How Long Do Wells Cash Flow?
The operator forecasts that these wells will produce income for at least 25 years.
That’s longer than we want to hold this investment, so we’re simply going to auction it off internally after eight years. Whoever wants to buy out the other members can do so, and the rest of us can walk away with a lump sum.
In between now and then, we’ll all enjoy the cash flow.
What Are the Risks?
The two main risks are the price of oil and the production of these specific wells.
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Price Risk: This is market risk, similar to the risk of stock prices going down. The higher the price of oil, the more cash the wells produce each month.
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Production Risk: If this portfolio of six wells doesn’t produce as much oil as forecast, that presents a risk as well.
The long-term nature of this investment helps mitigate the price risk. Sure, the price of oil will fluctuate. In some years it will be higher or lower. But as an eight-year investment, that smooths out some of the price volatility over time.
As for production risk, this is why the operator will drill six wells instead of one. A single well might underperform or overperform, but six should average out similar to the other wells already flowing in this oil field.
What About Ethical Concerns?
If you’ve ever heard me talk about how there are many more dimensions to investments than just risk and returns, one of the many that I talk about is Personal Values. I’ve always used oil and gas as an example of that.
Oil drilling has high historical returns with moderate risk, but it doesn’t fit many people’s personal values, so they don’t invest in it despite the asymmetric returns.
While only you know how you feel about owning an interest in oil wells, here are two questions I asked myself:
- Does the US need oil in its current economy?
- Is the US better off producing that oil domestically or buying it from petrol states like Russia, Venezuela, and Saudi Arabia?
Again, I’m not trying to persuade anyone of anything, just sharing how I personally explored the ethics question.
