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  • Which Fair-Market Value Method Should You Use?

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    German Rodriguez
    63 tayangan12 halaman
    F Garb Fair Market JPT Which Fair-Market Value Method Should You Use?

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    F Garb Fair Market JPT Which Fair-Market Value Method Should You Use?

    Hak Cipta:

    © All Rights Reserved
    Unduh sebagai PDF atau baca online dari Scribd
    Tandai sebagai konten tidak pantas
    63 tayangan12 halaman

    Which Fair-Market Value Method Should You Use?

    Diunggah oleh

    German Rodriguez
    F Garb Fair Market JPT Which Fair-Market Value Method Should You Use?

    Hak Cipta:

    © All Rights Reserved
    Unduh sebagai PDF atau baca online dari Scribd
    Tandai sebagai konten tidak pantas
    dari 12
    Which Fair-Market Value Method Should You Use? Forrest A Garb, Forrest A. Garb & Assocs., Inc. Reprinted from the January 1990 issue of JPT Journal of Petroleum Technology Which Fair-Market-Value Method Should You Use? Forrest A, Garb, SPE, Forrest A. Garb & Assocs. ‘Summary. Fai-marketvalue (FMV) determination is now used not only to set a purchase price but also to de- termine the best investment. Various methods for determining an FMV have been used, all in attempts to protect a purchaser against the un- Certainties that might render an ac Quisition imprudent. This paper reviews frequently used FMV guide- lines and presents a method for their simultaneous use to evaluate a hydrocarbon-producing property. Introduction ‘The current acqusitional tendencies of the USS. oil industry have increased the impor- tance of determining the best investment among many options. FMV determination is now used not only o seta price, but also ta select the investment. The FMV for a producing property is nota unique value de- rived by solving an equation; rather, itis a subjective estimate reflecting the expecta- jons of the buyer and the seller atthe time ‘of trade. Any change in the economic out- look will likely change the estimated FMV, ‘but not necessarily the method used to de rive it. The various methods used to est- ‘mate the FMV never yield exactly the same ‘value, but they usually establish a range. Be ccause an FMV may be required to estimate ‘collateral value for a bank loan, to settle ligation, or to establish tx Hability, the ap- praiser is usually required to establish a sin- fle value estimate rather than a range. The appraiser estimating the FMV, therefore, ‘must have a good knowledge ofthe various FMV guidelines used in the industry and must know their strengths and weaknesses (o narrow the range. Definition ‘There have been several definitions of FMY, but the one cited most frequently in the petroleum industry is “‘the amount a willing buyer will pay willing seller, with the property or interest exposed tothe mar- ket fora reasonable period, nether the buyer nor the seller being under a compulsion to buy or to sell, both being competent and having reasonable knowledge of the facts."” ‘Unfortunatly, this ideal situation rarely, if ‘ever, exists, The seller usually is under pres- sure to liquidate some asset. There may be ‘cash need within the company, or a more attractive investment opportunity may arise. In private companies, the proprietor may reach retirement age. The acquisitions vice president ofthe buying company may need to purchase something to.confirm the im- portance of his job. ‘The definition also assumes that the buyer is knowledgeable. The seller of the property, ‘who is associated with the operations ofthe ‘Coniane 190 sey Paaeum Engrs subject property, is usually ina etter posi- tion to know the positive and negative aspects of the property. The negative may not be presented to the prospective pur- chasers, while the positive certainly will be ‘Of course, there are times when the prop- erty may have greater value tothe purchaser than to the seller. This sometimes occurs When the purchaser is the end-user of the oil or gas and is buying the production to ensure a feedstock or an energy source for day-to-day operations. Stee! mills, brewer Jes, and glass plants have purchased gas- producing properties to guarantee a source ‘of economical energy during potential periods of fuel shortage. Confusion sometimes exists about the terms present worth (PW) and FMY. Too often, non-petroleum-industry personnel think’ that the PW of a hydrocarbon producing propery is the FMV, or the value at which the property would change hands. ‘Tis notion is understandable because, wea we speak of almost any item we own (©... an automobile), its PW is its price. The difference, of course, is that most items we buy or sell are not income-producing. The ‘meaning of PW changes when we speak of values tht result from income tobe received inthe future, In this instance, PW is merely the value today of those future revenues. Methods for Determining FMV “The various methods for determining FMV fall into four general categories: compara- tive sales, rule-ofthumb, income forecast, and replacement cost All the methods attempt to establish a fir price fora property that protects the buyer against all foreseeable business uncertain ties and risks. These uncertainties, which ‘may render the purchase imprudent, include technological, economic, and political con- ccems. The technological uncertainties in- clude the possiblity thatthe reserves might not be recovered in the amounts oF at the rates forecast. The economic uncertainties include future oil and gas prices, market concitions, future operating costs, and the Potential need for additional capital expen-

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