Jericho Oil Loves the Idea of Lower Oil Prices
It would be logical to assume that all oil companies want to see the price of oil go up. After all, anyone producing a commodity wants higher prices, right?
I know one oil company that hopes for lower oil prices. That would be Jericho Oil. (JCO-V) Their business model calls for picking up distressed assets cheap, refurbishing them and then waiting for higher prices. It works for them. Production has increased by 450% from Q3 of 2015 to Q3 of 2016 while operating costs decreased from $26 a barrel to $21.
Given that the price of oil has fluctuated wildly between 2008 and today, Jericho management came up with a plan that they can make money or at least improve the quality of their assets with a three fold strategy. (1) When prices are low, they demand price reductions and work to achieve operating efficiencies to improve cash flow. (2) When they need to, they will high-grade fields based on the rate of return and (3) with low prices, they will continue to acquire underdeveloped and undervalued producing projects near their current asset base.
Jericho’s goal is to be cash flow neutral at $20 a barrel oil. They are going to be constantly integrating new acquisitions to take advantage of economies of scale in order to drive operational efficiency at the field level.
In March of 2016 with prices near a ten-year low, the company began a program to rework fields that prior companies had failed to maintain economically. By doing so, they managed to dramatically increase daily production. In August of 2016, in conjunction with the family partnership that is part of all their JVs, they entered into a $30 million line of credit.
Given the record number of commercial shorts in oil, and after all, the commercials are the smart money, Jericho began a program of hedging production and are guaranteed a minimum price of about $55 a barrel for over 70% of production until the 4th quarter of 2017. As time passes, the amount of production hedged decreases.
For prices of WTI below $35 the company will be looking for new fields selling for distressed prices. For prices from there into the mid-upper $40s, the company focus will be on continuing work over programs on low-risk, up-hole completions and re-fracs. Above $60 a barrel, the company will be looking to initiate drilling on high potential targets in their 75,000 acres of land.
Buying into oil companies today is no longer an investment. It’s not even a gamble on the quality of management or assets. It’s a pure bet on the price of oil. If oil goes down to $26 a barrel as it did as recently as February of 2016, you lose no matter whom you invest in. If on the other hand, oil more than doubles over the six months after such a decline, everything goes up.
A correction is taking place in the price of oil right now with the price down over 12% in the last two weeks. It will last until the imbalance between wildly optimistic longs and more conservative commercial shorts back to a more normal state. In the mean time, investors can do no wrong looking at an oil company that not only isn’t afraid of lower oil prices but actually welcomes them.
Jericho is an advertiser. I own shares and naturally I have a bias. Do your own due diligence.
Jericho Oil Corporation