Setting Oil Well Investment Expectations

If you receive a proposal from an operator looking for your investment dollars, you need to have reasonable expectations going into the investment. If the proposal has proforma profit numbers based on a well producing 100+ barrels of oil per day, how reasonable is that? Sometimes the spreadsheet of potential profits will show profits based on different levels of production from 5 barrels of oil up to hundreds of barrels. Remember most wells in the USA will ultimately end up as stripper wells producing less than 15 barrels of oil per day, with most producing just a few. It is very easy for a new investor in the oil patch to get very excited about potential. Before jumping in with both feet, the investor must set realistic expectations of production.

Ask the operator what his average well in the area "settles in at". Confirm his numbers by calling other operators in the area. Speak to geologists and call well service companies in the area to add further confirmation. Many states have online geological surveys that will show you well data in the area that you are considering as an investment. These online systems can be cumbersome at first, but are a treasure trove of information, so be patient.

Understand the formations that the operator is trying to produce from. Is it sand or limestone, maybe shale? Are there any particular risks such as "hitting the ocean" or having a high water cut? How many formations does the operator typically see production from?

Another area of setting too high of expectations is well service. Often, especially during hot oil markets like the present, well service equipment and labor is in high demand. Therefore, often there are delays associated with getting a piece of equipment or skilled labor to the well site. Did the CAT get frozen to the field? Is the acid truck stuck in the mud? These types of problems are common in the environment we drill in, thus the investor must have patience.

I like to underpromise and overdeliver, therefore, I tend to be ultra conservative in my assumptions. If that means losing potential partners/investors, so be it! This is not a game of get rich quick. It is a game of allocating a portion of your investable assets into a sector of the economy that has tremendous tax benefits, creates consistent cash flow, and will continue to be in high demand. Inevitably, you will have hiccups in both directions, good and bad. We have a process in place to mitigate risk, but you have to expect it. On the flip side, you always have the potential of hitting a big well. Stand at the plate and swing the bat, that is the only way to hit the ball. Investing in oil wells can be sexy to talk about at dinner parties, but it is persistent, long term investing that reap true rewards for the investor.