Oil & Gas Valuation

1. Oil & Gas Valuation Presented by Pat Meyer – Park County Assessor

2. Fair Market Value • Wyoming statutes state that all property except agricultural land will be valued at its fair market value. Fair Market Value is defined by Wyoming Statute 39-11-101(a)(vi) as: • “Fair market value” means the amount in cash, or terms reasonably equivalent to cash, a well informed buyer is justified in paying for a property and a well informed seller is justified in accepting, assuming neither party to the transaction is acting under compulsion, and assuming the property has been offered in the open market for a reasonable time. • The entire state of Wyoming is self-reporting for personal property

3. Three Approaches to Value: Income Approach • The income approach to value is typically the least applicable approach to value for mass- appraisal assignments of personal property, with the exception of leased personal property.

4. Three Approaches to Value: Sales-Comparison Approach • The sales comparison approach to value estimates a property’s value (or some characteristic, such as depreciation) by comparing it to similar properties that have recently sold. This approach relies on the economic principles of supply and demand, substitution, and contribution. This approach is considered, but not used due to a lack of sales of used equipment

5. Three Approaches to Value: Cost Approach • The cost approach, based on the principal of substitution, is the most widely used of the three approaches for the appraisal of personal property because it has broad applicability and readily available data. Replacement costs can be obtained from, but not limited to: Marshall and Swift and the DOR Personal Property Valuation Manual. The resulting estimates of value utilizing a cost approach is based on the premise of cost new less depreciation.

6. Three Approaches to Value: Cost Approach Cont. • There are two valuation methods used in the cost approach. Quality of information reported from taxpayer dictates which is used. • Replacement Cost New – This variation begins with an estimated replacement cost new of property derived from what the company reports as its installed cost. Wyoming is a self-reporting state, relying on information provided directly by the taxpayer. This value, when installed, is trended by tables that are provided by the Department of Revenue to all the Assessors. The value is also depreciated to arrive at the final Fair Market Value. Once equipment is purchased and installed new, that should establish the Market Value. Whether or not the price of gas and oil goes up or down, the price of that equipment does not change.

7. Oil & Gas self-reporting concerns: New owners • By law, the company that first purchased and installed the equipment, must report the original installed cost to the local assessor • When a new company purchases the equipment, often in a bulk sale of a field, the current tendency is to use accounting principles to allocate the cost of the entire purchase down to each piece of equipment when they report to the Assessor. • This contradicts statute 39-13-103(b)(ii), which specifies the assessor must use appraisal methods and not accounting methods to determine the market value. • Statute 39-13-103(b)(ii): All taxable property shall be annually valued at its fair market value. Except as otherwise provided by law for specific property, the department shall prescribe by rules and regulation the appraisal methods and systems for determining fair market value using generally accepted appraisal standards.

8. Oil & Gas Valuation: Cost Approach • The appraisal method typically used to value this equipment is the cost approach to value – a method supported by the International Association of Assessing Officers standards and by the DOR’s State of Wyoming Personal Property Valuation Manual. • Because the Assessor has historical original installed costs, they have the ability to apply trending and depreciation factors (annually provided by the DOR) to arrive at a new taxable value. • Despite the Assessor having the historical original installed cost, the Assessor is not allowed to provide that information to the buyer of the equipment. The information is considered confidential per statute 39-13-102(i), therefore the Assessor cannot release the original installed cost to the new owner without the seller’s permission.

9. Oil & Gas Valuation: Cost Approach Concerns • Although the Assessor possesses the original installed costs, the companies who are buying these assets are reporting that they have no access to the original installed costs and therefore their only option is to allocate their purchase price, reporting only a fraction of the value to the Assessor. • Even if the seller of the equipment agrees to allow the Assessor to release the original installed cost to the buyer, they will say they have no way to verify those costs and therefore will not report the cost. ***This is an inequitable method of reporting.***

10. Comparing the method of assessing Real and Personal Property • State Statute -- Title 34: Property, Conveyances and Security Transactions, specifically 34-1-142: Instrument transferring title to real property procedural exceptions; confidentiality. • (d) The sworn statements shall be used by the County Assessors and the State Board of Equalization and the Department Of Revenue along with other statements filed as data in a collection of statistics which shall be used collectively in determining sales-price ratios by county. An individual statement shall not, by itself, be used by the County Assessor to adjust the assessed value of any individual property. • In the valuation of Real Property, the Assessor legally can’t use a single purchase price to value a single property. • For example, if two homes are exactly the same and are side by side, the taxable value should be the same for the two properties. • The Assessor cannot reduce the value of one, simply because it had been purchased in a liquidation, foreclosure, a sale between family members, homes that were not on the market, etc., while leaving the other home at a higher value.

11. Oil & Gas Valuation: Location, Location, Location • Wyoming law requires companies to submit declarations of personal property equipment for the purpose of taxation and unlike commercial operations, oil and gas holdings can span several tax districts and even county lines. Therefore it is essential to report equipment accurately so that all taxing authorities are receiving the proper funding. • This isn’t being done thoroughly because the reporters are typically accountants and simply do not know. • This makes it extremely difficult for the assessor to allocate tax money to the correct jurisdiction and to do any physical inspection.

12. The Wyoming Oil & Gas Commission requires companies to report the API number, latitude and longitude of well sites.

13. Oil & Gas Valuation: Location Concerns Two statutes create somewhat of a problem for the assessor to correctly assign the equipment to the correct jurisdiction. They also create an opportunity for the companies to not report as thoroughly as they could. • 39-13-103(b)(i)(A) requires property to be listed and taxed in the county in which it is located. • However, it does not specify that it also must be taxed in the proper jurisdiction. • 39-13-103 (b)(v) does not require the reporting of the location of the equipment but does give the authority for the Assessor to examine the property. • However, with no specific location reported, the assessor cannot examine the property to be assured that the company has identified the proper tax district or to make any physical inspections of any particular well.

14. The Wyoming Constitution States … • Article 15 Section 11 (d) • “All taxation shall be equal and uniform within each class of property. The Legislature shall prescribe such regulations as shall secure a just valuation for taxation of all property, real and personal.”

15. How to possibly solve the problem when a company is purchased • Like Real Property, we do not want a single sales price of an entire field to dictate the current Fair Market Value of the Oil & Gas equipment. • We would like the principles of state statue 34-1-142(d) to be applied to the valuation of Oil and Gas Equipment. • The sworn statements shall be used by the County Assessors and the State Board of Equalization and the Department Of Revenue along with other statements filed as data in a collection of statistics which shall be used collectively in determining sales-price ratios by county. An individual statement shall not, by itself, be used by the County Assessor to adjust the assessed value of any individual property.

16. How to possibly solve the location problem • Require companies to report API number, Latitude and Longitude – the same as they have to do for the Wyoming Oil & Gas Commission.

17. Thank You! Questions? Pat Meyer: pmeyer@parkcounty.us / 307-527-8655