2019 Texas Oil & Gas Property Value Update

Transcription

1 2019 Texas Oil & Gas Property Value Update OIL & GAS APPRAISAL 101: Oil & Gas Terms, JD, RPA, RTA, CTA Oil & Gas Oil wells produce Barrels (bbls) of Oil and may produce some gas, called Casinghead Gas (mcf). Gas wells produce Gas which is measured in million cubic feet (mcf), and may produce some oil called Condensate (bbls). Both oil and gas wells can produce water. Other Well Types Disposal Wells provide a place to dispose of unwanted brine, or salt water. P&A Plugged& Abandoned Wells Operators are legally obligated to pour concrete down an abandoned well in order to properly seal it off. The average cost to P&A a well can exceed $30,000.

2 Lease Operating Expenses The day to day costs of operating the lease. Do NOT include one time capital expenses such as workovers. For Ad Valorem Tax purposes, we use the prior year s average monthly expense adjusted, if necessary. Reserves The Oil or Gas that is still in the ground. THIS is what we value for ad valorem tax purposes! Usually not all reserves are produced before reaching the economic limit of a lease. Reserves are what we value. Not current income. Operator The Company who contracts with the mineral owners to drill the well(s). Usually owns the Working Interest. Responsible for all Costs and Equipment. Working Interest (WI) Usually belongs to Operator. Largest Interest because they take all the risk. Gets credit for Lease Operating Expenses. But also gets taxed on Equipment.

3 Royalty Interest (RI) Usually the owners of the land &/or mineral interests. Can own mineral interests without owning surface land. Allow operator to produce minerals for a portion of what is earned. Little or no risk. NO credit for LOEs; not taxed on equipment. Overriding Royalty Interest (OR) Treated like a Royalty Interest for Ad Valorem Tax purposes. Investors who buy into a lease in the hopes of recovering more than they invest. WIs look for these when they want additional capital and the interests usually come out of the WI amount. Own no interest in the property itself. Interest in property dies with the lease or zone. Lease One Railroad Commission number (ie or ) May be assigned a Permit number that is later replaced by a Railroad Commission number (ie ) Usually one single gas well or a number of oil wells, on one specified tract, producing from the same reserves. Field An area where various reserves are available for production. Consists of many leases all producing different reserves.

4 Unit or Unitized Field For Ad Valorem Tax purposes, a Unitized Field, or Unit, is a group of leases within one Field that are all effecting each others production. In order to produce the entire field as efficiently as possible, the operator will unitize, or pool, all of the production and pay royalties based on % ownership in the entire unit rather than in individual leases. Economic Life The point at which it is no longer economical to produce the lease. When it costs more to produce the lease that you will make from it. Usually occurs before all reserves are depleted. COSTS > INCOME 3 KEY FACTORS IN OIL & GAS APPRAISALS: PRODUCTION PRICES COSTS Production

5 PRODUCTION Operator reports production to Texas Railroad Commission & Comptroller (for Severance Tax purposes.) 2 3 months behind actual. (We just received production thru October 2018.) Report will show Oil, Gas and Water production (if reported). For 2019 appraisal, use production through December RRC DISTRICT 1 Oil and Gas Production Annual Oil (bbls) Gas (mcf) Casinghead Gas (mcf) Condensate (bbls) ,042, ,110, ,916,948 52,840, ,982,448 1,015,950, ,543,390 54,862, ,526, ,096, ,452,683 44,204, ,008, ,176, ,165,888 35,913, * 188,713, ,880, ,248,840 28,330,970 3% increase in OIL Production ; 21% decrease in 2016; 13% decrease in 2017; 2.5% increase in (1.3% DECREASE with condensate.) 17% increase in GAS Production ; 17% decrease in 2016; 14% decrease in 2017; 10% decrease in (7% decrease with casinghead gas.) Data Source: Texas Railroad Commission *2018 Annual Production Estimates based on actual production through October 2018 plus estimates for Nov & Dec. New Well Production RRC District 1 NEW WELLS FOR 2015 = 3554 NEW WELLS FOR 2016 = 2898 (18% decrease) NEW WELLS FOR 2017 = 1647 (43% decrease) NEW WELLS FOR 2018 = 804 (51% decrease) OIL & GAS APPRAISAL 101: The Appraisal The appraiser gets all of the production information for each lease from the Railroad Commission and the Comptroller each year by early March. We graph the historic production points on a curve to determine the decline of the production on January 1 and a projected production curve throughout the economic life of the lease. The point at which it is no longer economical to produce the lease (it costs more than it is earning) is the economic life, as determined by the production curve. NEW WELLS FOR 2019 = 1484 (85% increase) Source: TX RRC Summary of Drilling & Plugging Reports

