that is somewhat problematic, and this is the very one that is frequently the basis for the formation of a new company. The producer need not wait to drill dry holes before he grows skeptical of the productivity of the undrilled portion of his property. He frequently knows that he is approaching the edge of productive territory, because the well records show either progressive thinning or interbedding of the oil sand with shale, or reduction of porosity in a given direction.

Another common error in many a prospectus is the assumption that the new wells that are to be found on a partly developed lease will have as high an initial production as those already drilled. There are two reasons why this is not ordinarily so: First, there is a loss of pressure through the earlier wells, so that when the later wells are opened there is no longer the strong pressure requisite for a large well. Except in unusual pools, one may say that after the pool or even a lease is half drilled, later wells can no more than suffice to make up for the decline in the earlier wells, and will often fail to do even that. As an instance, the Deaner, Oklahoma, pool nearly reached its highest point when only 66 of its wells had been drilled, although it later had 104 wells, and there are probably more to be drilled. Secondly, more frequently than not, the drilling of wells is hurried in the richest parts of the pools and the poorer portions are left till later. Thus, the late wells in any pool are generally located in an inferior, fringing zone around the earlier drilled portion. Of course, the discovery well is sometimes a poor "edge" well, but development soon directs activity to the richer center, so that the rule applies even in such cases.

The prospectus should discuss the possibilities of a deeper sand that may be discovered later, as well as lower sands that may be developed on undrilled portions of the leases. Where an anticline is producing from a shallow sand, chances of a rich, deep sand are sometimes of great importance. The Cushing, Garber, Mexia, Salt Creek and Eldorado, Kans. fields are examples where this has proved to be the case. Indeed, in the case of Salt Creek there is still an excellent chance of still deeper sands.

The quality, price, and marketing facilities of the oil, or the expected oil, should be given consideration in the prospectus. Sometimes it is admitted that the oil is heavy, but the claim is made that it has extraordinary value as a lubricant. Such a statement should be taken with great skepticism, as only rarely have such claims actually been justified in the price eventually realized for the oil.

Where the prospectus makes much of the high gasoline content of

the oil, the reader should bear in mind that, in general, wells are smaller where the oil is very light. In general, a well that has the average gravity for its general district in the sand in question is likely to be larger than if the oil were either lighter or heavier.

The rate of decline in the production of oil wells is greater than is popularly supposed. Hence, to lay great stress on present earnings is unfair. In the case of the McKeesport gas boom of 1919, although gas has produced fewer booms than oil, an investment exceeding $20,000,000 produced a product of only $2,750,000. It was this practice that led to the absurd overvaluations in some of the Towanda, Oklahoma, royalties, where some of the units sold consisted of 1/60,000 of a 1/6 interest of a 1/8 royalty of 80 acres. Especially before investing in royalties, should the investor inform himself of the rate of decline to be expected in the class of properties in question. In fact, this factor alone usually determines the success or failure of the investment.

Passing now to the data which should be presented in respect to undeveloped leases and this applies in part to the undeveloped portions of leases partly developed - the prospectus should contain a complete list of the leases, giving in tabular form the acreage, length of term, royalty, rental date, and date when the first rental is due. The location of the best favored leases should also be shown on a map, which should indicate by contours the geological structure of the region, if this is public or already in the hands of competitors. The text should state the depths to the horizons from which production is expected, and the reasons for believing that production may be found at such horizons.

Financial data should include the amount of stock outstanding, an inventory of any cash on hand or property other than the developed or undeveloped properties, and the amount of stock being offered and at what rate, also the amount held as treasury stock, if any.

A complication in buying stock in a company is that the investor is not merely buying a share in a definite property, but is also buying a share in such properties as the management may later buy or develop. The prospectus must therefore give the personnel of the directorate and officers, and should outline their policy. The investor should also remember that, in the oil business especially, the management should be in the hands of specialists; therefore the interested investor should not be greatly impressed by the names of prominent bankers, farmers, or miners in the directorate or on the list of officers. Many such locally prominent people have had no better judgment than to actually buy, as a speculation, subdivisions of leases twenty feet square. This

is an ancient swindle and has become a joke among oil men, but is still perpetrated at intervals.

