WIT Press

Value-based approach to managing the risks of investing in oil and gas business

Price

Free (open access)

Paper DOI

10.2495/SDP-V12-N6-1085-1095

Volume

Volume 12 (2017), Issue 6

Pages

10

Page Range

1085 - 1095

Author(s)

A. DOMNIKOV, P. KHOMENKO & M. KHODOROVSKY

Abstract

Development of the oil and gas business is inextricably linked to large-scale investment programs. Large-scale flow of capital funds, long duration of projects, as well as the external environment’s high uncertainty for oil and gas businesses bring about the high-risk investing; and therefore, it becomes urgent to develop methodological tools for risk management issues. The authors’ approach to risk man- agement of capital investments allows an individual to estimate the risk level of an investment project on the basis of a ratings model, and to evaluate the need for capital to cover potential losses on the basis of the target level of financial stability and long-term strategy of the company. The authors’ technique of RAROC (risk adjusted return on capital) analysis of investment projects allows to calculate the risk-adjusted return on investment and to carry out the selection of projects that contribute most to the creation of value and screen out those projects that destroy the company value. The results can be used by management of oil companies, investors, and analysts in financial decision-making.,

Keywords

economic capital, investment project, investment risks, oil and gascompany, probability of default, value management.