What should I look for when buying an oil well for investment?

I'm thinking of investing in producing oil wells. What should I: look for? I calculated a 16% return, but how do I factor in depletion rate, proven reserves, etc? How do I know if its a good deal and are there any formulas? ie 6x EBITDA

You need a history of production, month by month to plot a Decline Curve. From that, you can extrapolate or extend the curve to its economic limit. That will give you a reserve estimate, future cash flow, and what the oil is worth.

If you can get the well records, you can see if there are any extraneous problems or expenses, like hole problems that cause frequent rod parts or holes in the tubing, or an increasing rate of salt water production. That water has to be hauled off at your expense.

I'm assuming the wells are pumping; how new is the equipment and what is the salvage value? If the wells are fairly old, say more than 10 years, and not very deep, salvage value of equipment recovered usually almost equals plugging cost, unless you have somewhere to re-use the equipment or sell it.

If you can't get a payout in two or three years, it's probably not worth doing.

You've got an extremely high risk factor in the price of oil. Although it may not seem likely, oil prices could easily be cut in half this year. You didn't say what price you used to calculate your return.

One other thing. Find out if the owners are the ones that drilled the wells. If they've changed hands several times, forget it. Something is wrong and hidden.

you must have a LOT of money, why dont you comsult a professional?

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