Menu Expand

Cite JOURNAL ARTICLE

Style

Kumar, B., Sujit, K. Determinants of Value Creation in Oil and Gas Firms: A Firm-Specific Comparative Study Using Panel Data. Applied Economics Quarterly, 65(1), 45-69. https://doi.org/10.3790/aeq.65.1.45
Kumar, B. Rajesh and Sujit, K. S. "Determinants of Value Creation in Oil and Gas Firms: A Firm-Specific Comparative Study Using Panel Data" Applied Economics Quarterly 65.1, , 45-69. https://doi.org/10.3790/aeq.65.1.45
Kumar, B. Rajesh/Sujit, K. S.: Determinants of Value Creation in Oil and Gas Firms: A Firm-Specific Comparative Study Using Panel Data, in: Applied Economics Quarterly, vol. 65, iss. 1, 45-69, [online] https://doi.org/10.3790/aeq.65.1.45

Format

Determinants of Value Creation in Oil and Gas Firms: A Firm-Specific Comparative Study Using Panel Data

Kumar, B. Rajesh | Sujit, K. S.

Applied Economics Quarterly, Vol. 65 (2019), Iss. 1 : pp. 45–69

Additional Information

Article Details

Pricing

Author Details

Kumar, B. Rajesh, Corresponding author. Institute of Management Technology, UG-02, Dubai International Academic City, PO Box 345006, Dubai, UAE.

Sujit, K. S., Institute of Management Technology, Dubai International Academic City, UAE.

