Oil and gas companies key metrics and stock performance

Proceedings the 10th students scientific research conference Oil and Gas Companies: Key Metrics and Stock Performance Group sciences: Nguyễn Hà Phương Nguyễn Thu Hiền Hoàng Nhật Hạ Class: AC2015D Science advisor: Dr Lê Đức Thịnh 120 Proceedings the 10th students scientific research conference Chapter – Introduction The necessity of topic The US State Board of Administration (SBA) sponsored an executive compensation research study by Farient Advisors LLC, covering 1,800 companies, 24 Industry groups, and fourteen years of data (from 1998-2011) The research project identifies the primary metrics used in executive compensation plans, overall and by industry, company size, and valuation premiums, and then tests these metrics to determine whether the metrics used have the highest impact on total stock returns The study found that, in aggregate, performance metrics are generally well-aligned with shareowner value Earnings growth, followed by returns and revenue growth, has the greatest impact on stock prices The review also found that many industries have a number of metrics to choose from; with half of the 24 industry groups studied having at least three metric categories with strong correlations to total shareholder returns However, the optimal use of measures differs considerably by industry This research aims to find out metrics that have strong correlations with total shareholder returns for companies in oil and gas exploration and production industry The petroleum or oil and gas industry, also known as the oil industry or the oil patch, includes the global processes of exploration, extraction, refining, transporting (often by oil tankers and pipelines), and marketing of petroleum products The largest volume products of the industry are fuel oil and gasoline (petrol) Considered to be the biggest sector in the world in terms of dollar value, the oil and gas industry is a global powerhouse employing hundreds of thousands of workers worldwide as well as generating hundreds of billions of dollars globally each year In regions which house the major national oil companies, these oil and gas companies are so vital they often contribute a significant amount towards national GDP The industry is usually divided into three major components: upstream, midstream and downstream The Upstream component is also refereed to as the E&P (exploration and exploration) This involves search for underwater and underground natural gas fields or crude oil fields and the drilling of exploration wells and drilling 121 Proceedings the 10th students scientific research conference into established wells to recover oil and gas.Downstream refers to the filtering of the raw materials obtained during the upstream phase This means refining crude oil and purifying natural gas The marketing and commercial distribution of these products to consumers and end users in a number of forms including: natural gas, diesel oil, petrol, gasoline, lubricants, kerosene, jet fuel, asphalt, heating oil, LPG (liquefied petroleum gas) as well as a number of other types of petrochemicals Midstream is generally classified under the downstream category In recent years there has been a growing negative sentiment towards the oil and gas industry and "big energy" Major environmental disasters such as the Deepwater Horizon Gulf Of Mexico Oil Spill have cast a negative spotlight up on the industry The trend towards Renewable and Alternative energy is also another threat to traditional oil and gas companies Coupled with the rise in pro-eco legislation and governmental pressure has meant the oil and gas industry is under more scrutiny than ever However the Oil and gas industry is still extraordinarily successful and still experiences massive growth Petroleum is vital to many industries, and is of importance to the maintenance of industrial civilization in its current configuration, and thus is a critical concern for many nations It's estimated that 30 billions barrels are consumed globally each year - primarily by developed nations Oil also accounts for a significant percentage of energy consumption regionally from 32% for Europe and Asia, 40% for North America, 41% for Africa, 44% for South and 53% for the Middle East.Petroleum is also the raw material for many chemical products, including pharmaceuticals, solvents, fertilizers, pesticides, synthetic fragrances, and plastics For all of these reasons, studying oil and gas companies is quite necessary and an interesting topic In this research, we focus on biggest companies operating in the upstream area Source: [1], [2] The goal of topic - Key metrics of oil and gas exploration and production companies - Annual financial and operating data of key metrics and stock prices from some biggest oil and gas companies around the world - Analysis of correlation between stock price and each key metric of these companies 122 Proceedings the 10th students scientific research conference - Multiple regression model 3.Research questions, methodology and scope of research  Research questions: - Which metrics have a positive/negative linear relationship with TSR for each oil and gas company? - Find out a linear multiple regression model between TSR and key metrics