Keith Schaefer, publisher of Oil & Gas Investments Bulletin, profiles a small-cap oil and gas firm active in the Oklahoma STACK that he believes stands out from the pack.

Oil stocks will be a screaming buy sometime between now and Dec. 31. Tax loss selling pressure will add to the pressure of lower oil prices, and some crescendo of selling will hit in the coming weeks, if not days.

So where do I look to buy into this fear?

I’ll tell you why I’m looking at Jericho Oil Corp. (JCO:TSX.V; JROOF:OTC)

They’ve hit on a couple monster wells in the last quarter, validating all their acreage. They’re in Oklahoma, which enjoys some of the best oil prices in North America. And Encana’s $5.5 billion buyout of Newfield tells me the industry loves this play.

All these producers will have a reflex bounce up come January—just from the mindless selling pressure of tax loss time ending. There is a “gimme” of 20-30% coming in early January.

But I think you have to be analytical to figure out where The Big Winners will be.

Pricing power has actually become A Big Deal for oil producers. Oklahoma is getting GREAT pricing, just $1.50/b off WTI.

The Big Oil Plays in North America are suffering from severe price discounts. Permian producers got scorched early this year as the amount of oil being produced overwhelmed infrastructure and West Texas oil prices tumbled to first $8, then $12 and finally $20/b lower than WTI pricing.

The Bakken in North Dakota had been enjoying a premium to WTI after the Dakota Access Pipeline went into service last year—but surging production there has already filled it and that premium has rapidly fallen to a $20/b discount on some days recently.

One of the largest producing basins is the Canadian oil sands, and those barrels have had a $50/b discount some days. That’s really ugly.

So I’m looking to invest where I can get the best bang for my buck—and that’s the U.S. midcontinent.

STACK Drilling Results Far Better Than Lofty Expectations

Jericho got into the STACK play in textbook fashion—it spent 2015/2016 patiently buying assets for pennies on the dollar, a rare company armed with cash in a world full of desperate sellers.

2018 was the inflection point where Jericho Oil switched from asset accumulation mode to production growth mode. The early results for Jericho’s STACK wells have vastly exceeded management’s own lofty expectations.

Jericho’s first well was the Wardroom 13-19N-13W #1H well, which was put on production early this summer.

The well targeted the Meramec formation within the STACK and the results knocked the ball out of the park.

This was a monster well.

Where Jericho Has Been Drilling

Source: Jericho Oil Corporate Presentation

The Meramec well came on production at an eye-popping 950 boe/day. That was a top decile result for the entire basin and Jericho did it on their very first attempt. Today—after 230 days—the well has verified the quality of Jericho’s acreage.

Jericho’s second well was the Swordspear 15-23N-10W location. This well targeted a second formation within the STACK which called the Osage. The Osage is quite different than the Meramec because it is a conventional reservoir.

Conventional means lower rates of initial production, but also much lower decline rates. This is the kind of production that generates stable cash flows that most junior growth companies don’t have access to.

Jericho’s Swordspear well came on at an excellent production rate of 500 boe/day. Since then production from the well has remained exceptionally strong. After 30 days the well was still doing 450 boe/day.

Just yesterday they said the well has averaged 330 boepd after 160 days. Having the Osage as a low-decline, second formation provides the perfect complement to the big initial production rates of the Meramec.

These 2018 drilling results from Jericho really couldn’t have been better. And while the results have been excellent they really aren’t all that surprising.

Competitors including Alta Mesa, Chaparral, Devon, Continental, Newfield, Exxon Mobil and Staghorn have been drilling excellent wells all around Jericho.

The economics of this acreage are equal to the best in the industry.

Source: Newfield Exploration Presentation

Not surprisingly, leasing activity in the play has increased by 1,800% over last year. . .making STACK acreage more highly coveted. The industry wants this play badly.

We don’t have to look any further than the $5.5 billion that Encana (ECA-NYSE/TSX) just agreed to pay for Newfield Exploration (NFX-NYSE) for proof of that.

So we’ve got:

1. Good oil prices
2. Great wells

And now for 3. . .a land value underpinning the stock that’s worth 2-5x what the stock is trading for. This kind of valuation is really only relevant on a buyout, but it’s the kind of valuation that lets me sleep at night.

Jericho and Partners’ 16,000 Net Core Acres in the STACK

Source: Jericho Oil Corporate Presentation

Today Jericho and its partners are sitting on 16,000 net acres of highly coveted STACK acreage. On average, Jericho was able to acquire that land for $2,300 per acre.

