Journal of Accounting and Economics 12 (1990) 173-205.

North-Holland

EFFICIENT CONTRACTING AND THE CHOICE OF

ACCOUNTING METHOD IN THE OIL AND GAS INDUSTRY*

David H. MALMQUIST
Securities und Exchange Commission, Washington, DC 20549. USA

Received September 1988. final version received July 1989

This paper’s results are consistent with the choice of accounting method in the oil and gas
industry being dominated by measurable characteristics of firms and guided by the principles of
efficient contracting. The results are inconsistent with an alternative hypothesis, opportunistic
behavior by managers. The efficient contracting explanation is also consistent with the empirical
findings from earlier studies: [e.g., Lilien and Pastena (1982) and Deakin 1979)].

1. Introduction and development of the issues

1.1. Issues motivating this study

There are two different permissible accounting methods in the oil and gas
industry - the full cost method and the successful efforts method. Under the
full cost method a firm capitalizes all exploratory costs and amortizes these
costs over the discovered reserves on a pro rata basis.’ Under the successful
efforts method a firm capitalizes only those prediscovery costs that can be
related directly to revenue producing wells.2

*I am especially grateful to Ross Watts and S.P. Kothari who provided me with much
encouragement, many useful ideas, and editorial comments, and to Robert Holthausen (my
discussant at the 1988 JAE/Olin Conference) whose constructive criticism has helped to improve
the paper. I am also grateful to Joseph Weintrop, Jerold Zimmerman. Ken Lehn, John R.
Norsworthy, Michael Ryngaert, Larry Harris, Charles Trzcinka, Jeffry Netter, Mark Mitchell,
Thomas Lys. Joy Begley, Horace Brock, Jack Albert, John Heyman, Clarence Staubs, James Ford,
Wayne Marr. Ronald Lease, and Ralph !&mders for their comments. Several research assistants
and interns. especially Robby Tapscott, Kevin Hughes, Jim Zabala, and Robert Vazzo, provided
help with data. Responsibility for any remaining errors is solely the author’s.
i *The Securities and Exchange Commission, as a matter of policy, disclaims nsponsibility for
&y private publication or statement by any of its employees. The views here expressed are those
of the author and do not necessarily reflect those of the Co mmission or the author’s colleagues on
the staff of the Commission.
‘See Sunder (1976, pp. 1-18).
‘See Sunder (1976, p. 5).

01654101/90~$3.50~1990, Elsevier sdence Publishers B.V. (North-Holland)

174 D. H. Mhquisr, Oil and gas industry accounting choice

The full cost and successful efforts methods usually produce markedly
different results. Full cost always yields higher book asset values than success-
ful efforts. Net income is higher under full cost when drilling and exploration
costs are sufficiently large relative to production, and is lower when this is not
the case.3 Furthermore, the issue of which method produces higher variability
of reported results depends upon certain firm characteristics (discussed below).
It is also well known that the largest firms - the so-called ‘majors’ - use
almost exclusively the successful efforts method. By contrast, it is generally
understood that pipelines and public utilities (largely because of regulations
requiring it in past years) account for their oil and gas activities under the full
cost method, and that small firms also prefer the full cost method.
Earlier studies of this issue have limited their samples to firms that are
characterized as drilling and exploration firms, on the implicit assumption that
the choice of method is only relevant to such firms. This paper takes the
approach that the choice between these two methods is relevant to all firms
who do, or may in the near future do, some drilling, and who have reserves to
value and contracts to monitor. The central theme of the paper is that firms
choose systematically the accounting method that provides the most efficient
monitoring of contracts between all economic agents.

1.2. Historical developments

There has been a long history of diversity in the application of accounting

methods in the oil and gas industry. This has been due primarily to problems
peculiar to the extractive industries in general, and the oil and gas industry in
particular. These problems derive from the large capital outlays and high
degree of risk associated with drilling and exploration activities. According to
Brock (1983, p. 3) high risk and large capital outlays ‘ . . . have combined to
produce a rather complicated and inconsistent application of generally ac-
cepted accounting principles.. . ‘. These two factors, he says, coupled with the
special tax treatment for this industry, have resulted in ‘ . . . the development of
many unusual contracts and legal arrangements for risk sharing that create
unique accounting problems’.
The idea of full cost accounting first emerged in the late 1950s. Before that
time there was only successful efforts accounting. However, even though there
was only one general method of doing things, that method was not applied
uniformly or consistently in practice.

. . . [S]ome companies concluded that geological and geophysical expendi-

tures inherently are not associated with specific reserves and that all such

‘See Sunder (1976, p. 6) for a mathematical treatment of the conditions under which net income
is higher under full cost, and when it is higher under successful efforts.
 D. H. Malmquist, Oil and gas indwtv accounting choice 175

costs should be charged to expense, whereas other companies capitalized

all exploration costs. There were also divergences in accounting for dry
holes. In addition, some entities charged the costs of unproved leases to
expense only when the leases were surrendered or expired, whereas others
amortized the cost of unproved leaseholds during the period they were
expected to be held. Thus there evolved many different methods of
successful efforts accounting.4

Full cost accounting has been the subject of controversy since its inception.
On two occasions in 1986 the SEC grappled with important policy proposals
relating to full cost accounting. In May 1986 the SEC voted not to suspend
temporarily the so-called ceiling test in establishing the balance sheet value of
proved reserves of full cost oil and gas companies.’ Then in October the SEC
considered a proposal to eliminate completely full cost accounting as an
acceptable accounting method. As a first step, such proposals are relased for
public comment. It was determined at that time not to seek public comment
on the proposal, and it went no further.6 In each of these instances the SEC’s
decision was based largely on efficient contracting arguments.’
The FASB, in Financial Accounting Standard No. 19 (FAS 19) proposed
the elimination of full cost as an acceptable method in 1979. That particular
event provided an experiment on the impact of mandatory accounting changes.
Several studies examine the stock price effects of the release of the exposure
draft of FAS 19.” Lys (1984) finds that full cost firms experienced significant
negative net-of-market returns on the day the original exposure draft appeared
in the Wall Street Journal. He also finds insignificant negative net-of-market
returns on the day the formal proposal of FAS 19 appeared in the Wall Street
Journal and insignificant net-of-market returns on the day the Wall Street
Journal reported that the SEC had overruled FAS 19 with its approval of
Accounting Standards Release (ASR) 253. Lys also examines the various

4Brock (1983, p. 4).

