Valuation of International Oil Companies - the Roace Era

32 Pages Posted: 17 Feb 2005

See all articles by Petter Osmundsen

Petter Osmundsen

University of Stavanger; CESifo (Center for Economic Studies and Ifo Institute)

Frank Asche

Stavanger University College

Klaus Mohn


Bard Misund

University of Stavanger

Date Written: February 2005


High oil prices are normally expected to stimulate exploration and the development of new oil and gas fields. But over the last few years, financial analysts have focused strongly on short-term accounting return (RoACE) for benchmarking and valuation, and this has led to high capital discipline among oil and gas companies. We analyse how high oil prices can be explained in terms of an implicit capacity game between the oil companies, and explore the stability of the current equilibrium. Our approach is an investigation of a key assumption among financial analysts, namely the presumed positive relation between RoACE and stock market valuation. 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 multiples. Recent evidence also suggests that the stock market is increasingly concerned about reserve replacement and sustained profitable growth. The current high-price equilibrium is therefore hardly stable.

JEL Classification: M41, M21

Suggested Citation

Osmundsen, Petter and Asche, Frank and Mohn, Klaus and Misund, Bard, Valuation of International Oil Companies - the Roace Era (February 2005). CESifo Working Paper Series No. 1412. Available at SSRN:

Petter Osmundsen (Contact Author)

University of Stavanger ( email )

4036 Stavanger

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679

Frank Asche

Stavanger University College ( email )

PO Box 2557
4004 Stavanger

Klaus Mohn

Statoil ( email )

Forusbeen 50
N-4035 Stavanger

Bard Misund

University of Stavanger ( email )

PO Box 8300 Forus


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