Real options and the value of oil and gas firms: An empirical analysis

Amir H. Sabet and Richard Heaney

Journal of Commodity Markets, 2017, vol. 6, issue C, 50-65

Abstract: This paper examines the link between oil (gas) firm share price and crude oil (natural gas) return, volatility and drilling activity. Particular emphasis is placed on testing for real option effects through analysis of the sensitivity of oil (gas) firm share price to oil (gas) price volatility. Using the level of active exploration drilling as a proxy for exercised real options, we find some evidence of a real option effect linked to drilling in gas firms, though there is little evidence of this for oil firms. There is evidence of a strong positive oil (gas) return effect on oil (gas) firm value. Finally, there is also some evidence of wealth destruction associated with exploration drilling compared with development drilling.

Keywords: Oil and gas firms; Real options; Volatility; Exploration and development drilling (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jocoma:v:6:y:2017:i:c:p:50-65

DOI: 10.1016/j.jcomm.2017.05.001

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