Thoughts on why ROI would drill ten shallow wells when the best results are expected from the deeper “Upper Jurassic” formation? (This was written before the post of onedaylate, so I will respond further to his post later)
First, they have the permits to do it.
Second, ROI is learning the geology of the formations.
Third, Amititlan is currently a service contract. While I do not know the terms, other service contracts have performance requirements. A company has to drill a certain number of wells to maintain the contract. These ten wells in the shallow formation are likely required to keep the contract in good standing.
Fourth, drilling at this time makes dollar sense. ROI pays 25% or the cost of each well drilled until the contract migrates to an E & P contract. The other partners pay 75% of the drilling costs. After the contract migrates and ROI picks up its option, ROI will pay 62.5% of the costs. So drilling ten wells before migration costs ROI about $7.5 million as its’ share. After migration it would cost ROI about $18.75 million to drill the ten shallow wells. So ROI needs to get the 10 wells done before Contract migrates. Revenue at this time is negligible as it is a service contract. Once the contract migrates then ROI goes from literally nothing on the revenue side (under $2.00 per barrel) to 62.5 % of the gross revenue after royalties. A real smart move, to be able to pay 25% of costs to drill and then reap 62.5 per cent of the revenue. Suppose ROI averages 150 barrels a day over the ten wells for a daily Bopd of 1500. ROI’s pre migration revenue of about $2.00 per barrel or $3,000 per day upon migration goes to about .625 x 1500 x U.S.$ 62.00 = U.S. $58,275 per day prior to royalties. If Royalties are at 30 per cent then the daily revenue would be about U.S. $40,792 per day.
In the time in between, ROI and its partners will be able to be recovering drilling costs out of the cash flow. ROI with its’ partners may be able to recoup the drilling costs before paying out royalties on the contract after migration. I have no knowledge on this but Mr. Steinke of ROI did indicate at one point that they may not get or ask for cost recovery depending on the royalty structure of the migrated contract or if PEMEX decides to come in as a partner.
If the Upper Jurassic well is completed and in production before the migration of the contract and if it comes in at the 1200 bopd as suggested on their website, then ROI’s share of revenue from that well would go from under $2.00 per barrel or $2400.00 per day to .625 percent x 1200 Bopd x $62.50 per barrel, minus a 30 per cent royalty; the after royalty revenue would be about $32,800 per day.
These combined, along with current revenue would give annual earnings of an estimated thirty (30) million or over ten cents per share. If you take off expenses, about 9 cents per share, and that is just earnings. I will explain the upside of this company in a future post.
The drilling results are all catalysts for an improved share price, but the dramatic jump in share price is going to occur the day the contract migrates. You don’t want to be sitting on the sidelines and you definitely don’t want to be shorting on that date. All of the drilling results from now to the day of migration will determine how big the jump is on that day, which could be any day. You certainly don’t want to be one day late.