The Value-Relevance of Accounting Figures in the International Oil and Gas Industry – Cash flows or Accruals?

Analysts often rely on a given set of accounting figures for evaluating the financial performance and relative valuation of oil and gas exploration companies. However, the relative importance of these various measures in the equity valuation process is unclear. The aim of our study is to determine the relative value-relevance of accounting figures using regression analysis of market and accounting data for 15 of the largest international oil and gas companies in the period 1990-2003. The results show that accounting figures calculated before the expensing of depreciation are more value-relevant than net figures. This indicates that investors have more confidence in profits before depreciation and in cash flows, than they have in net income.