Evaluating Financial Model Performance: An Empirical Analysis of Some North Sea Investments

TL;DR

This study empirically analyzes fifty North Sea oil and gas investments to identify relationships between purchase prices, expected returns, and the impact of price uncertainty on financial outcomes.

Contribution

It provides new insights into the statistical relationships in North Sea investment returns and the influence of oil and gas price volatility on financial modeling accuracy.

Findings

Significant relationships between asset prices and returns were identified.

Oil and gas price uncertainty affects estimates of future financial returns.

The median financial return for these investments was determined.

Abstract

Fifty North Sea oil & gas investment transactions were analysed using traditional spreadsheet based financial modelling methods. The purpose of the analysis was to determine if there was a statistically significant relationship between the price paid for an oil & gas asset and the actual or expected financial return over the asset's economically useful life. Several interesting and statistically significant relationships were found which reveal useful information about financial modelling performance, the premia paid to acquire North Sea assets, the contribution oil and gas price uncertainty has on estimates of future financial returns and the median financial return of these North Sea Investments.