How long does Wells’ cash flow last?
The operator predicts that these wells will generate revenue for at least 25 years.
That is longer than we want to keep this investment, so we will simply auction it internally after eight years. Anyone who wants to buy out the other members can do so, and the rest of us can walk away with a lump sum.
Between now and then we will all enjoy the cash flow.
What are the risks?
The two main risks are the oil price and the production of these specific sources.
Price risk: This is market risk, similar to the risk of stock prices falling. The higher the oil price, the more money the wells produce each month.
Production risk: If this portfolio of six wells does not produce as much oil as predicted, that is also a risk.
The long-term nature of this investment helps limit price risk. Of course, the oil price will fluctuate. In some years it will be higher or lower. But as an eight-year investment, that smoothes out some of the price volatility over time.
As for production risk, this is why the operator will drill six wells instead of one. A single well may underperform or overperform, but six should be on average comparable to the other wells already flowing in this oil field.
What about ethical concerns?
If you’ve ever heard me talk about how there are many more dimensions to investing than just risk and return, personal values are one of the many dimensions I talk about. I have always used oil and gas as an example of this.
Oil drilling brings high historical returns with moderate risk, but does not fit many people’s personal values. That’s why they don’t invest in it, despite the asymmetric returns.
While only you know how you feel about owning an interest in oil wells, here are two questions I asked myself:
- Does the US need oil in its current economy?
- Is the US better off if it produces that oil domestically or buys it from oil states like Russia, Venezuela and Saudi Arabia?
Again, I’m not trying to convince anyone of anything, just sharing how I personally researched the ethical issue.
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