Abstract
We examine the role proved reserves and production play in the market capitalization of publicly traded oil and gas companies engaged in the exploration and production of hydrocarbons. The paper provides two important contributions to the literature. First, we extend the existing research by utilizing the method of Robust Least Squares to estimate a multivariate market capitalization model that controls for firm type. Second, we document the impacts that oil and gas reserves to production ratios have on market capitalization. This is a key finding in the context of discounted net cash flow models and the findings suggest there is an optimal tradeoff between current and future production, given current volumes of reserves, the latter of which is valued positively by the market. Moreover, this optimal tradeoff or the optimal profit-maximizing intertemporal production choice is unique to the type of hydrocarbon being considered. Additionally, our findings highlight the importance of capital structure in the heavily capital intensive oil and gas industry. The results from this research should benefit both oil and gas companies and investors. Specifically, the results provide new and robust information as to the empirical relationships between key determinants of oil and gas company market valuations.
| Original language | English (US) |
|---|---|
| Pages (from-to) | 576-581 |
| Number of pages | 6 |
| Journal | Energy Policy |
| Volume | 98 |
| DOIs | |
| State | Published - Nov 1 2016 |
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Keywords
- Hydrocarbons exploration and production
- Market capitalization
- Oil and gas reserves
ASJC Scopus subject areas
- Energy(all)
- Management, Monitoring, Policy and Law
Cite this
The role of reserves and production in the market capitalization of oil and gas companies. / Ewing, Bradley T.; Thompson, Mark A.
In: Energy Policy, Vol. 98, 01.11.2016, p. 576-581.Research output: Contribution to journal › Article
}
TY - JOUR
T1 - The role of reserves and production in the market capitalization of oil and gas companies
AU - Ewing, Bradley T.
AU - Thompson, Mark A.
PY - 2016/11/1
Y1 - 2016/11/1
N2 - We examine the role proved reserves and production play in the market capitalization of publicly traded oil and gas companies engaged in the exploration and production of hydrocarbons. The paper provides two important contributions to the literature. First, we extend the existing research by utilizing the method of Robust Least Squares to estimate a multivariate market capitalization model that controls for firm type. Second, we document the impacts that oil and gas reserves to production ratios have on market capitalization. This is a key finding in the context of discounted net cash flow models and the findings suggest there is an optimal tradeoff between current and future production, given current volumes of reserves, the latter of which is valued positively by the market. Moreover, this optimal tradeoff or the optimal profit-maximizing intertemporal production choice is unique to the type of hydrocarbon being considered. Additionally, our findings highlight the importance of capital structure in the heavily capital intensive oil and gas industry. The results from this research should benefit both oil and gas companies and investors. Specifically, the results provide new and robust information as to the empirical relationships between key determinants of oil and gas company market valuations.
AB - We examine the role proved reserves and production play in the market capitalization of publicly traded oil and gas companies engaged in the exploration and production of hydrocarbons. The paper provides two important contributions to the literature. First, we extend the existing research by utilizing the method of Robust Least Squares to estimate a multivariate market capitalization model that controls for firm type. Second, we document the impacts that oil and gas reserves to production ratios have on market capitalization. This is a key finding in the context of discounted net cash flow models and the findings suggest there is an optimal tradeoff between current and future production, given current volumes of reserves, the latter of which is valued positively by the market. Moreover, this optimal tradeoff or the optimal profit-maximizing intertemporal production choice is unique to the type of hydrocarbon being considered. Additionally, our findings highlight the importance of capital structure in the heavily capital intensive oil and gas industry. The results from this research should benefit both oil and gas companies and investors. Specifically, the results provide new and robust information as to the empirical relationships between key determinants of oil and gas company market valuations.
KW - Hydrocarbons exploration and production
KW - Market capitalization
KW - Oil and gas reserves
UR - http://www.scopus.com/inward/record.url?scp=84989942754&partnerID=8YFLogxK
UR - http://www.scopus.com/inward/citedby.url?scp=84989942754&partnerID=8YFLogxK
U2 - 10.1016/j.enpol.2016.09.036
DO - 10.1016/j.enpol.2016.09.036
M3 - Article
AN - SCOPUS:84989942754
VL - 98
SP - 576
EP - 581
JO - Energy Policy
JF - Energy Policy
SN - 0301-4215
ER -