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Reserves and Valuation using Multiples for Oil and Gas Companies

Author

Listed:
  • Eduardo Pontual Ribeiro

    (Instituto de Economia / UFRJ)

  • Luiz Teles Menezes Neto

    (Petrobras)

  • Rosemarie Bröker Bone

    (Escola Politécnica - UFRJ)

Abstract

The aim of the article is to evaluate the effect of oil and gas reserve increases on firm market value. The estimates are based on Olson’s market value prediction model – that nests the multiples P/E (price-earnings), P/B (price-book value) and in the oil industry, the P/R (price-reserves) ratio. Reserves are an important characteristic of these firms, but they are not part of equity under usual accounting practices. Using data from firms listed on NYMEX, the results suggest that reserves are positively correlated with firm equity market price. Yet, reserve increases without profit or equity expansions will be penalized by the market, if the reserve increases do not boost profits or the book value of the firm. The evaluation using price multiples appears inefficient, as earnings (or equity) and price proportionality is rejected in our empirical model.

Suggested Citation

  • Eduardo Pontual Ribeiro & Luiz Teles Menezes Neto & Rosemarie Bröker Bone, 2011. "Reserves and Valuation using Multiples for Oil and Gas Companies," Brazilian Review of Finance, Brazilian Society of Finance, vol. 9(4), pages 549-570.
    • Handle: RePEc:brf:journl:v:9:y:2011:i:4:p:549-570
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    More about this item

    Keywords

    Oil and Gas Reserves; Market Value; Multiples Valuation;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • M20 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics - - - General

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