That’s pretty accurate in the Barnett or anyplace where production is older, the upside is non-existent, extremely hopeful, or otherwise unlikely to happen anytime soon.
In the Delaware almost all of the value, in most cases, IS the upside. Multiples of PDP (current production) cash flow is out the door and there is no hard fast rule. This is just spitballing here, but here is how I think someone would attempt to value this acreage.
Let’s say hypothetically that you look at 23S 28E, and decide there are 3 economic landing zones likely to be drilled. 2nd Bone Spring, upper Wolfcamp A/XY, and lower Wolfcamp C/D whatever people want to call it. Let’s call that 12 Proved-but-UnDeveloped locations (PUDs) per mile wide unit. Then you need to generate an oil-gas type curve for each type of well, let’s call them all 2 mile laterals. So you look at all the offsets in those zones, get an average production profile to-date for them scaled to 2 mile horizontal length, then forecast it out for 40 years or so. Those production profiles times realized pricing is going to give you expected revenue for a future well. Then you need to have some estimate of when these wells might be drilled. If the well is already permitted, figure spud date in 150 days, and online in another 200 days. We will throw those wells in the “Permits” bucket and reduce the PUD count by 1 for each. If a well has been drilled but has not started producting, figure it will come online in 120 days and call those wells DUCs (drilled-uncompleted), and reduce the PUD count by 1 for each well. Then you need to estimate when the remaining PUDs will come online.
For the sake or argument say you have zero idea, but math says that at the rate that rigs are currently running in 23S 28E, each 2 mile area should have 12 wells in 15 years. Space out the remaining wells at 1.25 year intervals from today.
In the end, somebody doing this pretty quick analysis is going to get a forecast/revenue stream for 4 buckets.
- PDP - current production - discount back at 10-12%
- DUC - well waiting to come online, little risk of this not happening thus discount back at 15-18%
- Permit - reasonably good chance this will happen, discount slightly higher at 18-20%
- PUD - risky, birds completely in the bush, discount at 25%+.
Again, discount rate gets higher the more risky it is that something will actually happen or not. 25% ROR sounds like a fantastic investment, but that represents the risk that stuff you have zero-control over will happen.
That may all sound complicated but its basically a 25 column excel spreadsheet with 480 rows (40 years). Discount all those future cash flows back to today at those discount rates. Tells somebody what your acreage is worth.
I can spare you the suspense, but for 23S 28E Sec 10, $13k per NRA is a pretty good offer IMO.
It’s not a Golden Goose, it’s an investment decision like any other resource. There is no guarantee of anything. That’s the oil business. It might double, it might be worth nothing if nobody drills any wells there. The beauty of no control. NM is a forced pooling state with 200% penalty given in almost all cases. If you don’t lease to somebody you are looking at either being a WI owner or you are looking at not being in the wells at all for a good long while. Coming from the operator’s side, if you don’t sign a lease in NM, then thanks for your free portion of the well, bro. Oh and btw, we will be the one’s calculating when we reached 200% payout. Sign a lease for the best terms possible.
The old “good decision, but I really meant bad decision” compliment.