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132, 169-170 (1992), affd. sub nom. Hildebrand v. Commissioner,
28 F.3d 1024 (10th Cir. 1994); see also Tallal v. Commissioner,
T.C. Memo. 1984-486, affd. 778 F.2d 275 (5th Cir. 1985).
The Memorandum used three critically flawed assumptions to
support the economic projections of Stonehurst’s asserted
profitability after having paid a 67-percent production royalty.
The first was the assertion in the Coburn report of a 90-percent
chance of finding oil with the projected drilling program, which
as we have found, was completely unwarranted and invalidates the
economic projections. The Memorandum projected as many as 23
wells producing 5 barrels a day in 1981 out of a total of 25
wells drilled. A 10-percent likelihood of finding oil at all
renders virtually nil the possibility that Stonehurst could pay
the minimum annual royalty. This flawed assumption also
highlights internal inconsistencies in the Memorandum, which, on
one page, disavowed any intention to conduct exploratory
drilling, while on another page, warned of the risks involved in
“exploration” for oil.
The second flawed assumption was the projected size of the
reserves. The Coburn report estimated that only 518,400 barrels
of oil would be produced over a 15-year period, while the
economic projections in the Memorandum projected, without any
additional support, that 757,700 barrels would be produced over a
similar period. Neither the Coburn report nor the Memorandum
cited any justification for either estimate. These projected
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