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56 www.resourceworld.com j u n e / j u l y 2 0 1 4 the oil patch report J o e l C h u r y I nvesting in junior oil and gas compa- nies will always carry higher risk versus investing in senior producers. When the going rate for a horizontal well is in the $6-9 million mark, one false step can be a junior killer. The market has responded with a healthy selection of juniors willing to play it safe, and find lower cost alternatives to grow production. In this column, I've already pointed out some of these safer options in the junior space. For instance, High North Resources [HN-TSXV] who are drill- ing and completing wells at $2 million which are paid back within a year, or Hemisphere Energy [HME-TSXV] drill- ing $1-$1.2 million wells that can be drilled from cash flow alone at a rate of one every two months. Instead of risking their entire drilling budget on one well, com- panies using this method are cheaply and steadily adding flowing barrels. However, recently listed Jericho Oil [JCO-TSXV] is taking this frugality to another level. "Our wells are shallow, low risk and completed to production at a cost of $40,000," says Allen Wilson, President and CEO. "A water injection well costs $30,000." These aren't big wells, nor are they new wells. Jericho is using a three-phased strat- egy: revitalizing what are called stripper wells; developing a field wide drilling pro- grams; and water-flooding. A stripper well is a well that has seen its production decline to less than 10 barrels a day. The US is full of them, and still derives benefit from them. In 2008, as much as 20% of the domestic oil supply came from strip- per wells, to the tune of 262 million barrels. So when Wilson and his team came across a unique opportunity to snag the rights to a seemingly endless supply of stripper wells in Kansas, they jumped at it. "We identified this area in eastern Kansas where we can basically pay market price for the production," says Wilson. "Whatever the barrel price is in east Kansas is what we pay. But the beauty in it is all of our drill targets come for free. Because we pick up production and have cash flow from day one, we can develop organically. After acquisition, we rework the acquired wells and then in-fill drill, consistently adding new production." "We found a model that applies across North America. We focus on picking up drillable acreage with little cost for drilling opportunities." says Wilson. "We started out in March with around 25 barrels a day. That doesn't sound like a lot; however, it's $2,500 a day in revenue, and over the course of the year we look to triple or qua- druple that." Not until after they've reworked the well with modern infrastructure and qua- drupled the production do they resort to water flooding. However, the formula is quite simple. It's squeezing more value out of seemingly dying wells, and breathing a new life into them. The simple formula has given confidence to at least some in the market. The stock price has doubled since the end of March. It's a cautious play that could pay off really well with patience and persistence. "I always say to people that we treat our money like it was yours. If it was your own money, what would you do with it," says Wilson. "Would you want to go out and drill a $9 million well hoping for enough oil to pay for itself? Or would you want to go out and slowly and steadily increase your production? Slow and steady fills the pail, and that's what we're doing." The in-fill drilling is so cost-effective it's ridiculous. Dry holes only cost the company $10,000, which is less than a used SUV. When they drill a producing well, and step out 300 feet in each direction, they increase their reserves and production through drill- ing, and not through exploration. "If we hit a dry hole, it isn't a significant loss. We actually don't mind, because it helps to more or less define the field," says Wilson. "If we've not hit a dry hole yet, then it means we haven't drilled enough holes yet." With this strategy, it's almost like Jericho is less a junior oil explorer, and more like a little oil manufacturing plant. So far, the biggest investment the com- pany has made was the acquisition of 2,800 acres, and 25 barrels a day for ~$2.45 mil- lion. However, it may still take some time to pay that back. At a starting point of 25 barrels a day, at this stage it would take them four to five years for payback – with- out any optimization or new production. With every improvement they make, that payback period gets shorter. Every drill location from here on out is for free. As well, a huge factor is the high margin and high netbacks they're seeing. Their conservative price models were worked out at $90, which pays back a healthy $50 per barrel. With those kinds of numbers, Jericho won't have to water down their stock to finance operations. n Jericho Oil revitalizing Kansas stripper wells "If we hit a dry hole, it isn't a significant loss. We actually don't mind, because it helps to more or less define the field. If we've not hit a dry hole yet, then it means we haven't drilled enough holes yet." says Allen Wilson