In Texas some local Appraisal Districts over estimate the annual production on a lot of wells. I have seen cases where they were 4 to 5 times greater than the actual production.
Does anyone know how how they can fairly estimate what a well is going to produce the way they are able to do it?
Basically What is the process the the Districts (County) get these values? A local East Texas Appraisal District said that the hire an outside firm that does this for most of the County Districts in Texas.
Most of the districts use TY Pickett or Capital Appraisal. They have a few others but mainly them two. Unless you are a petroleum engineer or have the knowledge to estimate the reserves I would leave that aspect alone. What you can do and have a high probability of succeeding is evaluate the actual price used for gas and oil the appraisal company is using. All you would have to do is calculate the average price per month on a well by well basis. Add them all up and divide by 12. That gives you the average price for the product for the year and then the appraisal company usually uses your price with proof.
The process the appraiser goes through is sometimes not as thorough for pricing as it should be. Sometimes all they do is get a data drop for the entire county and calculate the average price that way. So if you are receiving a hire price you benefit from the lower priced areas in the county. If your prices are lower than the average you are going to paying more than you should. All at the same time the district are going to receive the same amount of money no matter what. If no one disputes their bill it should be nearly if not the exact same as sent out in the estimate. When people start contesting and proving that their production is not receiving as high of price they will get a reduction in value and the tax percentages will go up.
One question i have pondered over the last ten years or so is whether or not each mineral owner is valued exactly the same based on their royalty or whether it differs. Most owners hold say less than 1% of the royalty. But for comparison purposes, lets say there are three mineral owners, each witha 1% royalty on the same well. Now lets say the first one owned 4% of the tract and had a 25% cost free royalty, another had a 5% interest in the tract but had a 20% cost free royalty and the third had 5% of the tract with a 20% royalty but for which the operator was allowed to deduct transportation, enrichment and other costs.
Will the appraisal district these each the same or will each be valued differently and how can you identify other parties with interest in the same wells?
I do not have an answer, but great question!
All of the interests will be valued the same as to the production and then apply the different owners percentage of ownership. The appraiser does not look into each individual lease and lease terms. They will use the tax rate and the average expense for the area. The appraiser will also get financials from the operator in most circumstances.
When someone contests, I do not know if they apply any correction to all of the owners though. I never really looked into that before. I was working for a group of owners or individual owners and just wanted to make sure we reduced their tax expense.
clearly the real economic value is different between the one who has a cost free royalty and the one who does not. Not sure if there is a difference in value for tax appraisals if both are cost free royalties and but one owns 5% of the minerals with a 20% royalty and the other owns 4% of the minerals with a 25% royalty and I guess it flushes thru to the working interest, so should be no difference in value for those two but in reality one owns more than the other, one structured a better lease than the other.
"...how can you identify other parties with interest in the same wells?"
I believe one can find an ownership by well index in the Mineral Roll books at county appraisal district offices [Texas].
It all depends on the decimal interest. Deductions are calculated either average for area of when provided by the operator the actual expenses. In Texas non-producing minerals are non taxable. Only producing minerals. If you get a better lease percentage and own less mineral acres you pay more in taxes because of the decimal interest. If you negotiate no deducts, your value will included expenses even though you may not have them. The county and districts have a budget. They will get it one way or the other. If ever body contests and succeeds in having value reduced it does nobody any good. It is only the few who contest and succeed in having their values reduced that wins.
Most people look at this as mailbox money. Some do not even know why they get the revenue or really care. The people on this forum and others who belong to mineral and royalty owner associations such as NARO are the winners who are actually educating themselves.
If you want to find the other owners of the wells you would have to request the data from the CAD. It will cost you. Other options are to use BlackBart Data Services or have a subscription to Drilling Info. You can go onto Taxnetusa.com and search also. Depending on the amount of information you need or like would depend on which one to use.
In my county the printed on paper Mineral Roll books are available for free to the public.
Brian,
This is a very good post, excellent. The tax districts will "run over you" if you let them. The outside companies they have to supposedly appraise the production don't basis the tax on the actual production, but on the future projected production from what I understand at this time. Most people who work in the govt. positions don't have much money and they seem to want to take it from you and me plus the people receiving the revenue that on the rights. Our money should be theirs they think!
The true valuation is done on the entire lease / well. If one owner has the value of their interest successfully reduced ( actual market value, not an adjustment for incorrect royalty interest amount, etc.) the valuation of the entire lease/well would be reduced proportionately for all interest owners.
That is what I always understood and thus the only party that has a real economic interest in reducing the value is the operator. So basically, the appraisal does not differntiate between cost free royalties and royalties subject to the owners "fair share" of expenses on their part.
thanks.
Just because it does not does not mean it should not: protest the valuation next time and take your argument before the Appraisal Review Board.
Dear Mineral Owner,
This is a great discussion. However, the Appraisal District does not estimate annual production. When you get your tax bill, that has NOTHING to do what the well will do over the next fiscal year. You are not being taxed on production, you are taxed on the value of the asset. The IRS and the state severance tax will base its cut on the value of the production. For example, your house creates no revenue, but it has an asset value. Essentially the same thing.
What they do estimate is the market value of the reserves in place, which may be for 15 years in the future, or less, or more. What they do not estimate or assign any value to is proven reserves behind pipe. Or probable reserves. Only reserves flowing to production.
After talking to the two major firms, what they do is essentially use the futures prices for the upcoming year for valuation of product pricing then use the EIA report on following years and then discount everything back down to a PV number.
So, remember, they are not valuing on product sold, or anticipated to be sold. They are valuing on their estimation of the asset value of the remaining EUR in place.
Best
Buddy Cotten
Great Specific answer and thank you so much!
How do the appraisers get away with estimating reserves or the future prices?
It sounds like "VooDoo" economics to me! Also theft by the counties and state!