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

Amir H. Sabet, Richard Heaney

Research output: Contribution to journalArticle

1 Citation (Scopus)

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.

Original languageEnglish
Pages (from-to)50-65
Number of pages16
JournalJournal of Commodity Markets
Volume6
DOIs
Publication statusPublished - 1 Jun 2017

Fingerprint

Gas
Oil
Empirical analysis
Real options
Drilling
Share prices
Wealth
Firm value
Crude oil
Price volatility
Testing
Natural gas
Return volatility

Cite this

@article{7769bd90589b4e9eb4108bfa41fc585e,
title = "Real options and the value of oil and gas firms: An empirical analysis",
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 = "Exploration and development drilling, Oil and gas firms, Real options, Volatility",
author = "Sabet, {Amir H.} and Richard Heaney",
year = "2017",
month = "6",
day = "1",
doi = "10.1016/j.jcomm.2017.05.001",
language = "English",
volume = "6",
pages = "50--65",
journal = "Journal of Commodity Markets",
issn = "2405-8505",
publisher = "Elsevier",

}

Real options and the value of oil and gas firms : An empirical analysis. / Sabet, Amir H.; Heaney, Richard.

In: Journal of Commodity Markets, Vol. 6, 01.06.2017, p. 50-65.

Research output: Contribution to journalArticle

TY - JOUR

T1 - Real options and the value of oil and gas firms

T2 - An empirical analysis

AU - Sabet, Amir H.

AU - Heaney, Richard

PY - 2017/6/1

Y1 - 2017/6/1

N2 - 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.

AB - 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.

KW - Exploration and development drilling

KW - Oil and gas firms

KW - Real options

KW - Volatility

UR - http://www.scopus.com/inward/record.url?scp=85020770677&partnerID=8YFLogxK

U2 - 10.1016/j.jcomm.2017.05.001

DO - 10.1016/j.jcomm.2017.05.001

M3 - Article

VL - 6

SP - 50

EP - 65

JO - Journal of Commodity Markets

JF - Journal of Commodity Markets

SN - 2405-8505

ER -