Exploration vs. acquisition of oil and gas reserves: Effect on stock returns

Abstract

This paper examines how oil and gas companies' reserves growth affects their share price returns. In particular we examine three issues affecting the relation between reserves changes and oil and gas firm returns. First, we examine if investors value reserves replacement as a result of exploration activities differently to reserves growth through acquisitions. In the second analysis, we test if reserves replacement of oil reserves impacts stock returns differently than changes in gas reserves do. Third, we examine the impact of the Shale gas revolution and the subsequent oil and gas price divergence on the association between returns and replacement of oil versus gas reserves. The results suggest that investors seem to be indifferent to reserves replacement strategy (exploration or acquisition). However, we find that changes in oil reserves impact oil and gas company returns differently than changes in gas reserves does. Moreover, we find that there has been a structural shift in the relation between returns and changes in gas reserves (but not changes in oil reserves) after 2008, coinciding with the Shale gas revolution and the break in the oil-gas price link. This latter result can be relevant for understanding the impact of the recent fall in oil prices on investor valuation of oil and gas reserves.

The impact of unproved reserve news on the energy stock volatility: an empirical investigation on Turkey

“…The reaction of financial markets to energy reserve revisions is one of the subjects in the literature. Misund (2018) analyzes whether the acquisition and exploration of energy reserves significantly impact energy stocks. Empirical results show that acquisition and exploration have different results on energy stocks in North America.…”

“…Hence, reserves are important assets that affect the business model and the sustainability of energy companies. However, Energy reserve processes (exploration, testing and exploitation) are essential cost drivers (Misund, 2018, p. 2). As the basic rule of economics, the quantity of a commodity is one factor that determines the price of that commodity.…”

“…Previous literature on the relationship between energy reserve and energy stock is analyzed in different dimensions. Some studies examine the effect of changes in energy reserves on energy stocks (Scholtens and Wagenaar, 2011; Misund, 2018). Energy price is another subject of impact on energy stocks (Arouri, 2011; Pham, 2019).…”