Showing posts with label appraisal Saskatchewan. Show all posts
Showing posts with label appraisal Saskatchewan. Show all posts

Tuesday, January 6, 2015

What is the Future for Bakken Real Estate?

 
 Dunn County "man camp" operated by Civeo, itself laying off 45% of staff



North Dakota and Canada's Bakken region can be considered a true boomtown economy, and with booms there are often busts based on changing economic circumstances.

The precipitous fall in oil prices is likely to whipsaw the Bakken economy, as shale oil production costs anywhere from $55 to $85 per barrel, and at this moment, West Texas Intermediate oil is trading on NYMEX for $47.88 per barrel. However, this figure represents the value of West Texas oil, not Bakken oil, which must be transported much farther than West Texas oil. The added transportation costs range from $11 to $19 per barrel of oil, meaning that the value of Bakken oil is much lower than for WTI.

This morning, the price offered at the pipeline for Williston Basin Sweet oil was just $31.69 per barrel and the price offered for Williston Basin Sour (meaning high sulfur content) was $22.58 per barrel.

Drilling activity in North Dakota has already been declining, with the number of drilling rigs declining 23% so far since this oil boom’s peak. The reason this number has not declined more is because much of the oil being produced at the moment is "hedged" or pre-sold at yesterday's prices. If current prices stay the same or decline more, the real bust might not occur for a few more months. That will be when layoffs accelerate and the man camps, motels and RV parks start experiencing significant vacancies.

The effect on real estate will be significant, and I have personally witnessed a similar collapse while working as an appraiser in Houston, Texas, from 1984 to 1987, when I lost my job in the Texas real estate collapse after oil prices fell to $9 per barrel.

Most affected will be the value of land previously considered to have development potential. There has been a proliferation of Bakken-area land parcels being advertised as ideal for business park, RV park or hotel development, at prices up to $200,000 per acre. Most of these are still raw, undeveloped land, and their highest and best use just may be a return to farming or ranching. It may be common to see commercial land values falling by more than 90% as highest and best use changes from commercial to agricultural.

RV parks will also be in jeopardy, as they typically house temporary oil workers who may be first to go as layoffs continue. Other “man camps” are already in trouble. Man camp operator Civeo, featured in the above photo, has announced layoffs for 45% of its total worldwide staff and saw its stock price plunge 50% yesterday. Its stock price is now $3.11 per share, an 89% decrease in the last year.

The lodging industry will also be severely impacted, as many hotel rooms were built to accommodate the boom in temporary workers, and there will be a consequent oversupply of rooms.

PS: Bakken update, January 14, 2015

The number of active drilling wells in North Dakota has fallen to 158 as of today, over 26% below the peak of the Bakken oil boom. The offering price for Williston Basin Sweet is $29.44 per barrel and $20.33 for Williston Basin Sour, representing further declines of 7% and 10% respectively in the last week.

PPS: Bakken update, March 5, 2015

The number of active drilling wells in North Dakota has fallen to 113 as of today, 47% below the peak of the Bakken oil boom. The offering price for Williston Basin Sweet at the Plains pipeline has risen to $35.19 per barrel for Williston Basin Sweet and $26.08 for Williston Basin Sour.

What this means is that Bakken oil producers are receiving 20 to 28% more for their oil in the last 2 months, as North Dakota drilling activity has dropped by 30% in the same time period and inventories shrink.

The consequences for the real estate sector will be negative.  Since the peak of Bakken drilling activity in mid-2012, the number of active drilling rigs has declined from 215 to 113, a drop of 47.5%.  Considering that each drilling rig employs 100 to 125 workers, this represents job losses of about 10,000 to 12,000 workers, workers who were living in motels and RV parks, and some who might have been renting apartments or even searching for a home to buy.  Despite the improvement in the price willing to be paid for Bakken oil, these benefits will go to the oil producers and not the real estate market.

PPS: Bakken update, March 16, 2015

The number of active drilling wells in North Dakota has fallen to 111 as of today, 48% below the peak of the Bakken oil boom. The offering price for Williston Basin Sweet at the Plains pipeline has plummeted to $28.44 per barrel for Williston Basin Sweet and $19.33 for Williston Basin Sour.

The most active driller in Bakken is Whiting Petroleum (WLL).  It put itself up for sale last week and the stock popped up to $40 per share after reporting interested buyers, at which time I sold this stock short. With current assets and a book value of property, plant and equipment (probably above market value) adding up to $13 billion, and liabilities of $8.3 billion, current market capitalization of $6.4 billion as of this moment seems at least 50% too high.

Related story:  http://on.wsj.com/1BNWrPY

PPS: Bakken update, March 27, 2015

The number of active drilling wells in North Dakota has fallen to 97 as of today, 55% below the peak of the Bakken oil boom. The offering price for Williston Basin Sweet at the Plains pipeline has increased to $32.44 per barrel for Williston Basin Sweet and $23.33 for Williston Basin Sour.

The most active driller in Bakken is Whiting Petroleum (WLL).  I sold this stock short 2 weeks ago at $40 per share and it closed today at $30.50 per share, for a personal gain of 23.75% in 2 weeks.

