Texas Property Tax on Producing Wells & Minerals

Texas counties are about to send out the 2020 property valuations for producing minerals and wells. Valuations are based on average prices in 2019, production volumes, decline curves and estimated well life on January 1, 2020. Generally the taxes due have been around 3% of annual income. This will certainly not be the case where prices have fallen so precipitously and many wells are being shut-in or having the production choked back.

The state of Texas General Land Office (GLO) is allowing wells under State leases to be shut-in through December due to the low prices. This includes RAL leases for mineral classified lands. So it is possible that mineral owners will receive income only through May or June and then no income for the rest of the year. This means that mineral owners need to put aside the current income now to pay property taxes at the end of the year. And that tax could be 15%+ of the total income for the year for wells shut-in now.

Valuations can only be protested for a short time in the spring. Consider contacting your state representative, state senator and Governor Abbott about property tax relief this year.

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Attention Texas producing mineral owners (ie, royalty owners) - this is important.

Ditto! This is VERY IMPORTANT.

Also, consult with your accountant about your potential quarterly IRS federal payments for 2020. They may be based on your income from 2019 and you may not have that income this year. Even though they may not be due until July 15 for Q1 and Q2, you do not want ugly surprises for Q3 and Q4 if you are having reduced (or no) income come in. Shut in wells have no royalties. And you may see the effects of really low oil prices for months to come. You need to get a plan NOW for how to plan ahead. Last year was a pretty good year. This year, not so much, so figure out what to do quickly.

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Valuation based on 2019 prices? I thought it would be pro forma prices, i.e., expected future prices, not 2019 historical prices?

This will be my first time, our first well only commenced production early 2019.

Yes, the future value is run based on 2019 average prices, then held flat into the future life of the well. There will be a very large disconnect this year between market value Jan. 1, 2020 and current market value when tax appraisals are received…

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I received my first 2020 tax appraisal and was shocked to see values increase. I contacted the outside mineral appraiser and was told they “are required by law to use last years pricing and outlook for 2020 going forward as January 1 is the appraisal date.” They also stated that current prices will not be accounted for until the 2021 appraisal. This was a small lease and I will be interested to see my larger properties.

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Received notice of appraised value from one county which included an insert that starts off - “*Even in these difficult times where everything is subject to change on a daily basis. We want you to know that we are sympathetic to the current economic situation we all find ourselves in. However, the Texas Tax Code requires the appraisal district to appraise all property at it market value as on January 1st each year. It is vital that our values are representative of that January 1st value because school funding may be reduced if the Comptroller’s Property Tax Assistance Division determines that the appraised values in any school district fall outside of their tested confidence internal.” viz.

I interpret this to mean, yes the value has fallen off a cliff, but tough luck for you and do not expect any relief from this county. What I have seen so far, overall values are same or up and so the taxes will be the same as last year. Important to budget for paying property taxes in the fall.

One should not get too carried away about getting their mineral taxes lowered by protest in Texas. They have to use 1/1/20 values and it is based on a weighted average of 2019 prices received and production, with assumptions for decline curves. This is a simplification. Therefore, most protests have to focus on the actual prices received versus assumed prices, the decline curve assumptions, and similar arguments. Just going in and saying 2020 prices have crashed and your wells got shut in in 2020 is not going to get you very far in a protest.

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You’re 100% right Wade. You cannot simply go in and protest and think they’re going to lower your appraised value. We are offering our services again this year to help mineral owners protest their mineral tax appraisal. We run economics specific to the mineral owners’ royalty interests and protest on their behalf. When you have sound data behind you, it is much easier to get your appraised value lowered. At least in our prior experiences. Many times, the county’s appraiser does mass appraisals and one small assumption can drastically affect a mineral owner’s appraised value. The attention to detail pays off. -David

I received the same “tough luck” insert. The process of appealing a loving county or other west Texas appraisal is being there. I’ve never thought it worth the trip.

A few months ago, several posts encouraged protesting, primarily challenging the estimated economic life or depletion curve, said such protests often succeed. Same posters also suggested your operator has skills/data to protest or appeal, suggested inquiring if your operator planned to challenge the value.

Our land began producing & paying royalties for the first time in 2019 … should we try to ask if the operator plans to protest/appeal, based on well life (not necessarily 2019 O&G prices)?

Yes, Roy. You should definitely look into that. Especially if you believe they are appraising the value too high. Especially in the first months of production, an appraiser can make the future production look like anything. Using offset analog production curves is crucial and most mineral owners are unable to run those models.

If your operator protests and gets the valuation lowered it may be passed on to the royalty owners. It depends on the reasons for lowering the value. If it was for a reason that would apply to the royalty owners, such as a steeper decline curve than the appraiser used, it would get passed on. If it was lowered because the appraiser assumed operating expenses, then it may not get passed on. The royalty owner doesn’t receive notice the operator got the value lowered, but if you compare the appraisal notices with the year end tax bills, you may notice some were lowered.

Bottom line- major operators are pretty good at keeping their taxes low. Small operators, maybe not so much. If you have a good relationship with your operator, it may be worth working with them on the protest, as royalty owners may cut a more sympathetic figure in front of an Appraisal Review Board than an operator.

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There was mention of contacting the Texas Legislature or Governor about property tax relief this year. Is anyone aware of plans or proposals being considered in Austin as they pertain to oil and gas owners and operators?

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