Two methods for the rapid valuation of oil properties are in common use. Theone best known and most widely used is the "per barrel" value, based onthe present daily production of the well, without regard to its pastperformance or the history of the sand or pool from which it produces. Thesecond method is the "time to pay out," or the length of time requiredfor a well to place itself upon the credit side of the ledger, from which timethe returns from its production (less the operating expenses) will be clearprofit.
The time basis for valuation is also commonly used in the appraisal of anundeveloped lease. In most oil fields, it is not thought good business toinvest in production that will not pay out in at least 4 to 5 years. Nearly allbuyers (except in certain regions of very persistent production like thedeep-sand territory of the Appalachian field) expect wells to pay out inconsiderably less time than this.
Like the barrel-per-day price, the time necessary for a well to pay out hasbeen determined for each field, so that one frequently hears a field ordistrict referred to as having a certain time to pay out. This is consideredthe norm for that field or district and the buyer and seller base their value, to greater or less extent, on their belief in the accuracy of this time.
The writer long ago became convinced of the inaccuracy of the barrel-per-daymethod, except when greatly modified for local conditions, such as the age ofthe wells, their economic limit, operating conditions in the field, the futureprice of oil, and the persistence of the sand as a producer. When so modified, this method becomes more of an analytic or predicted probable-yield valuation.While the appraiser may not go through each step in a valuation based on futurereturnable revenue, his knowledge of the field and the local conditionssurrounding his leases make it possible for him to estimate a fair sales valuethat, in many cases, will be a close approximation to the truth.
AIME 068–82
