milestones, page-10

Hi Haz,

There is a seemingly common point of misunderstanding for most investors in O&G.... and that is figuring out roughly how much revenue the company receives for its production.

That's important as that is our cash flow.


If WTI index is at $80 bbl - say avg for the year.

For that 1 barrel of oil,

+/- some amount is added or deducted on the type oil and the location. If you have invested in stocks that in the Bakken for example you would know about the "Bakken Discount" which has been as high as $15 against WTI benchmark.

25% (typically in TX) goes to royalty interest. There maybe other over riding royalty interests (ORRIs) that get deducted.

x% (say 0% for now for simplicity) gets deducted for state severance/production tax (variable by location and well type)

Now apply the working interest (100% in Permian but 10% in EFS for example).

Now deduct the LOE (Lease Operating Expenses) which include transport and marketing costs. For oil as example it either gets trucked or connected to pipeline. Wet gas needs to be connected to pipeline and fractionated to seperate NGLs. All of this cost cash!!!

Next of course is 1 boe DOES NOT equal 1 barrel of oil.

In Permian we are probably looking at 70% or so oil, 20% NGL and 10% gas.

And thats before we factor decline rates..


All the above means that "...6 months @ 100boed @ $80/bbl = $1,400,000..." is a long way from accurate.

Roughly (and I mean roughly) it would be:

70 bopd (at WTI $80 gross)
20 barrels NGLS equivalent (at $30 gross)
60Mcf (at $3Mcf maybe if anything - could just be flared)

Now apply any discount/premium, take out royalties, apply WI and deduct LOEs.

So with no discount/premium, 25% royalty, 100% (PB) and $15Boe LOE, cash flow to GGP becomes:

180 days x 70 bblo x (0.75 x $80 - $15) = $567K
180 days x 20 bbl NGL x (0.75 x $30) = $81K

The cash flow is more like $650K

An easier way is to ask the company for the "Netback" on their various plays (or get comparison from another company nearby).

Our netback is probably around $35 - $40 per boe.

Another way is to try and calculate (or ask) for Net Margin.


My point is that you only get the Netback to invest back into working capital.

Hope that helps.