The Salt Creek oil field in Wyoming was drilled in 1908, and its wells are good producers after 12 years. Other fields in Wyoming 10 years old or over are the Grass Creek and the Lander fields.
It would seem that a safe estimate of the life of wells is certainly 10 years, and one is safe in assuming that length of time in making estimates for new wells, with the possibility of even longer life. In many producing fields 10 years of added life can be safely assumed," but such assumptions must be made with all due respect to local conditions.
Present Value of a Future Profit.—The present value of a future profit is the sum of money which, invested at a given rate of interest in good securities, will equal the full amount at the date the profit is realized.
A dollar profit received 10 years from to-day is worth to-day 100 at simple interest at 6 per cent = .62.50.
In other words $0.625 placed at simple interest of 6 per cent for 10 years would equal $1 at the end of that period. Similarly, the per cent value of any amount running for 5 years at 6 per cent 100 130 = 0.769.
At compound interest the principal amount would be less. For 10 years it would be 0.558, and for 5 years 0.747.
Column 5, Table 20, page 253, gives the factors by which to divide the future profit to obtain its present value.
As shown in Table 20 the largest profits would be paid in the early years. If the returns on the investment were returned on such a basis the amount of interest would be paid in proportion.
The amount received the second year would not be so large as the first year and the amount of interest less.
Interest.—In buying property, interest on the investment must be considered. The interest would be automatically cared for by retiring the investment on the basis of the decline curve. If a definite amount of money were paid back each year to retire the capital, a large amount at first and a smaller amount in later years in proportion to an average curve, then that money could be invested in good securities.
The difference between the present and the future value of the profit compensates for the interest. This could be carried
out in more detail, but it is thought sufficient to illustrate the principle. No hard and fast rule of procedure can be set down as the terms of each transaction vary, but if the general plan of buying is based on the procedure outlined, estimates can be made that will be good guides in purchasing properties.
Dividends.—If an oil concern owns only one property it should declare its largest dividends in the earlier years according to the ratio of annual decline. If, however, the company has a large reserve of proven and of prospective land it can plan a drilling campaign which will maintain a steady production.
An oil company, using its funds for development, could put aside an amortization fund which would pay interest and retire the initial capital within a few years. The amount set aside each year to return the capital would be made on the basis of the method described on page 248.
A large,• well organized operating company should pay dividends of not less than 10 per cent a year, and upward. Good stocks of old companies pay as high as 50 per cent per year on the original capitalization.
Expectations of Ordinary Stock Companies.—The general public has a mistaken idea of the value of oil companies. During the past five years many millions of dollars have been invested in oil companies without rhyme or reason. The country seems to have gone oil mad. Many big promotions that will never pay have been "put across." Also thousands of small companies have been formed that will never pay profits to their stock holders.
A few figures may prove of interest. In Texas, out of 1050 new stock companies formed in 1918 and 1919 only seven paid profits. In Oklahoma, in 1918, the State Corporation Bureau figured that out of every $550 invested in stock companies only $1 was returned. In Kansas out of 1500 new companies in 1916 and 1917 only 12 had paid profits.
These figures are fair examples of the risks undertaken by novices. The early excitement in North Central Texas caused a reaction that hurt the whole oil industry.