Here's my brief version of the AOW farmout agreement. I
posted this earlier, but I was incorrect on a couple of points, so, thought I'd try again so as to make it more
accurate.
AOW puts up about $500,000 to get the Gemini earning well started. Partners pay the rest to ensure that AOW
does
not fail to earn the land.
AOW is then carried completely-- no capital required-- for a ten well drilling program over the next two years.
AOW would pay nothing to receive 25% interest.
For the first ten earning wells, and the next 110 potential locations on AOW land, AOW would receive a cash
payment of
$100,000 per well before each well is spudded. During the
field development,the cash payments could potentially total
120 x $100,000 = $12.0 million dollars.
After the carry on the first ten wells. AOW would continue to receive the $100,000 per well, but would only have
to pay " one-eight to earn one quarter". With this built-in
promote or carry, AOW would likely require no additional capital and instead would receive a net cash payment
at the time each new well was drilled, with an ever-increasing cash-flow from the Warbonnet, Gemini and the
next ten earning wells.
Now, after posting that, I was corrected by the Gentleman that negotiated the agreement with the Pannonian partnership:
The Gemini well doesn't count as one of the ten earning wells. So within
two years, Arrowhead would actually have twelve wells on the go: WB 9-23,
Gemini and ten more. The ten wells would also have to meet the following
schedule: 4 in the first year and 6 in the second. If for any reason,
Pinedale Partners fails to come up with the money or whatever... they don't
get their interest in the full Gemini, Gannet, Warbonnet and Bull Draw
packages. Instead, they only earn into each 80 acre spacing unit for each
well they finance and drill. So Arrowhead has almost nothing to lose and
everything to gain. Remember my quote: RISK is a four letter word. P.S.
Your eyes are not deceiving you... part of the Farmout includes provisions
for Arrowhead to get back it's premium land at the Gannet.
3) Finally, it would be wonderful but too wonderful to be true. Arrowhead
doesn't get to keep a 25% working interest, what it gets to keep is 25% of
our current working interest. Let me give you an example: Right now
Arrowhead has the right to earn a 42.5% working interest in the Gemini.
Our interest after being carried would be 25% of 42.5% = 10.63%. Again,
remember my repeated public quotes.... Arrowhead should not be drilling
100% of one well, I want 10% of ten wells. Thus spreading out the geologic
risk and letting the laws of statistics and probability give us 3 super
wells, 4 average wells and 3 less than average wells. Also, I expect that
the technology will continue to improve by leaps and bounds and cost
cutting measures will also keep improving. So by the tenth well, Arrowhead
(& Schlumberger) will be doing even better than the first one!
4) More info. When Partners drills an earning well, they will be paying
Arrowhead $100,000 before spudding! What is the price per acre? Partners
can ultimately earn 75% of 42.5% of 80 acres at an 80% NRI = about 20 net
acres. So the arithmetic is simple... $100,000 / 20 acres = $5000 per acre. |
