Eagle Ford Shale: A “Taxing” Challenge

Ad Valorem Tax Appraisal Symposium

Friday, May 15, 2015

Cotulla, Texas

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Who is Pritchard & Abbott?Who is Pritchard & Abbott?Professional appraisal and information services consulting firmFounded in 1926 to serve a public needEngineers, geologists, accountants, computer programmers and other professionally degreed personnel Over 100 Texas County Appraisal District clients Thousands of Texas taxing entities (counties, schools, etc.) Numerous out-of-state clients100% employee-owned companyFully integrated firm able to satisfy ALL your property tax needs

Appraisal Services

Specialize in Complex “MIUP” Properties– Minerals– Industrial– Utility– Personal Property

Real Estate– Local residential– Business commercial– Agricultural

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E A G

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COUNTY CRUDE OIL (BBLS) COUNTY TOTAL GAS (MCF)

1. KARNES 6,312,242 1. TARRANT 47,456,769

2. LA SALLE 4,062,864 2. WEBB 47,195,061

3. DEWITT 3,174,817 3. PANOLA 25,830,804

4. MCMULLEN 2,811,071 4. DIMMIT 21,321,380

5. ANDREWS 2,749,522 5. JOHNSON 20,999,335

6. GONZALES 2,736,350 6. WISE 17,396,196

7. MIDLAND 2,666,941 7. KARNES 16,817,865

8. MARTIN 2,587,741 8. DEWITT 15,999,531

9. UPTON 2,575,984 9. DENTON 14,475,541

10. ECTOR 2,087,009 10. LA SALLE 12,530,817

TOP TEN OIL AND GAS PRODUCING COUNTIES - RANKED BY FEBRUARY 2015 PRELIMINARY PRODUCTION*

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*Source: Texas RRC website, Texas Monthly Oil and Gas Statistics

THE TEXAS CONSTITUTIONARTICLE 8. TAXATION AND REVENUESec. 1. EQUALITY AND UNIFORMITY; TAX IN PROPORTION TO VALUE; INCOME TAX; EXEMPTION OF CERTAIN TANGIBLE PERSONAL PROPERTY FROM AD VALOREM TAXATION.

(a) Taxation shall be equal and uniform.

(b) All real property and tangible personal property in this State, unless exempt as required or permitted by this Constitution, whether owned by natural persons or corporations, other than municipal, shall be taxed in proportion to its value, which shall be ascertained as may be provided by law.

Property Tax Code, Appraisal MethodsSec. 23.01. Appraisals Generally.

(a) Except as otherwise provided by this chapter, all taxable property is appraised at its market value as of January 1.

(b) The market value of property shall be determined by the application of generally accepted appraisal methods and techniques. If the appraisal district determines the appraised value of a property using mass appraisal standards, the mass appraisal standards must comply with the Uniform Standards of Professional Appraisal Practice. The same or similar appraisal methods and techniques shall be used in appraising the same or similar kinds of property. However, each property shall be appraised based upon the individual characteristics that affect the property’s market value, and all available evidence that is specific to the value of the property shall be taken into account in determining the property’s market value.

Property Tax Code, Definitions

Sec. 1.04. Definitions.In this title:(1) ‘‘Property’’ means any matter or thing capable of private

ownership.(2) ‘‘Real property’’ means:

(A) land;(B) an improvement;(C) a mine or quarry;(D) a mineral in place;(E) standing timber; or(F) an estate or interest...... in a property enumerated in Paragraphs (A) through (E) of this subdivision.

Property Tax Code, Appraisal MethodsSec. 23.0101. Consideration of Alternate Appraisal Methods.

In determining the market value of property, the chief appraiser shall consider the cost, income, and market data comparison methods of appraisal and use the most appropriate method.

(Enacted by Acts 1997, 75th Leg., ch. 1039 (S.B. 841), § 22, effective January 1, 1998; am. Acts 1999, 76th Leg., ch. 1295 (S.B. 1641), § 1, effective January 1, 2000.)

Limited to just one?

Income Approach• Used for all types of income-producing properties (office buildings,

retail, multi-family structures, hotels, mineral interests, commercial salt water disposal wells, refineries, gas distribution, regulated pipelines, railroads, telecom, electrical generating (including wind farms) and chemical/industrial plants, etc.)

• Income being analyzed is all about the FUTURE!

