innovation and the externalities: why oil and gas firms ... linton, … · innovation and the...
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Innovation and the Externalities: Why Oil and Gas Firms and R&D
Intensive Firms are similar to each other and different from other types of Firms
Jonathan Linton, PhD, PEng Power Corporation Professor for the Management of
Technological Enterprises Editor-in-Chief, Technovation
Head of Science Technology Studies Laboratory, National Research University Higher School of Economics
Spoiler Alert
The Take-away is that Investment in exploration and innovation is
undervalued by the finance people due to the use of inappropriate
techniques
Oil and Gas
Innovation Sustainability
Why?
• Better Use of Resources
• Less Material/Energy/Waste
• Greater Value
What Drives Value
• Typical Assumptions are Incorrect
• Implications of Incorrect Assumptions
– Insufficient investment
– Insufficient exploration
The dynamics of exploration?
Financial techniques assume that the underlying value obeys a normal random walk (i.e., log-returns are taken from a Gaussian distribution)
http://www.sos.siena.edu/~jcummings/teaching/astronomy/lectures/reveal.js-master/
How R&D Intensive Firms Can Behave
Lévy flight and random walk towards something
Example: regulatory approval, successful testing, bad publicity
American Energy Group (2004 to 2013)
Stock returns for American Energy Group Gaussian (p-value 0.000, μ=-4.57e-4, σ =0.138). A power law, such as the Cauchy distribution (p-value=0.001, A=0.055, μ=-0.005). Mixture of two Gaussian (p-value=0.136, p=0.170, μ1=0.028, σ1=0.290, μ2=-0.006, σ2=0.074).
Valuing Investment Decisions Ex
plo
rati
on
co
sts
($)
Power law options
12
Sébastien Casault - University of Calgary lunch and learn
Effect of Price of Underlying West Texas Intermediate Daily Price: 1986-2013
Histogram of Daily Returns
Exploitation versus Exploration Note 6 to 1 ratio – 554 firms
R&D Intensive Small Cap Firms – Similar 512 firms 10 to 1 ratio
Too low a value on Explorative Activities
• Need to consider high volatility events for O&G
• What percent is based on price?
• What percent is based on exploration?
• What percent is based on innovation?
What Drives Sudden Changes? Insights from a sample of R&D Intensive Firms
0 100 200 300 400 500 600
Trial Result
FDA Announcement
New Discovery/ Product Release
Conference Call
Third Party Agreement
Patent Granted
Overall Impact
Impact on Price (Total σ )
Negative Impact
Positive Impact
Institutional Tendencies
• Avoid Risk
• Punish Failure
Possible Improvement/Solutions
• New approach to investments
– Recognize thick tail effect
– Consider portfolios not projects
– Expect certain percentage of failure
– Manage for failure as well as success
