Throughout history, fortunes have been made buying distressed assets when few had the liquidity, or the courage, to step in and buy. Cloaked in desperation, the current oil sector has created a generational opportunity for bargain hunters with cash.
Carnage: necessary ingredient #1
In early February, BP reported a $3.3 billion fourth-quarter loss. Exxon Mobil, the largest U.S. oil producer, saw a 58% decline in its quarterly profit. The oil market can provide swings like few sectors… Chevron, for example, recently posted a fourth-quarter net loss of $588 million after reporting a net profit of $3.47 billion in the same quarter last year. During boom times, the exuberance that can take hold in the oil sector, from large producers to wildcatters, is truly shocking. Dating back to the first oil boom of the 1850s, it has always been an industry of risk takers. As history has well documented, when profits balloon, executives’ sanity erodes and industry-wide leverage skyrockets.
Reported in a 2013 article from Bloomberg, Global Sustainability’s David Hughes estimated the U.S. needed to drill 6,000 new wells per year at a cost of $35 billion to maintain current production. Why does this matter?
With oil below $40 per barrel, drills have come off line faster than any time in recorded history. The U.S. rotary rig count from Baker Hughes has collapsed approximately 56.5% year over year, and was down another 7 rigs on April 8th to 443 active drills – a more than 150-year low! The slashing of budgets, lack of exploration and drilling will lead to oil supply shortfalls outside of OPEC.
Jody Chudley of Daily Reckoning astutely wrote in December, 2015,
“Supply is coming down outside of OPEC, and global daily oil demand continues to grow. Demand is up big this year… even the IEA (which chronically underestimates demand) is showing 2015 demand up 1.8 million barrels.”
A proven system: necessary ingredient #2
Buying at lows and hoping oil prices will go back up is not a business strategy. It’s more of a gamble. However, buying heavily discounted assets with solid fundamentals from previously large oil companies that, in some cases, are being forced to sell and on the brink of bankruptcy, is a strategic way to build a new oil company from the ground up. By acquiring producing wells that may profit at low oil prices ($35-$40 WTI), the potential upside for investors becomes clear…
This is exactly what our new Featured Oil Company has built its business strategy on: low cost, proven production in an infrastructure-rich region.
The Story of Jericho Oil (JCO:TSXV)(JROOF:OTC PINK)
Jericho’s business model was brought to our attention after its most recent acquisition from November 2015, in the depths of the oil bear market. What the company pulled off defines the phrase, “timing is everything.”
What led to the buying opportunity for Jericho was a historic crash. PostRock Energy traded up to $80 per share in 2011 but last traded at just $0.075 due to a number of reasons, including weakness in the oil sector and taking on too much leverage.
After falling to pennies per share, PostRock cautioned shareholders in mid-October about its stock price, by “reiterating its belief that its common stock has no material value or a value materially below the current market price.” In that same release, PostRock stated, “The Company previously announced a strategic review process to seek a sale as a whole or of individual assets…”
As the liquidation throughout the U.S. oil sector picked up steam amidst a host of bankruptcies, Jericho got to work… around American Thanksgiving weekend in November 2015, when oil acquisitions were the last thing on most people’s minds, Jericho Oil was on the hunt for stable, producing assets with access to nearby world-class infrastructure.
On November 18, 2015, PostRock Energy announced it had executed a Purchase and Sale Agreement with Jericho Buckmanville Oil LLC to sell certain of its Oklahoma assets for $13 million.
Jericho Oil – our new featured oil and gas company – pitched in to acquire 25% of certain PostRock assets in the deal. The deal resulted in an immediate spike in Jericho’s partnership net production, because even though the acquisitions were finalized at year end, they had an effective date of October 1st, 2015, which can be seen below:
Jericho’s weighted average interest is approximately 34% in the above partnership net production. The company and its partners’ production in central Oklahoma has averaged approximately 88% oil and 12% gas.