• Past income can be useful as a guide. However, “past performance is no guarantee of future results.” (Oil price in 2015 vs. 2014, for example)

• Two basic techniques:

• Direct capitalization (V = I / R) (Income must be stable.)

• Discounted Cash Flow (DCF) (allows for variable future income)

• Gross Rent Multiplier or Payout is simple “back of the envelope” indicator of value.

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Appraisal of Mineral Interests

Real Property per Property Tax Code Sec. 1.04(2) (Definitions)

Income Approach to Value– Discounted cash flow (DCF)– All projected future net income discounted

(reduced) to present worth (FMV)– Four main parameters:

Production Price Expense Discount

= Gross Revenuetimes

times

= Net Revenue

= Fair Market Value!

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Simplified DCF Appraisal (RI)

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200 BOPD on January 1, 20145% Royalty Net Revenue Interest (NRI)

a b c d e f g h i

(c x d) (e - f) (g x h)

Future Year

Production Decline

Future Production

(bbls)

Future Oil Price

($/ bbl)

Future Gross Revenue

Future Expenses

Future Net Revenue

Discount Factor

Future Net Revenue

1 2014 65% 43,187 $95.00 $205,138 $19,693 $185,445 0.9325 $172,928

2 2015 40% 25,912 $97.85 $126,775 $12,170 $114,605 0.8109 $92,930

3 2016 30% 18,139 $100.79 $91,405 $8,775 $82,630 0.7051 $58,263

4 2017 20% 14,511 $103.81 $75,318 $7,231 $68,087 0.6131 $41,747

5 2018 10% 13,060 $106.92 $69,820 $6,703 $63,117 0.5332 $33,652

114,808 $568,456 $54,572 $513,884 $399,520

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LA SALLE COUNTY, TX

Projected future production by La Salle CAD (first six years only).

Projected future production by La Salle CAD (first six years only).

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First month avg: 635 boe per dayFirst year decline ~ 65%

~610 mboe reserves (30+ years)

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Loss of income and value

DISCOVERY: Publications / Vendors

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American Gas Magazine (American Gas Association)

Appraisal Journal (Appraisal Institute)

Texas/S. E. New Mexico Oil Directories (Armstrong)

Texas & LA Oil & Gas Directory (Bryam, R. W. )

Texas Statewide Rules (Bryam, R. W. )

Chemical Engineering (Chemical Engineering)

The Wall Street Journal (Dow Jones & Co.)

2012 Gas Turbine World Handbook (Gas Turbine World)

Gas Price Detail (GASearch)

Hydrocarbon Processing (Gulf Publishing Company)

The Oil Field Appraiser (Hadco International, Inc.)

Midstream Monitor (digital e-mail) (Hart Publications)

Oil & Gas Investor (Hart Publications)

Midstream Business (Hart Publications)

SBBI Yearbook 2013 (Ibbotson Associates (Morningstar))

API JAS (HIS)

Aries (Landmark Graphics Corp.)

CD-Rom Texas Historical Production (Lasser, Inc.)

Platts (McGraw Hill Companies)

Commercial Estimator 7 (Marshall & Swift)

Commercial Cost Explorer (Marshall & Swift)

Lexis Nexis (Matthew Bender)

Newspaper - Oil Reports (Midland Reporter)

Car & Commercial Truck Guides (Nada Used Card Guide)

Nebraska Observer Newspaper (Nebraska Observer)

Commercial Trailer Blue Book (PD Price Digest)

WW Petroleum Industry Outlook (PennWell Publishing)

Oil & Gas Journal (PennWell Publishing)

Monthly Spot Market Prices (Pipe Logix)

Line Pipe Price & Key Market Factors (Pipe Logix)

Rig Data Location & Op. (started 05/04) (Rig Data)

Pipeline Shape Files (RRC)

Annual Survey of Econ. Parameters (Society of Petrol. Eval. Eng.)

Property Tax Code Books (Texas Comptroller)

Land Rig Newsletter (The Land Rig)

Value Line Investment Survey (Value Line)

Aircraft Value Reference Book (Vref )

Television & Cable Factbook (Warren Communications News)

Electric Index (Whitman, Requardt & Assoc.)

Gas Index (Whitman, Requardt & Assoc.)

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PRITCHARD & ABBOTT, INC.

for all your property tax needs!

www.pandai.com

VALUATION CONSULTANTS