REVISED-Economics Question

# REVISED-Economics Question - (b For each additional...

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1 of 1 REVISED: Example Question on Economic Calculations You are offered a chance to participate in a 4 well drilling deal for a sandstone pay (15% porosity) at a depth of 4,900 feet that has good potential to produce oil. Your (initial) investment is \$83,250 (1/3 of prospect deal) WI = 33.3% NRI = 25% DHC = \$250,000 CWC = \$600,000 (x 4 completed wells = \$2,400,000) Reserves = 100,000 BO for the prospect Ps = 20% Price of oil = \$100/barrel (12/2011) A – If the exploration well is a dry hole, what is your cost? ___\$83,250__ This is all of your initial investment 83,250 / 250,000 (DHC) = 0.333 or you took 33.3% of the deal B – If the exploration well is a discovery, what is your cost for the 4 wells to develop this play? (a) You now will pay for the completion of the initial well - an additional \$116,550. (\$600,000 - \$250,000 = \$350,000 x 33.3% (WI) = \$116,550) or total of \$199,800
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Unformatted text preview: (b) For each additional completed well you will pay 33.3% of the CWC (\$600,000) C - Calculate the values below -- both gross numbers and net to you. Gross Numbers Net to You (100 % numbers) (NRI = 25%) (WI = 33.3%) a. Expected reserves (barrels of oil) 100,000 (x NRI) = 25,000 (25%) b. Expected income (\$100/barrel) \$10,000,000 (x NRI) = \$2,500,000 ( 25%) c. Expected expenses (4 wells) \$2,400,000 (x WI) = \$799,200 (33.3%) D. What is the net risk capacity for you for this venture? ___ 21.4 ___ Risk Capacity = PV Profit (whole venture) + DHC DHC Risk Capacity [net to you] = (Net income – net expenses) + (your initial DHC investment) (your initial DHC investment) = (2,500,000 – 799,200) + 83,250 = 21.4 83,250 E. Since the Ps = 20% - would this be a good venture? Yes or No (circle one) Ps x RC = 0.2 x 21.4 = 4.28 This is much > 1, so yes it is a good venture...
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