PostRock Energy announced just over a week ago that, “it and its subsidiaries have filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code in the U.S. Bankruptcy Court for the Western District of Oklahoma…”
It appears Jericho got to some of PostRock’s assets just in time. Jericho locked up a 25% working interest in a 30,000 acre asset package from PostRock with average 2015 Q3 production of 427 barrels of oil equivalent per day. Jericho has reported it intends to acquire an additional 25% working interest, bringing its total to 50%, of this package in 2016.
At year-end 2015 Jericho also acquired a 50% working interest in a second 10,000 acre asset package with current production of approximately 119 barrels of oil equivalent per day.
It is important to note that, the PostRock acquisition was priced at about $30,000 per flowing boe (barrel of oil equivalent). For some context, in 2014, Mid-Con Energy Partners acquired projects in Oklahoma and Texas of similar size and scope for approximately $117,000 per flowing boe.
What a difference a year and a half can make. Just look at the junior gold or lithium sectors right now.
Large caps spent tens of billions of dollars drilling formations across the United States prior to the beginning of the collapse in late-2014. In Jericho’s own words from its corporate presentation, “Bad practices, mis-management and poor drilling have been exposed by low oil prices.”
Unfortunately for many oil companies, much of the drilling was done on leverage – a recipe for disaster in a down market. With oil prices hovering around $40, much of the debt has gone bad, resulting in a liquidity crunch, credit downgrades and bankruptcies. The Bakken shale of North Dakota/Montana and the Eagle Ford of Texas got most of the print during the boom years; however, Jericho is targeting the Mississippian-Lime and Woodford formation with its acquisition strategy.
Note: Jericho and its partners cumulatively own 45,000 acres in the Mississippi Lime, Woodford and Hunton formations – all located in central Oklahoma.
Combined daily production at Jericho’s joint venture assets has averaged approximately 556 boe/day in Oklahoma, plus approximately 90 boe/day at its legacy field in Kansas, through November 2015.
The types of wells located in the central-Oklahoma Mississippian formation have a rapid initial decline rate. Production declines and then typically stabilizes for long-periods of time (8-12 years or longer).
The below chart represents how many months it took for 4 of the largest Mississippi producers to fall below 100 boe/day, despite continuing to produce 120 months after initial production.
What is important to understand about Jericho’s system is that it does not buy rapidly declining wells, but rather wells that have already declined, with established and consistent low-cost production, and infrastructure in place. Currently, Jericho is not in the business of oil exploration. They have been focused on acquiring assets which are on line and producing at low cost. In a low oil price environment, we love this strategy for a junior with a market cap of approximately CAD$30.3 million.
It is virtually impossible to thrive in today’s oil market without low production costs. Following a Houston energy conference in late-February, in which the Saudi oil minister spoke, Jeff Gaulin, vice-president of communications at the Canadian Association of Petroleum Producers (CAPP), stated:
“The challenge that we got from the Saudi minister was this: Cut your costs or get out of the way.”
Jericho, unlike many oil producers, has a focus to, “Continue to achieve recurring field – level cash flow neutrality at/or less than $20/ barrel WTI,” according to its corporate presentation dated Q1 2016. WTI Crude closed trading on Friday around $39.70 per barrel.
In regards to the November transaction, Ryan Breen, Director of Acquisitions & Divestitures for Jericho, commented,
“Amid the precipitous drop in the price of oil, credit availability has become scarce. As a result, capital flight, evidenced by the declining rig count in the Mid-Continent region year-over-year, has produced illiquidity, and most importantly, market dislocations in regards to the long-term intrinsic value for both cash flow positive and highly distressed assets alike…”
*See full press release here.
