Valuation of  
Ralph E. Davis  
Consultant, Houston, Tex.  
Natural Gas Property  
Dr. Eugene A. Stephenson  
Professor Emeritus, University of Kansas  
The appraisal of natural gas properties is a complex prob• What an Appraisal Is  
lem affected by many non-engineering factors. Attention will  
be brought here to the more important matters that influence  
value of such properties, such as the necessity of competent  
estimates of reserves, availability of the products and of mar•  
ket outlets, the expected rate of recovery, the anticipated  
prices of products and future costs, the effect of the graduated  
An appraisal is an estimate of the value of a property. It  
requires a study made by a person with knowledge of the  
type of property to be appraised. The elements which are  
important in evaluations of real property are: annual produc•  
tion, expected prices and costs, risks, physical deterioration  
and exhaustion of productivity. In the case of oil and natural  
gas property, their appraisal is a relatively recent develop·  
ment of the older art of appraising mining property. In both  
cases the fundamental requirement is an estimate of the ulti·  
mate production, the timing of this production, its costs and  
income. The determination of these elements is based upon  
geology and engineering.  
income tax on profits which lead to greater value of  
a property  
to one owner than to another, and other items. To a degree,  
in each appraisal the problems are unique in that the ap•  
proach must be suited to the particular case.  
During the past 30 years and more, many engineers and  
geologists have accumulated considerable experience in the  
problems of evaluating properties capable of producing oil  
and natural gas. An extensive literature has developed out•  
lining the principles and methods that govern appraisals.  
is placed herein on the importance of careful analy•  
sis of the various factors which should lead to a determina•  
tion of value, and to point out the inadequacy of rather com•  
mon engineering appraisals that frequently have little rela•  
tion to what has been termed "fair market value." In a Dela•  
ware court some years ago an engineer admitted freely on  
cross-examination that his appraisal was "an engineering  
valuation - not a determination of the fair market value.'  
Such so-called "enl!;ineering appraisals" are perhaps interest•  
ing, and occasionally may be of some use, but must not be  
considered of fair value.  
Some Aspects of "Value"  
An appraisal results in a dollar value of the property in  
question. What is this value? The appraised value may be  
above or below the value of the property to its owner, or to a  
particular prospective purchaser. It will probably differ from  
the value as indicated by a recent sale for similar property.  
The careful evaluator does not necessarily underwrite the  
judgment of the principals who make a transaction. Rather.  
the appraised value is an expression in dollars of the inter•  
play of all the principal physical, economic and perhaps  
political forces that affect the property now and perhaps in  
the future.  
An appraisal is a guide to busi.ess decisions, not their  
determinant. The buyer, the seller, the lender, the borrower.  
each views a property differently, because each one must con•  
sider it in relation to his particular tax position.  
Property may have value for a number of reasons. "Use  
value" is a quality of consumer goods, such as houses' and  
shoes. "Investment value" is based on earning power in the  
form of future annual incomes which the property is expected  
to produce. For example, the appraisal of a proved gas  
property yields an investment evaluation. "Speculative value"  
arises because of expected capital appreciation over present  
value. Acreage which is probable or prospective for mineral  
production has speculative value.  
A fundamental economic difference is apparent between  
proved and unproved acreage. The appraiser's estimate of  
the investment value of proved acreage is a process that is  
reducible largely to measurable quantities. The steps in the  
process, other than judgment, are explicit. obiective and can  
be substantially verified. The methods of valuing unproved  
acreage are quite different. Hence, a clear distinction must be  
drawn between what is proved and unproved. and the invest•  
ment value ascribed to the proved acreage onlv.  
. During the past few years the effect of the graduated in•  
come tax has become especially important in the appraisal  
of properties yielding income, and promises to continue to be  
so far a long time. This tax places some corporations in the  
52 per cent bracket and subjects individuals to rates that may  
be as high as 85 to 90 per cent. To those institutions whose  
income is not taxed, a property can be worth two or three  
times as much as it may be to the individual in a high tax  
bracket. Hence it is necessary to consider and determine the  
fair value applicable to the tax situation of the prospective  
purchaser. Government regulation of the buying and selling  
price of gas also influences value. Examples are known where  
a single property is owned in part by a gas company whose  
earnings are regulated to, eay, 6 per cent and the other co•  
owner is able to sell his gas even to his regulated partner at  
price far above that permitted the latter for his own gas. The  
result is that one part of the property a fair value in the  
market place of several times that of the regulated share.  
Appraisals are made for business purposes and although it  
would seem illogical to find at a given time substantially  
for a part!cular property, depending upon  
'··the business purpose, it is clear that these factors just men-  
'tilmed have produced precisely that situation.  
This distinction is particularly important under current  
business conditions. Our economy operates under  
burden of  
July, 1953