Cotton Valley Sand Play
Economics
Our typical drilling and completion cost is about $1 million, including land costs. The probability plot shows that there is relatively low risk in making an uneconomic well. Well costs are expected to climb, as are product prices, offsetting one another.
A model with the following assumptions was constructed:
- $1.02 million of up-front cost, inclusive of acid frac cost
- A 1.1 BCFGE Cum over twenty five years
- $30 oil price over the life and $4.50 gas price
This resulted in a well with a 2.4 year payout, generating an additional $1 million dollars of undiscounted cash flow. The internal rate of return (IROR) is a little better than 30%. A cash flow spreadsheet may be downloaded if needed (see cvscash1b.xls).
The economics enjoy the benefit of tite-gas severance tax credits from the state of Texas.
A cost sensitivity analysis was performed on the model decline well, and it is important to note that discounting hits the Cotton Valley Sand wells quite hard, even given high product prices; but the wells are good annuities with low risk for players enjoying a lower cost of capital. Looking at a high cost well ($1,500,000) for the play, with a deeper depth and an expensive frac with escalating costs, at $2 gas and $20 oil the well would payout in 22.8 years, have a negative discounted (Present Worth at 10%) Profit to Investment ratio of 0.37, and a 1% Internal Rate of Return (IROR). In other words, the high cost well with a modest 1 BCFGE Cum would still payout a loan at 1% interest rate. At $10 gas and $60 oil the payout would only be 1.1 years, have a positive discounted (PW10) P/I ratio of 2.19, and a 62% IROR. The IROR varies in an almost linear fashion between the end members of those product prices. At $6 gas and $40 oil, the well yields a 2.6 year payout at 30% IROR.