PPS: Bakken update, July 15, 2015

The number of active drilling wells in North Dakota has fallen to 73 as of today, 66% below the peak of the Bakken oil boom. The Plains All American Pipeline is no longer publishing offering prices for Bakken crude, but oil prices in general are higher compared to March, and the offering price for Nebraska Intermediate, closest in proximity to Bakken, is $39.50 per barrel today.  This is better news for oil companies, but bad news for Bakken-area real estate, as a two-thirds reduction in drilling rigs means that some oil workers might be moving out of state. The effect on employment could be muted, though, because up until this year, many workers were working double shifts so that they could earn six-figure incomes.  Still, this hinders their ability to pay the inflated rents of yesterday.
 

Sunday, July 1, 2012

Appraisal of land outside Regina, Saskatchewan

Saskatchewan is unique in Canada for its continuing economic boom, fueled by world demand for its potash and oil.  Similar mineral-led economic booms in places such as North Dakota, Wyoming and Western Australia have also led to housing shortages and rising land prices.

Before this valuation assignment, I last appraised in Saskatchewan during the Fall of 2010, and the boom has continued since then.  The property being appraised this time was almost one square mile of cropland right outside the city limits of Regina, SK, presently cultivated with canola and wheat, but in the process of being rezoned for mixed use to accommodate the expansion of the city of Regina, a city of 200,000 residents in the southeastern part of the province.

Appraising land in Canada is an easy assignment compared to most international work.  Each province has its own land registry system capable of providing comparable sales, and the prices for sales data are low in Saskatchewan ($20 got me 150 sales), and the last time I appraised in Alberta, their sales data were free. In British Columbia, the provincial land registry wholesales the data to middlemen such as Landcor, which costs several times as much, but is still a bargain.

A couple of issues relating to the conversion of farmland to residential development relate to the ability of the soils to support vertical construction and the potential for toxic contamination of the soil by pesticide use.  Another newly built Regina-area subdivision several miles northwest of the subject is currently sinking in the mud, for instance, due to the failure to discover the unsuitability of the soils until it was too late.

I normally like to read a geotechnical study and environmental report during the appraisal of a subdivision instead of copping out with the use of “assumptions and limiting conditions” that everything is assumed to be all right. A lot of money has been lost with assumptions, and I disagree with the appraisal profession's mindset that placing "assumptions and limiting conditions" in appraisal reports is good appraising.  It is not good appraising; it is dangerous appraising. Complicating the situation, though, was a lender client who let the developer set the stage for intransigence by refusing to show purchase contracts.

Although this was a Canadian property, I still follow USPAP (Uniform Standards of Professional Appraisal Practice set by the Appraisal Foundation, a U.S. institution), one of which is Standards Rule 1-5(a): “analyze all agreements of sale, options, and listings of the subject property current as of the effective date of the appraisal”.  My request to see the purchase agreements spooked the developer, who called the client to call off my request due to the fear that I would practice “anchor bias”, the tendency among real estate appraisers to “hit the purchase price” in 96 to 97% of appraisals.

The developer’s fear was unfounded, as I do not practice anchor bias and am also mindful of USPAP Standards Rule 1-4(c): “When analyzing the assemblage of the various estates or component parts of a property, an appraiser must analyze the effect on value, if any, of the assemblage.  An appraiser must refrain from valuing the whole solely by adding together the individual values of the various estates or component parts.” This assemblage would probably be more valuable than the sum of its parts.

The comparable sales were rather consistent in this Rural Municipality – farmland was selling for about $2500 per acre, while close-in farms were being bought by developers for up to $20,000 per acre prior to rezoning. I certainly recognized the value of the assemblage going on, but my client's tacit permission to let the developer stonewall me hindered my ability to protect them.  When I asked for other information, such as a geotechnical study and the names of the current property owners, the initial responses were "Have a blessed day", and then "Geotechnical Report...not available at this present time" and finally "this question is un-usually [sic] and has no merit when completing an appraisal value report on a property."  

While I disapprove of the practice of most appraisers and valuers to defer essential issues as buildability and environmental contamination to “Assumptions and Limiting Conditions”, which often don’t get read by clients, I had to in this instance. If the soils or water table make construction infeasible or the soils are contaminated by pesticides, the value of the property reverts back to agricultural land values, a significant diminution of value.  I made my estimate of value conditional upon the receipt of an acceptable geotechnical report and environmental report and prominently displayed this by my conclusion of value, and then presented a separate value of the property as agricultural land just in case the developer refused to present relevant documents.  So far, this developer continues to refuse to cooperate.

As for why I ask to see purchase contracts, this is a USPAP rule (not required in Canada but sometimes followed), and it often alerts me to sales concessions, flips (when the seller is not the registered property ower), sales between related parties, or suspicious discrepancies, such as when a buyer or seller misspells their own name (suggesting forgery) or doesn't sign at all. The reason why I ask who the sellers are is if the sellers' names are different from the recorded property owner's names, the transaction becomes more suspicious. In a classic illegal flip, the buyer uses a disguise, such as an LLC or LP, to purchase the property at a lower price and then sell the property to himself at a much higher price, thereby fooling lenders and appraisers. The first time I saw this a doctor paid $1.8 million for an apartment building and then sold it to himself for $2.7 million, thereby tricking the lender into lending too much money on the property.

Lenders need to consider the consequences, though, of letting borrowers decide which questions they can decide to answer or not answer, which is tantamount to letting the borrower dictate appraisal policy and letting the fox run the hen house.

Next stop, Ecuador.

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