This Week's 'Dumb As a Fence Post' Award

...goes to the undisclosed high bidder in New Mexico's Bureau of Land Management lease auction last week on a 1,180 acre tract in Eddy County, New Mexico. The winning bid, actually possibly the ONLY bid, was $102,086,000.00, or $86,515 an acre (click for article). That beats Concho's record of something like $79,000 an acre in its RSP acquisition and sets a new record, of sorts, for the right to develop unconventional shaley carbonates in the Permian Basin. Some reports suggest some of the stuff in this auction went for over $90K an acre.

Mind you, this is bonus paid for a mineral lease with a 10 year primary term. There is no land associated with it, the Lessee does not own a 30 story high-rise office complex with 100% occupancy and 30 year leases on it and this land does not have a world renown trout stream running thru the middle of it. Probably not even any damn trees. It might have some stinking potash under it but please don't confuse that with gold, or diamonds. If at the end of ten years you, as Lessee, are not producing minerals in profitable quantities (a real possibility at 85% decline rates the first 3 years of well life, then 15% annually thereafter)...you must relinquish that lease and you will walk away nada. Diddly squat. Zilch.

Lets say they can drill this 1,180 acres on 320's and can squeeze four wells on it. I just received several 20,000 ft. TMD lateral AFE's for Wolfcamp wells in Eddy County and they were $10.5MM each. Further, whoever it is that bought that 'Jewel of the Nile' tract of land in Eddy County might be able to get two more stacked laterals out of each wellbore; another in the the Wolfcamp and one more in the Bone Springs, at another $8MM each lateral; they would then have $106MM of development costs on top of the $102MM they paid for the lease. That's $208 million smackers of total CAPEX in the prospect.

Ultimate recovery profiles from realized production data in Eddy County, New Mexico; HZ wells, all benches. Courtesy shaleprofile.com

So, for fun, lets say each of these laterals will ultimately produce 400K BO each based on the above graphic x 3 laterals per well x 4 wells in the unit, that means the unit looks like it could produced 4.8MM BO based on realized production data filed with the State of New Mexico from other Wolfcamp and Bone Springs wells in the county. You can use that BOE BS if you want to, but do it at 22:1, not 6:1, and make sure you can sell the stuff, first. SE New Mexico is lit up like a Friday night Permian High School football game right now from all the flares and no market for gas.

At $65 dollar gross well head prices, deduct royalty of 1/8 of 8/8ths for BLM stuff, market deductions, general administrative overhead (yes, when running a big corporation you must pay for your employees, and overhead, from your oil production), taxes, interest expenses and ever-increasing incremental per barrel lift costs (WOR is increasing and water disposal costs are going thru the roof!!), I'd say net back oil prices at the moment, or take home pay, is about $26-29 per BO. 4.8MM BO x $28 per barrel = $134.4MM net. Round that up to $140MM; add another $20MM of imaginary net income in there for good measure, or if you think after 50 years as a producer I don't know anything about well economics...its still a looser. On a $208MM dollar investment, you might make $160MM of net income if everything goes just right and oil prices stay at $65. That's an economic disaster, actually. If you want to stuff more wells on that lease, and more laterals, help yourself, just add more costs.

And pray you have water to frac with. New Mexico is restricting fresh water use for frac'ing now, in a big way, and a number of tracts in this BLM auction were deferred because of water concerns.

Paying one hundred million dollars for a ten year "lease" is insanity.