Economics: 2021 #31

A company has two good but highly speculative opportunities to invest in, gas field A and oil field B, yet only enough capital to invest in one due to a stiff interest rate of 15% for both. The investments and expected cash flows are below. Which alternative should be selected based on NPV analysis?
A) Investment A; NPV of A >$50,000 more than “B”
B) Investment A; NPV of A <$50,000 more than “B”
C) Investment B; NPV of B <$50,000 more than “A”
D) Investment B; NPV of B >$50,000 more than “A”
A and B
Initial invest: $200M and $300M
Annual revenue: $100M and $150M
Annual expense: $10M and $25M
Invest life (yrs): 7 and 7
Salvage Value: $50M and $175M

Economics: 2016 #10

Problem 10. An investor buys a lease for a 12.5% landowner royalty. An engineer is retained to work the lease for a 5.5% overriding royalty interest. The first investor sells...but keeps a 12% overriding royalty interest with a 25% back-in working interest...net revenue ownership interest for the engineer after payout is closest to: (A) 7.5%; (B) 3.75%; (C) 4.75%; (D) 5.5%

This one is easy; the engineer’s share is an "overriding royalty interest" and thus not effected by anything after his initial 5.5%, hence, 5.5%. See 10 ECN 2 for the definition of ORRI and a more complex example that includes this part.

NPV, dNCF, PVR: 2017 #76

A tool was purchased at the start of 2011 for $240M. It returned $65M each year...sold for half price end of 2016. 6% discount rate. NPV, dNCF, & PVR are closest to ($M)?

Solution:
NPV: -240+61+58+55+51+49+46+85 = 165 (A)
dNCF: 153.8+240 = 404
PVR: 164/240 = 0.68.

Since 2/3 of the choices are closest to A, we select (A). Source: 10 ECN 1.

Economics: 2017 #11

Problem 11. Your company invests $100,000 in operating equipment that returns $40,000 annually for 3 years. The interest rate is 5 percent. The equipment has a salvage value of $50,000. The investment’s discounted net cash flow ($ thousand) is closest to:  (A) $142  (B) $152 (C) $42 (D) $52.

Solved in the Guidebook for Net Present Value (NPV).  This problem, however, asks for discounted net cash flow (NCF). So just ignore the initial investment of $100M: answer (B).

This problem is too easy but I include it to help practice reading questions carefully. Note that the NPV answer is included as an option, and since that's a more common calculation it's the kind of mistake can happen to anyone. So always check work.

Economics: 2018 #57

Problem 57. Two 20-year leases are considered for investment:
Type/Investment: Gas/$450M; Oil/$720M.
Type/Annual Revenues: Gas/$90M; Oil/$135M.
Type/Annual Expenses: Gas/$9M; Oil/$11.7M.
Type/Salvage value: Gas/$45M; Oil/$67M.

If the cost of unlimited capital is 15%, the statement most TRUE regarding NPV analysis is:

(A) The difference between the oil and gas leases NPV is between $0 and $5,000.
(B) ONLY the oil lease investment may be chosen.
(C) ONLY the gas lease investment may be chosen.
(D) NEITHER the oil or gas lease investment may be chosen.

Guidebook 10 ECN 1 and Petroleum Engineering Handbook I, Mian, PennWell (1983) can help on this problem. Once you know about NPV, the difficulty becomes apparent. Which is: 20 years is difficult to calculate by hand for the two scenarios. It can be done, but time is precious. Use PWF (present worth factor) for the salvage & SCAF (series compound amount factor) for the revenue: 
-450M+(90M-9M)(SCAF)+45,000(PWF)
-450M+(90M-9M)(6.2593)+45,000(0.0611) = $59,753
-720M+(135M-11.7M)(6.2593)+67.5M(0.0611) = $55,896

UPDATE: It seems most don't have access to the tables so I'm going to show the calculations for SCAF for a number of years (n) at an interest rate (i) is:  
SCAF = {[1 - (1 + i)^(-n)] / i} = (1 - 1.15^(-20)) = 6.2593.
And of course PWF is in the Guidebook:
PWF = (1 + i)^(-n) = (1.15^(-20) = 0.0611

Anon below points out the formula (arranged differently) is in HS1 P777. It's called the "Series CAF".

