques to try to profit from aging wells, but one of the most important things that we as investors need to keep in mind is that oil isn’t going anywhere.In my opinion, it will be the most sought after commodity in our lifetime and will take 70 to 80 years before our world changes and adapts to new forms of energy. That is why I think it’s crucial we keep some of the domestic oil and gas producers on our radar screens before we see a huge spike up. I want to stay with domestic producers for the moment, as I understand the jurisdiction and believe this new technology could drastically reduce drilling costs in North America. That said, there is one company in particular I want to feature today – an earlier-stage, higher-risk play called Jericho Oil ($JROOF) that is seeing great success in the industry.
Ready to Spring Forth
Obviously we’re talking about a different class of company with Jericho as opposed to many of the much larger multi-billion dollar E&P most of us are used to seeing, but even in their short history, the company has been able to achieve some substantial milestones. They are well-funded with $5 million in the bank, have no debt, and they’re generating production and is growing cash flow. In my opinion, this drop in oil presents a tremendous opportunity for Jericho to take advantage and acquire assets at extremely discounted valuations and I think you ought-to keep it on your radar screens at these levels.
Now trading on the OTCQX under the symbol JROOF, Jericho is a Vancouver/Kansas based oil company that targets fractured markets with high ratio of operators to production by using modern development technology. Jericho focuses on shallow, vertical, low-risk, aging stripper wells that produce 10 BOE/D (Barrels of Oil Equivalent Per Day) or less within historically producing, mature oil fields that have been neglected or abandoned.
The multi-faceted team has had over 25 years of experience in the natural resources/energy sector with a very successful track record in Jericho’s targeted basins. With limited competition, the company is well positioned to develop assets that are overlooked by larger industry players; in a market where guys are running for the hills and selling off all they can, this is the time to buy if you have cash…and Jericho has enough of it.
The company’s major project is located in Eastern Kansas. Jericho has 50% working interest in approximately 3750 acres of oil leases.
Why do I like Kansas? Netbacks remain high even in light of the recent price decline. The most important thing that differentiates Jericho from many other junior oil and gas companies drilling in other areas is the fact that Jericho can still make money at these prices. Take a look at this picture I found in the company’s corporate presentation on page 15:
Injector wells cost approximately $25,000 per well while producer wells in the area cost around $37,000 per well and pay back within 13 months; that’s still fairly cheap and very impressive. With $5 million in working capital, the company can easily position itself as a powerhouse in the area. IRR’s on these wells are around 76% based on $90+ oil. Obviously we’re not at these prices today, but the company can still get great returns at lower oil prices – just take a look at the chart below:
Their recent drill program was successfully completed within 2% of the company’s budget, allowing them to swiftly move into Phase II. Fifty additional producers and injector wells are expected to be completed by the end of the fourth quarter, doubling or even tripling its current production.
In a recent interview with James West of The Midas Letter, Jericho’s CEO Allen Wilson suggested that low oil prices were not a negative influence on the company’s profits. With the intention of adding another platform within the United States, the oil price market may make the acquisitions easier for Jericho. “We are positioned well, given the price,” stated Wilson. Wilson has added to his current position in the company by buying shares in the open market last week as per the insider filings here.
So there you have it; a company that is just at the tip of the iceberg when it comes to oil exploration, development, and production in the U.S. Even though its current production figures are small, it’s a company that shows a lot of promise going into 2015. They have succeeded in bringing in new technology to benefit from aging wells and will use it towards increasing their production. Jericho is not only fully funded, but they have the necessary capital behind them to start acquiring other assets at fire sale prices, which, as we all know, could be very accretive to shareholders down the road.
Even though the oil market seems rough right now, aging/stripper wells and the use of new technology to access them could be our saving grace and the wave of the future. With the artificial lift market expected to double, companies that are already in the oil market should see a significant return. In my opinion, now is the time to invest in domestic oil and gas companies that are focused on undervalued, aging wells across North America.
As always, if you have any questions, please don’t hesitate to get in touch with me anytime. I look forward to hearing from you.
Best,
Etienne
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