Chariot Oil & Gas (OTCPK:OIGLF) has the following two prospects offshore Namibia that they expect to spud in 2012 (values as determined by the independent third party reserve auditor, Netherland, Sewell & Associates, Inc.):

**Tapir South** - 25% chance of success - spud expected early April 2012

90% chance that the prospect, if successful, holds at least 451 million net barrels (P90)

50% chance that the prospect, if successful, holds at least 592 million net barrels (P50)

**Nimrod** - 24% chance of success - spud expected before year end 2012

90% chance that the prospect, if successful, holds at least 631 million net barrels (P90)

50% chance that the prospect, if successful, holds at least 1090 million net barrels (P50)

Chariot Oil & Gas uses the P50 number in its latest presentation because it is the best estimate of the prospective resource if successful. It is equally likely that the prospective resource volumes are higher or lower than the P50 number. Using P50 prospective volumes, the company has provided the following NPV (10) values for barrels of oil in the ground using $70/bbl, $85/bbl, and $100/bbl respectively:

- Tapir South $5.46/bbl, $7.77/bbl, $10.16/bbl
- Nimrod $4.90/bbl, $6.49/bbl, $8.09/bbl

Chariot Oil & Gas goes on to provide the following after tax, stand alone valuations for their prospects, if successful, based on P50 prospective volumes and $85/bbl oil as of 1/1/12:

- Tapir South - $26.94 per share
- Nimrod - $41.55 per share

Below I make the following conservative valuation estimation based on P90 numbers, and using a value of $5 per barrel of oil in the ground:

**Tapir South** - P90 case valued at $5/bbl of oil in the ground

- 451 MMbbl x $5/bbl / 187.64 million fully diluted shares = $12.02 per share
- 25% chance of success x 90% chance of at least 451 MMbbl = 22% probability of at least $12.02 per share PV10 value

**Nimrod** - P90 case valued at $5/bbl of oil in the ground

- 631 MMbbl x $5/bbl / 187.64 million fully diluted shares = $16.81 per share
- 24% chance of success x 90% chance of at least 631 MMbbl = 22% probability of at least $16.81 per share PV10 value

There is a 40% chance that one of these wells will hit. Alternatively, there is a 60% chance that both wells will be dusters which would necessarily not doom the stock. However, to simplify the following calculation, I assume that there is a 60% chance that the stock goes to zero and a 40% chance that the stock goes to at least $12.02.

The optimum bet size is determined by the Kelly Formula. If you are a geek like me, read William Poundstone's book "Fortune's Formula" for an entertaining story of the history of the Kelly Formula. Alternatively, you can get a great understanding of the Kelly Formula just by reading Chapter 10 of Mohnish Pabrai's book "The Dhandho Investor."

I Googled "Kelly Formula Calculator" and I plugged in the odds as 12.02 to 2.80 (current share price as of this writing is $2.80). I entered the probability of winning as 40%. The calculator tells me to bet a little over ¼ of my capital. Too much for me! Too much downside risk. I decided to bet about 2% of my capital. This stock is not for the risk adverse.

**Disclosure: **I am long OIGLF