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A fundamental analysis approach to oil and gas firm valuation
Abstract
This study examines the value-relevance of nine fundamental signals identified by equity analysts as instrumental to the equity valuation process in the oil and gas industry. Drawing from a fundamental analysis framework, this paper predicts that the fundamentals are valued by the market. In addition, this study predicts that the fundamentals are incrementally value-relevant with respect to accounting earnings and book value of equity. This study employs the valuation model developed by Ohlson (1990, 1995) as well as a traditional cumulative stock return model to test these predictions. Most fundamental analysis studies have employed cross-sectional approaches, examining large samples of firms for indicators of future earnings and resulting firm value. However, numerous researchers have requested that industry-specific studies be performed (i.e., Bernard and Stober 1989; Lev and Thiagarajan 1993; and others). The underlying motivation for the current study stems from the ramifications of unique accounting procedures available to firms in the oil and gas industry. Firms within this industry have two distinct accounting methods available to them. The choice of accounting methods is considered the cause of major discrepancies between the balance sheets and income statements of oil and gas firms. This study contributes to the fundamental analysis literature by identifying four categories of fundamentals specifically designed by analysts to overcome the comparability problems inherent in the equity valuation process of oil and gas firms. These fundamentals are then linked to firm value. The findings demonstrate a significant relationship between a number of the fundamentals with both the market value of equity and cumulative stock return. In addition, results suggest that the fundamentals provide incremental information beyond earnings, change in earnings, and book value of equity when explaining equity values and stock returns. This information can be regarded as a first step in the quest to identify a fundamental valuation model which accurately predicts stock price, cumulative return, and/or earnings growth. Thus, this research is useful to analysts and investors within the oil and gas sector as well as to academic researchers.
Subject Area
Accounting|Finance
Recommended Citation
Quirin, Jeffrey J, "A fundamental analysis approach to oil and gas firm valuation" (1998). ETD collection for University of Nebraska-Lincoln. AAI9908481.
https://digitalcommons.unl.edu/dissertations/AAI9908481