Summary of the latest Central-Oklahoma Acquisition Highlights(1):
* The Central Oklahoma asset is comprised of ~50 producing wells and 30,000 net acres
* Reserves are ~90% Proved Developed and ~80% Oil
-Reserve-to-production ratio of ~8.5 years
* Net Proved Developed Producing reserves of ~1.25 MMboe (312m net boe to Jericho’s interest) acquired at ~$10.08 per barrel
* Average 3Q15 net production of 427 boepd (106 net boepd to Jericho’s interest) acquired at $30,458 per flowing Boe
– Increases Jericho’s production by over 100%
– 88% Oil, 12% Gas
* Oil production priced at an LTM differential to WTI of ~$3.25/bbl
(1) Based on third-party reserve estimates and preliminary internal assumptions
From that single transaction (PostRock), Jericho was able to increase its production by over 100%, with the option to increase it by 225% if it chooses to acquire the additional 25% in 2016.
In regards to the transaction, Jericho’s CEO, Allen Wilson, stated, “We are grateful for the tremendous support of our stakeholders, who share our belief that the current low-price oil environment offers Jericho an extraordinary opportunity to acquire quality producing assets, below what we believe are their long-term intrinsic values, while amassing a land bank with enormous development and drilling upside when prices recover.”
Central Oklahoma is arguably superior to regions such as Alberta when it comes to juniors producing oil. For starters, access to infrastructure and refineries on the Gulf of Mexico is world-class. Jericho’s current assets and pipeline of potential acquisitions sit mere hours from Cushing, Oklahoma which houses one of the largest supplies of crude oil in the world. Cushing’s nickname is “The Pipeline Crossroads of the World”for a reason. In an article published in Tulsa World, Casey Smith reported, “It is also the price settlement point for crude oil futures traded on the New York Mercantile Exchange.”
Smith added, “Cushing contains 13 percent of the nation’s crude oil storage capacity.”
Alberta, on the other hand, is still without a new pipeline and is now dealing with increased regulation. The“polluter pays” policy which was implemented by Alberta Energy Regulator’s in August of last year has created potential expense issues for oil producers in the province. It could force companies to put down a deposit if their production revenues are deemed insufficient to cover the estimated cost of cleaning up oil wells at the end of their producing life.
Tim Veenstra, an engineering consultant with privately-held Crimson Oil & Gas, was quoted in an April 6th Reuters article, “It’s devastating, it’s the final thing that pulls the rug right out from all the weak companies. You’re forced to produce wells that are uneconomic just to keep your LLR positive.”
Oklahoma does not have these issues…
In the same Reuters article by Nia Williams and Euan Rocha titled, Alberta’s oil well clean-up plan puts pressure on small producers, it was estimated “That cost can range from roughly C$60,000 to over C$300,000 a site, depending on well depth, location and other factors.”
Cash is King in Today’s Oil Market
Having the courage to buy distressed assets is one thing. Having the capital to deploy, when many competitors are in a liquidity squeeze, is another.
Since going public, Jericho Oil has conducted a number of strategic private placements…
Just over 2 years ago, in late-February 2014, Jericho raised $6.5 million at $0.30 per share. In October of that year, Jericho raised $4.2 million at $0.50 per share. And in January of this year the company closed on an additional $6.9 million at $0.40 per share.
How many junior oil companies do you know were able to raise near $18 million in roughly the past 2 years?
And how many do you know were able to raise non-brokered capital? These days, many junior resource companies on the TSX Venture aren’t too selective with who they grant equity to, doling out 6-10% in broker commissions regularly. But that’s not Jericho.
Allen Wilson, Jericho’s CEO, is well-connected and has proven ability to raise capital in the worst of markets (i.e. closed a $6.9 million financing in January of this year and another $650K last week).
Jericho Oil’s largest shareholder: The Breen Trust
We mentioned a quote from Ryan Breen earlier. Prior to joining Jericho Oil, Ryan Breen was an investment banking analyst at J.P. Morgan, based in New York. He worked within the Diversified Industrials Group focused on Multi-Industrial, Aerospace & Defense and Transportation opportunities. While at J.P. Morgan, Ryan participated in transaction structuring and execution, including M&A and Debt and Equity financings.
