An empirical study on the valuation of oil companies

Abstract

AbstractThis study examines the determinants of value creation for the world's largest oil and gas companies. The study was based on 82 oil companies. The financial performance analysis for the period 2009–2013 reveals that the average total revenues increased from $39.82 billion in year 2009 to $68.87 billion in year 2013. The largest oil firms in terms of average revenues were Exxon Mobil, Royal Dutch Shell and Sinopec during the period 2009–2013. Three major market value variables were regressed on various independent variables representing performance, the financing, investment and dividend policy variables of oil firms. The empirical analysis finds that dividend policy and cost efficiency are important determinants of valuation of oil companies. The higher the liquidity position of the energy firms, the higher is the value creation in the market. The study establishes negative relationship between capital intensity and value creation. It can be viewed that market is sceptical about high capital expenditures by oil and gas firms. Higher cash flows result in increase in value for oil firms in stock market. Higher working capital efficiency leads to higher value creation. Undervalued stocks in the oil sector tends to have higher potential for value appreciation. Focus on effective asset utilisation is a value increasing activity for oil and gas sector firms.