oil rights as investment / income or gamble?

[masraum]

What sort of an investment is oil rights?

Hypothetical situation. Lets say you have 50% of some mineral rights for an oil well that has been producing for 10-15 years, and the person that had the other 50% was thinking about selling. It appears as if the going rate for buying/selling is for about 3 years of what the well is paying. Oil prices currently suck. They'll probably eventually go up some, but who knows when, and the assumption is that it won't be back to $100/barrel.

The stock market has also currently tanked.

Question 1-ish: If you can get the oil rights for $10k, and in theory, make your money back in 3 years, how does buying the oil rights sound as an investment? What sort of lifespan do you put on an oil well? With prices in the gutter and the well having been around for a while, how much of a gamble is it to buy these rights?

Question 2: The stock market is down quite a bit right now. If you had that same $10k ^ would you prefer to stick it in the market?

So, what sort of investment is a producing oil well especially considering the current oil prices.

And does the market tickle your investment bone more?

[aigel]

You only can answer ANY of your questions if you know how long the well will continue producing at current rate. Another 10-15 years? Then it makes good sense to think about it. Unknown lifetime? Well, now you may as well go play at a table and at least get served free drinks ...

I would not assume that oil prices are ever going to go back up again. it would have to make financial sense at $25/bbl.

G

[NoRush993/951]

Most wealth on the planet is based as a derivative of oil. Oil is the foundation from which society is built. Without it, life as we know it would collapse. Time of holding is the measure you are trying to quantify. All investments are cyclical. And the monetary units they are valued in are continuously debased. There is no simple answer other than oil is now lower than it was. So hedge your position if that knowledge is available to you. Otherwise, nibble your way into an enhanced position. The world is experiencing a liquidity crisis and cash will remain king as debts must be paid in the issuing currency. The world is hunting dollars to repay all those 2008 loans from the central bank and there aren't enough to go around. If it was my well, I would leave the oil in the ground and come back in 10 years.....

[widebody911]

Tabby? Is that you?

Originally Posted by NoRush993/951

Most wealth on the planet is based as a derivative of oil. Oil is the foundation from which society is built. Without it, life as we know it would collapse. Time of holding is the measure you are trying to quantify. All investments are cyclical. And the monetary units they are valued in are continuously debased. There is no simple answer other than oil is now lower than it was. So hedge your position if that knowledge is available to you. Otherwise, nibble your way into an enhanced position. The world is experiencing a liquidity crisis and cash will remain king as debts must be paid in the issuing currency. The world is hunting dollars to repay all those 2008 loans from the central bank and there aren't enough to go around. If it was my well, I would leave the oil in the ground and come back in 10 years.....

[MBAtarga]

Originally Posted by widebody911

Tabby? Is that you?

Not likely - no mention of collectible artwork, antique spoons, or designer shoes.....

[GH85Carrera]

Countless trillions of dollars have been lost or made betting on the oil patch. There are some oil wells around here that have been pumping since before WW2. I wish I was lucky enough to be part of the family that got that chunk on land. I own a house and the property it sits on in a typical neighborhood. I did not get the mineral rights with the land. The mineral rights are almost always retained but the family that got the land originally. There will never be any drilling in this area.

To buy the option to drill is a total crap shoot. How long will the oil glut last?

I know a few guys in the oil industry that are all hoping for a nice war in the middle east to raise the price of oil soon.

[masraum]

I'm shocked, we have so many investment types, I thought I would have gotten more hits.

Thanks for the comments so far, guys.

[widebody911]

Originally Posted by GH85Carrera

I wish I was lucky enough to be part of the family that got that chunk on land.

[Cajundaddy]

Oil rights are high risk with potential for high reward. If you could buy it, cap it, and sit on it for 5 years it may provide some nice returns but I would look hard at independent geology reports first. What size are the reserves? For how long? At what delivery rate? $10k seems like a mighty small stake in the oil game so my guess is this well is nearly done, and far in the red operationally at $30/bbl.

[Bob Kontak]

Originally Posted by Cajundaddy

but I would look hard at independent geology reports first. What size are the reserves? For how long? At what delivery rate? $10k seems like a mighty small stake in the oil game so my guess is this well is nearly done, and far in the red operationally at $30/bbl.

Historical reports would provide a solid hint of the decline rate.

What would it cost to perform seismic testing? $10-30k? What was the original basis for drilling? I have heard geologists joke about aiming at a syncline.

Even if a stripper well, OP needs 111 bbls per year to break even @ $30/bbl not counting cost of money or op costs.

He should have enough data for trending.

I say go for it if it seems palatable.

[NoRush993/951]

Originally Posted by widebody911

Tabby? Is that you?

No I am not Tabby. But if he had collectible artwork and antique spoons, he must have an interesting point of view on things. Or maybe he was with Antique Roadshow....:

[Hugh R]

In general, don't invest in things you don't know much about.