Ryan is the son of Ed Breen. Mr. Ed Breen is the Chairman and CEO of DuPont, the world’s fourth largest chemical company by market cap. He was previously the Chairman of Tyco International and is a Lead Independent Director of Comcast. In November of 2015, Bloomberg featured Fundstrat Global Advisors’ selection of 5 CEOs who have outperformed the S&P 500’s total return index and their peers during their tenure atop at least two companies…
A Fundstrat strategist wrote, “We have uncovered five individuals with stellar track records who add proven management firepower and a shareholder’s mindset…”
The Top 5 CEOs:
Liberty’s Media’s John Malone, Intrexon’s Randal Kirk, DuPont’s Ed Breen, Tesla Motors’ Elon Musk, and Tempur Sealy International’s Scott Thompson.
Full article here.
It was announced on January 12, 2016 that the Ryan D. Breen Non GST Trust (“Breen Trust”) had increased its holdings in Jericho Oil to 16.73 per cent of the current issued and outstanding common shares of the company. Click here to read the full release.
Jericho’s Stock Price shows Resiliency
We had the chance to take in a presentation from Jericho’s CEO Allen Wilson in Calgary in late-March. Upon Wilson announcing that Jericho had raised nearly $7 million in January 2016 the audience erupted in clapping. Being an oil town, investors in Calgary appreciate that kind of grit and fund raising ability in a down oil market.
Compare Jericho’s stock chart to almost any oil and gas producer, even the large caps, and the relative stability is noteworthy for a junior. When oil crashed around mid-February of 2016, Jericho held its value between $0.40 and $0.45 per share.
Jericho Oil 1-Year Stock Chart
BP 1-Year Stock Chart
Exxon 1-Year Stock Chart
Chevron 1-Year Stock Chart
Remarkably, Jericho’s share price has held relatively firm during one of the worst oil bear markets in a generation. From our vantage point, this is a testament to the quality and commitment of Jericho’s shareholder base.
The company reported in its Q1 2016 corporate presentation that its focus is to “Continue to achieve recurring field – level cash flow neutrality at/or less than $20/ barrel WTI.” Additionally, the company is debt free…
Jericho’s CEO, Allen Wilson, believes “your first goal as a junior company should be to be profitable” and that, “History will judge oil companies how they managed this downturn.”
Jericho’s Long-Term Strategy is 5-Pronged:
- Target Fractured and Dislocated Markets
- Long-Life Conventional and Unconventional Producing Oil Assets
- Bring Modern Production & Development Techniques to Underperforming Assets
- Repeatable and Consistent Acquisition and Development Strategy
- Positive Cash Flow with “Option Value” Through Stacked-Pays
We asked Allen if he was concerned about the price of oil and the current market environment. His response was exactly what we wanted to hear:
“You need to be prepared for lower for longer. Whether it’s true or not, develop your oil company around that thesis and you’re being set up for success.”
We are biased towards Jericho Oil because they are an advertiser client and we participated in the company’s recently announced private placement for our own investment purposes. We may also increase our share position in the company following the release of this report. Please take responsibility for practicing your own thorough and independent due diligence.
Jericho Oil executed three acquisitions in 2015; and, with a growth strategy based on the acquisition and development of overlooked and undervalued assets across the Mid-Continent region, it will likely continue to look at buying production during this down market. With its deep roster of seasoned mid-continent oil veterans reviewing assets of distressed companies, it may not be long until Jericho Oil (JCO:TSXV) makes its next move.
All the best with your investments,
Jericho Oil Corporate Presentation
Disclosure, Risks Involved and Information on Forward Looking Statements:
Please read carefully before proceeding.
THIS IS NOT INVESTMENT ADVICE. All statements in this report are to be checked and verified by the reader.
This report may contain technical or other inaccuracies, omissions, or typographical errors, for which Maximus Strategic Consulting Inc., owner of PinnacleDigest.com, assumes no responsibility.
