Due Diligence Tips: The Drill Project

Drilling Costs

An Operator should treat investors like partners, not meal tickets. If the drill program fails, no one should make any profits.

For instance, does the Operator truly believe in the drill prospect? In other words, is the operating company willing to stake its own profit potential on the success or failure of the drill program?

Operators who do not believe strongly enough in the drill prospect will therefore guarantee themselves a profit no matter what. They achieve this by charging excessive fees for the drilling and well completion costs. Then it does not really matter if they find oil or not. So start out by ensuring that the projected drilling costs are not padded out in favour of the Operator.

Again, you will have to conduct thorough research to arrive at what you believe to be a reasonable cost for drilling in the area in which the Operator is active. In essence, you want the assurance that the Operator is drilling for cost.

You can make your assessment by doing some comparative analysis. Get on the phone and find out what would be considered reasonable costs for:

  1. Seismic analysis (if seismic work is included with the program you are considering).

  2. Drilling and completing wells in the area of interest and under similar geological conditions. When making comparisons, consider the depth and the reality that deeper wells are more costly to drill. Manpower costs will also differ from state to state and area to area.

  3. Call the state Oil and Gas Association as a good starting point to begin you’re your inquiries.

  4. Get investor packages from other drilling ventures in the area and compare.

  5. Talk to the geologists, engineers, and geophysicists who provide technical support for the respective drilling programs

Stonehenge Capital Research has a protocol for dealing with these issues. We can help.


Due Diligence Tips: The Operator

Due Diligence Tips: The Drill Project

 

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