References

  1. Abarbanell, J./Bushee, B. (1997): “Fundamental Analysis, Future Earnings and Stock Prices,” Journal of Accounting Research 35, 1–25.  Google Scholar
  2. Amir, E./Lev, B. (1996): “Value Relevance of Non-Financial Information: The Wireless Communication Industry,” Journal of Accounting and Economics 22, 3–30.  Google Scholar
  3. Antill, N./Amotl, R. (2000): Valuing oil and gas companies, Woodhead Publishing Ltd.  Google Scholar
  4. Arellano, M. (1987): “Computing Robust Standard Errors for Within-Groups Estimators,” Oxford Bulletin of Economics and Statistics 49, 431–434.  Google Scholar
  5. Bauman, M. (1996): “A Review of Fundamental Analysis Research in Accounting,” Journal of Accounting Literature 15, 1–33.  Google Scholar
  6. Behn, B./Riley, R. (1999): “Using Nonfinancial Information to Predict Financial Performance: The Case of the US Airline Industry,” Journal of Accounting, Auditing and Finance 14, 29–56.  Google Scholar
  7. Bernard, V. L./Stober, T. L. (1989): “The nature and amount of information in cash flows and accruals,” The Accounting Review 64, 624–652.  Google Scholar
  8. Bhandari, L. C. (1988): “Debt/Equity ratio and expected common stock returns: Empirical evidence,” Journal of Finance 43, 507–528.  Google Scholar
  9. Biddle, G. C./Seow, G. S./Siegel, A. (1995): “Relative versus incremental information content,” Contemporary Accounting Research 12, 1–23.  Google Scholar
  10. Bradshaw, M./Sloan, R. (2002): “GAAP Versus the Street: An Empirical Assessment of Two Alternative Definitions of Earnings,” Journal of Accounting Research 40, 41–66.  Google Scholar
  11. Caby, J./Clerc, G./Koch, J. (1996): “Stratégie d’entreprise et finance: le processus création de valeur,” Revue française de Gestion, March-April-May 1996.  Google Scholar
  12. Chua, J. H./Woodward, R. S. (1994): “Financial Performance of the U.S. Oil and Gas Industry: 1980–1990,” Financial Markets Institution. and Instruments 3, Blackwell Publishing.  Google Scholar
  13. Collins, W./Kothari, S. (1989): “An Analysis of Intertemporal and Cross Sectional Determinants of Earnings Response Coefficients,” Journal of Accounting and Economics 11, 143–182.  Google Scholar
  14. Dayanandan, A./Donker, H. (2011): “Oil prices and accounting profits of oil and gas companies,” International Review of Financial Analysis 20, 252–257.  Google Scholar
  15. DeBodinat, H. (1978): “Strategie et polique financiere,” La Revue Banque 374, 750–756.  Google Scholar
  16. Dechow, P. (1994): “Accounting earnings and cash flows as measures of firm performance: The role of accounting accruals,” Journal of Accounting and Economics 17, 3–42.  Google Scholar
  17. Francis, J./Schipper, K. (1999): “Have financial statements lost their relevance?” Journal of Accounting Research 37, 319–352.  Google Scholar
  18. Giovannini, M./Margherita, G./Alessandro, L./Matteo, M. (2006): “Conditional correlations in the returns on oil companies stock prices and their determinants,” Empirica 33,193–207.  Google Scholar
  19. Harris, T./Ohlson, J. (1987): “Accounting Disclosures and Market’s Valuation of Oil and Gas Properties,” The Accounting Review 27, 651–672.  Google Scholar
  20. Hirigoyen, G./Degos, J. G. (1988): Evaluation des Sociétés el de leurs Titres. Paris: Vuibert.  Google Scholar
  21. Hodge, F. (2003): “Investors’ perceptions of earnings quality, auditor independence, and the usefulness of audited financial information,” Accounting Horizons 17, 37–48.  Google Scholar
  22. John, K. (1987): “Risk-shifting incentives and signaling through corporate capital structure,” Journal of Finance 42: 623–641.  Google Scholar
  23. Johnston, D. (1992): Oil Company Financial Analysis in Non-Technical Analysis, Tulsa OK, Pennwell Publishing.  Google Scholar
  24. Koester (1990): “Problems in analyzing financial statements of oil and gas producing companies,” Oil and Gas Tax Quarterly 41, 319–345.  Google Scholar
  25. Leland, H./Pyle, D. (1977): “Informational asymmetries, financial structure, and financial intermediation,” Journal of Finance 32, 371–388.  Google Scholar
  26. Lev, B. (1989): “On the usefulness of earnings and earnings research: Lessons and directions from two decades of empirical research,” Journal of Accounting Research 27, 153–192.  Google Scholar
  27. Lev, B./Thiagarajan, S. (1993): “Fundamental Information Analysis,” Journal of Accounting Research 31, 190–215.  Google Scholar
  28. Luciani, G./Salustri, M. (1998): “Vertical Integration as a Strategy for Oil Security.” In Strategic Positioning in the Oil Industry, Abu Dhabi: Emirates Center for Strategic Studies and Research.  Google Scholar
  29. Magliolo, J. (1986): “Capital Market Analysis of Reserve Recognition Accounting,” Journal of Accounting Research 24, 69–111.  Google Scholar
  30. McCormack, J. L./Vytheeswaran, J. (1998): “How to Use EVA in The Oil and Gas Industry”, Journal of Applied Corporate Finance 11, 109–131.  Google Scholar
  31. Misund, B./Asche, F./Osmundsen, P. (2008): “Industry upheaval and valuation: Empirical evidence from the international oil and gas industry,” The International Journal of Accounting 43, 398–424.  Google Scholar
  32. Misund, B./Osmundsen, P. (2015): “Probable Oil and Gas Reserves and Shareholder Returns: The Impact of Shale Gas,” CESifo Working Paper Series No. 5687.  Google Scholar
  33. Misund, B./Osmundsen, P./Asche, F. (2008): “The Pricing of International Oil and Gas Companies 1990–2003—A Structural Shift in the Equity Valuation Process,” University of Stavanger, Institute for Research in Economics and Business Administration, Norway.  Google Scholar
  34. Misund, B./Osmundsen, P./Sikveland, M. (2014): “Vertical Integration of Valuation of International Oil Companies,” USAEE Working Paper No. 14–176.  Google Scholar
  35. Modigliani, F./Miller, M. H. (1963): “Corporate income taxes and the cost of capital: A Correction,” American Economic Review 53, 433–443.  Google Scholar
  36. Myers, S. C. (1977): “Determinants of corporate borrowing,” Journal of Financial Economics 5, 147–176.  Google Scholar
  37. Myers, S./Majluf, N. S. (1984): “Corporate financing and investment decisions when firms have information that investors do not have,” Journal of Financial Economics13,187–221.  Google Scholar
  38. Okafor, C. A./Mgbame, C. O. (2011): “Dividend Policy and Share Price Volatility in Nigeria,” Journal of Research in National Development 9, 202–210.  Google Scholar
  39. Osmundsen, P./Asche, F./Misund, B./Mohn, K. (2006): “Valuation of international oil companies,” Energy Journal 27, 49–64.  Google Scholar
  40. Pene, D. (1983): “Modeles d’evaluation des entreprises et modeles strategiques,” Analyse Financière 54, 55–62.  Google Scholar
  41. Quirin, J. J./Berry, K. T./O’Bryan, D. (2000): “A fundamental analysis approach to oil and gas firm valuation,” Journal of Business Finance and Accounting 27,785–820.  Google Scholar
  42. Rappaport, A. (1986): “Linking competitive strategy and shareholder value analysis,” The Journal of Business Strategy 3, 58–67.  Google Scholar
  43. Rappaport, A. (1987): “Corporate performance standards and shareholder value,” The Journal of Business Strategy 4, 28–38.  Google Scholar
  44. Ross, S. A. (1977): “The determination of financial structure: The incentive-signalling approach,” Bell Journal of Economics 8, 23–40.  Google Scholar
  45. Samy, N./Mohamed, G. (2002): “The relationship between dividend policy, financial structure, profitability and firm value,” Applied Financial Economics 12, 843–849.  Google Scholar
  46. Shevlin, T. (1996): “The Value Relevance of Non-Financial Information: A Discussion,” Journal of Accounting and Economics 22, 31–42.  Google Scholar
  47. Silvano T./Brandon, T./Noora, A. (2011): “National Oil Companies and Value Creation,” World Bank Working Paper No. 218.  Google Scholar
  48. Sloan, R. G. (1996): “Do stock prices fully reflect information in accruals and cash flows about future earnings,” The Accounting Review 71, 289–315.  Google Scholar
  49. Smith, J. L. (2003): Petroleum Property Valuation, MIT Center for Energy and Environmental Policy Research.  Google Scholar
  50. Stevens, P. (2005): “Oil Markets,” Oxford Review of Economic Policy 21, 19–42.  Google Scholar
  51. Taheri, F. (2011): “Evaluation of influential factors on market values of five major international oil companies, using the method of panel data with two-way error components and its application in the oil and gas industries of Iran,” OPEC Energy Review 35, 220–226.  Google Scholar
  52. Taimur, S./Harsh, P./Rekha, P. (2015): “Analysis of Factors Affecting Share Prices: The Case of Bahrain Stock Exchange,” International Journal of Economics and Finance 7, 22–28.  Google Scholar
  53. Varaiya, N. (1987): “The relationship between growth, profitability and firm value,” Strategic Management Journal, 8, 487–497.  Google Scholar
  54. Weston, J. F./Johnson, B. A./Siu, J. A. (1999): “Mergers and restructuring in the world oil industry,” Journal of Energy Finance and Development 4, 149–183.  Google Scholar
  55. White, H. (1980): “A Heteroscedasticity-Consistent Covariance Matrix and a Direct Test for Heteroscedasticity,” Econometrica 48, 817–838.  Google Scholar
  56. Wooldridge, J. M. (2002): Econometric Analysis of Cross Section and Panel Data, Cambridge, MA: The MIT Press.  Google Scholar