‘This test calls for write-downs on regular periodic financial statements whenever the book
value of oil and gas reserves exceeds the market value. See Ingersoll and Petzinger (1986, p. 4) for
a discussion of this event.
%ee Ingersoll (1986. p. 1).
‘When it denied the suspension of the ceiling test, the SEC weighed the impact of a mid-stream
change in the rules upon current bondholders and upon the value of contracts written in the
future. When it failed to propose abolition of full cost accounting (a necessary first step prior to
actual abolition), it relied upon the argument made by Commission economists that the choice of
method appeared to have a certain regularity - in particular, that small drillers seemed largely to
choose full cost, while the large integrated firms tended to apply successful efforts, and those in
the middle were a mixed bag. It seemed only logical, given this regularity, that the choice must be
based upon rational economic criteria and must reflect the very different economic realities faced
by these different classes of firms, and that to allow only one method would impose costs upon
those firms who would not have otherwise chosen that method.
‘These include Collins and Dent (1979). Dyckman and Smith (1979). and Lys (1984).
176 D. H. Mulmquist, Oil and gas industry accounting choice

cross-sectional determinants of the net-of-market returns on the various event

dates. In this part of his analysis a measure of firm risk based upon the
standard deviation of daily share price returns and the firm’s capital structure
are significant variables.

2. Economic theory and oil and gas accounting

Since there are no significant direct cash flow implications resulting from
choosing between the full cost and successful efforts methods, one wonders
what generated the controversy. An efficient securities market can see through
differences in reported results arising from accounting method choice. Accu-
racy of securities prices aside, however, reported results can make important
differences in: (1) securities underwriting, (2) debt covenant monitoring,
(3) managerial compensation schemes, and (4) political costs. Furthermore, the
manners in which these factors affect the choice of method is very much
influenced by the economic characteristics of firms.

2.1. Securities underwriting

A securities underwriter who put his clients in a company having low, or
possibly even negative, book value of equity may be taken to court by
disgruntled shareholders in the event of future bankruptcy. While the proba-
bility that the underwriter might be held liable in such a case is low, there are
expenses and the effect of negative publicity upon the value of his brand name
to be concerned about. As a result, underwriters can be somewhat loathe to
bring an issue to market with negative book value, even though the market
value of the underlying assets net of liabilities may be positive; and they are
especially disinclined to do so when an acceptable alternative accounting
method can produce positive book values. Thus, while it may not be possible
to fool the market with differences in book values deriving entirely from choice
of accounting method; differences in reported results can impose real costs
upon securities underwriters.
The choice of method will not affect the likelihood of bankruptcy and
should not affect the aftermarket price performance, as these depend on firm
value and cash flows. Nevertheless, should either poor aftermarket price
performance or bankruptcy occur, and the underwriter finds himself faced
with shareholder suits, the lower book values and higher variability of reported
results for a small drilling and exploration firm under successful efforts could
conceivably make it more difficult for a court (especially a jury) to make the
link between the offering price and the underlying financial statements which
accompanied the prospectus, particularly if the book values presented in the
prospectus are negative. Therefore, if all firms had to use successful efforts, as
 D.H. Malmquist, Oil and gas indust accounting choice 177

was proposed by the FASB in 1979 and by the, SEC’s Office of the Chief
Accountant in 1986, then the costs associated with the increase in legal
expenses and potential loss of brand name faced by underwriters would have
to be passed on to issuers and might result in some issues not coming to
market at a11.9

2.2. Debt covenants

Besides the issue of negative equity, the active monitoring of debt covenants
can be problematic for both the lender and the borrower if the accounting
values being monitored contain large components of ‘white noise’ variation
relative to variation in the underlying values of these phenomena.‘O False
signals of financial distress can cause unnecessav default and costfy renegotia-
tion proceedings that are better avoided, not only from the standpoint of
bankers but from the standpoint of management, bondholders, and share-
holder as well. Therefore, value-maximizing managers have incentives to
choose the accounting method that produces the least white noise. Generally,
full cost produces less variance in the debt-equity ratio; however, for the
larger firms a full cost based measure of the variance in the debt-equity ratio
may be unrealistically low.
These arguments presuppose that covenants in the oil and gas industry are
in fact written in terms of accounting data. It has been argued elsewhere that
this may not be the case. Foster (1980), for example, suggests that the use of

‘Seen in this context, the question of access to capital markets can be’s real issue. At the time
the proposal to eliminate full cost accounting was debated at the SEC, Commission staff
economists were not fully aware of the underwriter brand name issue and hence not persuaded by
the access to capital markets argument.
“In discussing white noise, no claim is made here that oil and gas firms can accurately assess
how much of total variance in accounting numbers represents true underlying variance and how
much represents white noise. Nevertheless, taking the debt-equity ratio as an example, successful
efforts can produce near zero (or even negative) book values of equity, even when there may be
substantial market value in the reserves. Forcing the denominator of the debt-equity ratio (or any
ratio for that matter) toward zero will cause its variance to explode. On the other hand, there can
be some masking of underlying equity value variance under full cost due to the fact that dry hole
costs are capitalized. Which of these two etl’ects dominates will depend upon, among other things,
the relative values of assets and liabilities and the number of independent drilling projects. Thus, a
firm whose assets relative to liabilities are large, and has a large number of independent drilling
projects, will probably derive a truer picture of the variance in its debt-equity ratio when it
employs successful efforts. On the other hand, a firm whose assets relative to liabilities are small,
and has a small number of independent drilling projects, will probably derive a truer picture of
the variance in its debt-equity ratio when it employs full cost. Somewhere in between, there is
likely a range where the relative accuracy of debt-equity variance under full cost vs. successful
efforts will be difficult to assess. Therefore, a tirm that wishes to most efficiently monitor its
contracts will have to make a judgement call, based on such factors as suggested here, as to
whether full cost or successful efforts will produce a truer picture of the variation in its financial
performance.
178 D. H. Malmquist, Oil and gas industry accounting choice

covenants based on reserve valuation estimates of geological engineers are

common in the industry. l1 Nevertheless, my own examination of covenant
information contained in Moody’s (1986), the findings of Frost and Bernard
(1988) and Press and Wintrop (1990) all indicate that most oil and gas
companies appear to face some degree of constraint, or potential constraint,
by accounting-based debt covenants.”

