An event study analysis of oil and gas firm acreage and reserve acquisitions

Abstract

We examine the impact of the announcement of acquisition of oil and gas acreage and reserves on the share price of US listed oil and gas firms. While there is evidence of information asymmetry related differences in the share market reaction on announcement of acquisition of acreage or reserves, we also identify greater sensitivity to crude oil price volatility for acreage acquisitions, consistent with the creation of valuable real options on acquisition of acreage. This is not evident to the same extent with acquisition of reserves. For example, acreage investment announcements reveal a statistically significant 1.22% premium (3-day CAR) in periods of high crude oil volatility compared with periods of low volatility. The premium on reserve acquisitions across these periods is a statistically insignificant 0.12%. This is supported in a multiple regression setting, with share price sensitivity to crude oil price volatility being higher for acreage acquisitions than for reserve acquisitions. Our sample consists of 1391 separate acreage or reserve acquisition announcements made by oil and gas firms listed on the U.S. equity market over the period from 1992 to 2011.