Probability: 2018 #38

Problem 38. When investigating a lease your geologist estimates there is a 40% chance of finding marketable oil, an 80% chance of finding marketable gas, and a 30% chance of finding marketable oil with marketable gas. The estimated probabilities of finding any marketable hydrocarbon, only marketable gas, and no marketable hydrocarbons at all (respectively) are:

(A) 90%, 50%, 10%
(B) 85%, 60%, 15%
(C) 90%, 60%, 10%
(D) 80%, 40%, 20%

For many, even most, this problem is difficult to do in six minutes. Why? It's uncommon, not intuitive, and working out the logic takes too much time to learn on the spot. However, the problem style is in the Guidebook as well as Mian's (I think), and since I also remember this sort of thing in the SPE HS (I think) it's definitely fair game. Note I cranked this one out fast, so please let me know if you find a typo!

Solution: A=oil, B=gas
P(A or B) = P(A) + P(B) – P(A and B) = 0.4 + 0.8 – 0.3 = 0.9
P(B only) = P(B) – P(A and B) = 0.8 – 0.3 = 0.5
P(neither A or B) = 1 – P(A or B) = 1 – 0.9 = 0.1
Key 0.4+0.8-0.3=0.9; 0.8-0.3=0.5; 1-0.9=0.1 (A)

Cash Break Even (CBE): 2016 #80

An investment had net cash losses of $5 million and $12 million in the first and second years, respectively, but gained $4 million, $8 million, and $15 million in years three, four, and five, again respectively. The number of years required for cash flow breakeven was closest to:  (A) 4.6 (B) 4.5 (C) 4.4 (D) 4.3.

On this problem, NCF is calculated for each year until the accumulated amount is passes from negative to positive. One then iterates to find the exact time. To do this quickly, make a table (below):

Year 1 2 3 4 4.33 5
NCF (5) (12) 4 8 15
Cum (5) (17) (13) (5) 0 10
CBE yr 1 2 3 4 4.33 5

This problem is pretty easy since NCF is given directly and need not be calculated. Cumulative cash flow goes from (5) to 10 in years 4 and 5, respectively. So going 1/3 of the way between 4 and 5 gives about 4.33 This is closest to (D).

Discounted Cash Flow: 2016 #72

Investment of $100M returns $40M/yr for 3 years when it is sold for $50M. Discount rate 5%.  The net discounted cash flow ($1,000/yr) is closest to?

This is a painfully easy problem. IF you know is that NCF leaves off the initial cost of the item AND it still includes the discounted salvage value. That's the whole ball game.

40(1.05)^-1 + 40(1.05)^-2 + 40(1.05)^-3 +50(1.05)^-3 =
$38.1 + $36.3 + $34.6 + 43.2 = $152 (all values M) or (A).

ESP Cost: 2005 #58 (similar)

ESP economic analysis: 7" vs 5" casing & pumps to 3,400 ft.
7" vs 5": casing $14 vs $12/ft & ESP $41 vs $28/stg (motors $25/hp).
TDH of 1,860' & 3,000 bbls of H20 required.

1) Given ft/stage (or on provided chart): 5" is 16'/stage & 7" is 44'/stage
2) 5" & 7" Stages: 1860'/16'/stage = 117 stages & 1860'/44'/stage = 43 stages (round up)
3) 5" & 7" Costs:
a) Casing: 3400'($12/ft) & 3400'($14/ft) = $41M & $48M.
b) Pump: 117 stages($28/stage) & 43($41/stage) = $3M & 2M (use curves as needed).
c) Motor: 117($0.58 BHP/stage)$25/HP & 43($1.4/stage) BHP/stage)$25/HP = $2M & $2M (use curves as needed).

Total 5" or 7" Costs: $41+$3+$2 or $48+$2+$2 = $46M or $52M.

Fishing Risk: 2005 #76 (similar)

This problem is just like the Guidebook, you merely enter the numbers as given into the equation; $400M sidetrack, $100M cost of fish,  $50 daily cost of rig and fishing. Then apply the even-money risk factor of 50%. Note these problems can get a lot more complex. Don't let that worry you, just follow the logic and keep the basic equation intact.

[($400M+$100M)/($40M+$10M)]0.5 = $500M/$50M[0.5] =  5 days.

Economics Present Worth: 2005 #27 (similar)

Assume a $700M investment, a lease abandonment cost of $50M, and a 15% discount rate. Then assume the following years of revenue (minus expenses & taxes):  $650M, $330M, $150M. For Present Worth, use the standard NPV formula:

-700M + 565M + 250M + $99M - $33M = $180M

This is painfully easy except for the abandonment cost part, which must be both subtracted and discounted (it's easy to space out on either of these; the typical problem uses salvage value, which is added not subtracted). Watch for the answer options to offer solutions for either mistake.

I can't implore enough to warily check these "easy" economics problems. The number of smart guys who miss these problems is myriad. I triple check these because they are so easy yet so easy to slip up on. Because overconfidence.