“Foster (1980. p. 36) cites examples of particular companies who claimed in their responses to
FAS 19 that their borrowings would not be affected by a mandated switch to successful efforts.
For example. Juniper Petroleum claimed that most of their ability to borrow related to engineer-
ing projections of revenues of producing properties. However, an examination of Moody’s (1980,
p. 4865) reveals that at the end of 1979 Jumper Petroleum had an outstanding credit agreement in
the amount of $21 million due May 31,1982. That agreement required the company, among other
things, ‘ . . . to maintain current assets equal to 100% of current liabilities, maintain a ratio of total
liabilities to equity of 250% or less.. ’ and further provided ‘ for certain restrictions relative to
the repurchase of capital stock, purchase of oil and gas properties and the payment of dividends’.
A similar description of the credit agreement covenants appears in the 1977, 1978, and 1979
M&v’s, Interestingly, in December of 1981 Juniper arranged another credit agreement. This
agreement was for a maximum of $25 million and borrowing was limited to the value of oil and
gas reserves (presumably an engineering based constraint). However, this credit was arranged with
the Continental Illinois Bank which subsequently filed for reorganization under Chapter 11 in
large measure because of bad loans to oil and gas companies. On February 10,1983, Jumper was
acquired by Damson Oil, whose credit arrangements contain accounting-based covenants.
“I examined six firms selected from table 4 in the appendix to determine what, if any,
accounting-based constraints they faced as of year end 1985. The following list summarizes the
findings: (1) Damson Oil [Moody’s (1986, p. 2757)] had an additional debt restriction which
would not permit it to increase its funded debt to the point where its ‘consolidated funded
indebtedness would exceed the sum of (i) 75% of the discounted net value of proved reserves plus
(ii) 60% of consolidated net tangible assets’. While the first part of this restriction might be
engineering-based, the second part obviously is not. Additionally, Damson Oil had accounting-
based dividend constraints. (Dividend restrictions are often based on retained earnings pools; but
however they are done, they are invariably accounting-based.) (2) Pennzoil [Moody’s (1986, p.
4276)] had credit agreements wherein the ceiling amounts that could be borrowed were based on
engineering estimates of the value of reserves. However, Pennzoil also faced dividend restrictions:
‘Pemuoil is subject to restrictions as to the payment of dividends under certain bank credit
agreements and indentures. Under the provision most restrictive in its effect at December 31,
1985, approximately $747.000.000 were unrestricted as to the payment of dividends.’ (3) Coastal
Corporation [ Moo&‘s (1986. p. 3001)] also had an effective restriction on the payment of
dividends. (4) The same was true for Noble Affiliates [ Mooc@‘s (1986, p. 4217)]. (5) Chevron
[Moo&‘s (1986, p. 198)] had a restriction which limited the total debt on hens by certain
subsidiaries to 10% of the company’s consolidated net tangible assets. (6) Tesoro Petroleum
Moo&‘s (1986, p. 6118)] had accounting-based dividend restrictions.
Frost and Bernard (1988, p. 26) present data on 19 full cost oil and gas companies. Of the 15 of
these that had private loan agreements, 11 had accounting-based covenants. Of the nine that had
public loan agreements, six had accounting-based covenants. Of the four that had no accounting-
based covenants in their private agreements, three had accounting-based covenants in their public
agreements; while of the three with no accounting-based covenants in their public agreements, one
had accounting-based covenants in their private agreements. In sum, 16 of 19 full cost firms had
accounting-based covenants in either public or private agreements.
Press and Weintrop have only five oil companies in their sample. All had some element of
accounting constraint. Press and Weintrop confirm that in general it is necessary to examine both
public and private agreements to determine the existence of accounting-based constraints and that
M&V’s does not pick up all the private agreements that are filed with the SEC.
 D. H. Mulmquist, Oil and gas indwtry accounting choice 179

2.3. Managerial compensation

Accounting-based managerial compensation schemes create additional in-
centives to choose an accounting method that provides accurate signalling of
corporate financial condition and performance. From a Coase-Jensen-
Meckling13 viewpoint, long-run firm survival and value maximization demand
that agency costs are mitigated through efficient contracting. Therefore, what-
ever may be the personal desires of individual managers for more lucrative and
less volatile compensation packages, bondholders, shareholders, and other
residual claimants (as well as other managers who view their personal fortunes
as more closely tied to prosperity of the firm) prefer a system that rewards
managers according to readily available information that accurately reflect the
contribution of those managers. l4 Additionally, managers should prefer an
accounting method that reflects their performance accurately. That is, they
prefer a high degree of information content relative to pure randomness in the
accounting criteria used to compensate them, or a high signal-to-noise ratio.
When management’s compensation is tied to reported earnings they bear
additional risk (in comparison with a straight salary without bonuses). Man-
agers have to be compensated for bearing this additional risk. This is the usual
trade-off facing a firm in compensating management. Thus, by aligning their
incentives, they are caused to bear more risk. Alignment of incentives should
raise firm income, while raising managers total compensation will have the
opposite effect. Tying managers’ compensation to a noisy signal, creates
inefficient risk-bearing arrangements which, in turn, impose real costs upon
the firm. Therefore, both shareholders and bondholders have incentives to
remove noise from the monitoring process.
It is assumed throughout this discussion that rational value-maximizing
managers will choose accounting methods that facilitate efficient contracting.
This logic can also be applied to the design of the managerial compensation
plan, including its degree of dependence upon accounting numbers vs. equity
market performance. In this world we have constructed, managerial compensa-
tion plans merely help to align the incentives of managers with those of other
stakeholders. Under these assumptions, we should expect to find no direct
effect from managerial compensation plans upon the choice of method.

