Price vs Production, which is better?



                                  1)  BPD equals Barrels Per Day

Do all transactions look the same?


Transaction – I  (closed May 2010)

  • Purchased 26 current producing vertical and horizontal wells with no new wells drilled/planned
    • Initial combined production of all the wells was approximately 200 BPD
    • Current total production is approximately 62 BPD


Transaction – II  (closed June 2010)

  • Acquired a lease of approximately 200 acres
  • Targeted two different production zones over a 24 month period
  • Drilled and completed three vertical and one horizontal well, with initial combined production of 40 BPD
  • Current total production is approximately 8 BPD


Transaction – III (closed Dec. 2010)

  • Acquired three different leases of approximately 1,000 acres
  • Drilled four vertical and four horizontal wells over 15 month period generating initial production of 175 BPD
  • Current total production is approximately 51 BPD


Transaction – IV (closed June 2011)

  • Purchased twelve producing vertical wells producing approximately 35 BPD on 1,000 acre lease
  • Drilled eight new vertical wells in late 2011 and early 2012
  • Lease requires significant water injection to increase production, through numerous production zones
    • Water-flooding began in October, 2012
    • Reserve estimates of 300,000 barrels, however, it’s difficult to determine a recovery period due to the multiple zones and size of the lease until several additional water injection wells are drilled
  • Sold Transaction IV back to the Operator in December 2013 due to poor performance


Transaction – V (closed Sept. 2011)

  • Drilling program consisted of 11 new wells (8 vertical and 3 horizontal wells)
    • Initial production of new wells has ranged from 30 to 300 BPD
    • Current total production is approximately 42 BPD


Transaction – VI (closed July 2012)

  • Purchased 25 existing wells with approximately 27 BPD of production in October, 2012
  • Lease consists of over 1,600 acres that sits on a large anticline (the best geologic structure)
  • No previous wells were drilled in excess of 1,500 feet, nor have any horizontal wells been drilled
  • Two of the largest prospects near very productive leases (Transaction – V)
  • Drilling Program: 9-10 new wells
  • Current total production is approximately 64 BPD


Transaction – VII (closed April 26, 2013)

  • Purchased 8 existing wells with approximately 13 BPD of production
  • Drilling Program: 9-10 new wells
    • 9 wells (6 Vertical, 3 Horizontal) were drilled and completed in 2013
    • 4 wells (all Vertical) were drilled and completed in 2014
  • Plan to drill 6 more vertical wells in 2015 on one of the leases
    • Each well on this lease has had an initial BPD over 80
  • Current total production is approximately 326 BPD


Transaction – VIII (closed Jan. 15, 2014)

  • Raised $3.7 million
  • Enhanced Recovery Project in Spencer County, Indiana
    • 350 acre lease
    • Expect to drill 12 producing and 10 surfactant injection wells
    • Existing production of 15 BPD from 10 wells
    • Production will slowly increase from 15 BPD to 150 BPD in 18 months
    • Estimated 400,000 recoverable barrels
    • Project life of 8 to 10 years
  • Drilling Program: 10 new wells
    • 8 vertical and 2 horizontal
  • Current total production is approximately 28 BPD


What can Impact Drilling Schedules

At Midwest, we communicate reasonable expectations to our clients.  While one transaction may look similar to another in the amount of funds raised, each transaction is unique.  Each lease that is acquired has its own specific drilling opportunities associated with it requiring an individual plan set on developing the lease and targeting the potential producing zones.

All drilling schedules can be impacted by the following challenges:

  • Weather/Flooding
    • Significant rain can cause delays due to muddy farm fields which can be damaged by the significant amount of equipment that is needed to be taken into each drilling site.
  • Local “Frost Laws”
    • From January 15th to April 15th road restrictions take effect in areas where we drill, limiting our ability to transport heavy drilling equipment to the drilling site.
  • Permitting
    • Permitting for each new well requires significant planning by the operator causing them to give the state specific information as to where the well will be located, the total depth that it will be drilled, etc.   Often the state reviewing the application will require additional information of the operator or be slow in processing the permit due to a large amount of permit requests.
  • Rig Availability
    • The amount of drilling rigs in the Illinois Basin are limited to a small number of operators.  Due to strong demand currently, especially for horizontal drilling, there is usually a waiting time required to obtain a rig.  The operator must be able to plan their drilling schedule based on the expected time they will receive a permit as they will lose the rig to another operator if they don’t have the permit when the rig becomes available.
  • Operational Results
    • A geologist has a general idea how to develop a lease but the results of a new well usually drives subsequent drilling efforts.  Some of the results that may alter the initial drilling schedule could be a dry hole, a new producing zone that was not expected, or a significant producing well.  Depending on the size of the lease, the dry hole may cancel any future drilling planned for the lease.  Finding a new producing zone may require the operator to change their subsequent drilling permit applications to include this zone (usually to drill deeper).   A significant well, while highly valued, may delay future drilling to allow for the leasing of adjoining ground that may also be part of the same highly productive zone.
  • Production Results
    • Future drilling, especially in planned offset wells, may be delayed by several months to monitor the results of the initial well to confirm that production is at the expected level.

