I always prescribe to investors the “5 P’s” process I use before any project.
Property, People, Performance, Procedure, Payout. If one of the P’s isn’t satisfied, Pass on it. The other thing to look for is a turnkey price. That way if there is cost overrun, the Operator eats it.
DaveE said:
Dave, it really depends on the prospect and its financials.
I invested 10% WI position on a well package in the Barnett with a very realistic 2 year ROI. The drill package was $750k with a 20 day timeline and 8 day extension. The operator was bonded, credible and prudent, yet ran into unforeseen engineering issues and ended up overextending and burdening working interest partners an additional 2.5% each. At the 10% point, what’s another 2.5% right?
Without knowing what kind of deal or structure you’re looking to get involved in, it’s difficult to say… but bottom line, be sure your technical data is sound and your drillers know what they’re doing. It’s very easy to get off budget.