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Equity Valuation in the Coal Seam Gas Industry

25 Pages Posted: 25 Aug 2009  

Duncan Keith

affiliation not provided to SSRN

Simone Kelly

Bond University - Finance

Ray Patrick McNamara

Bond University

Date Written: August 24, 2009

Abstract

The coal seam gas industry is an important and rapidly developing sector of the Australian mining industry and the economy as a whole. This sector provides an excellent site to test the relevance of the Hotelling Valuation Principle (HVP) in explaining the market capitalisation of this industry sector. In addition, the test enabled the test of which reserve classification best explains the market capitalisation of firms in the industry.

Currently, the majority of listed firms in this sector do not have positive cash flows from the sale of gas. The HVP posits that market values are a function of company reserves. We test five measures of firm reserves as explanations of market capitalisation. After controlling for scale differences, we find that 2P Reserves have the highest explanatory power. No other measure of reserves or resources plays any significant role in explaining market capitalisation. We conclude that the effort and cost undertaken by the industry in arriving at classification below the reserves category, the contingent and possible resource classification, has no meaning to capital markets.

Keywords: Equity Valuation, Coal Seam Gas, Energy Valuation, Hotelling, Reserves

JEL Classification: G10, G12, G30, L71, Q40

Suggested Citation

Keith, Duncan and Kelly, Simone and McNamara, Ray Patrick, Equity Valuation in the Coal Seam Gas Industry (August 24, 2009). 22nd Australasian Finance and Banking Conference 2009. Available at SSRN: https://ssrn.com/abstract=1461136 or http://dx.doi.org/10.2139/ssrn.1461136

Duncan Keith

affiliation not provided to SSRN

Simone M. Kelly

Bond University - Finance ( email )

Gold Coast, QLD 4229
Australia

Ray Patrick McNamara (Contact Author)

Bond University ( email )

Gold Coast, QLD 4229
Australia
+61437333555 (Phone)

HOME PAGE: http://www.bond.edu.au

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