Gordo would use his Grandmother's money and JR would shoot...

Gordo would use his Grandmother's money and JR would shoot anyone named Bobby.

But in the interest of discussion.... WDES (What did Einhorn Say) - pg 25

"One useful rule of thumb: when someone doesn’t want you to look at traditional metrics, it’s a good time to look at traditional metrics."

"In frack country, Capex has averaged 75% of revenues over the past 8 years. Depletion is a real expense."

"By asking investors to ignore the Capex when it’s spent, and the depletion when the oil is produced, the industry wants us to look only at the cash that comes out of the business while completely ignoring the cash that goes into it."

Let's for the moment say your right Buc (did I really just say Buc was right?). You're going to need $762M of capital to develop. Of course all 154 can't magically be drilled and put online all at once but say you ran a 2 rig program and each well took 1/2 mth to D&C and be put onto production - so 2 well/rig/mth or 48/yr and you'd be fully developed in about 3 1/2 yrs. There is a method for calculating the compounding of the production curves from whatever EUR type (its called functional convolution - an apt name) so you can see your maximum production and decline and peak Capex. Don't forget to add in GG+PPE for development. And of course the capital isn't free so make sure WACC is reflected. Plus of course the EUR is over a 30 year period typically so make sure the DCF takes that into account.

Is the venture profitable. When does the venture become profitable. What are the price sensitivities for the venture to be profitable? Tougher questions...

Put it in context of the mother-fracker used by Einhorn - PXD - pg 36

"How much does it cost for Pioneer to create a developed reserve?
This chart looks at Pioneer cumulatively over the past 9 years. It has grown its developed
reserves by about 30 million BOE and taken about 470 million out of the ground. So, it has
developed about 500 million BOE.
Capex net of asset sales during that same period has been $14 billion, meaning reserves
have cost $28 per BOE to develop."

So assume 154 wells each with 550MBO EUR that are counted as Reserves - 84.7 MmBO - and "just" $762M of capex to develop - cheap at $9 per BO to develop. Einhorn's gotta love that.

And its 100% oil so we'll claim WTI less $10 location differential - so call it net $45. How do we want to go on Opex? Would a total of $25/Bo be to much? Leaves you with $2o Cash Margin still. It's positive margin which is good.

BUT Einhorn's point is "Is it generating positive value". Now take the time value of money into account as you're spending the capital upfront and generating the cash over 30+ years most likely. Now is it profitable considering your money has been poured into holes in the ground. A dollar today likely buys less in a years time - who was it that posted about should have bought Sydney properties from the proceeds of the land sale.


It's not for everyone - but read it and look at more than the pictures and jokes - it shines a spotlight on some very interesting "economics"