Whether you need a machine appraisal for insurance purposes or want to better evaluate the worth of a used oil rig up for auction, an oilfield equipment appraisal can help determine the fair value of equipment in the current market. Learn how an equipment appraiser might value a piece of machinery to better understand the equipment values of assets you own or are considering purchasing.
How Fair Value is Determined for Oil and Gas Equipment
- Physical deterioration - An appraiser will review the piece of equipment, taking note of its physical condition. The old adage about never judging a book by its cover applies well to machinery appraisals. Even if an oil rig engine looks old and shows visible wear and tear, these are not necessarily an indication of a low value. Appraisers will typically review maintenance records and inventory for oil and gas equipment before making a value determination. Equipment that was well maintained, or has spare parts on hand in the warehouse, might receive a higher value accordingly.
- Replacement cost - An appraiser might gauge how much it would cost to purchase an equivalent rig or tanker new, and then deduct from this cost based on the condition of the used equipment. When oil and gas equipment is being appraised for insurance or resale process, equipment values are often calculated in this manner.
- Useful life - The appraiser may estimate the useful life of the machinery by reviewing the age, physical condition, and depreciation of equipment. By consulting a chart showing the useful life of the particular object, and deducting time for age and wear and tear, an appraiser can calculate how many years of "useful life" a given piece of oil and gas equipment might have left.
- Market approach - In a market-based approach to oil and gas equipment valuations, appraisers look at recent sales prices of comparable equipment. While this is considered a highly reliable way to value machinery, the method only works when equipment like that in question has been recently sold, is comparable in condition and value, and was sold in a similar manner and location. It would not be fair to compare the price of a frack tank sold at auction to one up for private sale, for example.
Appraisers will typically employ one or more of these methods to determine the value for a piece of oilfield equipment. The appraisal report should list which method was used, explain the criteria under which the fair value was determined, and provide additional evidence used to support these conclusions.
If you are considering buying a used rig engine, it is well worth the appraisal cost to know the equipment's fair value on the market. Taking the extra step of having an appraisal done can help you avoid spending money on equipment that is in bad shape and would be expensive to repair or confirm that a piece of used equipment is a good value, enticing you to bid on it.
When it comes to something as specialized as oilfield equipment, it is important to find an appraiser who understands the oil and gas industry and can value the machinery accordingly. When your business assets and worth are on the line, never settle for a general appraiser who lacks industry experience. For help finding an experienced appraiser of oil and gas equipment in your area, look to Equipment Appraisal Services.