Three years ago the program of the Petroleum Branch of the AIME included one session on the general subject of petroleum valuation and economics. The program of the current meeting includes few subjects outside of this field. What has happened in this short period to change the emphasis? Has it been that the interim merely brought overdue recognition to the importance of' the subject? Or have trends and events within the industry combined during this short period to give increasing importance to petroleum economics and, in particular, to the economics of exploration and production? We believe the latter to be the case.
When your representative extended an invitation to speak to you today he suggested that we again talk about the use of valuation reports in making investment decisions. We replied that we doubted that we had anything new to say on the subject. When pressed for a title of the talk before preparation of the paper had begun, we chose "An Oil Investor Looks at 1956" on the theory that the title was sufficiently broad to permit us to include any subject we wished. But we shall not exercise this open-ended option. We shall restrict our comments to subjects important to the owner of oil securities —his problems, his triumphs and his frustrations.
Consider the oil investor. His position is the end result of a host of decisions made by other men, few of whom can be personally known to him. Yet somehow — by logic, by hunch or by accepting the views of others — he must formulate a view on a matter more important to him than any other. He must evaluate management in a field where ratio analysis of financial statements is less likely to give him the answer than in a manufacturing enterprise. More than ever before, he must consider the general business outlook while making investment decisions. Heretofore there was ample historical precedent to assume that oil unit consumption would suffer little in a period of deflation.