did the sums

Hey all,
To continue on with the discussions before I had to go away...
The numbers speak for themselves...
When I discounted an EOK well I came up with a present value of 1.383Million AUS, and with discount rate of 15% which is debateable...
The truth in the pudding is really how many wells can Red Fork drill over the next few years...

The sorts of answers I have been recieved with imply that RFE become the most successful ASX oiler in the onshore US region EVER...
boy 60wells... I struggle to think that 60 wells per year is achieveable...
mainly because of the size of RFE as a growing junior oiler who have alot to prove...

Here below I have posted an accurate NPV valuation on ONE EOK well using the growing annuity formula to work out the total earnings per well over its life time...

I will explain each step so there is no confusion as to the authenticity of the answer...

And I will leave it up to the individual to make assumptions on how many production wells RFE drill per year...

I personally think 60 wells per year is madness...

Target 200 BCF
each well recoverable .3 BCF
Target to have 10 wells in production by years end
Natural gas price $3.50 per mcf
flow rates per day 300,000 cubic feet, (this is equivalent to 300 mcf)
NRI 81.25%
vertical well costs $150,000 US
production life 20 years
decline rate 8%

To answer the question of what one of these wells is worth over its life time, we can write down the future revenue streams and discount them back to a present value... equivalently we can use the growing Annuity formula to get the same answer... as flow rates are expected to decline by 8% per year, in the formula we put a negative number...

we will first work out the cashflows and then put the answer into the annuity formula, so

300,000 cf is 300mcf
and at $5 per mcf
is $1500 US per day...
note that current market price for mcf much lower than $5 MCF...

...
from that we minus production costs of $1.80 per mcf...
(low cost producer)....

300 *$1.80US= $540 US
$1500-$540=$960 per day,
our Net revenue interest or NRI is 81.25%
960*.8125= $780 US

so $780 per well, per day assuming production of 330 days per year is
$257,400 US per year...

convert to AUS dollars at .8
257,400/.8=$321,750

Now for the growing annuity formula as we want to find the cashflows for this project for its life time, (20 year production)...

Present value of a growing Annuity formula is

PV= C (1/r-g) -(1/r-g)*(1+g/1+r)^t

where PV is the present value
C is the revenue stream per year ($321,750)
r is the interest rate/discount rate (15%)
g is the growth rate (-8%)... production rate declines 8% per year as per company releases
t is time (20 years)

so plug the numbers into the equation

PV= $321,750((1/.15--.08)-(1/.15--.08)*((1-.08)/(1+.15))^20)

If you punch these numbers into a calculator you will get
$321,750 * 4.2978 = $1.383 Million dollars AUS per well over its life time...
so each well costs $150,000 US, and over its life time, of 20 years production the well will earn a total of $1.383 million AUS using a discount rate of 15%...
This discount rate is set fair which corresponds to the level of risk, and the fact that investors need to be compensated a higher rate of return for holding a (risky) development stock...percieved to be risky...


4.2978 is the annuity factor which is multiplied by the period payment of $321,740 per year...
to work through the annuity equation you need to solve the brackets first and there is a double negative in the formula because growth rate is negative with declining production...

So,
IMO getting a million and abit per well, drawn out over 20 years is not exciting when front end payments are involved with drilling costs...
(even though they and production costs are lower than normal standard)....

East Okalahoma is no good, what about Tulsa?
EOK project only works on very large scale..
with 10 well program taking 5 months, and another program planing for next year then this could be a small little earner for the company...
with lofty expenditure requirements in running an oil business, and associated costs (like tax which I never mentioned)...and 700k quarterly admin, then this is not going to be a positive cashflow company, to support a one hundred million dollar market cap....
and grow that cash backing, which is whats required to get a higher market value...
I dont think ive made any mistakes, correct me if im wrong...

.^sc