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Multi-Year Program Acquisition Example
The following conservative parameters have been used to construct this Scenario:
Oil @ $75/barrel
A very conservative production figure over three years of 40 barrels/day/well.
An assignment bonus to you by the purchasing operator of $3,000 per lease.
(This is a minimum figure; we are often able to negotiate a larger bonus on your behalf.)
Overriding royalties on production of 4%. (Can vary from about 3% to 10% in
exceptional circumstances.)
To make figuring simple in this simple illustration, only oil production is
considered. Gas can be a very appreciable source of revenue; indeed, our
single most lucrative client lease is in a unitized coalbed methane field in the
Powder River Basin of Wyoming.
Again, to simplify matters, it is assumed that all leases acquired are in the 80-
acre size range. You may well end up with an assortment of leases ranging in
size from 40 to 2560 acres.
| FIRST YEAR: | Two leases acquired @ $25,000: $50,000. outlay. |
| SECOND YEAR: |
Two leases acquired @ $25,000: $50,000. outlay.
Four leases assigned to an oil & gas operator @ $3,000 bonus per lease; $12,000 income. (The $3,000 figure is a conservative minimum. We may well be able to negotiate a higher assignment bonus on your behalf.) Two leases are drilled, one well each; one begins producing @ 40 barrels/day. Assume production begins midyear. 40 barrels/day x $75 = $3,000/day gross, minus minor taxes = $2,900 basis for computing royalties x
4% = $116 x 30 days/month = $3,480 royalties/month. $3,480 x 6 month = $20,880
income + $12,000 = $32,880 income for year. |
| THIRD YEAR: | Two leases acquired @ $25,000: $50,000. outlay.
Two leases assigned: $6,000 income. Two more leases drilled: one produces. You now have two producing leases. One has been producing all year (subtract one month downtime) and one begins midyear. 11 + 6 months = 17 months x $3,480 = $59,160. Income for year = $
59,160 + $6,000 = $65,160.
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| FOURTH YEAR: |
A third lease, out of your six total, begins to produce in July. 22 months + 6 months royalties = 28 x $3,480 = $97,440.
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| FIFTH YEAR: |
Three producing wells averaging 40 BOD. 33 months royalties = $114,840.
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FIVE YEAR TOTAL OUTLAY: $150,000
FIVE YEAR TOTAL INCOME: $212,880
Once you begin to derive income from leases, you should be able to deduct at least some part of the costs of acquisition. (Obviously, a tax professional should be consulted in this regard.)
We look forward to going to work for you!
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