The main factors in valuing oil land have been considered.
To apply these methods to a more general case, consider a new 100-bbl. well on a property of 160 acres with 19 drilling locations remaining. This well of 100-bbl. flush will average 25 bbl . per year as determined from past history of similar wells. Such a well will follow the general decline curve for the field.
As shown in Table 20, Column 7, the present value of profit for a barrel of new production is 2.07 for 10 years, or in dollars $2173.50 as shown above. The value of a new well making 25 bbl. average for the year will then be 25 X $2173.50 = $54, 337.50 for 10 years.
The buyer must also figure on drilling 19 additional wells which would cost an average of $20,000 each, or $380,000 for the 19 wells. The drilling cost must be deducted: The profit for one well is shown to be $54,337.50. The a mount for 19 wells will be $54,337.50 X 20 = $1,086,750.00.
The total present value of profits above drilling costs will then be $1,086,750 less $380,000 or $707,750.
707,750 At 100 per cent profit the buyer would pay = $353,875.
This means $2211 per acre for the 160 acre tract.
Valuing Settled Production.—"Settled" production is a term of indefinite meaning. To some oil operators a well is considered settled when the production is 6 months old. To others, produc tion is settled when 12 months old. Settled production is really not a specific term but a relative one.
When the decline in production becomes constant a well may be considered really settled. The decline as shown in Column 3, Table 21 is not really constant until the thirteenth year. However, for all practical purposes production is considered settled when the decline in production is not marked. A well may have an initial production of 100 bbl. and at the end of the year produce 20 bbl. per day. The drop is 80 bbl. and is very large. At the end of the next year the well makes 12 bbl. or a drop of only 8 bbl. which is not so marked. A buyer will generally consider production well "settled" at the end of the first 12 months. Actually this is not the case.
The term "settled production" is, however, so generally em ployed in oil circles that it is difficult to avoid using it.
Table 21 and Fig. 104 present data on old production. The age of the production in this case was chosen at the end of the fifth year of the life of a well.
A barrel of production 5 years old will settle in this case as shown in Table 21. The production at the end of the sixth year would be only .808 of the preceding or fifth year, or .808 of a barrel. The production for the next year, the seventh, would be 85.5 of 0.81 or — 0.69. The factors are shown in Table 21 for each year. .
Table 20 shows production from its flush to its later stages for a barrel of new production. Table 21 and Fig. 101 show the per formance of a barrel of production bought at the end of the fift year. The two tables, while related, show values for two differen
ages of a barrel of production.
As shown in Table 21 the yearly decline in time becomes very small. A barrel of production bought at the end of the fifth year will for the cost figures given and a market price of $3.50 produce many years before the factor of oil produced and the factor for operating cost are equal. In fact, at the end of the twentieth year a well which when purchased make 2 bbls. daily would yield 2 X 0.27 or 0.54 of a barrel, and its life would continue for many more years.
For 20 years the total cumulative factor of production from Column 9, is 8.74. The total cumulative present value•of the profit, see Column 8, is 5.598.
Application of Method.—To apply the above method. An operator desires to know the present value of 1 bbl. of such pro duction in dollars. The producing time per year averages 300 pumping days. The present value for each year is, Market price of oil, $3.50 X 300 X 5.598 factor present cumulative profit per barrel for 20 years = $5878.00. This represents the present value of a barrel of production, if the well produces for 20 years.
A buyer, however, would consider this from another angle. He would probably figure only 10 years life. In buying such pro duction he would require 100 per cent initial capital returned, interest, and at least 50 per cent profit on his money. He would want the capital returned in at least 5 years, and his profit in the next 5 years. The balance of the profit above 10 years would be a gamble.
He would figure as follows: The total amount desired is 150 per cent above interest in 10 years. Divide the present value of the future profit as of 10 years by 150. This would give the total amount he could afford to pay. The present value for 10 years is $3.50 X 300 X 4.065 = $4263 The highest price he could pay to meet the conditions would be 4 = $2840.
It is well to bear in mind that the 20-year figures show a present value of $5878. The figures of present value for 10 years show a value of $4263. The difference, $1615, represents the present value of the profit after 10 years and up to 20 years. Anyone buying the production at $2810 would receive a return of the money invested in 5 years, interest at 6 per cent and 50 per cent profit on the investment in 10 years, and the gamble for a future profit of $1615 or 59 per cent on the amount invested for the second 10 years.
Flush and Settled Production.—In buying settled or aged pro duction with proven undrilled acreage, one has a combination of two problems. The settled production and the proven acreage should be treated as two separate units, and a price for each determined. Then the sum of the two prices would fix the amount paid for the property. If purely prospective acreage were in view its value should also be added.