The most interesting finding in a new PricewaterhouseCoopers (PWC) study of financial reporting by oil and gas companies isn't how much invest- ors wish they knew about companies but don't-although the void is large and interesting enough.
The most interesting finding is instead the contrast between how well companies think they communicate with their owners and how poor in- vestors and analysts judge the effort to be.
Of 39 senior oil company executives surveyed for PWC during November 2001 and March 2002, 52% consider themselves "proactive" in their communication with investors, according to a report PWC released last week. That means they initiate contact with investors as soon as new information becomes available and "anticipate concerns and questions through continuous dialog."
Fifty institutional investors and fund managers and 30 analysts from investment banks don't so strongly see things that way. Only 14% of the former group surveyed for PWC and 20% of the latter agreed with the majority company view.
Disclosures suspicious
There was a time when assessments by investors and analysts of oil company disclosures didn't matter much. Companies reported what they had to report-mostly financial performance data-plus whatever they thought would lift their stock prices. Investors and analysts supplemented that information with whatever they could pry out of company officials on their own.
Those days are over. Abuses by Enron Corp. and others have made financial disclosures by all public companies suspicious.
"In the rush, post-Enron, to scrutinize reporting practices, it is inevitable that the oil and gas industry will be high on the list for politicians and regulators," notes PWC Global Petroleum Leader Rich Paterson in the study's introduction.
"The danger for companies is that such scrutiny may be driven disproportionately by political factors rather than insight and understanding of the industry, its strategies, and its processes."
One way or another, disclosure in general will increase. The PWC study argues that broadened reporting will help companies.
"By increasing disclosure," Paterson's introduction says, "companies have the prospect of deepening relationships with long-term investors, reducing stock volatility, and maximizing share value. It also provides a clear platform for influencing and educating the regulatory climate."
A reason for the disparity of judgment about current reporting efforts by oil and gas companies shows clearly in the PWC survey: Investors see high value in types of information that companies don't.
PWC asked survey respondents about the importance of 51 potential indicators of company value. Eighty percent or more of the investors in the survey identified 22 of those indicators as particularly important to assessments of companies. A similarly large share of analysts considered 32 of the indicators to be particularly valuable.
Companies gave the high-value rating to only 19 of the indicators.
Examining convergence and divergence of interest among companies, investors, and analysts, the PWC study trimmed the list of indicators to 35 to exclude values relevant only to service and marketing companies.
Interest of the three groups converged around these value indicators: strategic direction, quality of management, and traditional financial metrics for the whole industry; reserves estimates by region, replacement costs, and exploration success rates for upstream operations; and capital expenditure, refining margins by region, and utilization rates for downstream operations.
Companies and analysts, but not investors, expressed high interest in supply, demand, and prices for crude oil and oil products by region.
By themselves, companies identified unit costs by refinery and refinery acquisition costs of crude as particularly valuable.
Most likely to shape future reporting, of course, is information that investors and analysts consider especially important but that companies don't.
Together, investors and analysts identified these indicators as particularly valuable: geopolitical environment for the whole industry, hedging strategy for upstream operations, and market share and refining capacity for downstream functions.
Analysts by themselves add, for upstream, operating profit and net cash flow per equivalent measure by geographic location and quality of crude reserves, and, for downstream, petroleum product sales by volume by refinery.
Unfulfilled opportunity
In general, the study says, investors say they neither get all the information they need nor rely heavily on analysts.
"Both these features mean that there is a significant unfulfilled opportunity for petroleum companies to communicate a better story," it says.
The study is at www.pwcglobal .com/drillingdeeper.
