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Reserves and Valuation using Multiples for Oil and Gas Companies

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Author(s): Eduardo Pontual Ribeiro | Luiz Teles Menezes Neto | Rosemarie Bröker Bone

Journal: Revista Brasileira de Finanças
ISSN 1679-0731

Volume: 9;
Issue: 4;
Start page: 549;
Date: 2011;
Original page

Keywords: Oil and Gas Reserves | Market Value | Multiples Valuation

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.
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