Important: Our disclosure for this report on Jericho Oil Corporation applies to the date this report was released to our subscribers (April 10, 2016) and posted on our website. This disclaimer will never be updated, even after we have sold all of our shares of Jericho Oil Corporation.
In all cases, interested parties should conduct their own investigation and analysis of Jericho Oil Corporation (“Jericho”), its assets and the information provided in this report.
Forward Looking Statements:
All statements in this report, other than statements of historical fact should be considered forward-looking statements. These statements relate to future events or future performance. Much of this report is comprised of statements of projection. Such statements or information involve substantial known and unknown risks and uncertainties. Forward-looking statements are frequently characterized by words such as “plan”, “expect”, “project”, “intend”, “believe”,”anticipate”, “estimate” and other similar words, or statements that certain events or conditions “may” or “will” occur. Forward-looking statements in this report include, but are not limited to, statements with respect to timing and completion of Jericho’s exploration and development program on its Kansas and Oklahoma oil and gas leases. Jericho participates in said oil and gas leases as a partner with a private family entity. Please refer to the titled slide “Acquisition Partnership” (page 19) of Jericho’s corporate presentation linked above for additional information on net ownership interests. Net production figures are quoted at the Partnership level throughout the presentation.
Forward-looking statements are based on opinions and estimates and are subject to a variety of risks and uncertainties and other factors that could cause actual events or results to differ materially from those anticipated in the forward-looking statements. Some of the risks and other factors that could cause results to differ materially from those expressed in the forward-looking statements include, but are not limited to: general economic conditions in Canada, the United States and globally; industry conditions, including fluctuations in commodity prices; governmental regulation of the oil and gas industry, including environmental regulation; geological, technical and drilling problems; unanticipated operating events; competition for and/or inability to retain drilling rigs and other services; the availability of capital on acceptable terms; the need to obtain required approvals from regulatory authorities; stock market volatility; volatility in market prices for commodities; liabilities inherent in oil and gas exploration, development and production operations; changes in tax laws and incentive programs relating to the oil and gas exploration industry; and the other factors described in Jericho’s public filings available at www.sedar.com. Readers are cautioned that this list of risk factors should not be construed as exhaustive. Expectations expressed in such forward-looking statements are based on reasonable assumptions, but such statements are not guarantees of future performance and actual results or developments may differ materially from those in the forward-looking statements. Investors should not place undue reliance on these forward-looking statements.
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Maximus Strategic Consulting Inc., owner of PinnacleDigest.com, has been paid CAD$50,000 plus gst to provide online advertisement coverage for Jericho Oil Corporation for a pre-paid six month online marketing agreement. The company (Jericho Oil Corporation) has paid for this coverage. The coverage includes, but is not limited to, the creation and distribution of reports authored by PinnacleDigest.com about Jericho Oil Corporation (reports such as this one), as well as display advertisements and news distribution about the company on our website and in our newsletter. This is our first report on Jericho Oil Corporation. We (Maximus Strategic Consulting Inc., owner of PinnacleDigest.com) subscribed to Jericho Oil Corporation’s private placement. In that private placement we purchased 62,000 units of Jericho Oil Corporation at a price of CAD$0.40 per unit. Each unit consists of one common share of Jericho Oil Corporation and one half warrant (a “Warrant”) with each full Warrant being exercisable into one additional Share of Jericho at a price of $0.60 per Share for a period of two years from closing. The Shares and Warrants are subject to a four month hold period from the date of the closing of the offering. We (Maximus Strategic Consulting Inc.) may buy more shares of Jericho Oil Corporation following the release of this report. We (Maximus Strategic Consulting Inc.) intend to sell every share we own, as well as any shares we may purchase in the future, of Jericho Oil Corporation for our own profit. All shares we (Maximus Strategic Consulting Inc.) currently own or purchase in the future of Jericho Oil Corporation will be sold without notice to our subscribers. Please recognize that we benefit from price and trading volume increases in Jericho Oil Corporation. Please recognize that we are extremely biased when it comes to Jericho Oil Corporation.
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