Hey folks,
I own some force-pooled interest in New Mexico (eddy county) that is getting ready to become a full working interest. I’m considering selling when it does but would like to get a feel on the valuation of it.
How do professional investors typically valuate these? I was thinking of taking the monthly income - JIBS (estimating 30% production cost), then multiplying by 60 months to come at a value.
Looking for feedback. Thanks!
Howdy,
I think that’s an ok place to start. To be honest I’ve never been real big on participating in anyone else’s wells, but looking at the metrics, I start looking by at decline analysis then cross reference with JIBS. A huge factor is also the reputability of the operator and who they broker out to drill their wells. Look up “PV model” if you’re not familiar with it already. In all honesty I think in today’s market most of the guys who have the capital to participate in a HZ play are going to shy away from any real risk unless you want to free yourself up to have some liquidity in a separate avenue.
The operator is the biggest factor (outside of geology) for non-op. Do you know who the operator is? @fixit
A word of caution: Most modern horizontal wells don’t follow rules of thumb very nicely due to steep initial declines that transition to hyperbolic production profiles. Most rules of thumb / back of the napkin formulas you’ll find available are for low exponential decline wells which are much more predictable. Also, even something as simple as water production (and subsequent disposal costs) can drastically affect a working interest owner’s bottom line. The “who” (operator/driller) and “where” (geology) questions will help with what risk to apply to the well, but honestly there’s not a ton of “higher than normal risk” wells being drilled at the moment. Even a low risk horizontal can have a 5-10% chance of being a train wreck depending on the area though. WI on horizontal wells is not for the risk-adverse.
Number of planned wells, timing of those planned wells, certainty of production, and commodity pricing are all very important inputs to a WI valuation.
Also, it should be in the operator’s best interest to acquire more WI unless they’re only drilling because they’re somewhat forced to by various metrics, so that is the easiest place to start for selling. How interested the operator is in acquiring your interest could be a way to judge their view of the economic risk in the well, since they should have the most information on it. It costs the same amount of overhead (G&A from personnel) to drill a 50% WI well vs a 90% WI well as an operator, so a higher WI helps economics…if they expect the well to make money. It’s not unheard of to drill a well that won’t ever make money on its own. There may be a pipeline commitment, or leasehold requirement, or drilling contract in place that is making them weigh options and chose to drill a net-negative cash flow well. They’d definitely reduce WI exposure if this were the case.
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