Wardlaw Appraisal Group

Value Estimation - Mineral Interests

This information below is provided to explain how your mineral interest is appraised for Texas ad valorem property tax purposes. Minerals are considered real property in Texas. The appraised value for property tax purposes reflects as closely as possible the fair market value of the property (the lease/well) as of January 1 of each year taking into consideration the jurisdictional exceptions. The appraisal is based on the projected future income of the lease, NOT on the previous year's income. The fair market value should represent the value for which you might consider selling your interest.

The mineral appraisal is a discounted cash flow analysis; a projection of the future monthly income using the following information:

1. 1. INITIAL PRODUCTION RATE
   The starting (January) monthly production rate is determined from Texas Railroad Commission production records and is adjusted for any anomalies.
2. 2. RATE OF DECLINE
   The rate of decline is calculated from the historical trend established by the production history of the lease.
3. 3. PRICE OF OIL & GAS
   The average 2010 prices are obtained from the Texas Comptroller severance tax records. Those prices are multiplied by a market condition factor (Oil=90.7%, Gas=89.3%) and the resulting prices are used for the first appraisal year. The prices in subsequent years are escalated in accordance with a schedule published by the Texas Comptroller.
4. 4. LEASE OPERATING EXPENSES (LOE)
   Average monthly lease operating costs from the preceding year as submitted directly by the operator are used if available. Otherwise, reasonable operating costs for the area are used and calculated as a function of depth and number of wells.
5. 5. PRODUCTIVE LIFE OF THE WELL
   Monthly income is calculated until the revenue received by the working interest is less than the monthly lease operating expense. We assume an operator won't continue to produce the lease once they begin to lose money.
6. 6. SEVERANCE TAX EXPENSE
   Severance taxes are deducted from the monthly lease income. The normal rates are: Oil=4.6%, Gas=7.5%
7. 6. EQUIPMENT VALUES
   The salvage value of the lease equipment (personal property) is added to the working interest (only) as a capital asset. The value is calculated as a function of the depth and number of wells on the lease.
8. 7. DISCOUNT RATE
   Income you receive in the future is not as valuable as income received today. To account for this in the appraisal, the future income is discounted. An annual analysis of the discount rates used by financial institutions and the Texas Comptroller's annual oil and gas discount rate study is used to determine the discount rate for the appraisals.

Using all the gathered appraisal information on the lease including the factors identified above, the future income from the lease is calculated over its economic life and then discounted to determine the appraised value. The calculations follow the basic steps described below:

1. 1. The future gas, condensate, and oil production rates are calculated using standard petroleum engineering methodology, based primarily on extrapolation of historical production performance.
2. 2. Future consecutive monthly revenues are calculated by multiplying projected production volumes by the oil and gas prices, deducting the severance taxes, and then separating out the royalty and working interest portions of the revenue.
3. 3. The monthly working interest net revenue (cash flow) is calculated by subtracting the monthly operating expenses from the projected monthly revenue. When the monthly working interest net revenue is less than the monthly operating expense the projection stops. Monthly operating expenses are not deducted from the royalty interest monthly income.
4. 4. The future monthly income is discounted to establish its present (1/1/2011) value. The sum of the discounted future revenues from each month of the well's projected life is the fair market appraised value of the well.

After the fair market appraised value of the well has been calculated, the value is distributed equally to each mineral interest owner based on the ownership type and percentage.