Abstract

Abstract

This study examines the role of firm-level financial and operational characteristics in explaining the market valuation of oil and gas-based energy companies. Using panel data based on 82 major oil companies, the study explores the value drivers involved in value creation of integrated and independent oil companies. In other words, the study explores the impact of investment, financing, and dividend decisions on value creation in energy firms.

The results suggest that stock market is skeptical about the risky capital expenditures undertaken by oil and gas firms. The study finds some evidence for signaling theory of debt financing, which suggests that the use of higher debt by energy companies is viewed positively by markets. Higher dividend payment is viewed negatively by markets. The enterprise value variable EVEBITA (Earnings Before Interest, Taxes, Depreciation, and Amortization) is positively related to share price with statistical significance. Higher profitability of oil firms leads to greater value creation for oil and gas-based firms. The higher the liquidity position, the greater the value enhancement of oil and gas firms would be. The study finds some evidence for the positive association of operating characteristics with market valuation of oil-based energy firms. Higher reserve replacement leads to higher valuation and is viewed positively by market analysts.

This study aims to provide new insights into how financial and operational information relates to the market valuation of both independent and integrated oil companies. The identification of factors for value creation in stock market is critical for the design of effective policies for wealth creation.

JEL classifications: G30, G31

Keywords: Market Valuation, Profitability, Reserve Replacement, Integrated Oil Companies

Table of Contents

Section Title Page Action Price
B. Rajesh Kumar / K. S. Sujit: Determinants of Value Creation in Oil and Gas Firms: A Firm-Specific Comparative Study Using Panel Data 1
Abstract 1
1. Relevance 2
2. Theoretical Background 2
3. Data and Methodology 7
Table 1: Descriptive Statistics 1
Table 2: Variables with a High Correlation Coefficient 1
4. Empirical Results 1
Table 3: Test of AR(1) for Serial Correlation 1
Table 4: Share Price as Dependent Variable 1
Table 5: Holding Period Returns as Dependent Variable (Fixed Effect Model) 1
Table 6: PE Ratio as Dependent Variable (Fixed Effect Model) 1
Table 7: MBR as a Dependent Variable 1
Table 8: Summary of Results from all Models 2
5. Conclusions and Implications 2
References 2