Investment Analysis: U.S. Oil and Gas Producers Score High in University Survey
Authors: Boyle Hugh F. , Schenck George K. 
Published: December 2007

Summary
America's oil and gas producers probably lead all other businesses in the degree to which they apply advanced techniques of investment analysis. As Fig. 1 illustrates, the dynamics of high risk, investment, and profit potential compel oil and gas producers to seek improved potential compel oil and gas producers to seek improved methods for analyzing investments. This report provides financial and planning personnel a chance to measure their investment analysis practices against those of the best in the industry. Nineteen of the twenty largest U.S.-based petroleum companies were among the 103 respondents to an investment survey of producers in the U.S. The 103 firms had worldwide sales of $583 billion in 1982, a figure that amount to 9253 of the total sales by U.S. oil and gas producers for the year. producers for the year. Questionnaires were sent in Aug. 1983 to all of the 306 oil and gas producing firms listed in Dun and Bradstreet's 1983 Million Dollar Directory, that reported annual sales above $9 million. The responding firms tended to be the larger companies and the results showed that the larger firms were more analytically sophisticated than were the nonresponding, smaller firms (based on information from a followup telephone survey). The questionnaire, shown as Appendix A, concentrated on five major areas: investment measures, cost of capital, capital availability, risk analysis, and inflation. About half of the 20 questions were similar to ones asked in earlier studies of investment practices at U.S. firms in a broad range of industries. 1 3 The petroleum industry now is far ahead of the results shown in those earlier studies.

Survey Results
The following statistics combine information from all 103 responses, except when the largest petroleum companies as a group generally reported different practices. For example, in their handling of risk analysis the large firms are reported on separately because they follow better practices than does me rest of the industry. The questions practices than does me rest of the industry. The questions generally were answered at a high corporate level. About 60% of the respondents were vice presidents or above, including 11 presidents or board chairmen, as shown in Appendix B.
To help ensure prompt response, the questionnaire in only two places (Questions 9 and 16) called for the firm to provide a specific number. The other 18 questions were multiple choice.
Investment Analysis Measures. The questionnaire asked what investment analysis measures the firm used to evaluate a project. A summary of the results as to use of primary and secondary measures is shown in Table I . In primary and secondary measures is shown in Table I . In retrospect, the separation between primary and secondary measures appears ambiguous because no definition of either was provided. However, it is reasonable to assume that respondents considered a secondary measure to be one that would provide additional information, which could either reinforce the primary result or suggest the need for some further analysis. Ninety-eight percent of the companies used at least one form of discounted cash flow (DCF) analysis, which is consistent with the importance of the time value of money. Internal rate of return [IRR, also known as DCF-return on investment (ROI)] was the most popular primary method selected, easily outdistancing its closest undiscounted challenger, payback period (also called "payout" ). Third choice went to net present value (NPV), which is the measure preferred by investment theorists. Combining the primary and secondary columns in Table I provides a broader perspective on investment analysis as performed by oil and gas producers. Viewed in this manner, rankings did not change, but IRR was then challenged by payback period as the most popular method, with each of these two being used to some degree by 83 % of the participating firms. NPV was used by 71 % of the respondents. The practice of using several investment measures, noted in previous investment surveys, was confirmed by this study. All the respondents acknowledged the use of more than one technique. The most popular combination of measures was a triad (chosen by 45%): IRR and payback for primary analysis, with NPV employed as a secondary measure. A majority of firms (76%) selected payback in conjunction with one of the discounted methods. Only 11 % of the companies used an undiscounted method as their sole primary evaluation technique, while 53% combined both discounted and undiscounted methods for their primary analysis.
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