The Hole Beneath the Bargain
A letter on buying distressed oil & gas companies
Oc
To my readers
Every few years, someone calls me about an oil company that is “trading for less than the value of its wells.” The production is real. The reserves are real. The price is low because the company is in trouble. On paper, it looks like the kind of bargain value investors dream about.
I have learned to ask one question before I look at anything else: what will it cost to close every well this company owns, and who has already paid for it?
Usually, nobody has.
That is the subject of this letter. I grew up in this industry as a petroleum engineer and later worked as a landman, reading title chains and lease files. I now spend my days building data tools for the same problem, in California. I am not writing to tell you to buy or avoid any company. I am writing to explain how I think about the price of a distressed oil and gas business, because the most important number is usually the one missing from the pitch deck.
The short version: in this industry, a cheap asset is often an expensive liability wearing a discount.
The hidden partner
When you buy an oil well, you buy two things: the oil that is left, and the obligation to close the hole when the oil runs out. The first shrinks every year. The second does not. Labor, steel, cement, and regulation tend to make it larger.
Think of the closing bill as a silent partner in every deal. It takes no dividends while the field produces. It waits. And it always collects, from you, from your lenders, or from the public if you are gone.
The accountants have a name for this partner: an asset retirement obligation. Large companies report it, and the numbers are not small. California Resources Corporation, the state’s largest producer, reported about $1.03 billion of these obligations at the end of 2025, and said a one-point rise in its inflation assumption would add about $94 million. (CRC 2025 10-K)
That is a well-run, well-capitalized company that tells you what it owes. The trouble starts further down the food chain. California has roughly 35,000 idle wells, and the state’s science advisors estimated that about 5,540 may already lack a viable operator, with nearly 70,000 more at risk as production declines. (CCST) In 2021, more than 1,000 operators neither paid their idle-well fees nor filed the required plans. (Assembly analysis)
Those are not bad oil fields. They are bad balance sheets attached to holes in the ground. And that is precisely where “distressed bargains” come from.
| Closing cost per well | Closing cost, present value ($M) | Value to owner ($M) | Verdict at a $20M price |
|---|---|---|---|
| $68,000 | 18 | 27 | Fair deal |
| $150,000 | 40 | 5 | Badly overpriced |
| $220,000 | 59 | −14 | You are paid to take a liability, and you should demand it |
| Line | Pitch-deck view ($M) | Owner's view ($M) |
|---|---|---|
| Asking price | 20 | 20 |
| Value of remaining production (present value) | 45 | 45 |
| Closing 400 wells, undiscounted (400 × $150k) | not shown | 60 |
| Closing 400 wells, present value | not shown | −40 |
| What the business is worth to an owner | 45 | 5 |
| Price paid per dollar of value | $0.44 | $4.00 |
| Assurance a buyer may need to post under AB 1167 | not shown | up to 60 |
The lesson is not that every distressed oil company is a trap. Some are genuine bargains. The lesson is that you cannot tell which is which without knowing, well by well, what the hole in the ground will cost and who has already secured the money.
What I look for, and what I avoid
Over the years I have settled on a short checklist. It is not clever. It is meant to keep me from being clever at the wrong moment.
What I look for:
- A closing bill I can count, well by well. Not a company-wide total in a footnote, but a list: each well, its age, how long it has been idle, and an engineer’s estimate to plug it.
- Money already set aside. Bonds, escrow, or reserves that actually cover the bill. A liability that is secured is a cost; one that is not is a gamble.
- A clean chain of ownership. I want to know who owned these wells before, and why they sold. A field that has changed hands three times in ten years is telling me something.
- Management that plugs wells when it doesn’t have to. Operators who close idle wells every year, not only when the regulator insists, usually run the rest of the business the same way.
- A second life for the site. A well near a geothermal resource, a carbon-storage formation, or land with a better use can turn part of the liability into an option. I treat it as a bonus, never as the reason to buy.
What I avoid:
- Idle wells kept “for when prices come back.” Hope is not a reserve category.
- Fees and plans the state is still waiting for. If an operator ignores small bills to the regulator, it will ignore large ones to you.
- Deals structured to move control without moving responsibility. When the paperwork is designed to make a liability disappear, the liability usually reappears, on the newest owner.
- “Reuse” with no budget, permit, or deadline. Calling a dead well a future geothermal project does not make it one.
- Any price that only works if closing costs stay where they are today. They rarely do.
My rule of thumb is simple. I would rather pay a fair price for a field whose closing bill is known and funded than a bargain price for one whose bill is unknown. The first is an investment. The second is a bet that someone else will pay later, and in California, that someone is increasingly unwilling.
Closing thoughts
The great investors taught us to buy wonderful businesses at fair prices and to stay inside our circle of competence. In oil and gas, that circle has to include the ground itself. The balance sheet you see in a filing is only half the company. The other half is underground, and it sends its bill late.
I am optimistic about this industry’s next chapter in California. Production is declining, but the land, the wells, and the people who know them are not worthless. Some sites will become geothermal plants, some will store carbon, and many will simply be closed properly and returned to the communities around them. Capital will be made in that transition by those who price the liability honestly before they buy the asset.
That is the work I have chosen. If you own, buy, insure, or lend against California wells, I would be glad to compare notes.
With appreciation,
Anelya
This letter is for educational purposes and reflects the author’s personal views. It is not investment, legal, or tax advice, and it is not a recommendation to buy or sell any security. The company and figures in the “Owner’s arithmetic” section are hypothetical. Consult qualified advisors before making investment decisions.