when considering each analyzed company as a sample  Methodology and Scope of analysis: - Qualitative: Study featured key metrics for oil and gas exploration and production companies (includingProduction to Reserves, Reserve Life Index, ReserveReplacement Ratio, Finding Cost (Technical) per Barrel of Oil Equivalent (boe), and Production Costs per boe), and some standard metrics in corporate finance (such as Earnings per Share Growth, Revenue Growth, Return on Equity, etc.) Source: [3], [4], [5], [6], [7], [8], [9], [10] - Quantitative: Analyze data from 14 big oil and gas companies in North America, South America, and Europe (mostly in the US) Source: [11], [12], [13], [14], [15], [16], [17], [18], [19], [20], [21], [23], [24], [25] Facilities and the difficulties of the researching process  Facilities: We obtain data from financial reports of fourteen oil and gas companies, and stock prices from Yahoo Finance  Difficulties: - Companies record data in various types of currencies - Some companies not have enough data to analyze 123 Proceedings the 10th students scientific research conference Chapter -Key metrics Total Shareholder Returns (TSR) TSR for a given period= Adjusted closing price at the end of the period−Adjusted closing price at the beginning o Adjusted closing price at the beginning of the period (We obtain stock prices from Yahoo Finance.) Featured Metrics for Oil and Gas Exploration and Production Companies a) Production to Reserves Reserves are the amount of resource still in the ground Production is the average amount of resource being pulled from the ground This ratio is used to determine if a company is replacing the reserves depleted through production To perform this calculation,first the amount of natural gas reserves needs to be converted from cubic feet (cf) to barrels of oil equivalent (boe), usually at a ratio of 6,000 (or 5,800) cfto1 boe Production ¿ Reserve = Production Reserves b) Reserve Life Index The RLI is the reciprocal of the Production to Reserves Ratio, showing how long reserves will last at the current production rate with no additions to reserves Production RLI ( years)= ¿ Reserves Ratio ¿ c) Reserve-Replacement Ratio The Reserve-Replacement Ratio is used to see if a company is replacing production Basically, it shows whether a company is increasing reserves or depleting them.The main objective of any oil and gas company is to maximize profit while increasing the value of the company year after year In order to this, the company must generate more revenue while cutting costs To achieve this, the company must enhance its oil and gas production year after year This is to say that a company needs to continually invest its financial resources in exploration and development activities to broaden their portfolio The greater the proved oil and gas reserves added to the company’s resource base, the greater the value of the company Reserve−Replacement Ratio= Increase∈ Reserves+ Production Production 124 Proceedings the 10th students scientific research conference d) Finding Cost (Technical) per boe Finding cost is used to estimate a company’s cost to find new reserves, measuring technical efficiency of that company Reserves changed Exploration Cost FindingCost (Technical) per boe= extensions∧discoveries ¿ ¿ e) Production Costs per boe Production costs for the period are divided by combined oil and gas production volumes, to be analyzed on a per boe basis Production Costs per boe= Production Costs Total Oil∧Gas Production Standard Metrics in Corporate Finance a) Diluted Earnings per Share (EPS) Diluted EPS is a very important performance metric used to gauge the quality of a company's earnings per share (EPS) if all convertible securities were exercised Companies usually report both primary and diluted EPS, but the focus is generally more on the diluted EPS, as it is more conservative and indicates a worst-case scenario in terms of EPS b) Diluted EPS Growth EPS Growth is defined as the percentage change in EPS over the previous 12-month period to the latest year end It gives a good picture of the rate at which a company has grown its profitability Diluted EPS Growth= Current yea r ' s diluted EPS−Previous yea r ' s diluted EPS Previous yea r ' s diluted EPS c) Revenue Growth Revenue Growth is the percentage increase (or decrease) in a company's sales from one period to the next Revenue Growth= Current yea r ' s revenue−Previous yea r ' s revenue Previous yea r ' s revenue d) Return on Equity (ROE) ROE is the amount of net income returned as a percentage of shareholders equity Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested 125 Proceedings the 10th students scientific research conference Income attributable ¿ Return on Equity=¿ shareholders Total shareholder s' equity e) Free Cash Flow (FCF) Growth FCF growth is the percentage change in FCF from year to year Free cash flow=Net cash provided by operating activities−Capital expentures FCF Growth= Current yea r ' s FCF −Previous yea r ' s CFC Previous yea r ' s CFC f) Earnings Margin We calculate this ratio as net income divided by revenue This ratio measure how much out of every dollar of sales a company actually keeps in earnings Income attributable Earnings Margin=¿ shareholders ¿ Revenue 126 Proceedings