Know The Score
Evaluate Any Drilling Venture
There are many different oil and gas programs out there. As a potential investor, the question that always looms large in everyone’s mind is how to determine which program has the best chance of success? The bottom line is it all comes down to value. The more an investor owns of a specific venture for the dollar amount invested, the higher the probability of achieving success.
Here is a simple 5 step process to show you a quick way to evaluate them:
Step 1) DO THE MATH!
For a true apples to apples comparison, you must know what you’re buying. When comparing one program against another, it all comes down to how much you are paying for the interest you will receive, the Price per Point. To do this, divide the dollar amount invested by the working interest equivalent allotted to that investment amount. This will give you the Price per Point on any given project.
Step 2) COMPARE COSTS
How do the Price per Point costs compare? For example, if one program cost $20,000 per point, and another costs $200,000 per point, the more costly of the two must make 10 times the daily production to just stay even with the lower priced project. It is as simple as that.
Step 3) REALITY CHECK
SURROUNDING PRODUCTION: This shows the cash flow and upside potential of each program.
Now compare the geology on each project.
- What type of production surrounds each prospect?
- How close is it to the drilling location?
What is the Daily Production of the surrounding wells?
This shows the cash flow potential for each project.
- Concentrate on actual Daily Rates and ignore Initial Production (IP) Rates.
- An IP is typically an instantaneous rate and not a true Daily Rate.
- Most wells produce at a much slower daily rate than their IP.
- This shows the cash flow potential for each project.
What is the Cumulative Production of the surrounding wells?
- This shows the upside potential on each project.
- RULE OF THUMB: Allow a 5% baseline Monthly Lease Operating Expense. Wells deeper than 10,000’ could be as much as 15%-20% or higher.
Once you’ve outlined the potential, measure the reality against your Price per Point. Do either programs offer a reasonable return in light of the potential risks associated with any drilling venture.
Step 4) A Few More Thoughts
OPERATIONS: This provides insight into if those offering the project can truly deliver.
- Is the drilling Turnkey or Heads up?
- How many wells in the area has the company offering the program drilled?
- Who is Operating?
- Are Operations performed at cost or marked up?
- Is there infrastructure to sell natural gas?
- Do the wells typically produce water? If so, how much?
- Is the production subject to field allowable rules limiting daily production?
- What are the monthly expenses per well in each of the areas.
Step 5) Explore even Deeper
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