Natural Gas Drilling Investments

How Do I Assess a Potential Natural Gas Investment?

by Lewis Fromkin

Understanding or assessing potential really starts with a two phase process:

1. The company that will be sponsoring the program.
2. The property that the company will be developing or acquiring.

The Company: One of the best ways I have found to analyze the company is to look at their management and track record. Look for solid financial records as well as integrity in their management and operations. The easiest way to find this information is to ask the company for what is commonly called a Due Diligence document.

A due diligence is basically a summary report of the company, its management, its staff, reserves, drilling equipment and track record.

From the due diligence you should be able to determine how well an investor has fared in prior programs, how economical the programs have been and how sound the proposed undertaking might be. Technical due diligence will help eliminate most of the unsound investment proposals.

One area of the due diligence I like to focus on is "Prior Activities."

Basically, this will summarize the programs the firm or company has drilled in the past and how they have fared. Prior activities will cover when the offer commenced, the amount of the offering, the minimum size of units, the method of offering (private or public), the number of wells in the project and the type of wells (development, waterflood, exploration). It will also cover the net revenue, the frequency of payments (monthly, quarterly, dry hole) and it should also state the amount of the promoted interest.

There are many ways to evaluate drilling proposals or acquisitions of producing assets. Generally, the sponsor will provide you with a geological report or engineering report discussing the potential of these reserves.

The Property: The best way to evaluate an oil project is to try to determine how successful the other wells that were drilled in the area were. What we are really looking for is a history of wells that have been drilled in a given area and what type of reserves have been recovered. This should serve as a benchmark in determining the probability of success in this project. In most drilling proposals or geological reports, what has been produced in the past will give a summary or probability of what might be expected in the future or throughout the drilling process.

Analyzing geological and engineering reports is a process that should be undertaken by someone with the proper investment acumen as well as understanding of geology and engineering. The best description of this individual would probably be an energy analyst. However, with a little common sense and time devoted to research and understanding, a non-industry individual should be able to determine the proper investment scenario.

Again, we come back to the question of how we asses the potential of a natural gas investment. There are many aspects of a natural gas project that need to be addressed. Some of these are sharing arrangements, deal terms, liabilities, market for product, pipelines, further development and many other subjects. For further information on this process please contact us.