Valuation of international oil companies : the RoACE era

Abstract

To improve their basis for investment recommendations and decisions, stock market analysts and investors make extensive use of operational and financial indicators. For the international oil and gas industry, a predominant indicator is return on capital employed (RoACE). The rationale for using this indicator is an assumed correlation between rentability and valuation metrics. Based on panel data for 11 international oil and gas companies, we seek to establish econometric relations between market valuation on one hand, and simple financial and operational indicators on the other. Our findings do not support the perceived positive relation between reported RoACE and market-based cash-flow multiples (EV/DACF). A simple valuation model with year dummies (reflecting oil price) and company dummies (reflecting size and reputation) prove to have high explanatory power for valuation in the oil sector.