What is that land worth today? It isn’t hard to determine.

With companies now rapidly acquiring acreage all around Jericho we have a steady flow of documented arm’s length data points available to do such a calculation.

Documented STACK Transactions

Source: Chaparral Energy

Adjusted for production, STACK acreage has been trading hands at prices ranging from $8,500 to $20,938 per acre.

That is hard, verifiable, data.

This provides us with a range of values, many of which were established when oil prices were much lower than today and when the play was much less proven.

What these data points show us is that acreage today is worth 4 to 10 times what Jericho paid for it. Jericho’s “buy when there is blood in the streets” strategy has allowed the company to make multiples on their investment.

That’s why I’m looking to increase my position in Jericho.

To conclude, I would add a couple soft points. JCO has a smart, deep-pocketed and tightly held shareholder base. These shareholders include unusually heavy hitters like Ed Breen, the CEO of Dow DuPont. It is a shareholder group that screams of credibility and long-term thinking.

These insiders own a full 46% of Jericho’s shares. These people all get paid one way. . .if Jericho’s share price goes up over the long term.

All of this is a recipe for commodity development success. Buy good assets when commodity prices are low, then develop those assets and sell the production when commodity price rise.

Keith Schaefer is editor and publisher of the Oil & Gas Investments Bulletin, which finds, researches and profiles growing oil and gas companies that Schaefer buys himself, so Bulletin subscribers know he has his own money on the line. He identifies oil and gas companies that have high or potentially high growth rates and that are covered by several research analysts. He has a degree in journalism and has worked for several Canadian dailies but has spent over 15 years assisting public resource companies in raising exploration and expansion capital.

Read what other experts are saying about:

• Jericho Oil Corp.

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Disclosure: 
1) Keith Schaefer disclosures are below.
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3) Statements and opinions expressed are the opinions of the author and not of Streetwise Reports or its officers. The author is wholly responsible for the validity of the statements. The author was not paid by Streetwise Reports for this article. Streetwise Reports was not paid by the author to publish or syndicate this article. The information provided above is for informational purposes only and is not a recommendation to buy or sell any security. Streetwise Reports requires contributing authors to disclose any shareholdings in, or economic relationships with, companies that they write about. Streetwise Reports relies upon the authors to accurately provide this information and Streetwise Reports has no means of verifying its accuracy.
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5) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their immediate families are prohibited from making purchases and/or sales of those securities in the open market or otherwise from the time of the interview or the decision to write an article until three business days after the publication of the interview or article. The foregoing prohibition does not apply to articles that in substance only restate previously published company releases. As of the date of this article, officers and/or employees of Streetwise Reports LLC (including members of their household) own securities of Jericho Oil, a company mentioned in this article.

Keith Schaefer and Oil and Gas Investments Bulletin Disclosures:

DISCLOSURE: I am long Jericho Oil.

Management at Jericho Oil has reviewed and sponsored this story. The information in this newsletter does not constitute an offer to sell or a solicitation of an offer to buy any securities of a corporation or entity, including U.S. Traded Securities or U.S. Quoted Securities, in the United States or to U.S. Persons. Securities may not be offered or sold in the United States except in compliance with the registration requirements of the Securities Act and applicable U.S. state securities laws or pursuant to an exemption therefrom. Any public offering of securities in the United States may only be made by means of a prospectus containing detailed information about the corporation or entity and its management as well as financial statements. No securities regulatory authority in the United States has either approved or disapproved of the contents of any newsletter.

Keith Schaefer is not registered with the United States Securities and Exchange Commission (the “SEC”): as a “broker-dealer” under the Exchange Act, as an “investment adviser” under the Investment Advisers Act of 1940, or in any other capacity. He is also not registered with any state securities commission or authority as a broker-dealer or investment advisor or in any other capacity.

Charts provided by the author.

Original Source: Click Here

Original Source: https://bit.ly/2AovUyu

To state that Oil has been through some tough sledding in recent sessions would be a colossal understatement. After recently hitting the skids for an unprecedented twelve consecutive sessions, this decline represents a rout never before witnessed.

Looking at this chart, you’d think global demand had fallen off a cliff.

Aside from Trump telegraphing warnings to OPEC not to cut production, there seems to be a perception out there that oil is fast becoming obsolete, that it’s going away, that the global shift toward a greater reliance on EV’s (electric vehicles) will render it a useless commodity overnight.

Not true. Not by a highway mile. The Big Three automakers continue to crank out traditional gas-powered vehicles, producing more in a single day than Tesla will in an entire year. Global oil consumption could top 100 million barrels per day going into 2019.

