New York Paper - Barrel-day Values (with Discussion)

The measure of value of an oil property is approximated by the length of time it takes to "pay out;" viz., the time required for it to return the original investment. This time varies in different fields. In the Appalachian and Mid-Continent fields, a good investment pays out in about four years; in California, it requires a slightly longer time; and in the Gulf field about two years. The two principal methods for establishing these values are based on acreage, as in California, and on production, as in the Appalachian field. The method of establishing values based on production1 was worked out in the Appalachian fields and approximates the value remarkably well in some fields; but it is a rule of thumb and should be used intelligently. Briefly, the method is as follows: An arbitrary number of dollars (called the barrel-day price) multiplied by the number of barrels of settled daily production of the property gives the value. In its crudest application, the barrel-day price is determined by the "$10 to $0.01" rule, which means that the barrel-day price is one thousand times the prevailing price of oil. For instance, with oil at $3.50 per bbl. the barrel-day price would be $3500 per bbl. This rule, however, is not strictly applied, for the barrel price is varied according to whether or not the wells "hold up." But when a barrel price for a district has been fixed it is quite general to raise or lower the price with the fluctuation in the price of oil; here the"$10 to $0.0l"ruleisused extensively. However, the prospective purchaser takes into account tangible equipment upon the property, the extent to which the drilling program has been carried out, whether or not the wells are "shot" or natural, depth of wells, spacing of wells, paraffin trouble, etc. The basis of this method is settled production. As soon as production is considered settled, a flat barrel-day price is generally applied to all properties, no matter what their age. If it were possible to show that this flat rate was erroneous and that the value of the property depended on the point on the decline curve at which the wells happened to be (in other words, their age), and also on the operating costs, the future price