The Philosophy Behind Trading Oil Properties
Author(s) -
Bob T.H. Hulsey
Publication year - 1962
Publication title -
journal of petroleum technology
Language(s) - English
Resource type - Journals
eISSN - 1944-978X
pISSN - 0149-2136
DOI - 10.2118/269-pa
Subject(s) - business , stock market , petroleum , financial economics , economics , commerce , paleontology , horse , biology
Since 1955, The Chase Manhattan Bank has headed financing of over $1 billion for oil and gas property acquisitions. Of these transactions, 25 have been analyzed in detail and the results of the study are shown in Fig. 1. Factors often associated by appraisers with values are shown. Bar graphs show the ranges for the composite group, and averages were obtained by adding individual values and then dividing by 25. As discussed by Terry and Hill in 1953, rate of return is the over-all rate after taxes. These data are presented here merely to indicate the wide ranges which occur in relation to the averages. It is not proposed to discuss or comment on the validity of using this information. Furthermore, since the literature is replete with methods of evaluation explained in detail, no new approach will be suggested. Rather, the purpose of this paper is to note some of the forces affecting the market for petroleum producing properties and some of the pitfalls which may be encountered on the road to a purchase. Market for Properties Stocks are traded at the New York Stock Exchange, but there is no such establishment where oil and gas properties can be bought and sold. Yet a market exists for such properties. Potential buyers and sellers constitute this market, and markets exist for each type of property interest. For example, nontaxable institutions and funds are predominant purchasers of choice producing royalties. Market knowledge is as vital to an able appraiser or a successful buyer or seller as is information on prior sales. Market Forces Petroleum is the leading source of energy in the United States and the Free World, and the competition to supply this energy is fierce. The resulting instability of refining and marketing earnings has created a great demand for producing properties. At the same time, there has been a growing trend toward liquidation by many producers. However, demand continues to exceed supply, creating a "sellers market" this is the dominant force in the producing-property market today. Other factors include economic conditions, political stability, proration, import regulations, discovery success, availability of capital and financing, and the quality of available properties. Pitfalls The more common causes of unsuccessful attempts to purchase producing properties may he traced to smugness and or laziness on the part of the appraiser. A firm belief in the accuracy of a first computation often dooms a transaction. Computations are the tools of an evaluator they are not the final answer. Only judgment and common sense can yield a proper result. How many assumptions or approximations are made in an engineering appraisal? Usually several hundred. Fig. 2 schematically represents such a calculation. JPT P. 727^
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