Your independent oil and gas company is considering the purchase at time zero of a 100 % working interest in a property. If you elect to develop the lease for an 87.5% revenue interest, the following costs will be incurred: in time zero, the lease bonus cost is $100,000, intangible drilling costs are estimated at $550,000 while tangible completion costs are estimated at $300,000. Operating costs are estimated to remain constant at $8.00 per barrel (includes production costs, severance taxes and ad-valorem taxes) in each of years 1, 2, 3 and 4. Oil prices are forecasted to be $50.00 per barrel in each of years 1, 2, 3, and 4. Production is summarized in the following table. The escalated dollar minimum rate of return is 12.0%. Use net present value analysis to determine if the acquisition and development of this lease is economically viable: (a) Before considering income taxes, (b) Assuming income tax rate of 30%. (Expense 100% of intangible drilling costs at the end of first year, use 5-years MACRS depreciation for tangible completion costs, and consider 15% rate for your cost depletion analysis, and a stand-alone analysis) Year 3 Production, (BOE/yr) 17,500 9,000 6,500 3,000 Selling price ($/BOE) $50.00 $50.00 $50.00 $50.00 Operating Cost, $/BOE $8.00 $8.00 $8.00 $8.00 Royalty, % of Gross 12.5% 12.5% 12.5% 12.5%
Your independent oil and gas company is considering the purchase at time zero of a 100 % working interest in a property. If you elect to develop the lease for an 87.5% revenue interest, the following costs will be incurred: in time zero, the lease bonus cost is $100,000, intangible drilling costs are estimated at $550,000 while tangible completion costs are estimated at $300,000. Operating costs are estimated to remain constant at $8.00 per barrel (includes production costs, severance taxes and ad-valorem taxes) in each of years 1, 2, 3 and 4. Oil prices are forecasted to be $50.00 per barrel in each of years 1, 2, 3, and 4. Production is summarized in the following table. The escalated dollar minimum rate of return is 12.0%. Use net present value analysis to determine if the acquisition and development of this lease is economically viable: (a) Before considering income taxes, (b) Assuming income tax rate of 30%. (Expense 100% of intangible drilling costs at the end of first year, use 5-years MACRS depreciation for tangible completion costs, and consider 15% rate for your cost depletion analysis, and a stand-alone analysis) Year 3 Production, (BOE/yr) 17,500 9,000 6,500 3,000 Selling price ($/BOE) $50.00 $50.00 $50.00 $50.00 Operating Cost, $/BOE $8.00 $8.00 $8.00 $8.00 Royalty, % of Gross 12.5% 12.5% 12.5% 12.5%
Chapter19: Lease And Intermediate-term Financing
Section: Chapter Questions
Problem 9P
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Transcribed Image Text:3. Your independent oil and gas company is considering the purchase at time zero of a 100 % working interest in a
property. If you elect to develop the lease for an 87.5% revenue interest, the following costs will be incurred: in time
zero, the lease bonus cost is $100,000, intangible drilling costs are estimated at $550,000 while tangible completion
costs are estimated at $300,000. Operating costs are estimated to remain constant at $8.00 per barrel (includes
production costs, severance taxes and ad-valorem taxes) in each of years 1, 2, 3 and 4. Oil prices are forecasted to
be $50.00 per barrel in each of years 1, 2, 3, and 4. Production is summarized in the following table. The escalated
dollar minimum rate of return is 12.0%. Use net present value analysis to determine if the acquisition and
development of this lease is economically viable: (a) Before considering income taxes, (b) Assuming income tax rate
of 30%. (Expense 100% of intangible drilling costs at the end of first year, use 5-years MACRS depreciation for
tangible completion costs, and consider 15% rate for your cost depletion analysis, and a stand-alone analysis)
Year
3
4
Production, (BOE/yr)
17,500
9,000
6,500
3,000
Selling price ($/BOE)
$50.00
$50.00
$50.00
$50.00
Operating Cost, $/BOE
$8.00
$8.00
$8.00
$8.00
Royalty, % of Gross
12.5%
12.5%
12.5%
12.5%
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