‘3Coase (1937) reasoned the firm to be a means by which an entrepreneur can achieve greater
simplicity and efficiency in the contracting relationships among factors of production than could
be achieved by contracting directly for such services in the market. Elaborating on this theme,
Jensen and Meckling (1976, p. 84) describe the private corporation as a ‘ . legal fiction which
serves as a nexus for contracting relationships and which is also characterized by the existence of
divisible residual claims on the assets and cash flows of the organization which can generally be
sold without permission of the other contracting individuals’.
“Some researchers have suggested that it is relatively easy to modify bonus compensation
packages when there is a change in accounting method; see, for example, Watts and Zimmerman
(1978). This suggests that the choice of managerial compensation plan may be endogenous to the
system determining choice of accounting method.
180 D. H. Mulmqui~t, Oil and gas industty accounting choice

It should be recognized that another kind of behavior is possible once we

introduce the cost of recontracting into the discussion. Specifically, the more
costly it is to renegotiate such plans the greater the possibility for opportunis-
tic behavior in the choice of accounting method by managers. Nevertheless,
there are strong disincentives and limits placed on such behavior by the
managerial labor market.15

2.4. Political costs

Several writers argue that larger firms are more politically sensitive.16
Because of their large size they are more likely to draw the attention of
bureaucrats and politicians than are smaller f%ms. As a result, large firms are
more likely to employ accounting methods that will defer current earnings to
future time periods. This is especially true of oil and gas Crms. Consider, for
example, the 1970s when oil prices increased substantially and oil companies’
profits soared. Since there was also a considerable amount of drilling going on
at that time, large firms employing successful efforts were able to expense their
dry hole costs, thus keeping reported earnings from going still higher. For such
firms, successful efforts has the added advantage in the political arena of
valuing proved reserves at only a small fraction of their market value.

2.5. Firm characteristics and hypothesis tests

The foregoing discussion of securities underwriting, debt covenants, man-
agerial compensation, and political costs lead to expected relationships be-
tween observable firm characteristics and the likelihood of choosing full cost
or successful efforts. The discussions under securities underwriting and debt
covenants conclude that firms with high debt-equity ratios (especially those
whose book values of equity under successful efforts would be in the neighbor-
hood of zero) will tend to have exaggerated variance in this variable under
successful efforts.” Therefore, we should observe that the debt-equity ratio is

“As Holthausen and Leftwich (1983, p. 85) point out: ‘Rational managers anticipate the extent
to which the value of their human capital falls if they opportunistically take actions that increase
their own wealth, but do not maximize the value of the firm. If ac4~unting rules are to alTect
managers’ wealth via management compensation plans, negotiation and renegotiation of those
plans must be costly. and the adjustment in the value of managers human capital must be less
than perfectly offsetting.’
‘?See. for example, Alchian and Kessel(1%2), Watts and Zimmerman (1978). and Zimmerman
(1983).
“Further. firms that have high debt-quity ratios may be closer to covenants (under either
method) than firms with low debt-equity ratios, and hence will have heightened interest in
accurate monitoring.
 D. H. Malmquist, Oil and gas Musty accountingchoice 181

an important variable influencing the choice of method. Specifically, those

discussions suggest the following testable hypothesis:

Hypothesis I. Ceteris paribus, the higher the debt-equity ratio, the greater the
likelihood that a Jirm will choose fill cost.

With respect to the effect of covenants, it is also possible that the type of
debt - public or private - can matter. On the assumption that public debt
permits less creativity in the writing of covenants,” it is expected that the use
of public debt will heighten a firm’s sensitivity to excessive variance in the
debt-equity ratio. This theory suggests the following hypothesis:

Hypothesis 2. Ceteris paribus, if a $rm uses the public debt market, there will
be a greater likelihood of its choosing full cost than if it does not.

The discussion under political costs suggests that size may be an important
variable. Specifically, large firms may derive benefit from the selection of
successful efforts. It was also suggested in the section under securities under-
writing that large firms are likely, for political reasons, to prefer successful
efforts. Small firms, especially new small firms tend to prefer full cost. Also, as
noted by several writers, including Sunder (1976) and Lys (1984), the effec-
tiveness of full cost in reducing that part of reported earnings variance due to
drilling risk diminishes as firm size increases. This is because of the portfolio
effect of having a greater number of drilling projects. These three factors all
point in the same direction and suggest the following testable hypothesis:

Hypothesis 3. Ceteris par&us, the larger the firm, the lesser the likelihood it
will choose full cost.

The foregoing discussion of drilling risk leads to the distinction between

drilling risk (or engineering risk) and product market risk. These are two
primary factors affecting the performance of oil and gas companies. Engineer-
ing risk relates to the probability of failure in exploration activities. Product
market risk results from the impact upon earnings stemming from flucttitions
in the market prices of crude oil and natural gas. The total risk faced by each
firm will largely be a function of these two risk components. The relative

IsRecent work by Press and Weintrop (1990) and Frost and Bernard (1988) suggest that private
agreements can contain quite restrictiveaccounting covenants; however, private debt contracts are
also less costly to renegotiate. Fmthermore, it may be more a function of who you are than
whether you use the privateor publicdebt market.Exxonwillprobablynot be strap@ withtight
accounting-based covenants in the public or the private debt market. In the sample of firms
employed here 126 out of a total 316 (40%) had public debt at the end of 1985. Of the so-called
independents, 42 out of 192 (22%)had public debt.
182 D. H, Mulmquist, Oil and gas industry accounting choice

importance of market and engineering risk will vary systematically across

firms, depending upon a number of characteristics.”
The variation of an oil and gas firm’s earnings depends upon the relative
importance of market versus engineering risk. Depending upon such factors as
its history, the size of its resource base and learned expertise, an oil and gas
firm will, over time, develop a comparative advantage in one phase of the
business or another. Firms deploy their assets according to where their
comparative advantage lies, and if their assets are more heavily concentrated
in drilling (producing), they will face relatively more (less) engineering, as
opposed to market, risk. If a firm is more of a driller than a producer, it is an
expanding firm, by Sunder’s definition. The expected income of such firms will
be higher under full cost than under successful efforts. On the other hand, if a
firm is more of a producer than a driller, then it is a declining firm by Sunder’s
definition, and such a firm will have higher reported results under successful
efforts. Whether such results are closer to economic reality is open to debate;
however, it is clear that such firms have a less acute need for full cost.
It is the engineering risk that may especially require amelioration in the
contract monitoring process through choice of accounting method, especially
since the risks of changing oil prices can be hedged against in the market
relatively cheaply and efficiently. And given the appropriate conditions, it will
be optimal for firms to engage in such strategies for reasons that are consistent
with the efficient contracting premise of this paper.*’ This discussion of risk
suggests the following hypotheses:

Hypothesis 4. Ceteris paribus, the greater the proportion of a jirm ‘s resources

devoted to drilling and exploration, the greater the likelihood it will choose full
cost.

