Guest post by Goetz Schuppan, Singer Oil Co., LLC
This shows the anatomy of losing a well; emphasizing that the operator is not a willing seller but is forced to sell for what the state says its worth Through the Corporation Commission forced pooling. This lowers values for everyone by multiple of as much as ten times. Oklahoma is the only state that allows the state to set prices. In All other states the parties negotiate for property. Isn’t that a novel concept?
If you look at the spreadsheet, a 30MCF/2bbl oil well has a valuation of $980,000. I would never pay that for a well but that is the profit that such a well is forecast to generate over the next 20 years.
After our wells get fracked into, settlement discussions often break down because we cannot come to an agreement on valuation. I think the most important point to consider is that we are not WILLING sellers of our wells and that traditional valuation models do not apply. I don’t agree to being FORCED into selling a well for a 5 year payout at today’s prices. Below are our assumptions:
- In a transaction between willing parties, there has to be room for the buyer to make a healthy profit over the remaining lifecycle of the well. We are not a willing seller. Traditional valuation models with 5 or 7 year paybacks don’t apply. Many of our wells have been around for 40 years and it is reasonable to expect another 20 years of production. We compare profits from our wells to annuities.
- Note: Mechanical integrity is a risk over that time period. We think it is offset by the potential for increased value due to new technology or changing environments. E.g.:
- Refracking of old zones using coiled tubing.
- Exponential increase in acreage value over the last 5 years
- We use a discount rate of 5% which is the interest rate we pay to our bank for loans. We don’t see a reason to use PV9 or PV12.
- We use oil and gas price forecasts from the US Energy Information Administration published in the “Annual Energy Outlook”. A lot more analysis goes into creating this forecast then what goes into the price deck from the local bank that is used to protect the bank’s loan values.
- Most of our wells are many years old and have a fairly flat decline curve.
- Our overhead and operating expenses are a fraction of the costs of bigger companies. We are able to operate profitably year after year because we keep costs to a minimum.
- Our operating costs are kept low by being geographically concentrated.
- We don’t have layers of management
- We do a lot of the repair and maintenance work ourselves, with older equipment that we own.
- We don’t have to answer to boards or financial investors.
- We don’t have to meet acquisition or divestiture targets.
- We don’t buy wells when we think prices are too high
- We don’t willingly sell wells in a low price environment. We would not willingly sell a well in the current pricing environment
Singer Oil Co., LLC