Reserves and Valuation using Multiples for Oil and Gas Companies

Eduardo Ribeiro, Luiz Teles Menezes Neto () and Rosemarie Bröker Bone ()
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Luiz Teles Menezes Neto: Petrobras
Rosemarie Bröker Bone: Escola Politécnica - UFRJ

Brazilian Review of Finance, 2011, vol. 9, issue 4, 549-570

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.

Keywords: Oil and Gas Reserves; Market Value; Multiples Valuation (search for similar items in EconPapers)
JEL-codes: G10 G30 M20 (search for similar items in EconPapers)
Date: 2011
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Persistent link: https://EconPapers.repec.org/RePEc:brf:journl:v:9:y:2011:i:4:p:549-570

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