Question

In: Finance

Optimistic Oil Corporation estimates the following costs to acquire, drill, and complete a well on Lease...

Optimistic Oil Corporation estimates the following costs to acquire, drill, and complete a well on Lease A:

Acquisition costs………………………………...$75,000

Drilling and completion costs…………………... 600,000

Selling price of oil……………………………… 60/bbl

Lifting costs…………………………………….. 25/bbl

State severance tax rate………………………….5%

Royalty interest ………………………………… 20%

Would the investment be profitable if proved reserves are:

a. 20,000 barrels?

b. 30,000 barrels?

c. 40,000 barrels?

Expert Solution

a)Acquisition costs =$75000

Drilling and completion =$600000

Lifting costs =25pbl *20000 barrels = $500000

Total cost = $75000+$600000+$500000 =$1175000

Selling price = 60pbl * 20000 barrels = $1200000

Profit before interest and tax =selling price-total cost

=$1200000-$1175000 = $ 25000

Less State tax @5%=25000*5%=$1250

Profit after tax =$23750

Less Royalty interest @20%=$23750*20%=$4750

Therefore Total net profit = $23750 - $4750

Net profit for 20000 barrels = $19000

So this investment is less profitable for 20000 barrels

b) acquisition cost +drilling &completion cost = $675000

Lifting costs = 25pbl *30000barrels = $750000

Total cost = $675000 + $750000 = $1425000

Selling price = 60*30000 =$1800000

Profit before interest and tax =1800000 - 1425000 = $375000

Less state tax @5% = 375000 *5% = 18750

Profit after tax = $356250

Less Royalty interest @20% = $71250

Net profit = $355250- $71250 = $285000

Therefore Net profit for 30000 barrels =$285000.

So this investment is profitable for 30000 barrels

c) Acquisition cost + Drilling cost =$675000

Lifting costs = 25*40000 =$1000000

Total cost =$675000 + $1000000 = $1675000

Sale price = 60*40000 = $2400000

Profit before interest and tax = $2400000-$1675000 =$725000

Less :tax @5%=725000*5%=$36250

Profit after tax = $$688750

Less :royalty interest @20%=$688750*20%=$137750

Net profit = $688750-$137750

=$551000

Therefore Net profit for 40000 barrels =$551000

So this investment is profitable for 40000 barrels.

jeff jeffy answered 2 years ago

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