How to Evaluate an Oil and Gas Investment Opportunity

Start with the Operator

The single most important variable in any oil and gas investment is who's running it. How long have they been drilling? What's their completion rate? Do they invest their own capital alongside investors? Ask for references from existing investors. If the operator won't provide them, keep looking.

Look at the operator's track record, not just the successes, but how they handled the wells that didn't work out. Did they communicate actively? Were costs close to the original AFE? Transparency during the bad times tells you more about an operator than performance during the good times.

Read the AFE

The Authorization for Expenditure is your cost blueprint. It breaks down every dollar: drilling, completion, facilities, and contingency. Look at the IDC/TDC split, this determines your first-year tax deduction. A typical split runs 65-80% IDCs, 20-35% TDCs.

Compare the AFE to actual costs from the operator's prior wells. If they consistently come in 20% over AFE, factor that into your projections. A 10-15% contingency line item is standard. If there's no contingency, that's a red flag.

Evaluate the Geology

Ask for the geological basis of the prospect. What formation is the target? What's the porosity and permeability? Are there producing offset wells nearby? How many, and what do they produce?

A good operator will provide a type curve derived from offset well data, actual production histories from wells drilled in the same formation within a few miles. If the projections are based on a single analogue well 50 miles away, the geological risk is much higher than presented.

Check the Decline Curve Assumptions

Review the production forecast. What IP rate is assumed? What decline model and b-factor? What oil and gas prices are used? A conservative operator uses current strip pricing, not $90 oil in a $65 market.

Calculate the breakeven oil price, the price below which the well loses money after operating costs. If breakeven is $55 in a $70 market, you've a cushion. If breakeven is $65, you're one price swing from underwater.

Red Flags

Guaranteed returns, there are no guarantees in oil and gas. Pressure to invest before year-end without adequate time for due diligence. AFEs that lack line-item detail. Operators who won't share offset well data. Excessive promotional fees that eat into invested capital. And any program structured as a limited partnership that claims active tax treatment, the Section 469 exception specifically excludes LP interests.

BassEXP welcomes due diligence. We provide complete AFEs, geological data packages, offset well comparisons, prior program results, and direct access to our team for questions.