Hypothesis 5. Ceteris paribus, the greater the proportion of a firm’s resources

devoted to producing, the greater the likelihood it will choose successful e$orrs.

lYSunder(1976. p. 6) derives mathematically the conditions under which the expected variance
of earnings will be lower or higher under full cost as compared to successful efforts. The variance
of reported earnings is shown to differ according to the probability of a successful strike, net
operating cash flow per successful well per period, exploration cost per well, the life of a successful
well, and the number of exploratory wells drilled per period. This analysis centers mainly on
engineering risk. The price of oil (market risk) enters implicitly into the analysis through its etl’ect
upon net operating cash flow per period.
“Smith and Stulh (1985) point out that the desire to achieve smoother results through hedging
does not depend upon risk aversion by the firm but upon the assumption that firms respond to
incentives existing ‘within the contracting process to maximize the market value of the firm’. Such
firms, they argue, will hedge for reasons of ‘(1) taxes, (2) costs of financial distress, and (3)
managerial risk aversion’. The third category refers to the existence of management compensation
schemes.
 D. H. Mulmquist, Oil and gas induwy accounting choice 183

Another observable firm characteristic is the type of management compen-

sation plan the firm has. However, it is an essential premise of this paper that
managerial compensation plans are adopted so as to promote the proper
alignment of managers’ incentives, and that their existence helps insure that
decisions - including such things as the choice of accounting method - are
made in the best interest of all stakeholders. Therefore, the efficient contract-
ing model that is put forward here does not suggest a predictable effect of type
of management compensation plan upon the choice of method. However, an
alternative theory referred to earlier - opportunistic behavior - suggests the
possibility that existence of accounting-based compensation plans might sys-
tematically influence managers to choose that accounting method that has the
effect of enriching management at the expense of other stakeholders. This
possibility is explored in section 5 below.
Other authors have examined the importance of firm characteristics. The
most detailed examination of the role of firm characteristics in determining
method choice in the oil and gas industry was undertaken by Deakin (1979).
Deakin employs multiple discriminant analysis to explain the choice between
full cost and successful efforts with a model containing seven variables - (1)
average depth of wells, (2) the ratio of the number of exploratory wells to
revenue, (3) the ratio of debt to revenue, (4) the ratio of capital expenditures to
revenue, (5) revenue, (6) age of the firm, and (7) the ratio of development wells
to total wells. The only significant variables are the ratio of debt to revenue
and the ratio of capital expenditures to revenue and the age of the firm.
Deakin excludes the 24 largest firms (the so-called majors), pipelines and
public utilities (because they are regulated), and diversified industrial compa-
nies that happen also to have some oil and gas operations (because of
insufficient data).
Lys (1984) does not exclude pipelines and public utilities or diversified
industrial companies from his analysis. However, since he primarily focuses
upon the losses to full cost companies and the cross-sectional determinants of
those losses, data on major companies does not play an important role in his
analysis.
Lilien and Pastena (1982), in a paper somewhat similar to the present
analysis, examine the determinants of choosing between full cost and success-
ful efforts, and also of choosing options within those two methods. Their
analysis, like Deakin’s, is restricted to drillers. Lilien and Pastena employ
exploration costs as a measure of a firm’s aggressiveness in driIling and the
debt-equity ratio to proxy for the effect of costly recontracting.*l In the

“However, they employ a book.valw measure of the debt-equity ratio, which contains a large
measure of method dependency for which they must correct. To a small degree - largely as result
of accrued interest expense on unproved wells - exploration costs are also method-dependent.
 184 D. H. Mulmquist, Oil and gap indust~ accounting choice

present paper, the question of the necessity to exclude firm types is treated
empirically. In fact, it is a basic premise of this paper that no categories, or
types, of firms should be excluded from the analysis. To the extent that there
may be some effects of firm type not fully captured by the analysis, the model
developed below attempts to control for that through the use of dummy
variables.

3. Research design and data

3.1. The model

The choice between full cost and successful efforts accounting can be
examined empirically by the application of any one of many binary choice
decision processes. For example, Deal& (1979) applies discriminant analysis
to this issue and Lilien and Pastena (1982) use a probit model. The specific
statistical methodology for this paper is maximum likelihood logit regression.”
A logit model of the following general form is estimated:

ln[ P,,. J( 1 - ptC,i)] = B,, + BJALES, + B, PROD, + b, EXC,

+ B,Dpsi + BPDdu;,i * EXC,,

where

pfc. i = probability firm i will be on the full cost accounting method,23

*%he logit approach is generally preferable to discriminant analysis in that it requires fewer
assumptions and is virtually no less efficient than disuiminant analysis even when all the
assumptions of discriminant analysis hold [see Harm11and Lee (1985)]. There are a number of
“factors present in this analysis which indicate the use of maximum likelihood approach to
estimating this logit model: the existence of several independent variables in the model, a umber
of which are continuous, and the fact that only one choice is associated with each set of
observations. Given these conditions, one is faced with a choia between maximum likelihood
estimation or an alternative nonlinear estimation method, and the latter tend to be computation-
ally cumbersome. Furthermore, ‘a unique maximum always exists for the logit model’ thus making
maximum likelihood especially attractive in logit applications; see Pindyck and Rubinfeld (1976.
p. 251) for a fuller explanation of this point.
23Since Pr, is the probability that the firm will be on full cost, (1 - P,) is the probability that
the firm will be on successful efforts. The predicted value of the dependent variable is therefore the
maximum likelihood estimate of the natural logarithm of the odds that the Arm in question will be
on full cost.
 D. H. Malmquist, Oil and gac industry accountingchoice 185

SALES = normalized logarithmic value of the total revenue of the firm

(the entire corporate entity, not just the oil and gas compo-
nent),
PROD = normalized logarithmic value of the ratio of the firm’s world-
wide production to the year-end market value of its equity,
EXC = normalized logarithmic value of the ratio of the lirm’s world-
wide exploration costs to the year-end market value of its
equity,
D/E = normalized logarithmic value of the ratio of the year-end value
of the firm’s long-term debt to the year-end market value of its
equity,
D PubDebt = dummy variable set equal to 1 if the firm has public debt and
to 0 if not,
Drer, D&x*D,, = dummy variables for three out of four different categories that
best describe a particular firm - refining and distribution (ref),
drilling and exploration (dex), pipelines and public utilities
(p), and diversified (no dummy).”