the 10th students scientific research conference Chapter - Analyzing correlation between each metrics and TSR We will analyze data of the following fourteenoil and gas exploration and production companies: - Tenof the biggest oil and gas companies in North America: ExxonMobil, Chevron, ConocoPhillips, EOG Resources, Occidental Petroleum, Marathon Oil, Anadarko Petroleum, Murphy Oil, Noble Energy, and Hess (all are American companies) - Three of the biggest oil and gas companies in Europe: Royal Dutch Shell (Netherlands), BP (UK), and Total (France) - One of the biggest oil and gas companies in South America: Petrobras (Brazil) Our choices are restricted, since the multiple regression model requirescosts per boe figures (the 4th and 5th featured metrics) accounted in the same currency We analyze both featured and standard metrics to find out correlation with total shareholder returns.We also run Pearson test in some cases to see if the data supports a linear relationship between two populations ExxonMobil Among featured metrics of this company, only Production/Reserves and RLI notably have linear relationship with TSR, because correlation with TSR of Production/Reserves and RLI are approximately 0.525 and -0.515, respectively 127 Proceedings the 10th students scientific research conference None of the standard metrics has significant relationship with TSR Out of these, Revenue Growth is the most related with correlation of about 0.410, still lower than that of Production/Reserves It is followed by FCF Growth (0.307) and EPS Growth (0.237).Therefore, in this case, Production/Reserves and RLI are the most effective metrics Chevron Chevron shares the same patterns with ExxonMobil regarding the first two featured metrics, that is, Production/Reserves is positively related with TRS (0.517) and RLI is negatively related with TSR (-0.530) This indicates that Chevron has similar production and reserves management strategy to ExxonMobil’s.They both produce a large amount of oil and gas compared to reserves each year, and this is possibly a sign of prosperity for the two largest oil and gas companies in the US 128 Proceedings the 10th students scientific research conference Similarly, none of the standard metrics of this company has strong correlation with TSR However, some slight relationships can be identified: FCF Growth is positively related with TSR because correlation is0.212; Earnings Margin and Diluted EPS are negatively realated with TSR, as correlation are -0.186 and -0.180, respectively ConocoPhillips For ConocoPhillips, in contrast with previous two companies, Production/Reserves has a negative (although weak) relationship with TRS, while RLI has a positive relationship This suggests that these two ratios can vary in meaning It would seem a long RLI in years would be better as resource would be produced over a long period of time However, if a company is lacking the ability to develop this 129 Proceedings the 10th students scientific research conference The relationships between the standard metrics and TSR are insignificant, except for EPS Growth and FCF Growth There is a weak positive relationship between EPS Growth and TSR at correlation of 0.445 Meanwhile, FCF Growth is strongly related to TSR at correlation of 0.742, and is effective to evaluate oil and gas stock in population (p-value = 0.007) Anadarko Petroleum The signs of the coefficients of correlation show that all five featured metrics above are following normal reasoning: Costs and Production/Reserves are negatively related with TSR, while RLI and Reserve-Replacement Ratio are positively related with TSR However, three of them are too small to take into consideration The notable relationship arethose between Reserve-Replacement Ratio and Productiontion Costs/boe with correlation of 0.466 and -0.391, respectively 133 Proceedings the 10th students scientific research conference On the other hand, the standard metrics hardly have any relationships with TSR for this company 8, & 10 Murphy Oil, Noble Energy, Hess These three companies are similar to previously analyzed companies, except that they are smaller in size and the relationships are weaker (For detailed data, refer to Appendix - Murphy Oil, Noble Energy, Hess at the end of this report.) 11 Royal Dutch Shell Among featured metrics, Finding Costs/boe has a strong negative relationship withTSR, while Reserve-Replacement Ratio is moderately positively related with TSR, at correlation of -0.642 and 0.495, respectively According to the p-value, Finding Cost/boe could be an effective metrics to evaluate stock in population Despite small coefficient of correlation, Production Costs/boe reveals that the company still follows the pattern depicting the negative relationship between costs and return Similarly, Production/Reserves also negatively related to TSR, which results inRLI being positively related to TSR However, in this case, EPS Growth, one of the standard metrics, is the most effective for stock valuation in population Based on the sample data, it is strongly related with TSR at correlation of 0.656, and p-value is lower than 0.02 134 Proceedings the 10th students scientific research conference 12 BP 135 Proceedings the 10th students scientific research conference Similar