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The AAPG/Datapages Combined Publications Database

CSPG Bulletin

Abstract


Bulletin of Canadian Petroleum Geology
Vol. 39 (1991), No. 2. (June), Pages 225-225

"Portfolio Concepts Applied to Exploration Investments [Abstract]"

Stephenson, P.1, Harrington, P.2

ABSTRACT

The "garbage in-garbage out" rule applies to exploration investment decision making. Good decisions are not possible if a firm's assessments are not representative of its prospects. Wealth maximization and risk minimization goals may be used to make decisions based on good assessments. A method of doing this is Expected Value {E(V)} - Expected Loss {E(L)} Capital Budgeting, in which interests in prospects are considered collectively. In this method the firm's wealth is maximized by maximizing the E(V) of its portfolio, and the firm's risk is minimized by minimizing the E(L) of its portfolio.

The following investment questions can be addressed using E(V) - E(L) Capital Budgeting:

  1. What interest should a firm take in each of several prospects?
  2. What is the cost to the firm of a decision not to farm out strategic prospects?
  3. What is the impact on investment decisions of transaction costs associated with farming out?

The E(V) - E(L) Capital Budgeting method can be illustrated using an example of a firm with ten Western Canadian prospects. The results of this method compare favourably with alternate investment decision techniques.

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ACKNOWLEDGMENTS AND ASSOCIATED FOOTNOTES

1 Esso Resources Canada Limited, Calgary, Alberta T2P 0H6

2 Unocal Canada Exploration Limited, Calgary, Alberta T2P 2M4

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