The economic rationale and our prior expectations about the variables in
this model are as follows: SALES should pick up any effect or size of firm
upon choice of method. By Hypothesis 3 the prior expectation is therefore that
the coefficient on this variable should unambiguously be negative.
PROD and EXC are concentration of activities variables. PROD measures
how important the activity of producing oil and gas is to the firm; and EXC
measures how important exploring is to the firm. Consistent with our theory
of product market versus engineering risk outlined above, the prior expecta-
tions - from Hypotheses 4 and 5 - are that EXC will have a positive impact
upon the likelihood of choosing full cost, and PROD a negative one.25
D/E26 enters the equation in order to test Hypothesis 1. The prior expecta-
tion by that hypothesis is that the sign on this variable is positive.
DpubDebt is included to test Hypothesis 2. The prior expectation here is a
positive coefficient.
The type-of-firm dummy variables are included to test directly the explicit
assumption of Deakin (1979) - and implicitly by Lilien and Pastena

%iversified companies includes firms whose main activities are largely unrelated to the oil and
gas business (e.g.. Burlington Northern).
%lternatively. the higher (lower) is EXC and the lower (higher) is PROD, the more likely the
firm can be described by Sunder’s definition as expanding (declining). The sign predictions from
this approach are the same.
*%e choice of market value of quity increases the likelihood of finding signiticauce for this
term vs. a measure employing book value. It does not mean that a bias has been introduced;
rather, a potentially large bias against finding si@Scance due to the use of book values has been
avoided. The market value of equity should provide an unbiased estimate of the market value of
the firm.
186 D. H. Mcdmquist, Oil and gas induwy accounting choice

(1982) - that the choice of method is only relevant to drillers.*’ Deakin

specifically excluded all majors and pipelines and public utilities; Lilien and
Pastena similarly restricted their sample. Our prior expectations concerning
the coefficients on the type-of-firm dummies are as follows: D,,, is not
expected to have any effect. The only reason it might have an effect is the
extent to which this variable signals a lack of drilling activity; however, we
have a variable, EXC, to control for that. Our prior expectation on Ddex is
ambiguous. It is included to test whether EXC by itself adequately models the
relation between exploration costs and method choice. The prior expectation
concerning Dp is strongly positive because the regulatory environment of the
early 1970s required full cost for public utilities; and while choice of method
had been relevant for such firms for several years at the time of our sample,
switching is costly.

3.2. The data

All data relate to the year 1985 and are developed from three sources:
Compustat II, Arthur Andersen (1987) and National Quotation Bureau (1986).
The sample of firms was developed originally from the complete list of oil and
gas firms listed in Arthur Andersen (1987).*’ Beginning with the 375 firms for
which valid CUSIPs could be found, all those firms that had zero proved
reserves or zero production, as indicated by Arthur Andersen, are eliminated.29
Also eliminated are those firms that either had zero sales or for which no sales
data were available.30 If no shares outstanding or year-end share price data

271nitially. type-of-firm dummies were constructed from categories applied to each firm by
Arthur Andersen & Co. Arthur Andersen’s four categories are: (1) majors, (2) independents, (3)
pipelines and public utilities, and (4) diversified companies. These categories are largely based
upon Arthur Andersen’s subjective evaluation and appear highly correlated with size of firm. In
particular, the category major is by definition based on size. It was determined therefore that a
more objective. less size-dependent method for establishing types of firms was necessary, and an
alternative set of categories was developed based on the firm’s dominant SIC code.
The four categories developed from SIC codes have rough correspondence with the Arthur
Andersen categories. For example, major companies always have refining and processing (2911) as
their dominant SIC code and most independents have drilling and exploration (1311) as theirs.
The pipelines and public utilities form nearly the same list of firms whether the determination is
made by reference to Arthur Andersen’s survey or by the dominant SIC code; there are, however,
some differences. There is also some similarity between the ‘diversified’ category from the Arthur
Andersen survey and the ‘everything-eke category based on SIC codes.
The use of SIC-based categories relieved the multicollinearity problems inherent in the model
employing Arthur Andersen dummies and also produced more robust econometric results. For
these reasons, only the SIC-based dummies are presented here.
*sArthur Andersen (1987) contains data for several years, the most recent being 1986. As
mentioned, the data employed here are for 1985.
2YThese firms were eliminated first because they tended to be those firms for which many of the
other variables, such as long-term debt, and end-of-year price, sales, etc., were not available and
because of concerns over zero dividend problems that might arise in the PROD and EXC
variables.
30Some data elements which were missing from Compustat II were filled in with information
such as Standard & Poor’s Corporation Records.
 D, H. Malmquikt. Oil and gas industry accotmting choice 187

were available, the firm is likewise deleted from the sample. The result of these
deletions is a sample of 316 firms for which usable data could be obtained for
all the variables in the estimating equations.
All the final data values used in the regressions discussed in the next section
are presented in, or can be inferred from, table 4 in the appendix.31 A brief
description of the initial calculation of each of the variables is as follows:
SALES: Total sales in millions of dollars from Compustat II for the fiscal
year ending in 1985, normalized and logged.32
EXC: Total exploration costs for the year ending 12/31/85 from Arthur
Andersen (1987) divided by the total market value of equity on 12/31/85
from Compustat II, normalized and logged.
PROD: Millions of barrels of oil and gas (at BTU equivalence) produced
during the year ending 12/31/85 divided by the total market value of equity
on 12/31/85 from Compustat II, normalized and logged.
D/E: Total book value of debt at year ending in 1985 from Compustat II
divided by the total market value of equity on 12/31/85 from Compustat II,
normalized and logged.
: This variable is set equal to one if, according to National
QukizE Bureau (1986), there was outstanding public debt at the end of
1985, and equal to zero otherwise.
The three type-of-firm categories for which dummy variables are assigned
are formed from the firm’s predominant SIC code from Compustat II as
follows: (1) Drer= 1 if SIC = 2911, 0 otherwise; (2) Ddex= 1 if SIC = 1311,
1381,1382, or 1389,O otherwise; Dp = 1 if SIC = 4922,4923,4924,4931,4932,
5170, or 5171, 0 otherwise.

