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« German Election Finally Gets Messy: “Euro Is More Than A Currency” And Greece “Shouldn’t Have Been Allowed In” | Main | Deluded Optimism in Corporate Earnings Growth (Now Shriveling) »
Wednesday
Aug282013

Hype Codified: Impact of Adjectives On Oil Company Stock Price

By James Burgess, of OilPrice.com.

Making big oil discoveries should make a company more attractive and therefore increase the share price, but in order to reap this growth in value the oil company must make investors aware of the discovery, and this means that marketing plays a huge role in the impact that new discoveries have on stock prices.

Two analysts from Sanford Bernstein, Oswald Clint and Rob West, studied 10,000 news articles and company press releases over the last five years, to determine the language used to describe new oil discoveries in and the subsequent rise in stock prices; and found that companies describing their new oilfield as ‘giant’ saw shares rise twice as much as those that used the adjective ‘major’, and three times as much as the companies that used the word ‘significant’.

One thing that they quickly noticed was that in 2009 very few companies actually made a big thing about their new discoveries; with 80% simply continuing their daily activity as normal and saying very little about the find, and only 20% bothering to market their success with words like ‘important’, ‘excellent’, or ‘significant’.

Related article: Chevron Regains Foothold in Argentina’s Oil Sector

Fast forward 4 years and 60% of companies are now likely to use more descriptive language when announcing new oilfield discoveries.

Then, by correlating the movement in company stock value to the different descriptive terms used Clint and West were able to calculate that a company’s share price would increase by 0.4% when describing a ‘significant’ discovery, 0.6% for a ‘major’ discovery, and 1.1% for a ‘giant’ discovery.

They suggested that one of the reasons why companies were using more descriptive language nowadays, is due to pressure to impress their shareholders and justify the higher exploration and drilling costs of modern times. Over the past five years spending on exploration has increased by 13.5% a year, so they explained that “with higher spending on exploration… it is not surprising that today we are hearing news of ‘extraordinary results’ from appraisal wells and other language that aims to maximize impact.” By James Burgess of Oilprice.com

These wildly optimistic estimates of earnings growth that analysts work on so studiously by copying and pasting what companies tell them, or by doing channel checks and poking around the industry, and that companies have to exceed at all costs “on an adjusted basis?” Well, they have been shrinking for 2013 – but only after reality forced them down. Read....  Deluded Optimism in Corporate Earnings Growth (Now Shriveling).

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