soa #2 - over hyped or a no brainer ?, page-4

Hi OMR, thanks for the great post. One comment I have is about the payback on these wells. I do expect these vertical wells to coat about $3.5M, but it'll take significantly more than 39,000 bo to obtain a payback at $90 oil:

Assuming $90 oil (WTI) if you have a longer term outlook (WTI currently around $100, but thats not likely to remain that high), there is going to be a discount of anything from $5-15/bo to the WTI price, I think a $10 average is a reasonable expectation. So the realised price of Goshen oil at $90 WTI will probably be $80.

Then there is the royalty interest that is taken off the top. I cant recall seeing SSN quoting what its NRI is for its goshen lease, but if its state land then the royalty interest I think is about 16%, and if federal land its 12.5%. I assume its state land.

Then after the royalty interest there is state severance and property tax which comes to about 13% (6% for severance tax, 7% for property tax%).

Then there are the lease operating expenses and admin/overheads, which will probably be about $10 combined ($9 for LOE, $1 for A/O).

The result is:

WTI = $90
less $10 discount = $80
less 16% royalty ($12.80) = $67.20
less 13% taxes ($8.74) = $58.46
less $10 expenses = $48.46 = gross revenue per bo to Samson to contribute to paying back the cost of the well and ultimately to make a profit.

$3.5M / $48.46 = 72,224 bo required for payback/breakeven, which I expect will take about 2 years on each well. Which is still not too bad, since in crude terms (i.e. not doing a proper NPV calc here) if the EUR is 200,000 bo, then after breakeven there is 127,776 bo x $48.46/bo = $6.2M NAV per well.

Remember Terry says in his preso's currently he expects 250 net conventional drilling locations in Hawk Springs, so you can see how this could add up to > $1B of NAV.

My favourite US oiler Noble has made a killing from these conventional wells in the Wattenberg field. The great thing about them compared to the horizontals is they are much quicker and less complicated to drill and complete (and of course half the cost or less), so they can really start banging them out once they done the first few development wells.

Cheers, Sharks.