blue sky article, page-10

You both have points.

Blue sky is correct that small cap oilers are the only type of "safe" gambling there is because you can take your bet off the table before the drill hits the reservoir, and sometimes even after the drill hits the reservoir, often with a nice profit.

You are also totally correct about the odds, no one would be investing if it actually was a 1% chance of success. The company wouldn't be drilling if it was a 1% chance of success (carry out that thought experiment for a moment - a company spending 6 - 10 BILLION on a hundred drills so they can go out of business before they get a chance of breaking even), and there is a level of innumeracy involved if people actually think a 3000% return on a 1% chance is actually a good bet. bluesky is exaggerating for effect and also somewhat missing his other point. He shouldn't care whether there is production or not, if they announce hydrocarbons he makes money - whether they come back two days later and say the water cut is too high, volumes too low for production etc shouldn't matter.

The company says 31% GPOS, we don't have to take this for a fact and we should be looking at variations of this figure and how it affects the risk/reward payoff and to see mathematically what the market thinks of things, but as long as your preferred P50 case has a return of 100%+ on a risked basis you should be in, everything else comes after that.