Michael Bowen Oil and Gas consultancy give a review with respect to oil and gas penetrating investments.Oil and gas offerings, nevertheless, can be particularly risky. Understand the relationship between: (1)Cost of investment (2)Expected return (3)Risk assessment

1. How to Invest in Oil Wells & Gas –
Investment Opportunities
• Michael Bowen Oil and Gas consultancy gives
a review with respect to oil and gas
penetrating investments.Oil and gas offerings,
nevertheless, can be particularly risky. While
many oil and gas wander openings are true
blue, there are a considerable measure of fake
promoters endeavoring to misuse growing
eagerness for imperativeness related
hypotheses.

3. Before making any money related
interests in oil boring or gas.
(1)Fraudulent Sales Techniques
(2)E-mail Promotions and Other Unsolicited
Materials
(3)“Once-In-A-Lifetime” Opportunities
(4)High Rate of Return
(5)oil Sales Pitches Focused on Highly Publicized
News
(6)“Can’t-Miss” Wells
(7)Confidential Opportunities

4. Acreage Position
• Sponsor submits project for due
diligence review
• Identify type of project
– Drilling project
– Producing property acquisition
– Mineral rights acquisition
• Identify acreage position and
ownership rights of Sponsor
• Review acreage position
– Identify producing and prospective
formations from offset wells
– Determine if oil, natural gas or both
• Ownership details
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5. Acreage Position
• Ownership
– Surface ownership
– Leasehold (subject to terms of OGL)
• Working Interest (expense bearing interest)
• Revenue Interest (Working Interest less royalty)
• Overriding Royalty Interest (non-expense
bearing interest)
– Mineral rights (minerals owned directly)
• Royalty Interest
• Examples – Property Level
– Leasehold
• Working Interest 100% Expense
• Royalty (20%)
• ORRI ( 5%)
• Revenue Interest 75% Revenue
– Mineral rights
• Royalty 20%
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6. Reserves & Economic Cash Flow Projection
Property Level Economics
Input Parameters
• Revenues
– Oil, Gas, NGL volumes
(adjusted from production to sales volumes)
– Oil, Gas, NGL prices
(adjusted from reference prices to wellhead realized prices)
• Expenses
– Operating expenses
– Production/ad valorem taxes
– Capital investment
• D&C , facilities, pipeline, leasehold
• Ownership
– Interests to be evaluated
• Working interest (expense bearing)
• Revenue interest
• Overriding royalty interest
• Changes in ownership due to deal terms
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7. Develop Production Profile for Well(s)
Type Curve Development - Offset Wells
• Typically used in unconventional and
repeatable conventional reservoirs
• Evaluate reserves and production profile for
offset producing wells to determine range of
expected results for future drilling
• Select offset wells producing in target
reservoir
• Review drilling and completion operations for
analogy to planned development
• Consider impact of multiple factors:
– Type of reservoir
– Type of reservoir fluid
– Type, vintage of offset wells drilled
– Location and orientation of wells drilled
– Distance from planned development
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8. Develop Production Profile for Well(s)
Decline Curve Analysis
• Normalize production
from offset wells to time
zero
• Calculate average
production based on
composite volume and
no. of wells vs. time
• Use decline curve
analysis on normalized
average production to
generate type curve
• Compare type curve IP,
decline profile, EUR to
min/max offset
performing wells for
reasonableness
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9. Type Curve Projection
• Type curve projection
represents estimated
production profile and
reserves for single well
• Modify application of
type curve for
development plan
• May have multiple type
curves and applications
• Production profile
developed from type
curve on undeveloped
acreage or from
decline analysis of
historical production
for producing wells
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10. Oil and Gas Price Environment
Nymex Oil Prices
• Historically high oil price environment
• Market in backwardation with long term average prices
~$80-85 per barrel
• Supported in near-term by oil supply/demand, fiscal
policy and geopolitical issues
• Potential upside/downside risk will track economic
conditions with continued volatility in market prices
Nymex Gas Prices
• Lowest gas price environment since early 2000’s
• Excess supply with large inventory and deliverability due
to shale gas development suppressing natural gas prices
• Expect near-term prices in $4.00/MMBtu range with
seasonal or weather related spikes at times
• No significant near-term increase in pricing due to
fundamentals
Price Realization
• Oil: Adjust for gravity, quality, transportation
differentials
• Gas: Adjust for BTU, gathering, transportation,
processing and marketing
• NGL: Adjust for liquids composition, transportation and
marketing
Actual I Projected
Actual I Projected
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Reference Nymex Oil Prices
Reference Nymex Gas Prices