Pricing of Oil

  • The Operators (Pioneer/Westar) sell all of its oil directly to CountryMark
  • CountryMark’s purchase price is the daily average price for the month in which oil was collected
  • CountryMark pays NYMEX spot market price less a local market adjustment of $8 per barrel
    • This market adjustment is primarily the transportation cost of getting the oil from the producing lease to CountryMark’s refinery located in Mt. Vernon, IN.
      • Adjustments in the industry can exceed $15 or more
    • The Operators (Pioneer/Westar) have bonus adjustments added back to the base CountryMark price, based on total production of the Operator
      • Averaging $3.00 to $4.00 per barrel bonus (equates to NYMEX – $3 or $4)
  • CountryMark collects the oil at each well one or more times per month depending on volume

Liquidity of Assets

Investing in oil wells is not a short term investment.  Expected well life for wells in the Illinois Basin is in excess of 10 years.  Unlike a publicly traded stock that allows one to buy and sell it in a matter of seconds, selling a stake in an oil well could take several months.  Most investors are concerned only with payback or when they can plan to receive their full initial investment.  These returns typically occur in four years or less.
The following are steps Midwest will take to help you get out of your position:

  • First, Midwest will contact the other investors in the transaction to determine if anyone wants to buy the stake or split the stake equally among everyone.
    • This method could take only a few weeks.
    • Midwest would take no fee for helping you.
  • Next, Midwest will search for qualified buyers outside the group to see if there is interest in entering the transaction.
    • This could take a few weeks to several months.
    • Midwest would take no fee for helping you.
  • Last, Midwest can work with a clearing house in Houston, Texas that can place your working interest on the open market for bid.
    • Midwest will need to hire a petroleum engineer to determine how much oil remains in the reserve.
    • This process will take a minimum of 2 months. The auction sale process can be accomplished in as little as 45 days from property commitment to financial settlement.  Auctions occur about every 2 months.
    • The clearing house uses a sliding scale commission percentage depending on the size of the sale.  The percentage ranges from 2.5% to 10% of the sale price.
    • A minimum bid can be set to retain interest in the occurrence that the bid is not received during the process.

Definitions and Key Terms

  • BPD – Barrels Per Day (1 barrel = 42 US gallons)
  • BBL – Barrel (unit measure)
  • Authorization for Expenditures (AFE) – An itemization of all costs needed to drill and complete a well.
  • Working Interest – The interest in an oil leasehold which is subject to the payment of the expenses of development, operation, and maintenance of a well and is subject to the payment of Landowners Royalty and Overriding Interests.
  • Net Revenue Interest – the amount of the interest owned in the proceeds derived from a producing well less all royalty Interest.
  • Intangible Drilling Costs – Those costs related to drilling, testing, and completion operations on the well which after no salvage value are immediately deductible.  IDC’s usually represent 60-80% of the well cost.
  • Tangible Drilling Costs – Items of cost that generally have a salvage value ordinarily required to be capitalized for Federal Income Tax purposes and which relate to equipment placed on the well.
  • Royalty Payments – Paid to the landowner or the mineral interest owner.
  • Gross Production – Refers to the total oil production before royalties.
  • Field Formation – A geographical area with one or more oil reservoirs.
  • Reserves – Estimated amount of recoverable oil contained in underground rock formations.
  • Pay Zone – The thickness of oil producing reservoir, used to calculate reserves.
  • Prospect Area – A parcel of real estate that is being contemplated for well drilling.  It can vary from several acres to several thousand acres.
  • Types of Wells Exploratory or Wild Cat, drilled to discover new field; Discovery, locates new field; Appraisal, drilled to side of discovery well to determine size of new field; Development, drilled in the known extent of the field.
  • Recoverable Oil – Oil that can be produced to make money under current economic and engineering conditions.
  • Initial Production (IP) – The first 24 hours of oil production from a completed well.
  • Waterflood – Water is pumped down injection wells into depleted reservoir to push some remaining oil to producing wells.