This next oil chart depicts the last five years of trading. The $50 level looks as if it could represent a fairly decent support zone. It’s also a big round number.

The market often succumbs to these big round numbers as if by some powerful gravitational pull.

My take of this support zone (horizontal line drawn in blue): a decent bounce from here, if not a bottom, could be in the cards short term.

For sure, the rumblings coming out of the Whitehouse and OPEC will continue in the weeks and months to come. For sure, the volatility we’ve witnessed recently will have made its masterpiece by year-end (Bill Shakespeare voice). But this current situation could represent a rare opportunity to back up the truck on asset rich companies at deeply discounted prices.

As the Chinese have been preaching for centuries…

The evolution of an aggressive small-cap oil company…

Jericho Oil Corp (JCO.V), a micro-cap in the oil space, is one of those rare company’s that had the foresight to stoke up its treasury while the going was good, before the market imploded several years back. With roughly $13M in the company coffers, it went looking for the right opportunity.

That opportunity came along in the mid-continent of the US – Oklahoma. Today, the company boasts an enviable land position of some 55,000 acres, including 16,000 acres in the Anadarko basin STACK play of Oklahoma.

According to the Fraser Institute’s list of the Most attractive jurisdictions for petroleum development, Oklahoma ranks number 2.

Jericho’s philosophy…

If you are small – relative to the size of the true giants in the industry – you need to be focused. You need to appreciate the opportunity-set in front of you. And you need to know the marketplace you plan to execute in.

By focusing on Oklahoma, they’ve completely mitigated the risk of any sudden systemic governmental shift that could take away their business. Local and state governments are more apt to move Heaven and Earth to see that wells get drilled, and assets get developed.

Nearby communities are tied to oil production. They’re immersed in the culture and fully appreciate the many dividends oil production can generate.

Deep value / strong hands…

Jericho acquired their position in the STACK for an average of $2,300 per acre. Today, those acres are fetching better than $15k per.

All of the these acquisitions have been drilled in the past. Jericho know there’s a significant resource there. They know the field is productive. They know the oil is extractable.

While the company was in the process of picking off properties on the cheap, they gained the support of three significant shareholders, each taking down a > 10% interest in the company. The names include the likes of…

• The Breen Family Trust, with patriarch Ed Breen, former president of Motorola, ex-Chairman, CEO and liberator of Tyco International, current CEO DuPont… you get the idea.
• A prominent private oil family with Oklahoma roots, via a family trust. Their investment in Jericho speaks volumes.
• The Hegna Family via Steve and Mette Hegna.

Make no doubt about it, this 10% plus club represents solid votes of confidence in Jericho’s underlying fundamentals. They represent long-term shareholders, smart money, and strong hands.

Another benefit of engaging these strategic shareholders: No investment banks. No finders fees. With this management team, every penny is a prisoner.

The STACK…

Named after the counties of Sooner, Trend, Anadarko, Canadian, and Kingfisher, the STACK has evolved into a premier North American horizontal development play.

The acronym also represents the multiple, stacked productive formations present in the area:Chestermanning, Meramec, Osage, and Woodford.

This a prolific hydrocarbon system. The STACK’s hallmark: high oil and liquids-rich natural gas content, multiple horizontal target horizons, extensive production history, and historically high drilling success rates.

It’s important to understand that the area is dominated by a handful of large producers – Continental Resources, Devon Energy, Marathon Oil, Alta Mesa Resources, Newfield Exploration, and Chesapeake Energy. These companies have poured billions of dollars into developing their STACK assets. Jericho has positioned itself in the land of giants.

Actually, the above list needs revision…

Encana to buy Newfield Exploration for $5.5B US

The recent takeover involving Newfield’s assets pound home the intrinsic value here – the price producers are willing to pay for these STACK assets.

The chart below helps demonstrate why these assets are so damn desirable…

The STACK is among the lowest cost basins on the entire continent. The region is flush with infrastructure. The area has good takeaway capacity – there are good pipes in the ground. Good takeaway capacity means exacting the best possible price for extracted oil.

Another factor driving investment in the region: your typical 1-mile horizontal well produces approximately 500,000 to 1,000,000 barrels of oil equivalent with rates of return greater than 75%. These are serious numbers.

The shift…

The pennies-on-the-dollar bargains Jericho scooped up in 2015 thru 2017 are not there today. As the market for acres shifted from dirt cheap to overpriced, so has the company’s focus. There have been no acquisitions since September of last year. The company’s focus is now on development. And they have heaps of development runway.