11. Reserves & Economic Cash Flow Projection
• Expenses
– Operating expenses – direct costs to produce wells (vary by type, depth and operating environment)
• Pumper $ 500
• Utilities 1,000
• Chemicals 750
• Field and well expenses 750
• Repair and maintenance expenses 500
• Salt water disposal 2,000
• Operator administrative charge – fixed cost per well/month 900
Total Operating Expense (per month) $6,400 Range <$1,000 to >$25,000
– Production/ad valorem taxes
• Oil production/severance tax Varies by State, percentage of revenue or unit of production
• Gas/NGL production/severance tax Varies by State, percentage of revenue or unit of production
• Ad Valorem property taxes Varies by State, County, tax jurisdictions
– Capital investment – direct costs to drill wells (vary by type, depth and operating environment)
• Drilling and completion cost
• Production facilities
• Pipeline
• Leasehold
• Authority for Expenditure (AFE) – Operator’s pre-drill cost proposal for working interest owners participation election
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12. Reserves & Economic Cash Flow Projection
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Cash Flow Projection - Property Level EUR = 155 MBO
Net
Oil Vol Oil Price Oil Rev Prod Tax Ad Val Tax LOE Oper CF Capital Net CF Cum CF Cash
Year (MBO) ($/Bbl) (M$) (M$) (M$) (M$) (M$) (M$) (M$) (M$) Yield
(2,750) (2,750) (2,750)
2014 25.0 93.00 2,325 163 70 60 2,033 2,033 (718) 74%
2015 15.0 87.00 1,305 91 39 61 1,113 1,113 396 40%
2016 10.5 82.00 861 60 26 62 712 712 1,108 26%
2017 8.4 80.00 672 47 20 64 541 541 1,649 20%
2018 7.6 80.00 605 42 18 65 479 479 2,129 17%
2019 6.8 80.00 544 38 16 66 424 424 2,552 15%
2020 6.1 81.00 496 35 15 68 379 379 2,931 14%
2021 5.5 82.00 452 32 14 69 338 338 3,269 12%
2022 5.0 83.00 412 29 12 70 300 300 3,569 11%
2023 4.5 84.00 375 26 11 72 266 266 3,835 10%
Remaining 22.3 85.00 1,897 133 57 500 1,208 1,208 5,043
Total 116.6 9,944 696 298 1,157 7,793 5,043
Economic Parameters
IRR 38%
ROI 2.83
Payout 1.64
Cost per MBOE 23.58
Property Level Economics (Pre-Tax)

