Abstract
The price of oil fluctuated wildly from 2011–2015 and fell to about half
the price it was at its peak. This paper investigates whether proven oil reserves of
companies provide information for the market value of the firm. In doing so, we
also examine if proven oil reserves help in predicting future earnings of companies
incremental to other measures such as current earning and book value. The study
uses financial models from the accounting literature that are influential and have
been used in other studies for different purposes and in different industries. The
sample consisted of Oil Exploration and Production firms (GICS subindustry
10102020) plus Integrated Oil firms (GICS subindustry 10102010) as included in
the COMPUSTAT database. The sample included 120 firms. Data points were
generated for a 5 year-period from 2011 to 2015. The results of the data analysis
indicate that proven reserve information does not seem to provide any additional
explanatory power for the market value of equity of firms incremental to the
information provided in financial variable such as earnings, book value, accruals
and cash flows. Also, proven reserve information does not seem to aid in predicting
future earnings over and above the information found in financial variables such
as current year earnings, book value and cash flow and accruals.