Jericho Oil (JCO.V) has surprised the markets this week, as right when most oil and gas companies see their banks cutting their credit lines, Jericho was able to announce its partnership has opened an US$30M senior secured revolving credit facility with East West Bancorp (EWBC), a Tier-1 bank.
The initial borrowing base has been set at US$10M for both Jericho and the private joint venture partner (so, for clarity sake, it’s not Jericho who received the line of credit, but its 50% owned subsidiary), and can be used for basically everything ranging from covering working capital requirements to acquiring new oil assets. We were positively surprised by the low interest rate on this debt. After all, Jericho is a small company with a limited production base (the total production rate of the 50% owned subsidiary is less than 1,000 barrels per day), so having a bank sign off on a US$10M line of credit (with the potential to expand this to US$30M on the back of higher reserves) is a major step forward, and paying an interest rate of just 4.25% is quite low for a small company with modest assets.
Jericho Oil also entered into hedging agreements whereby approximately 75% of the forecasted oil and gas production has been hedged, partly with swaps, partly with put options. Approximately 85% of the total oil production has been hedged for the next 11 months at a floor price of $43.83-44.52 per barrel, ensuring Jericho remains cash flow positive based on an expected production cost of $20 per barrel of oil.
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The author has a long position in Jericho Oil. Jericho is a sponsor of the website. Please read the disclaimer
