princeslew and emdyal, what we really need are the numbers.
I'll try to put some numbers on, these are just wild guesses...but the point at the end of this exercise is to show that if I can do it then surely Peter N can do it.
Let's say ERHC is able to secure, I don't know, 40% rights on the marginal fields.
Let's say for a non-Nigerian operator the 40% fields would cost $13 million. But ERHC, because of its "Nigerianaliy" gets to purchase the fields for $10 million.
It then turns around and farms out half of its rights (20%) to an operator for $6 million. This is a win-win, since ERHC paid only $5 million for 20% and the operator would have had to pay $6.5 million but gets a bargain thanks to ERHC's comparative advantage due to its "Nigerianality".
PLUS - with an OPERATOR involved, you have a second set of eyes, i.e. more due diligence on the fields.
So here's where we stand:
ERHC owns 20% and has had a total cash outlay of ($10 million - $ 6 million) : $4 million
It has an operator, who has done joint due diligence, and will be providing ERHC with 20% of all profits on what is drilled, which is ERHC's new revenue stream.
So what would the profits (20% of which is ERHC's new revenue)have to be to at least break even on the investment?
Well that all depends on how risky are the profits from the operation...let's say pretty risky given the Nigerian Delta situation. So I will use a discount value of 20%.
So, as a perpetuity (if I assume these marginal fields will pretty much keep producing during our lifetime), then the break even point will be:
ERHC's Annual Revenues/0.20 = ERHC's total outlay of $4 million.
Solving for ERHC's Annual Revenues, and you get a minimum break-even of $800,000.00 in revenues a year.
Since ERHC's revenues equal to 20% of the profits of the operation, that means the total profits from the oil in the marginal field must equal about $4,000,000.00 (because 20% of that goes to ERHC as $800,000 in revs).
So far so good?
So how much oil must that equate to? Well let's say profits are $50 per barrel. That means the marginal fields must be able to pump out 80,000 barrels of oil per year.
And there you are. So how hard was that? Sure the numbers could be different than in my example, but the calculations don't change really (unless you wanted to use an annuity instead of perpetuity, but the change would be only a slight modification).
So all Peter really has to do is collect those numbers, and plug and chug to a break-even and see if the project is worthwhile.
Krombacher