4. Empirical results
Tables 1 through 3 present the main empirical results for three samples -
(1) all firms for which we could obtain data, (2) all firms excluding pipelines
and public utilities, and (3) all firms excluding pipelines, public utilities, and
the major oil and gas companies. Thus (2) and (3) are subsets of (1).

3’Instead of separately listing the type of firm dummies in table 4, each firm’s respective SIC
code is given. The interested reader could therefore reconstruct the dummies employed here or
create different ones. Similarly, the dependent variable is not presented as a 0,l dummy. Rather,
under the heading ‘Method’ are listed two letter designations, ‘s’ (successful efforts) and ‘F’ (full
cost). The heading ‘Type’ refers to Arthur Andersen’s categories: ‘D’ (diversified), ‘I’ (indepen-
dent), ‘M’ (major), ‘P’ (pipelines and public utilities).
32Specifically. observations on continuous variables are divided by the mean value for that
particular series. and then the natural logarithm is taken. This is done primarily for ease of
interpretation of the coefficients, to eliminate potential problems associated with variables being
on widely disparate scales, and because of priors that a logarithmic specification simply makes
more intuitive sense. A shift factor of 0.5 was added to eaeh ratio value before taking the
logarithm, in order to avoid the problem taking the logarithm in the neighborhood of zero.
Furthermore. these variable transformations were undertaken before a single regression was run in
order not to bias the results because of a ‘hunt’ for the right specification.
188 D.H. Mahnquist,Oiland gar lndwtryaccountingchoice

Table 1
Logit regression results for all firms in the study, based on 1985 end-of-year data (number of
firms = 316: 197 full cost, 119 successful eflorts).

coetticient
Explanatory Predicted Value
variable’ sign (standard error) p-value
INTERCEPT ? 0.322 0.512
(0.491)
SALES - - 0.910 0.002
(0.295)
EXC + 2.354 0.002
(0.761)
PROD - - O&48 0.026
(0.292)
D/E + 0.758 0.002
(0.244)
+ 0.426 0.167
(0.308)
Drcf ? - 1.033 0.156
(0.731)
Ddex ? -0.149 0.789
(0.553)
DP + 2.384 0.002
(0.760)
Ddex * EXC ? - 2.008 0.009
(0.538)
-2.logL 356.71
Model chi-square 61.90
(degrees of freedom) (9)b

%A LES - total corporate revenues; EXC - total exploration costs divided by total market
value of equity: PROD-oil and gas production divided by the market value of equity;
D/E- total debt divided by market vahre of equity: DpubDcb,,Dmr, Ddexrand D,, arc dummy
variables signifying the existence of public debt, a reIining and prowssing Arm, a drilling and
exploration firm, and a pipeline or public utility, respectively.
bSignificant at 1% level.

The empirical results are interesting from several points of view. First, in
each case the chi-square statistic for the model as a whole is highly significant,
ranging in value from 32.18 (with eight degrees of freedom, signiticant at the
1% level) to 61.90 (with nine degrees of freedom, significant at the 1% level).
The coefficients in all four continuous variables - SALES, EXC, PROD,
and D/E - are highly significant and have the correct signs in each of the
three sample specifications. Furthermore, the coe&ients on these four vari-
ables are also quite stable across the different samples. Thus, Hypotheses 1, 3,
4, and 5 are strongly supported by the results. Hypothesis 2 is close ‘to
significance only in table 2 and therefore is rejected.
 D. H. Mrrlmquis~,Oil and gas industry accounting choice 189

Table 2
Logit regression results for all firms in tbe study except pipelines and public utilities, based on
1985 end-of-year data (number of firms - 287: 171 full cost, 116 successful efforts).

Coet%cient
Explanatory Predicted value
variable’ sign (standard error) p-value

INTERCEPT ? 0.245 0.623

(0.499)
SALES - - 1.202 0.001
(0.358)
EXC + 2.271 0.004
(0.780)
PROD - - 0.662 0.024
(0.294)
D/E + 0.753 0.002
(0.246)
Dhhoch, + 0.511 0.110
(0.319)
Drer ? - 0.769 0.293
(0.731)
Ddex ? - 0.272 0.632
(0.569)
Ddcx * EXC ? - 1.920 0.015
(0.792)
-2*logL 335.44
Model chi-square 51.83
(degrees of freedom) (Qb
%A LES = total corporate revenues; EXC- total exploration costs divided by total market
value of equity: PROD = oil and gas production divided by the market value of equity;
D/E = total debt divided by market value of equity; DPubDebl, D,,, and Ddex are dummy
variables signifying the existence of public debt, a refining and processing firm. and a drilling and
exploration firm, respectively.
hSignificant at 1% level.

In an attempt to ascertain whether a specification error had been made with

respect to DpubDebtby constraining it to operate through an intercept shift
term alone, an alternative specification was tested. In that specification DpubDebt
was allowed to interact with D/E and EXC, as well as to work through an
intercept shift. These results are shown on the right-hand side of table 3 under
‘Alternate specification’. The results from this specification provide no help
whatsoever for DhbDcb, and Hypothesis 2 must still be rejected.
Of all the type-of-firm dummies, only D,,, the pipeline dummy, is strongly
significant. The large positive coefficient is consistent with the past regulatory
environment of these firms which required full cost accounting. D,.,+ the
dummy variable for refiners, is, as anticipated, not statistically significant in

J.A.E.-G
190 D. H. Malmquist, Oil and gas industry accountingchoice

Table 3
Logit regression results for all firms in the study except pipelines and public utilities and majora
oil and gas companies based on 1985 end-of-year data (number of firms = 273: 171 full cost, 102
successful efforts).

