is concerned with valuation of reserves, as opposed to determining value. The recent changes by the S.E.C., as part of the modernization of oil and gas reporting, will most likely again affect the valuation process. Remember, these rates apply to publicly held companies, most likely not your subject interest. Integrated Petroleum Companies’ Financial Information Used for WACC Method Total Convert'l Preferred Stock (Millions) Non-Integrated Petroleum Companies’ Financial Information Used for WACC Method
GAS POWERED POST DRIVER SAN ANTONIO TEXAS CODE
36 to 48 times the last three years monthly incomeĪ comparison to the undivided oil and gas royalty funds using the Market Approach to Value is another alternative, as Section 2031(b) of the Internal Revenue Code states that in valuing unlisted securities, the value of stock or securities of companies engaged in the same or a similar line of business, which are listed on an exchange, should be taken into consideration.Ĭurrent information on the WACC method based for both integrated and non-integrated public oil companies follows:.The rules of thumb for purchases currently used in the industry are as follows: In this case, the subject interest is also a security interest, subject to a lack of market discount, which also does not appear in industry practice. As such, it is appropriate to use this methodology to arrive at the fair market value for oil and gas royalties.Īlthough oil and gas royalties are considered real estate, we are beginning to see the emergence of both public and non-public entities, which market undivided oil and gas royalty interests to investors. Texas Tax Code §1.04(7) defines “market value” consistent with the definition of “fair market value” in Treas. Texas Tax Code §23.01(a) requires “market value” county appraisals of taxable property. The use of the financial information is an acceptable practice for the estate tax valuation. This approximates the small company average return of 17.4%, as reported by Partnership Profiles in their oil and gas treatise. Source: Texas Comptroller of Public Accounts: Property Tax Divisionīased upon the reconciliation of data from the sales analysis market survey, the Texas Property Tax Division concludes that a before tax discount rate range of 17.25% to 22.68% is generally suitable for the appraisal of oil and gas properties, unless property specific risk requires use of a discount rate outside this range. *** Discount rate based on the appraisal of 9,806 properties (less ad valorem taxes): 2007 Property Value Study ** Discount rate based on 70 survey responses: Survey of Economic Parameters Used in Property Evaluation, June 2008 * Discount rate based on 78 PDP transactions 1990 – 2005: Analysis of Oil and Gas Transactions and Sales, January 11, 2006 Texas Comptroller of Public Accounts / Property Tax Division *** Society of Petroleum Evaluation Engineers ** See the latest survey, which appears below: Summary of Findings From Annual Sales Analysis, Market Survey, and the 2007 Property Value Study. In addition, the analysts often apply after tax discount rates to before tax indexes resulting in a mismatch of discount rates and cash flow.Īlthough discount rates determined from market sales are rarely used, they are commonplace in the ad valorem taxing industry. safe harbor rate, not a discount rate supported by any recognized build-up WACC method or a market derived method. The discount rate used (often 10%) happens to be the S.E.C. Recently we have been active in the valuation of oil and gas royalties for estate tax purposes and have come to the conclusion that the predominant methods used are determined by Petroleum Engineers often using a reserve appraisal method (see information published by the Society of Petroleum Evaluation Engineers) instead of an income method determined from general business valuation theory. Valuation and Litigation Services Peer Review.
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