I live about 50 miles Southwest of San Antonio near Uvalde where many of the large Live Oak trees are long gone due to drought. I think you need immediate results to help the tree now. For this I suggest #1. The other stuff can be done later.
A few suggestions that I have found useful:
1) Never used them but check out this link for Deep Tree Watering Stakes (http://www.sprinklerwarehouse.com/Tree-Shrub-Watering-s/9070.htm
). The same thing can be accomplished by digging a hole near the drip line of the tree. Say 4 to 5 ft in depth with a post hole digger and bar. In the hole bury a 4" PVC with small holes drilled in it (small because you don't want dirt particles coming into your pipe). Septic PVC is cheaper than the other stuff. You can even back fill your hole with river gravel to create a sort of reservoir. I would put several of these around the tree depending on how big it is. Fill with water. You can also add compost teas, fertilizers, etc... This will allow water to get down deep where it needs to be with minimal budget.
2) Add compost under tree then mulch. I would use cedar mulch versus cypress. Cypress mulch is very unsustainable due to poor harvesting ethics. Cedar mulch is readily available in the Hill Country plus it has many beneficial properties for keeping away weeds, grass, and some insects. The compost will bring the soil back to life.
3) I agree with terracing the land since it is on a slope. Must catch whatever water falls. And the roof catchment/greywater usage is also a must for the long term sustainability.
My personal opinion is get the tree/s help as fast as possible. Water is our #1 limiting factor. Save the trees! Good luck.