Probability and COS.

I read a post which really concerned me about oil drill and more specifically drill campaigns. It is absolutely vital for any investor in an exploration oil stock to understand cos and how it applies to multiple drills.

So firstly what’s cos? Cos stands for chance of success. 

This is not the chance that xxxx bopd will be found in the drill, nor that the drill will be commercial. It’s the chances that the drill will be a valid and working geological oil or gas trap. Many wild cat drills have a COS of less than 20%, many drills in existing oil fields will have a COS of more than 80%.

The COS applies to a single target zone normally and not to a large play nor always to a particular drill. For example a single drill will often go through several target zones, each as independent standalone traps, each with their own COS. Popular recent examples of this are Range’s, Lenigas’s and Citation Oils drills.

Now for a very quick overview of probability. I was fortunate enough to have attended a lecture about 6 months ago from a lecturer at Oxford University. Although nothing that was said was ground breaking it did reinforce how misleading probability can often be. With regards to oil we need to know, for example if you drill 5 holes each with a single different target and each with a 20% COS what are the chances that one of them will find oil? Hint it certainly won’t be 100%.

How about if we have a single drill that goes through 3 different targets ?

When working out risk/reward if we don’t understand the risk of the oil not finding oil, we certainly won’t get our risk/reward calculations right.

So probability; firstly the Monty Hall problem. If you know about this feel free to skip it.

“Suppose you're on a game show, and you're given the choice of three doors: Behind one door is a car; behind the others, goats. You pick a door, say No. 1, and the host, who knows what's behind the doors, opens another door, say No. 3, which has a goat. He then says to you, "Do you want to pick door No. 2?" Is it to your advantage to switch your choice?”

The answer is not that you have a 50/50 chance now…..The answer is if you don’t switch you only have a 1/3 chance of winning and if you do switch you have a 2/3 chance of winning. Strange…but true. If you don’t believe me, it’s been proven multiple times by computer software creations and just google Monty hall problem.

So next one, if we have a six sided dice and we roll it 3 times. We have a 1/6^th chance of success with the first roll..But we don’t have a 50% chance of success with 3 rolls….why on earth not.

Well yes the first roll has a 1/6^th chance but next roll is totally unconnected to the first roll, whether you have rolled a 6 or not previously won’t effect whether you roll a 6 on the 2^nd attempt.

However the chances are connected. If you rolled a 6 on the first attempt you wouldn’t have to roll a 2^nd time. On the 3^rd attempt you’ve had 2 unconnected attempts to roll a 6. So a bit of math.

“For three rolls, there is a 1/6 probability of rolling a six on the first

roll. There is a 5/6 probability that the first roll is not a 6. In that

case, we need to see if the second roll is a 6. The probability of the second

roll being a 6 is 1/6, giving us a probability of 11/36. There is a 25/36

probability that neither of the first two rolls was a 6. In that case, we

need to see if the third roll is a 6. The probability of the third roll being

a 6 is 1/6, giving us a probability of 1/6 + (5/6)*(1/6) + (25/36)*(1/6) =

91/216. Again, this is less than 3/6.”

So where does this leave us for investing in oil exploration. Well firstly some oil drills are connected as they have similar caps, an example of this was Loligo for FOGL. However for a company like ROSE where we have a likely 50% COS for one area (paradox) and a 30% chance for a second(mancos). If we add in the complication of 2 possible targets for mancos we get a % chance of one of the any drills well above 70%.

Different drill targets (unconnected) = good. Multiple zones in the same drill = good.

Don’t let idiots mention 20-30% chances and leave it at that, equally don’t let rampers mention 2 drills both at 50%, 100% certainty and believe it.

COS is massively complicated….