I was told that in Washington County Oklahoma leases are $40,000 per proven barrel. Could this be true? Thank you.
I would be skeptical of this. If the question is how much a mineral interest can be leased for, how much a producing mineral can be sold for, or how much the oil companies' leasehold interest can be assigned for, they all have different answers. Further, is the barrel produced every month, or to be extreme, once a year. That would impact the value.
The barrel is produced every month. It is a proven production. Thank you for your help.
Generally, the rule of thumb is 60 months time revenue over expenses, if any. Therefore, the value would be closer to $4000.00. Now that figure can go up or go down based on the location.
The original statement was most likely referring to $40,000 per daily barrel produced. That is a fairly standard way of assessing value, albeit overly simplistic.
Would this be reasonable in the current economic state of oil production? How much should the history of declining oil production on this lease be factored in? I realize there are many factors but I'm just looking to get in the general ballpark. It would be my first lease. It has a good infrastructure. Thank you.
Steve Durrett said:
The original statement was most likely referring to $40,000 per daily barrel produced. That is a fairly standard way of assessing value, albeit overly simplistic.
As I said, this method is overly simplistic. A full evaluation uses a detailed projection of declining production, future oil prices, operating costs, taxes and even abandonment costs, all specific to the property in question.
However, in a given area where many of these variables are similar, the dollars per daily barrel figure tends to work as an approximation. You wouldn't use the same value for the Eagleford as you would for say a shallow stripper well in KS or OK.
I am not current on events in Washington County, OK, so I couldn't say whether $40,000 per daily barrel is reasonable there or not, although it wouldn't be out of the question in other areas.
When you say this would be your first lease, what do you mean? Is someone trying to sell you a producing lease? If so, I would strongly advise you to get an independent evaluation.
Many tertiary recovery fields in SE Kansas are valued on a per daily barrel basis. $40K/BBL is on the low side there but that is what a few have gone for lately due to current oil prices. Obviously there are many other factors but, like Steve wrote, it is a simplistic way of valuing production. I have heard of fields going for $120K+/BBL in that area, but that was in better times and paid by groups of investors that did not understand the oil business. They are probably selling them back for $40K now.
Be very careful. I have evaluated buying leases in SE Kansas before. It was a very good learning lesson. Get expert opinions. Use reliable data sources. Make sure you have money to lose. I will tell you though, I have seen leases that are very poorly run that just need good TLC and a good pumper to get back into profitable production. However, there is always the unknown. Many wells are old, and equipment is in need of replacement. Most "turn-key" deals I have seen are on the high side with pricing. Factor in the cost of abandonment for any wells that are not producing or possibly near the end of their economical life. On one lease I evaluated there was an old abandoned well (not on state maps) that would have been required to plug immediately, another well that was 35 years old that was converted to an injection well - but was not permitted to do so. Personally I think the lease had a lot of potential, but the compliance issues and the need to build an access road meant that $15k purchase would need an extra $15-20k just to legally produce the first barrel of oil.