Developing a well is not an overnight process. From a scientific POV, a lot of thought and methodical planning need to go into it. Be that as it may, the company has two wells in the bag and two more coming on.

The wells…

Producing Operations:

Wardroom (Meramec formation):

• Jericho holds a 47.5% Working Interest.
• currently producing at 220 Gross BOE per day (40% oil; 227 days since first oil production)

Swordspear (Osage formation):

• Jericho holds a 47.5% Working Interest.
• currently producing at 351 Gross BOE per day (50% oil; 128 days since first oil production)

Drilling operations:

Trebuchet (Operator: Armor Energy; Major County – Osage formation)

• Jericho holds a 48.0% Working Interest.
• Drilling ahead and building the curve from vertical to lateral section.

Valkyrie (Operator: Staghorn Petroleum; Blaine County – Meramec formation)

• Jericho holds a 23.5% Working Interest.
• Drilling ahead and nearing total measured depth of approximately 13,500 feet

The company also has a small working interest in two additional Osage formation wells, Ula and Hilltop, operated by ExxonMobil and Alta Mesa Resources respectively. Jericho’s participation in these wells is primarily to gain a greater understanding of the underlying subsurface geology.

November 12th STACK drilling and completion update…

Here, the company reported progress on the drilling, completion, and flowback of their most recent Osage and Meramec wells:

The highlights from this news release are as follows…

Drilling Operations:

Trebuchet (Operator: Armor Energy; Major County – Osage formation):

• Jericho holds a 48.0% Working Interest.
• Drilling ahead in the lateral section – ~90% of the planned total measured depth.
• To date, the company has seen tremendous strides in the rate-of-penetration (“ROP”) on the Trebuchet relative to their first Osage formation well (the Swordpear) attributable primarily to an improved drilling-bit set-up and specific lateral geo-steering.
• The ROP in the lateral on the Trebuchet is approximately 1.6x-1.8x the Swordspear at the same measured depth putting downward pressure on total rig days for the well.
• The fracture stimulation of the well is expected to begin in late-November / early December.

Flowback Operations:

Valkyrie (Operator: Staghorn Petroleum; Blaine County – Meramec formation):

• Jericho holds a 23.5% Working Interest.
• 35 fracture stimulation stages successfully performed and currently in flowback.
• After only a few days on flowback, the company is extremely pleased with the resulting downhole pressures and total fluid flowback.

Brian Williamson, CEO of Jericho Oil, had this to say regarding these recent developments:

“The Company continues to deliver on its two-pronged strategy of delineating and de-risking our STACK acreage for the Meramec and Osage formations,” adding, “our second Meramec and Osage formation wells have given our team the added knowledge and confidence in our world-class acreage position. We continue to learn from each well and have put forth best practices on our Trebuchet well to decrease drilling costs in the lateral section. We are excited to provide further updates on the production of these wells by year-end.”

Though Jericho’s current focus is in de-risking and proving-up its 16,000 acres in the STACK, significant upside also exists within the company’s asset portfolio – some 40,000 acres – outside of the STACK. Their drill ready Osage Extension play in northeast Oklahoma is the only one example of a project with significant upside potential.

Final thoughts…

Equity Guru’s Chris Parry, during a recent conference call with the company, offered this take on the company, its assets, and development strategy. To paraphrase Chris…

‘Jericho has taken a MONEYBALL approach. They got in when everyone else was getting out. They got some nice assets on the cheap. They saved themselves the trouble and expense by purchasing assets that had already been explored and tapped into. They have competitors coming into the area and purchasing assets next door at significantly higher valuations to the prices they paid. They’re treating their money like it’s valuable. All of the above lowers the risk and sets up a nice growth play, even if the price of oil doesn’t cooperate.’

Nice summary. Accurate too.

With 128.7 million shares outstanding and a sub-fifty cent share price, Jericho has an extremely modest market-cap of $61M. This price weakness is unlikely to last.

The company could be on the verge of dramatic production growth. Newsflow should be strong going forward.

Ultimately, Jericho’s goal, via a systematic and methodical approach to development, is to build a world-class blue-chip energy company.

We stand to watch.

END

~ ~ Dirk Diggler

Full disclosure: Jericho Oil is an Equity Guru client.

Greg Nolan, Equity.Guru

Feature gif courtesy of Giphy

Disclaimer: ALWAYS DO YOUR OWN RESEARCH and consult with a licensed investment professional before making an investment. This communication should not be used as a basis for making any investment.