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Wright Consulting Company, Inc
www.wccoilgas.com
1010 10th Street, Golden, CO 80401
Wright Consulting Company, Inc
Quick Look Economics
(to Help Sell Your Deal)
presented at
SIPES 56th ANNUAL MEETING
June 4, 2019
by
John D. Wright
www. wccoilgas.com
East Donkey Creek Prospect
2
www. wccoilgas.com
East Donkey Creek Prospect
EAST DONKEY CREEK Area: 225.9 ac Rec: 664.2 BO/ac ft (Kummerfeld) H: 14 (Kummerfeld) Vol: 3,162.6 ac ft Rec res: 2,101 MBO
3
Prospective Resources = 2,100 Mbo (See PRMS)
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FROM: So you want me to buy your deal?
S.I.P.E.S. Foundation Seminar, March 17, 2004
4
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Economic Analysis
• Requires expensive computer program
• Requires monthly production forecasts
• Takes a long time to do
• Is best left to the engineers
• Will kill my deal
• Does not have to be complicated to be useful
• Can help you sell the project
• Can be done quickly for an initial screening
• Can include “risk analysis” and “sensitivity analysis” with
little effort
• This presentation: A way to do simple economics with a
couple of tricks
5
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Cash is King
Calculate Net Cash Flow
From:
“Oil and Gas Property Evaluation”
by John D. Wright pg. 26
Published by Thompson-Wright, LLC
Copyright ©, 2017
Used with permission, further
publication prohibited.
www.Thompson-Wright.com
BFIT
6
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Let’s use the back (front) of an envelope
7
Do “Life of Project”
Economics
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Calculate NCF (BFIT) for Project Life
• Gross Production – Analogy 2,100 Mbbl
• Shrinkage – Zero (unless it’s not)
• Net Revenue Interest (NRI) 80%
• Price (net of transportation & differentials) $50/bbl
• Sev & Adv Tax 10% – My book, pp. 356-67, $150
– TW, LLC website (Errata), free
– Various State websites
– The accounting department
• Operating Costs 6 wells x $4000/mo x 35 yrs
• Investments 6 wells x $4MM
8
Fill out the blanks and do some arithmetic
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NCF (BFIT) for Life of Project
9
What about discounting and “time value of money”
and all that other stuff engineers argue about?
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An approximation for Discounting
• We can calculate an approximation for the ratio between
PV10 of the Operating Income and PV0 of the Operating
Income as a function of the shape of the decline curve.
• Decline Curve Shape = “initial decline rate” & “b”
– The steeper the initial decline, the bigger the “initial decline rate”
– The bigger the hyperbolic exponent “b”, the faster the curve bends
10
1
10
100
0 2 4 6 8 10
Ra
te, v
olu
me
/da
y
Time, years
Di=100%
b=
0
0.5
1.0
1.25
1.5
2.0
(Nominal)
1
10
100
0 1 2 3
Ra
te,
vo
lum
e/d
ay
Time, years
b=0.5 Desi
0.2
0.1
0.3
0.4
0.7
0.5
0.6
0.9
0.8
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Kummerfeld Production
11
10
100
1000
10000
1955 1960 1965 1970 1975 1980 1985 1990 1995 2000
Annu
al P
rodu
ctio
n, M
bbl
Data fit
Desi = 32%b = 0.35
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0.742 0.01 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0 1.1 1.2 1.3 1.4 1.5 1.6 1.7
0.1 0.31 0.52 0.67 0.75 0.80 0.83 0.85 0.87 0.88 0.89 0.90 0.90 0.91 0.91 0.92 0.92 0.92 0.92
0.2 0.31 0.50 0.64 0.73 0.78 0.81 0.84 0.85 0.87 0.88 0.89 0.89 0.90 0.90 0.91 0.91 0.92 0.92
0.3 0.31 0.48 0.61 0.70 0.75 0.79 0.82 0.84 0.85 0.87 0.88 0.88 0.89 0.90 0.90 0.91 0.91 0.91
Desi 0.4 0.31 0.47 0.58 0.67 0.73 0.77 0.80 0.82 0.84 0.85 0.86 0.87 0.88 0.88 0.89 0.90 0.90 0.90
0.5 0.31 0.46 0.56 0.63 0.69 0.73 0.77 0.79 0.81 0.83 0.84 0.85 0.86 0.87 0.88 0.88 0.89 0.89
0.6 0.31 0.44 0.54 0.60 0.65 0.70 0.73 0.76 0.79 0.80 0.82 0.83 0.84 0.85 0.86 0.87 0.87 0.88
0.7 0.31 0.44 0.52 0.57 0.62 0.66 0.70 0.73 0.75 0.77 0.79 0.80 0.82 0.83 0.84 0.85 0.85 0.86
0.8 0.31 0.43 0.50 0.55 0.59 0.63 0.66 0.69 0.71 0.73 0.75 0.77 0.78 0.80 0.81 0.82 0.83 0.84
0.9 0.31 0.42 0.49 0.53 0.57 0.60 0.63 0.65 0.67 0.69 0.71 0.73 0.74 0.76 0.77 0.78 0.80 0.80
b - hyperbolic exponent
An approximation for Discounting
12
PV10 of OPERATING INCOME / PV0 Oper Inc.
