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contribute te alterations in the se\ nee-tax rate, a rate of 2.5% of oil and gas revenues
was used for the study period. Rccy rate of 12.5% of revenues was used in the study.
Data associated with a 5% royalty rate are also presented in the appendix.
XII-6
Ca investment and other tax incentives that oil and gas companies periodically
receive from political entities wer" likewise ignored in this work. In addition to
presenting a major limited data prediction problem, consideration of tax incentives would
involve acquisition of additional proprietary data from area producer firms. An average
corporate-tax rate of 34 % was therefore used.
AI' "able income (listed as Taxable Inc i: Table 1) is assumed to be New
Mexico inv,me for state-tax purposes. New Mexico corporate tax rates are 4.8% of
taxable income under $500,000, $24,000 plus 6.4 % of the excess over $500,000 for
amounts between $500,000 and $1,000,000, and $56,000 plus 7.6% of the excess over
$1,000,000 for taxable income over $1.000,000.
Discount rate
Results are presented above for 10% and 15 % discount rates. Estimation of
discount rates for risky investment projects (the perspective taken in this study was one of
viewing oil and gas exploration activity in the zones of interest as risky investment
projects) is generally a difficult and inexact process. The standard finance theory-based
method (for an excellent discussion of the process of determining discount rates see
Copeland, et aI., 1990) revolves around estimating a market based firm specific cost of
capital (discount rate) using a publicly traded firm's beta value.
Beta values for oil companies (Value Line Invesrnlent Survey of 17 March 1995)
with some type of operational)resence in the Eddy County region range from 0.6
(Exxon) to 0.95 (Unocal). The;' values are below the market average beta of J and point
to the use of a iJwer rate (suc;, as 10%) to discount cash flows from oil and gas
operations. 15 % may be seen as a conservative upper bound. However, given the extent
of current successful drilling and extraction activity in the general area of the WIPP site
and the future of the market for oil and gas products. the profitability risk associated with
oil and gas operations in the Eddy County area is relatively low. A precise discount rate
for different firms operating in the WIPP area is difficult to estimate (particularly in the
absence of debt/equity ratio data for said firms). So, although pinpointing a discount rate
for a 35 year project is quite risky; current levels of activity in the region and market
factors point to a 10% discount rate for oil and gas.
REFERENCES
Copeland T., Koller T., and Murrin J. , 1990, Valuation: Measuring and Managing the
Value of Companies; New York. Wiley.
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