Valuation of Natural Gas Property

The appraisal of natural gas properties is a complex problem affected bymany non-engineering factors. Attention will be brought here to the moreimportant matters that influence value of such properties, such as thenecessity of competent estimates of reserves, availability of the products andof market outlets, the expected rate of recovery, the anticipated prices ofproducts and future costs, the effect of the graduated income tax on profitswhich lead to greater value of a property to one owner than to another, andother items. To a degree, in each appraisal the problems are unique in that theapproach must be suited to the particular case.

During the past 30 years and more, many engineers and geologists haveaccumulated considerable experience in the problems of evaluating propertiescapable of producing oil and natural gas. An extensive literature has developedoutlining the principles and methods that govern appraisals. Emphasis is placedherein on the importance of careful analysis of the various factors whichshould lead to a determination of value, and to point out the inadequacy ofrather common engineering appraisals that frequently have little relation towhat has been termed "fair market value." In a Delaware court someyears ago an engineer admitted freely on cross-examination that his appraisalwas "an engineering valuation - not a determination of the fair marketvalue. Such so-called "engineering appraisals" are perhaps interesting,and occasionally may be of some use, but must not be considered of fairvalue.

During the past few years the effect of the graduated income tax has becomeespecially important in the appraisal of properties yielding income, andpromises to continue to be so far a long time. This tax places somecorporations in the 52 per cent bracket and subjects individuals to rates thatmay be as high as 85 to 90 per cent. To those institutions whose income is nottaxed, a property can be worth two or three times as much as it may be to theindividual in a high tax bracket.