RE:Pay debt or drillThanks , was asking last week if any big math brains could lay down a formula cheers
dllscwbysfn wrote: It looks like a fair bit of debate as to whether it is better to pay off debt or drill for more oil. For me and my calculator it is very clear that at these prices companies are way better off drilling than paying off debt. Lets take a look at the math. I will try to use conservative numbers and please correct me if I am wrong.
Scenario 1 Pay off 3million in debt, over a full 1 year period you would save 240, 000 in interest assuming an 8% interest rate.. So after 1 full year debt is down by 3,240, 000, the following full years you would save another 240,000/year/
Scenario 2 Drill a well that cost 3million and takes 3 months to complete. If this well were to produce on average 300/ b/day and they netted $40/ barrel over the next 9 months they would receive 3,240,000. So after 1 full year comparing these 2 scenarios the company would be even. So what happens the following year(s). Lets say oil prices crash and they only make $10/barrel. That works out to be about 1 million/year. So under a pretty conservative scenario it looks like they would make 4 time more money drilling than paying off debt.