6 Discounted Cash Flow Analysis Each year of the DCF has a different price to year 6, then price is frozen for life of lease. Prices

7 OIL PRICES TAX CODE OIL OR GAS INTEREST (summarized) 1. use the average price of the oil or gas from the interest for the preceding year multiplied by 2. a price adjustment factor as the price at which the oil or gas produced from the interest is projected to be sold in the current year of the appraisal. FOR APPRAISALS Crude Oil Change Year 1 $ $ % Year 2 $ $ % Year 3 $ $ % Year 4 $ $ % Year 5 $ $ % Year 6 EL $ $ % Change Year 1 $ $ % Year 2 $ $ % Year 3 $ $ % Year 4 $ $ % Year 5 $ $ % Year 6 EL $ $ %

8 Change Year 1 $ $ % Year 2 $ $ % Year 3 $ $ % Year 4 $ $ % Year 5 $ $ % Year 6 EL $ $ % Change Year 1 $ $ % Year 2 $ $ % Year 3 $ $ % Year 4 $ $ % Year 5 $ $ % Year 6 EL $ $ % Change Year 1 $ $ % Year 2 $ $ % Year 3 $ $ % Year 4 $ $ % Year 5 $ $ % Year 6 EL $ $ % * Change Year 1 $ $ % Year 2 $ $ % Year 3 $ $ % Year 4 $ $ % Year 5 $ $ % Year 6 EL $ $ % * Estimates ONLY!!

9 * Year 1 $ $ Year 2 $ $ Year 3 $ $ Year 4 $ $ Year 5 $ $ Year 6 EL $ $ OIL PRICES WTI crude oil prices averaged $65.18 per barrel in EIA estimates $54.19/b in A roughly 17% decrease in oil prices, compared to a 1% increase last year. Source: EIA, Short-Term Energy Outlook, December 2018 For Ad Valorem purposes, we used $50.57 in 2018 and one estimate for 2019 is as much as $65.06 in 2019, a 29% increase. * Estimates based on December 2018 STEO data.) BUT WAIT!!!!! WTI crude oil prices averaged $65.18 per barrel in EIA estimates $54.19/b in A roughly 17% decrease in oil prices, compared to a 1% increase last year. Source: EIA, Short-Term Energy Outlook, December 2018 For Ad Valorem purposes, we used $50.57 in 2018 and another estimate for 2019 is $54.19, only a 7% increase * Change Year 1 $ $ % Year 2 $ $ % Year 3 $ $ % Year 4 $ $ % Year 5 $ $ % Year 6 EL $ $ % * Estimates ONLY!!

10 GAS PRICES * Year 1 $ $ Year 2 $ $ Year 3 $ $ Year 4 $ $ Year 5 $ $ Year 6 EL $ $ * Estimates based on December 2018 STEO data.) FOR APPRAISALS Natural Gas Change Year 1 $ 3.86 $ % Year 2 $ 3.91 $ % Year 3 $ 3.97 $ % Year 4 $ 4.02 $ % Year 5 $ 4.08 $ % Year 6 EL $ 4.13 $ % NATURAL GAS: Change Year 1 $ 3.44 $ % Year 2 $ 3.51 $ % Year 3 $ 3.57 $ % Year 4 $ 3.64 $ % Year 5 $ 3.71 $ % Year 6 EL $ 3.78 $ %

