Whats the best way to evaluate a drilling project?
The best way to evaluate a drilling project is to identify the potential payout of a project versus your investment. We call this the “acid test.” The acid test will tell you your break-even point, meaning how many barrels of oil the project must produce just to break even and ultimately return your investment. This requires a little math, and you must know the price per unit, net revenue interest per unit, gross revenue and price of oil per barrel. For example, suppose you are being offered a .7% net revenue interest in a project for $100,000. For your investment to break even, the well will need to produce a total of $14,285,714 in revenue ($100,000/.007 = $14,285,714). If oil averages $50 a barrel, your well will have to produce at least 285,714 barrels of oil over its productive life ($14,285,714/$50 = 285,714 barrels) for you to break even. You can do the same math for gas or combined oil and gas projects using an anticipated price per thousand cubic feet of gas. Now, look at the
