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Gold/Mining/Energy : Big Dog's Boom Boom Room -- Ignore unavailable to you. Want to Upgrade?

To: Big Dog who wrote (140966)	10/12/2010 2:36:08 PM
From: The Reaper	Respond to of 206184

When I was selling these to unsuspecting investors back in 1982, I remember the "projected" IRR being around 24%. Of course this is going to depend on whether it's exploratory or in-fill drilling in a producing field.

To: Big Dog who wrote (140966)	10/12/2010 4:53:41 PM
From: Ed Ajootian	Respond to of 206184

BigDog, we need to be careful about terms here, if its really a Net Royalty Interest (aka Overriding Royalty Interest or ORRI) that he is offering, then that return would not be considered adequate unless the wells were already producing at that rate, ideally having been produced for 3 years or so. For new drilling and/or re-entries, workovers, its very unusual to offer an ORRI, vs. offering a direct working interest in the project. I believe this has something to do with the tax issues (I believe an ORRI can't deduct IDC's for example). For drilling new wells you probably would need to offer a return that is triple the amount your buddy is offering, but given that these are re-entries/workovers he might get away with something like a 30-35% return. A lot would depend on the particulars of the deal of course.

To: Big Dog who wrote (140966)	10/13/2010 3:20:29 AM
From: energyplay	Read Replies (1) \| Respond to of 206184

My background is limited, but I did my own taxes for two year in which I had a few hundred stock trades and some oil and gas investments. That was about 150-200 hours of my life each year that I can't get back. Okay - The tax side of these deals changes the denominator of the return calculation. The top federal rate is 35%, and 33% is just under that. At a 33% federal rate, if everything can be classified as IDC, the after tax cost of the investment is only 66% of the nominal, and the return will be improved about 50%. There were two or three tax incentives for different types of rework, I think one of those is still around. There is also the 15% depletion allowance, which will not be taxed. At a 33% rate, that adds another 7.5 % to the moneys returned. That might multiply the ROI by 1.075% or more for net royalties. For a working interest, where the depletion is figured on the production units, and then there are costs that are deducted before the investor gets their money, the depletion allowance can be a very large factor. So for an ORRI there should not be any costs, Net Royalty may have certain costs, but you should not be assessed to for more capital. *** If there a track record that is similar to this deal, and the deal has a large number of similar wells, the odds of failure may drop enough that a lower return can be okay. If twenty wells on both the east and west side XYZ field were successfully reworked, and those well have a track record online with the RRC and this is 20 wells in the middle, with the same crew, same equipment, etc. That's something that is easier to sell. **** The National Association of Royalty Owners has some info, their online store has some basic books, naro-us.org These guys will be happy to sell you a $155 book - onlinestore.cch.com And of course... irs.gov