11 NATURAL GAS: Change Year 1 $ 2.65 $ % Year 2 $ 2.65 $ % Year 3 $ 2.66 $ % Year 4 $ 2.66 $ % Year 5 $ 2.67 $ % Year 6 EL $ 2.67 $ % NATURAL GAS: Change Year 1 $ 3.06 $ % Year 2 $ 3.05 $ % Year 3 $ 3.05 $ % Year 4 $ 3.04 $ % Year 5 $ 3.03 $ % Year 6 EL $ 3.02 $ % NATURAL GAS: * Change Year 1 $ 3.13 $ % Year 2 $ 3.15 $ % Year 3 $ 3.16 $ % Year 4 $ 3.18 $ % Year 5 $ 3.19 $ % Year 6 EL $ 3.21 $ % GAS PRICES Henry Hub natural gas spot price averaged $3.17 per MMBtu in EIA forecasts them to average $3.11/MMBtu in 2019, a 2% decrease. Despite low inventory levels, EIA expects growth in the US natural gas production to put downword pressure on prices for Source: EIA, Short-Term Energy Outlook, December 2018 For Ad Valorem purposes, we used $3.13 in 2018 appraisals but one estimate for 2019 is as high as $3.36 for 2019, a 7% increase. *Estimates ONLY!!!

12 BUT WAIT!!!!! Henry Hub natural gas spot price averaged $3.17 per MMBtu in EIA forecasts them to average $3.11/MMBtu in 2019, a 2% decrease. Despite low inventory levels, EIA expects growth in the US natural gas production to put downword pressure on prices for Source: EIA, Short-Term Energy Outlook, December 2018 For Ad Valorem purposes, we used $3.13 in 2018 appraisals but another estimate for 2019 is $3.11, less than a 1% decrease. NATURAL GAS: * Change Year 1 $ 3.13 $ % Year 2 $ 3.15 $ % Year 3 $ 3.16 $ % Year 4 $ 3.18 $ % Year 5 $ 3.19 $ % Year 6 EL $ 3.21 $ % *Estimates ONLY!!! Lease Operating Expenses (LOE) Costs of Operation The day to day costs of operating the lease. Do NOT include one time capital expenses such as workovers. For Ad Valorem Tax purposes, we use the prior year s average monthly expense adjusted, if necessary.

13 ALONG WITH PRODUCTION AND PRICE, VALUE IS ALSO A FUNCTION OF COST. As Lease Operating Costs go Down, Lease Values Go Up and Vice Versa. A LEASE THAT IS EXPENSIVE TO OPERATE IS LESS VALUABLE THAN A COMPARABLE LEASE THAT IS NOT AS EXPENSIVE. Lease Operating Expenses Come only from the Operator of the Lease; not recorded publicly. Can vary dramatically from lease to lease and operator to operator. Additional Economic Impact Can cause a huge difference between Noticed values and Final values.

14 ADDITIONAL IMPACT Pipeline Values should increase as production increases. Hotel Occupancy rates may increase as workers come in to drill new wells or re work old wells. Hotel Prices may increase as occupancy increases. Business Personal Property should slowly increase as support businesses get back on their feet. Where are we for 2019? OIL OIL Values If starting prices are in the $60 range and escalating, then values should be up from 2018; above the 2015 levels, but not anywhere close to But, starting prices could be up only slightly, in the $50s and still not up to the values of Costs are stabilizing as support companies stabilize and become fewer and leaner which also helps get us back closer to 2015 values. Where are we for 2019? GAS GAS Values Production is strong, because demand is growing, but that strength is keeping prices down. Fewer new gas wells for Prices are keeping people out in the Eagle Ford where oil is king. Prices are either going to be flat for 2019 or up just a little. Likely not enough to offset depletion, so there will likely be a loss in over all value from gas.

15 What about beyond 2019? The Texas Legislature is back in session and is focusing on property taxes. SB 211 allows for appeal to JP Court on accounts where taxes are less than $5000. Would include mineral accounts. QUESTIONS? 2019 Texas Oil & Gas Property Value Update Thanks for coming!, JD, RPA, RTA, CTA