Danger!
These approximations are not universally applicable.
Use with extreme caution!
Create your own table for the types of deals you do.
Conventional
Horizontal
Initial Effective “Secant” Decline Rate
b~0.35
Desi ~ 0.32
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An approximation for Discounting
• The values for “initial decline rate” on the previous page
are based on the “SECANT” definition of decline rate.
(Desi)
• See “SPEE Recommended Evaluation Practice #6 -
Definition of Decline Curve Parameters” OR …
– Wright, Chapter 5- Decline Curve Analysis using Arps’ Equations
13
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= Operating Income BFIT 65,520
— Investments 24,000
= Net Cash Flow BFIT 41,520
Adj. to OpInc for Discounting 72%
= PV10 of Operating Income BFIT 47,174
— PV10 of Investments 24,000
= Discounted (10%) NCF BFIT 23,174
ROI / 2.73
Disc ROI / 1.97
“Discount” OI and NCF and Calc ROI’s
14
= 65,520 / 24,000
= 47,174 / 24,000
= 47,174 - 24,000
But Wait!
We’ve all gone to business school and Internal Rate of Return is all we
care about.
What is the IRR?
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Hold my beer and watch this!
(a relationship(?) between IRR and DROI10)
15
0%
50%
100%
150%
200%
250%
300%
1.0 1.5 2.0 2.5 3.0
Inte
rnal
Rat
e o
f R
etu
rn
DROI @ 10%
IRR v. DROI
Danger!
This graph is not universally applicable.
Use with extreme caution!
Create your own correlation for the types of deals you do. 1.110.734( 0.829)DROI
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Now we can finalize the economics
16
Gross Production, Mbbl 2,100
— Shrinkage 0
= Gross Sales, Mbbl 2,100
* Net Revenue Interest 0.800
= Net Sales, Mbbl 1,680
* Price, $/bbl 50
= Your Revenue, M$ 84,000
— Sev. & Ad Valorem Taxes, M$ 8,400
— Operating Costs, M$ 10,080
= Operating Income BFIT 65,520
— Investments 24,000
= Net Cash Flow BFIT 41,520
Adj. to OpInc for Discounting 72%
= PV10 of Operating Income BFIT 47,174
— PV10 of Investments 24,000
= Discounted (10%) NCF BFIT 23,174
ROI / 2.73
Disc ROI / 1.97
IRR (from correlation) 84%
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But wait! (There’s more)
• What about sensitivities?
• This is the success case. What about a risk analysis?
• Sensitivities: If your envelope is a spreadsheet you
can easily change numbers and see the results. The big
drivers are oil volume, oil price, and initial investment (as
usual).
• Risk Analysis: OK. Let’s look at a failure case,
estimate the probability of success, and calculate
Expected Monetary Value.
17
www. wccoilgas.com
-5,000
0
5,000
10,000
15,000
20,000
25,000
0 0.2 0.4 0.6 0.8 1
Exp
ecte
d M
on
etar
y V
alu
e, M
$
Probability of Success
Expected Monetary Value v. Prob of Success
Risk Analysis
• Assume 1 dry hole @ $2.5 MM
• We can plot EMV versus Probability of Success (Ps) and
read EMV at any Ps. We can also find the minimum Ps
for the EMV to be positive.
18
23,174 M$
(NPV10)
-2,500 M$
EMV positive
above 10%
Ps At 40% Ps
EMV =7,770 M$
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Summary
• You can do useful economics on the front of an envelope
that include profitability indicators and risk analysis.
– NCF
– NPV10
– ROI
– DROI10
– IRR
– EMV
19
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East Donkey Creek Prospect
20
It can have a Ps as low as 10% and still have a positive EMV
The economics were good enough that it got drilled.
= Discounted (10%) NCF BFIT 23,174
ROI / 2.73
Disc ROI / 1.97
IRR (from correlation) 84%
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21
Questions? [email protected]
Oil and Gas Property Evaluation (2017)
649 pages; 196 illustrations; 133 examples
Free shipping for S.I.P.E.S members
To order go to:
www.thompson-wright.com/SIPES
