You have been presented with an opportunity to purchase a high quality undevelop

Question

You have been presented with an opportunity to purchase a high quality undeveloped asset in a play that was first successfully tested a year ago. Ten wells have been drilled in the play to-date. The type well economics presented by the seller are robust: IRR 65% Payout 1.60 Years IP 800 BOEPD Arps b factor 3.2 Terminal Decline 4% 3-Stream Net Reserves 1.12 MMBOE The ask for the property is $18/BOE for PUD reserves, which in the current pricing environment is attractive. With only the information you have been presented, what potential pitfalls should you immediately be concerned about and why?

Explanation / Answer

Answer:-

The asset valuation looks attractive with IRR of 65% which is $650000 per US$1Million.

The payout of 1.60 years looks attractive.

But these are test results of the well, actual are not known without experiencing one can't comment. Economic data are good for analysis but the end result is also not always 100%. Economic cycle changes fast and faster for. Commodity like gas, oil and related product. More supply will reduce the price and can make this proposition unattractive.

The other hidden cost or unknown costs are not present, presence of it will give us more insights. Technological cost required to extract value should me known otherwise the attractiveness of said proposition fades out. These cost will help to know the true profit picture.

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