On the other hand, while ill-advised purchases or development on the part of the management may ruin a hitherto promising company, a really efficient company has an important value as a going concern. Its widely distributed staff gathers information that is collectively of great value, and landowners are constantly bringing their offers to such an organization.

Any one oil lease, unless it be of a very unusual character, has too short a career to constitute the property base for an oil company. The best profits must be expected in the company which keeps on hand an adequate reserve of promising undrilled lands and which acquires more leases as these areas are developed. In fact, if the company owns a refinery, its needs demand such a continuation policy. In these then, all the more, must the investor be influenced by considerations of the efficiency of the personnel. This efficiency cannot be measured by the financial status of the company at any one particular time.

Since the productive leases will soon decline, it follows that the investor, when examining the prospectus or the annual reports of oil companies for a choice of investment, should consider the reserves of leases on hand as second in importance only to the producing property on hand. It is the quality, rather than the mere quantity, of leases that must be considered. The heavy burden of annual rentals on an extensive but ill-chosen reserve can ruin even a strong company.

The reader of the prospectus may properly feel alienated by devices generally characteristic of lurid stock promotion and not based on sound practice. One such method is offering stock at absurdly small par values. There can be no sound reason for par values of less than $10 per share in any oil company, because the very small investor who would desire less than an investment measured in $10 units cannot afford to give the amount of study required in selecting so variable a thing as an oil investment. Much space devoted to the profits that other people have made by investing in other oil stocks raises the presumption that there is a lack of merit in the present offering, since it must resort to devices not based on its own merit. Other common faults are the announcement of an advance in the offering price to take place at a set date, and the use of pictures of the large wells of other companies or of pictures of the promoters or officers, before the company has won its way. In general, appeals to feeling should repel a man who is looking for real information in the prospectus.

Where professional maps are given or professional reports are quoted, the investor will do well to discriminate as to the degree of expertness of the author cited. Where the report is paraphrased, the investor should ask to see the original report; this is also a wise plan to follow if the abstracts do not seem to be fairly selected.

The wise investor, then, should be very much more discriminating in his judgment of oil companies, and of the oil company prospectus, than he is. A critical examination of the prospectus permits the wellinformed reader to winnow out those companies which are worthy of further attention from those whose success is unlikely, for a company not equipped to present a proper prospectus is presumably less well equipped to operate successfully.

CHAPTER XIII

THE ANNUAL REPORT

The board of directors annually submits a report to the stockholders. This gives in summary form a survey and statement of operations, incomes, expenditures, the state of the finances of the company and the condition of its properties at the close of the fiscal or the calendar year. This report is usually compiled with the secondary purpose of interesting potential stockholders and retaining the confidence of the present stockholders. Inasmuch as it is the only definite, official information given to the investors, the report should be a complete digest of all the leading affairs of the corporation. It is the barometer of the business and is used by the stockholders, as well as by bankers, brokers, credit men and the corporation managers.

The treatment of the information in the annual report should be clear and attractive. Many stockholders and investors have little or no training in accounting. They are unable to analyze complex financial statements, and therefore they will greatly appreciate a simple and clear report. Furthermore, as many copies of this annual report may be used to attract new investors, a further effort should be made to compile not only a clear and concise report, but one that is noticeably attractive.

The liberal use of maps, charts, graphs and even of photographs, aids materially in making the publication interesting and readable.

The annual report should give three definite kinds of information: -first, the personnel of the corporation; second, accounting reports; and third, comparative statistical data and miscellaneous reports. No set rule has been followed as to the order of presenting this material, save that the personnel data are placed at the beginning of the report.

The following outline gives a suggestive order for the arrangement of the annual report. When the accounting material precedes the comparative and miscellaneous data, the reader of the annual report is acquainted with the present and immediate condi