13. Reserves & Economic Cash Flow Projection
Fully Loaded, Net to Investor Economics
• Property level economics LESS Sponsor deal structure
– Sponsor deal structures vary depending on
• Type of oil and gas investment – drilling, acquisition, other parameters
• Sponsor cost structure (administrative costs and third-party expenses)
– Investment mark-up Sponsor mark-up on leasehold, D&C AFE, acquisition or capital costs
– Administrative Costs Annual fee of ~1% of capital contributions
– Third-party Expenses Annual costs of ~0.25-0.5% of capital contributions
• Sponsor return (sharing arrangement)
– Partnership sharing arrangement
BPO APO1 APO2
Sponsor 10% 20% 30%
Investor 90% 80% 70%
– Carried working interest Investor pays disproportionate amount of capital costs for development
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14. Reserves & Economic Cash Flow Projection
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Cash Flow Projection - Fully Loaded, Net to Investor Level EUR = 155 MBO Investor pays Capital Cost + 10% to earn 90% BPO, 80% APO
Net
Oil Vol Oil Price Oil Rev Prod Tax Ad Val Tax LOE Oper CF Capital Net CF Investor Inv CF Admin Fees Net CF Cum CF Cash
Year (MBO) ($/Bbl) (M$) (M$) (M$) (M$) (M$) (M$) (M$) Capital (M$) (M$) (M$) (M$) Yield
(2,750) (2,750) (275) (3,025) (3,025) (3,025)
2014 25.0 93.00 2,325 163 70 60 2,033 2,033 1,829 38 1,791 (1,234) 59%
2015 15.0 87.00 1,305 91 39 61 1,113 1,113 1,002 38 964 (269) 32%
2016 10.5 82.00 861 60 26 62 712 712 636 38 598 329 20%
2017 8.4 80.00 672 47 20 64 541 541 433 38 395 724 13%
2018 7.6 80.00 605 42 18 65 479 479 383 38 346 1,070 11%
2019 6.8 80.00 544 38 16 66 424 424 339 38 301 1,371 10%
2020 6.1 81.00 496 35 15 68 379 379 303 38 265 1,636 9%
2021 5.5 82.00 452 32 14 69 338 338 270 38 232 1,869 8%
2022 5.0 83.00 412 29 12 70 300 300 240 38 202 2,071 7%
2023 4.5 84.00 375 26 11 72 266 266 213 38 175 2,246 6%
Remaining 22.3 85.00 1,897 133 57 500 1,208 1,208 906 303 603 2,849
Total 116.6 9,944 696 298 1,157 7,793 5,043 3,530 681 2,849
Economic Parameters Property Level Economic Parameters Offering Level
IRR 38% IRR 23%
ROI 2.83 ROI 1.94
Payout 1.64 Payout 2.45
Cost per MBOE 23.58 Cost per MBOE 31.45
Fully Loaded, Net to Investor Economics (Pre-Tax)

15. Oil & Gas Underwriting
Analyzing the Return Potential
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-
500
1,000
1,500
2,000
2,500
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033
Net Cash Flow Projection
LOE Fees Net Revenues Revenues
NettoInvestorEL
PropertyLevelEL
Economic life of Net to Investor cash flow
impacted by level of fees and expenses

16. Reserves & Economic Cash Flow Projection
Reserve Reports and Reserve Definitions
Reserve Reports
Typically prepared by Sponsor or third-party independent petroleum engineers
Independent Firms
Large international – Netherland, Sewell; Ryder Scott; Cawley Gillespie; others
Mid-size domestic – many
Small domestic – many
Reserve Categories
PROVED RESERVES Reasonable certainty to be commercially recoverable from known reservoirs, defined economic conditions
Proved Developed 90% probability actual quantities > 1P estimate
Producing
Non-Producing Developed: Quantities expected to be recovered from existing wells and facilities
Proved Undeveloped Undeveloped: Quantities expected to be recovered from through future investments
Total Proved (1P)
PROBABLE RESERVES Geoscience and engineering data indicate to be probably recoverable from reservoirs (mid case)
Probable Developed 50% probability actual quantities > 2P estimate
Probable Undeveloped
Proved + Probable (2P)
POSSIBLE RESERVES Geoscience and engineering data indicate may be possible to recover from reservoirs (high case)
Possible Developed 10% probability actual quantities > 3P estimate
Possible Undeveloped
Proved + Probable + Possible (3P)
RESOURCES
Contingent Discovered, sub-commercial
Prospective Undiscovered
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17. Reserves & Economic Cash Flow Projection
Generalized Risk Assessment
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Exploration
HIGH Drilling HIGH
Undeveloped Mineral
Acquisitions
Production
Acquisitions
LOW LOW
Producing Proved Undeveloped Probable Possible
ReturnPotential
GeneralizedRiskAssessment
Recovery Operations
Field Extension
Drilling
Secondary/Enhanced
Development
Drilling

18. Oil & Gas Underwriting
Analyzing the Return Potential
Understand the relationship between:
– Cost of investment
– Expected return
– Risk assessment
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