to Occidental Petroleum from the US, BP’s Reserve-Replacement Ratio has a moderatelypositive relationship with TSR, and it is also can be used to evaluate stock in the population as the p-value is relatively small (0.057) Costs metrics and Production/Reserves are negatively related to TSR at correlation of -0.113, -0.141, and -0.182, respectively On the other hand, RLI is positively related to TSR at correlation of 0.192 Among standard metrics, FCF Growth has an abnormallystrong negative relationship with TSR One possible explanation is that while BP’s stock price slightly went up during the examined period, its free cash flow had decreased drastically since 2010, due to compensations and environmental charges after the Gulf of Mexico oil spill 13 Total 136 Proceedings the 10th students scientific research conference The French company’s metrics have some irregular relationships with TSR To be specific, Finding Cost/boe is moderately positively related to TSR, and ReserveReplacement Ratio has a weak negative relationship with TSR, at correlation of 0.499 and -0.277, respectively 14 Petrobras For this company, the metrics most significantlyrelated to TSR are Production Costs/boe, Production/Reservses, and RLI, at correlation of -0.633, 0.469, and -0.455, respectively.The first one can also be effective for evaluating stock in population, as its p-value equals 0.0247 Among standard metrics, Revenue Growth has moderate, but negative, relationship with TSR In fact, most of standard metrics in this case have negative relationships with TSR except for EPS Growth, which is irregular and not yet to be explained 137 Proceedings the 10th students scientific research conference From the data acquired, we observe that comparing the two sets of featured and standard metrics, featured metrics for oil and gas exploration and production companies tend to be more effective in evaluating stock performance, while standard metrics in corporate finance are more likely to be not related enough, or to show unexplained relationships with TSR.Production/Reserves, RLI, Reserve-Replacement Ratio, Finding Cost/boe, and Production Costs/boe can be potential effective metrics in various circumstances, although they appear to be a bit harder to interpret than standard metrics Chapter -Analyzing correlation among variables The below table shows the values ofcorrelation among the variables 138 Proceedings the 10th students scientific research conference The highest positive correlation is observed between ROE and EPS Thecorrelation value is 0.84, which means that 84% positivecorrelation is present between ROE and EPS It means that when ROEincreases, EPS will also increase The lowest negative correlation coefficient is observed between Finding cost/boe and RLI The correlation value is -0.20, which means that 20% negative correlation is present between Finding cost/boe and RLI It means that when Finding cost/boeincreases, RLI willdecrease 139 Proceedings the 10th students scientific research conference Chapter - Multiple regression analysis After analyzing data of the fourteen oil and gas exploration and production companies, we choose nine out of eleven metrics as the independent variables to perform a multiple regression analysis to check the usefulness of the model It will show whether thevariation of dependent variable has been explained by the variation of independent variables The regression equation is TSR=β + β ( RLI )+ β2 (ReserveReplacement Ratio)+ β ( FindingCost /boe)+ β (Production Costs/bo Excel is used to produce the outputs below From this printout we can see that the sample regression equation is TSR = 0.309 - 0.012(RLI) + 0.042(Reserve-Replacement Ratio) - 0.002(Finding Cost/boe) - 0.013(Production Costs/boe) + 0.013(EPS) - 0.190(Revenue Growth)- 0.365 (ROE) + 0.002(FCF Growth) + 0.149(Earnings Margin) 140 Proceedings the 10th students scientific research conference From the Excel output, the coefficient of determination R is 0.12930673 This means that 12.93% of the variation in the TSR is explained by the nine independent variables, while 87.07% remains unexplained The adjusted coefficient of determination is 6.90%, indicating that how we measure the coefficient of determination can affect the model’s fit greatly We test for the overall utility of the model: Step 1: H0: β1 = β2 = … = β9 = HA: At least one βi is not equal to Step 2: Decision rule: Reject H0 if p-value < α = 0.05 Step 3: Since overall p-value = 0.03< 0.05, we reject H There is enough evidence to indicate that the model is useful at the 5% level of significance For each independent variable, we find that: p-value(Production Costs/boe) = 0.01 < 0.05, which means that Production Costs/boe has significant impact on TSR p-value(Reserve-Replacement Ratio) = 0.09 < 0.1, showing that Reserve-Replacement Ratio has relatively significant impact on TSR p-value(Revenue Growth) = 0.07 < 0.1, which means that Revenue Growth has relatively significant impact on TSR 141 Proceedings the 10th students scientific research conference Chapter -Conclusion and Recommendation Experience and benefits learned from the study of topic During the research process, we obtained some interesting knowledge about oil and gas exploration and production industry We also had