Current Investment Practices and Procedures: Results of a Survey of U.S. Oil and Gas Producers and Petroleum Consultants

Abstract

Abstract Based on a survey of investment practices of U.S. oil and gas companies, this paper assesses investment techniques in current use and the impact of environmental and tax regulations. Questionnaires sent to selected oil and gas companies, professional consultants, and bank engineers concentrated on seven major areas: capital availability, investment analysis techniques, cost of capital, risk analysis, impact of environmental regulations, valuation of property acquisitions and miscellaneous investment considerations. Replies were analyzed to obtain the distribution of responses for each question, and cross-correlations between size of capital budget and responses in the major areas. In the areas of capital rationing, impact of environmental regulations and investment evaluation methods, significant differences in the responses across firm size or between firms and consultants are not apparent. Differences are apparent for determination of discount rates, causes of capital limitations, value of nominal discount rates and effect of AMT. The average nominal after-tax discount rates reported by firms and consultants are 14% and 13%, respectively. A little over half of our responding firms report that AMT has had a negative impact on investment. Results are compared to those of a similar study showing the trend in investment analysis and the broadening scope of concerns in picking good investments. Introduction This paper presents the results of a survey of investment practices of U.S. oil and gas companies. In order to obtain a full spectrum of views, questionnaires were sent to (i) 308 oil and gas companies, selected from the Oil and Gas Journal 400 (OGJ400), Dun and Bradstreet's Million Dollar Directory 1991 and the Annual Review of California Oil and Gas Production 1990, (ii) 75 investment advisors. with listings in the Journal of Petroleum Technology, and (iii) 62 bank engineers listed in the Bank Engineers' Directory. 108 companies, 25 consultants and very few of the banks responded. The latter were not analyzed. Over 90% of the responding firms are registered corporations, and include 6 of the 10 with largest total assets. Of 107 respondents, 63 indicate a capital budget of less than $10mm, 25 between $10mm and $200mm, and 19 greater than $200mm. We designate the first group as small, the second as medium and the third as large. A substantial majority (72.6%) indicate a capital budget of less than $50mm; in the previous survey the corresponding proportion was 42%. Findings are:(i)About two-thirds of the firms report some constraint on their capital budget. This frequency is consistent with 68% of respondents reporting that they formally rank capital projects.(ii)IRR and payout time are the most popular discounting and non-discounting methods, respectively, for both firms and consultants.(iii)A significant proportion determine their discount rate subjectively; in contrast, an overwhelming majority of respondents deal with risk quantitatively.(iii)Environmental regulations pertaining to groundwater contamination and pit closure rules are most important in affecting investment decisions; potential liability and punitive damages is the greatest concern relating to environmental regulations. P. 53^