Atoka Sands (Pregnant Shale or Davis Sand) Play
Economic Assumptions and Model Cash Flows
Estimated cash flows were modeled assuming a ten well program, with an economic completion in each probability category (P30 thru P90). The model assumes one dry hole, and two uneconomic wells – the P10 and P20 wells. These were not considered economic after testing, and were then plugged. As each well becomes uneconomical due to declining production it was then plugged. The P60 was also modeled separately as an example of what can be expected as the “typical well.” The average well becomes a reasonable approximation of what is expected, after success with a light sand frac. The life of the wells as modeled was 10 years, although these wells often have a life of at least 15 years, but after 10 years the estimated economic return on the wells begins to decline. After 10 years the wells are assumed to be sold, although the sales proceeds are not included in the cash flows.
The total costs to complete the well program were assumed to be $600,000, which includes lease cost, not required on all wells; drilling and location cost; completion and stimulation cost; and lease equipment cost. Operating costs were set at $800 per month per flowing well. The tax rate assumption was 7.25%, which is lower than the average, due to various tax reductions these wells may qualify to receive. These include a tax reduction for recompleting a well that is no longer producing, and completing a well in a formation that had been classified as a tite gas formation. Prices received are assumed to be $3.00 per MCF.
Investors typically receive a working interest in each well. This is the percentage of revenue, before operating costs, returned to the investor, usually every month, after the royalty interest (given to landowners) and overrides are subtracted from the gross revenue. In our model, investors received 80% Working Interest after 20% royalty interest was subtracted from the gross revenue, or an 80% Net Revenue Interest. The model assumes a 20% “carried” working interest, as a “promote.” Investors pay for 100% of all initial costs, and receive 80% of the revenue. On average we expect this to be a conservative estimate, meaning the working interest to investors may at times be greater than 80%.