chancesto apply the knowledge of previously studied subjects, especiallyManagerial and Financial Accounting, Business Statistics, and Corporate Finance, in practice Conclusion We analyze annual data of fourteen of the biggest oil and gas exploration and production companies in North America, South America, and Europe in aten-year period (2008-2017) to see if there are positive/negative linear relationships between total shareholder returns and five key oil and gas metrics, as well as six standard metrics for stock valuation in corporate finance We find out that in some cases, the correlation between total shareholder returns and some key metrics are statistically significant (p-value < 0.1) We also find a multiple regression model to test the impact of key metrics on total shareholder returns Results show that Reserve-Replacement Ratio has significant positive impact on total shareholderreturns, while Production Costs per boe and Revenue Growth have significantnegative impact on total shareholder returns (p-value < 0.1) 142 Proceedings the 10th students scientific research conference References Corpgov.law.harvard.edu (2018) Performance Metrics and Their Link to Value [online] Available at: https://corpgov.law.harvard.edu/2013/02/20/performancemetrics-and-their-link-to-value/ Oil and Gas IQ (2018) Introduction to Oil and Gas Industry [online] Available at: https://www.oilandgasiq.com/strategy-management-and-information/articles/oilgas-industry-an-introduction Investopedia (2018) Key Ratios For Analyzing Oil And Gas Stocks: Measuring Performance [online] Available at: https://www.investopedia.com/university/important-ratios-for-analyzing-oil-andgas-stocks/measuring-performance.asp OilPrice.com (2018) The Single Most Important KPI For Oil & Gas Companies | OilPrice.com [online] Available at: https://oilprice.com/Energy/Crude-Oil/TheSingle-Most-Important-KPI-For-Oil-Gas-Companies.html EKT Interactive (2018) Upstream Oil and Gas Production Performance Metrics EKT Interactive [online] Available at: https://www.ektinteractive.com/upstreamoil-and-gas-production-performance-metrics/ The Top Ways to Measure Oil & Gas Finding & Development Costs (2018) Evaluate Energy Ross, S., Westerfield, R and Jaffe, J (2008) Corporate finance Boston: McGrawHill/Irwin Investopedia (2018) Diluted Earnings Per Share - Diluted EPS [online] Available at: https://www.investopedia.com/terms/d/dilutedeps.asp Stockopedia (2018) Earnings per Share Growth %, Last Year [online] Available at: https://www.stockopedia.com/ratios/earnings-per-share-growth-last-year-587/ 10 Investopedia (2018) Return On Equity - ROE [online] Available at: https://www.investopedia.com/terms/r/returnonequity.asp 11 Yahoo Finance Web: https://finance.yahoo.com/ 12 ExxonMobil Annual Reports Web: https://www.sec.gov/cgi-bin/browse-edgar? action=getcompany&CIK=0000034088&type=10K&dateb=&owner=include&count=40 13 Chevron Annual Reports Web: https://www.chevron.com/investors/financialinformation#secfilings 14 ConocoPhillips Annual Reports Web: http://www.conocophillips.com/companyreports-resources/annual-report/annual-report-archive/ 15 EOG Resources Annual Reports Web: http://investors.eogresources.com/AnnualReports-and-Proxy-Materials 16 Occidental Petroleum Annual Reports Web: http://www.oxy.com/investors/Reports/Pages/SEC-Filings.aspx 17 Marathon Oil Annual Reports Web: http://ir.marathonoil.com/financialinformation/sec-filings 143 Proceedings the 10th students scientific research conference 18 Anadarko Petroleum Annual Reports Web: http://investors.anadarko.com/annualreports 19 Murphy Oil Annual Reports Web: http://ir.murphyoilcorp.com/phoenix.zhtml? c=61237&p=irol-sec 20 Noble Energy Annual Reports Web: http://investors.nblenergy.com/financialinformation/annual-reports 21 Hess Annual Reports Web: http://phx.corporate-ir.net/phoenix.zhtml? c=101801&p=irol-reportsannual 22 Royal Dutch Shell Annual Reports Web: https://www.shell.com/investors/financial-reporting/annual-publications/annualreports-download-centre.html 23 BP Annual Reports Web: https://www.bp.com/en/global/corporate/investors/results-and-reporting/annualreport/annual-reporting-archive.html 24 Total Annual Reports Web: https://www.total.com/en/investors/publications-andregulated-information/regulated-information/annual-financial-reports 25 Petrobras Annual Reports Web: http://www.investidorpetrobras.com.br/en/annualreports/form-20f 144 Proceedings the 10th students scientific research conference Appendix Murphy Oil, Noble Energy, Hess Murphy Oil 145 Proceedings the 10th students scientific research conference Noble Energy 146 Proceedings the 10th students scientific research conference 10 Hess 147 ... goal of topic - Key metrics of oil and gas exploration and production companies - Annual financial and operating data of key metrics and stock prices from some biggest oil and gas companies around... of featured and standard metrics, featured metrics for oil and gas exploration and production companies tend to be more effective in evaluating stock performance, while standard metrics in corporate... correlation between each metrics and TSR We will analyze data of the following fourteenoil and gas exploration and production companies: - Tenof the biggest oil and gas companies in North America: