Value Change in Oil and Gas Production VI. Buy-Out, Farm-Out, or Stand

Abstract

Often a corporation has an immediate cash need, either to avoid insolvency or for further opportunities it deems to be likely highly lucrative. In such a situation a corporation will often attempt to farm-out a percentage of a profitable field, or attempt a complete buy-out so that the corporation can meet its immediate cash needs. Here we show how one can quantitatively evaluate the farm-out price and fraction, or the buy-out price, most likely to lead to acceptance by a tendering corporation, and still maintain the highest chance of realizing the immediate cash needs. When parameters involved in the estimates of future field worth, future costs, and allied field-related parameters are themselves uncertain, we also provide a stochastic procedure that enables one to determine not only the greatest probability of a range of farm-out or buy-out prices being accepted, but which also enables one to determine which of the uncertain parameters is causing the greatest uncertainty. In this way one can see where to improve resolution should it be deemed necessary based on the total uncertainty and volatility of the estimated success chances. Numerical examples are given to illustrate all the various components of the deterministic farm-out considerations as well as the buy-out scenarios, and also for the uncertain parameter situations.