Texas Oil & Gas AssociationMineral Sub-Committee

ANNUAL TXOGA PROPERTY TAX CONFERENCE

FEBRUARY 18-19, 2020

Committee Members

➢Brad Bailey – Conoco Phillips Co

➢Michael Horne – Occidental

➢Ron Kane – EOG Resources

➢Damien Larsen – Stancil Property Tax

➢Lauro Porto- ExxonMobil

➢Randy Prince – Chevron

➢Rich Sanchez – Merit Advisors

➢Nathan Young – American Ad Valorem Tax Consultants

Mineral Sub Committee Activity

➢Meet to discuss valuation parameters

➢Schedule meetings with the Appraisal Firms

➢Summarize meeting discussions

➢Report to the Membership▪ Firm Summary File to be emailed once complete

Texas Production – Crude Oil

Top 10 Producers – Crude Oil

Texas Production–Natural Gas

Top 10 Producers – Gas

EIA Annual Energy Outlook

➢Released on January 29, 2020.

➢§23.175 Texas Property Tax Code ▪Appraisal districts must use the EIA AEO data

to calculate the Price Adjustment Factors for oil & gas if published by March 1, 2020

Price Adjustment factors

EIA - Price Adjustment factor - AEO Report released January 29, 2020

Table 12 Prices in Nominal Dollars Table 13 Prices in Nominal Dollars

Oil - WTI Spot Price Natural Gas - Henry Hub Spot

2020 Price 54.43$ 2020 Price 2.49$

2019 Price 56.26$ 2019 Price 2.57$

MAF 0.96747 MAF 0.96887

EIA STEO vs. AEO

Dec 19 STEO Jan 20 STEO Feb 20 STEO 2020 AEO

2020 Oil 55.00$ 59.25$ 55.71$ 54.43$

2019 Oil 56.70$ 57.02$ 57.02$ 56.26$

2020 PAF 0.9700 1.0391 0.9770 0.9675

Spot WTI Price - 2/11/2020 49.75$

Dec 19 STEO Jan 20 STEO Feb 20 STEO 2020 AEO

2020 Gas 2.45$ 2.33$ 2.21$ 2.49$

2019 GAS 2.59$ 2.57$ 2.57$ 2.57$

2020 PAF 0.9459 0.9066 0.8599 0.9689

Spot HH Gas Price - 2/11/2020 1.79$

EIA's STEO vs. AEO

Oil - WTI Spot Price

Natural Gas - Henry Hub Spot (MMBTU)

Producer Price IndexBLS - PPI Calculation for Oil & Gas - Full Year 2019

X = index figure for current year (Base year 1982 assumed to be 100)

Y = number of years between 1982 base year and current year

To determine average inflation rate over any particular time span:

Inflation (%) = (X / 100)^ (1 / Y) - 1

Factor 157.8 85.6

Year 2019 2019

Escalator 1.2405% -0.4193%

Crude Oil Natural Gas

2020 Pricing Escalators

Year Oil Price Factors Notes Year Gas Price Factors Notes

2019 56.26$ 2019 2.57$

2020 54.43$ 0.96747 PAF 2020 2.49$ 0.96887 PAF

2021 55.11$ 1.01240 PPI 2021 2.48$ 0.99581 PPI

2022 55.79$ 1.01240 PPI 2022 2.47$ 0.99581 PPI

2023 56.48$ 1.01240 PPI 2023 2.46$ 0.99581 PPI

2024 57.18$ 1.01240 PPI 2024 2.45$ 0.99581 PPI

2025 57.89$ 1.01240 PPI 2025 2.44$ 0.99581 PPI

2020 Tax Year 2020 Tax Year

Oil - 23.175 Max Forecast Gas - 23.175 Max Forecast

Appraisal Firm Meeting Notes New Contracts for 2020➢CAG – Cooke & Val Verde Counties

➢P&A – Childress, Comal and Gillespie Counties

➢TYP – Coryell, Dallam, Gray, Hutchinson, Jasper and Kimble Counties

➢Reeves County – In House

Appraisal Firm Meeting Notes➢Firms will use the 2020 AEO to determine the PAF for Oil & Gas Pricing.➢Escalation from BLS – years 2-6

➢Firms indicated they will adjust discount rates from 2019 or adjust property specific.

➢Firms expect mineral values to decrease based on pricing scenario.

Lease Operating Expenses➢CAG – will use actual 2019 LOE. Lease operating costs categorized as fixed & variable. Yr 1 – Flat. Escalation will vary based on category classification. (Range from .9 to 1.02 based on Oil Esc.)

➢P&A – will use 2019 actual or historic. Oil lease – de-esc 3% year 1,Flat year 2 thru 6. Gas lease – de-esc 3% year 1, hold flat all years until reaching economic limit.

➢TYP – Use 2019 actual or historical. LOE esc .8% for first 5 years then held flat for subsequent years until reaching the economic limit.

➢WAG – will use 2019 actual or de-escalate historical up to 20%. Will escalate .8% years 2-6 and hold flat until economic limit.

➢Requests sent to HLA & MAVSI

Capitol Meeting Notes➢CAGI – Discount rate – S&D analysis – ValueLine Companies (15% Base Rate)➢Min – 14.5% to Max 22%.

➢10 plus well units – reduce wells (1/2 decl *well count per year)

➢Website enhancements – Notices are now available on line.

➢Counties are requesting new copies of AOA’s.

➢New Counties – Cooke – Ken Hitt, Val Verde, Jeff Ronk

Pritchard & Abbott Meeting Notes

➢Retirements – Vic Henderson & Mac Jourdan, FTW – Mark Stewart, AMA

➢New Appraisers – Mason Patterson FTW, Malachi Ashley AMA

➢Calculates individual County base prices from Comptroller data.

➢Discount Rates – reduced 1% all properties

➢Equipment value – Discount rate reduced to 5% (2019 5.5%)

Thos. Y Pickett Meeting Notes➢2020 value reductions – Est 15% decrease.

➢Discount rate – 1% increase – 16%.

➢Added Mack Jourdan for 2020 Mineral Appraisal.

Wardlaw Meeting Notes➢Expects to increase discount rate. Rate to be finalized.

➢Requesting variable pricing WI vs. RI➢RI – Free of deducts – higher price

➢Marketing costs – won’t use 100% reported

➢LaSalle – Support for low gas prices.➢Identify Gas lift or EOR projects.

Other Topics Discussed➢Drilling Permit wells▪ Placing on Roll in appraisal cycle.

➢Unknown Interests▪ Correction of prior year roll once identified.

➢County Crossover Leases – Value Allocation▪ Leasehold acreage vs lateral length

Questions?

THANK YOU