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Valuation of International Oil Companies

Abstract:
According to economic theory, exploration and development of new oil and gas fields should respond positively to increasing petroleum prices. But since the late 1990s, stock market analysts have focused strongly on short-term accounting return measures, like RoACE , for benchmarking and valuation of international oil and gas companies. Consequently, exaggerated capital discipline among oil and gas companies may have reduced their willingness to invest for future reserves and production growth. Based on panel data for 14 international oil and gas companies for the period 1990-2003, we seek to establish econometric relations between market valuation on one hand, and simple financial and operational indicators on the other. Our findings do not support the general perception of RoACE as an important valuation metric in the oil and gas industry. We find that the variation in company valuations is mainly explained by the oil price, oil and gas production, and to some extent reserve replacement.

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Energy Specializations: Petroleum – Markets and Prices for Crude Oil and Products; Energy Investment and Finance – Public and Private Risks, Risk Management; Energy Investment and Finance – Corporate Strategy; Energy Modeling – Other

JEL Codes:
L13 - Oligopoly and Other Imperfect Markets
D81 - Criteria for Decision-Making under Risk and Uncertainty
D92 - Intertemporal Firm Choice: Investment, Capacity, and Financing
C59 - Econometric Modeling: Other

Keywords: Oil industry, valuation, panel data, econometric model, RoACE, performance

DOI: 10.5547/ISSN0195-6574-EJ-Vol27-No3-4


Published in Volume 27, Number 3 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.