[Eric 951]

A few indicators to look at regarding the possible investment.

1. Where is the well--state and oil field? How deep is the well?
2. Who operates the well and who is the current buyer of the oil? Is the current buyer locked in to a long-term purchase contract?
3. Are you responsible and for what percentage of maintenance/repair/operating expenses on the well?
4. If yes to above, what are the current operating annual operating costs.
5. Is the investment just for the single well, or a portion of the overall play(total acreage where the well is currently) are you buying into any type of future consideration if other wells are developed in that play?
6. Is well pumping at current maximum capacity(doubtful), what was the peak production rate, what is average monthly production rate?
7. What is the water cut of the current BO--are you responsible for any of the processing fees for the oil to be market ready? Are you responsible for water disposal after separation(Usually into an injection well which will have a per barrel expense.)?
8. What are similar wells producing in the area and expected reserves in that particular field where well is located?
9. Is it a traditional vertical shaft well or is it a fracked well with multiple horizontals?
10. How does the lease read where the well currently sits? Does the land owner get a percentage? how much?
Wells can be a gamble--it can produce for less than a year, 10-15 years, or 50+ years--usually at a diminished return over the life of the well.

[masraum]

Thanks all. Lots of good info.

[KFC911]

I'm certainly not offering advice, but I find the recent market correction to have been expected after the run up over the past 7 years. I'm down about 10% overall but one of my long term holdings (Kinder Morgan) has been absolutely hammered as part of that mix. Directly tied to the price of oil I suppose. That said, I doubled down on my position about one month ago and it's up 25% since then, though the previously healthy dividend has been slashed. Don't have a clue what it will do this year, but I'm pretty sure I'll be smiling as the price of oil recovers and I look back a few years down the road. I ain't going to be moving to Beverly Hills with a cement pond however...but I think picking a beaten down energy related stock would be a reasonable alternative to a risky gamble on something I didn't have a clue about...like oil wells

[Hugh R]

Originally Posted by Hugh R

In general, don't invest in things you don't know much about.

Case in point, a lot of states and Foreign Gubmits give tax credits for filming in their locale. Those legislatures think they know more about filming financing and the tax implications than we do. We have legions of accountants and tax specialists who understand the subject matter WAY better than they do. We ALWAYS get the better end of the deal.

[KFC911]

That damn mouse took my NC state tax cheese didn't it Hugh ?

I knew it...

[Hugh R]

We have no shows in NC right now. We did have "Secrets and Lies" there last year in Wilmington, but we moved it back to Los Angeles for wait for it....

Tax credits. DUH!

[Tobra]

The mouse always wins, always.

Originally Posted by MBAtarga

Not likely - no mention of collectible artwork, antique spoons, or designer shoes.....

That, and it is in plain, well articulated, English.

[masraum]

Originally Posted by Eric 951

A few indicators to look at regarding the possible investment.

1. Where is the well--state and oil field? How deep is the well?
----Texas, GE partners with Vess Oil to acquire East Texas oil and gas reserves - PennEnergy
I suspect it's one of the ones mentioned below that's been worked since 2011.

The Eaglebine area has been drilled vertically for years as the play is home to a number of other pay zones, such as the Austin Chalk, Buda Lime, Bossier Sands, Deep Bossier, Edwards, Freestone Trend, Georgetown, Glen Rose and Wilcox formations. Drilling activity in this region had been fairly active since at least 2011

2. Who operates the well and who is the current buyer of the oil? Is the current buyer locked in to a long-term purchase contract?
---- There are 4 places that are paying royalties, currently

3. Are you responsible and for what percentage of maintenance/repair/operating expenses on the well?
---- Don't seem to be.

4. If yes to above, what are the current operating annual operating costs.
---- nada

5. Is the investment just for the single well, or a portion of the overall play(total acreage where the well is currently) are you buying into any type of future consideration if other wells are developed in that play?
---- was a partial owner of some acreage. Sold the property, but retained the bulk of the mineral rights

6. Is well pumping at current maximum capacity(doubtful), what was the peak production rate, what is average monthly production rate?
---- No idea

7. What is the water cut of the current BO--are you responsible for any of the processing fees for the oil to be market ready? Are you responsible for water disposal after separation(Usually into an injection well which will have a per barrel expense.)?
---- still no idea

8. What are similar wells producing in the area and expected reserves in that particular field where well is located?
---- I got lots of no idea

9. Is it a traditional vertical shaft well or is it a fracked well with multiple horizontals?
---- I think it's traditional, but I could totally be talking out of my butt.

10. How does the lease read where the well currently sits? Does the land owner get a percentage? how much?
---- tiny, like 1 or 2%

Wells can be a gamble--it can produce for less than a year, 10-15 years, or 50+ years--usually at a diminished return over the life of the well.

This would essentially double the current portion.