Alternate specification
Coefficient Coefficient
Explanatory Predicted value value
variableh sign (standard error) p-value (standard error) p-value
INTERCEPT ? 0.426 0.409 0.463 0.370
(0.516) (0.517)
SALES - - 0.779 0.047 - 0.797 0.044
(0.393) (0.396)
EXC f 2.649 0.002 2.877 0.001
(0.855) (0.873)
PROD - - 0.582 0.048 - 0.465 0.141
(0.295) (0.316)
D/E + 0.692 0.005 0.697 0.014
(0.246) (0.284)
D Puhllkht f 0.454 0.156 0.435 0.177
(0.320) (0.323)
D rcl ? - 0.578 0.435 - 0.569 0.443
(0.737) (0.742)
Ddcx ? -0.190 0.745 - 0.230 0.693
(0.582) (0.583)
Ddcx l EXC ? - 2.317 0.008 - 2.413 0.006
(0.868) (0.868)
D PuhDcht * EXC ? - 0.454 0.259
(0.402)
D Puhl)eht * D/E ? - 0.172 0.716
(0.475)
-24logL 328.64 326.99
Model chi-square 32.18 33.84
(degrees of freedom) (8)’ (10)’
“Companies are excluded as ‘majors’ if they are so classified by Arthur Andersen & Co. (1987).
hSALES = total corporate revenues; EXC = total exploration costs dividedby total market
value of equity: PROD= oil and gas production divided by the market value of equity:
D/E= total debt divided by market value of equity; DpubDcb,, D,,, and Ddex are dummy
variables signifying the existence of public debt, a refining and processing firm, and a drilling and
exploration firm. respectively.
‘Significant at 1% level.
 D.H. Mulmquist, Oil and gus industry accounting choice 191

any of the three sample specifications. Even the drilling and exploration
dummy is only significant in interaction with EXC.

5. A competing hypothesis
This paper argues that the choice of accounting method is motivated by the
requirements of efficient contracting. Nevertheless, an alternative explanation
is that the choice of accounting method results rather from management’s
ability and willingness to engage in opportunistic behavior, i.e., the existence
of a serious agency problem. Two areas of potential agency conflict are
management versus shareholders and shareholders versus bondholders. The
usual argument is that an agency problem in the management vs. shareholder
relationship enables management to behave opportunistically in the choice of
accounting method. One motivation for such behavior is the management
incentive compensation plan. To get such a result, two conditions are required.
First, it must be costly for shareholders to remove managers. For example,
managers might possess unique skills in the management of assets that are
specific to the firm. Second, the cost of recontracting the compensation plans
must be sufficiently high to allow managers to engage in their opportunism.33
This being the case, it is unlikely that opportunistic behavior could be so
pervasive as to explain the systematic consistency and strength of the results
presented in tables 1, 2, and 3.
Nevertheless, some additional empirical findings presented here provide
clues about the possibility that choice of method is dominated by opportunis-
tic behavior by managers. Data on management holdings and type of compen-
sation plan were developed from reading proxy statements at the SEC. The
overall sample size dropped from 316 to 282 because the relevant information
could not be found for some firms. The data were grouped into four compen-
sation plan types: (1) those with no bonus compensation plan, (2) those based
strictly on the market value of equity, (3) those with strictly accounting-based
plans, and (4) those with bonus compensation plans based in part on the
market value of equity and in part on accounting data. The dollar value of
management holdings34 was normalized and logged so as to be similar in
construction to the other continuous variables. This variable was identified as
MGT. Then dummies were. created for three of the four bonus plan
categories - D, (equity compensation plan), DAc (accounting compensation
plan), D,, (blended compensation plan).
These four new variables were added to the models presented in tables 1, 2,
and 3. In none of the three sample specifications - (1) all firms, (2) all less

“See Holthausen and Leftwich (1983).

34This is the market value of stock held plus the share equivalents of options held. These are
reported by the firms on their proxy statements. It is not known how accurately or consistently the
firms perform these calculations.
192 D. H. Mdmquist, Oil and gas induvtry accounting choice

pipelines and utilities, (3) all less pipelines, utilities, and majors - can a
significant coefficient be found on any of the compensation plan dummies.
Furthermore, their signs defy interpretation. DAc and D, are both negative,
while D,, is positive, in all three samples. Interestingly, the estimated coeffi-
cient on MGT is positive and significant in two of the three samples.
Meanwhile, all the estimated coefficients that are significant in tables 1, 2, and
3 retain their significance in these results. They also retain their signs and their
approximate magnitudes. The coefficients on the new variables for the sample
exclusive of public utilities (these results being the most favorable of all to the
opportunistic behavior hypothesis) are as follows:

DAc = - 0.905 ( p = 0.156) D,, = -0.299 (p = 0.502)

D ac = 0.588 (p = 0.307) MGT = 0.608 ( p = 0.105).

A proper investigation of these relationships requires endogenization of.

management compensation plans; therefore, these results should not be pushed
too far. It is just as legitimate to inquire about how choice of accounting
method affects the choice of compensation plan ass it is to ask how the choice
of compensation plan affects the choice of accounting method. In addition,
some of the same variables will likely affect both decision processes. This is
clearly a simultaneous estimation problem that one hopes will be addressed in
future research. Nevertheless, these results provide no hint that choice of
accounting method in this industry is the result of managers’ ability to enrich
themselves by this choice through accounting based management compensa-
tion plans.

6. Conclusions
I postulate a model of accounting choice grounded on the theory that
managers are rational and are guided by the principles of firm value maximiza-
tion and avoidance of recontracting costs. The empirical model employed is
one of logit regression analysis, where the dependent variable is a zero/one
dummy (full cost = 1, successful efforts = 0), transformed in the usual way.
The independent variables are a measure of ti size, the relative importance
of exploration, the relative importance of production, the debt-equity ratio, a
dummy variable for the existence of public debt, and several industry dum-
mies.
The present paper differs from earlier works in several respects. First, it
considers a wide variety of firm types, in contrast to the more narrowly defined
samples of earlier papers. The paper fails to provide support.for the notion
 D. H. Malmquist, Oil and gas industry accounting choice 193

that the choice between full cost and successful efforts is only relevant to firms
that are predominantly drillers, although exploration costs is the most impor-
tant continuous variable. After excluding pipelines and public utilities, there is
no information contained in knowledge of the firm’s predominant SIC code
that is not contained in the continuous variables. The coefficients on the
dummy for the existence of public debt have the correct sign (positive). Theory
suggests that the existence of public debt eliminates flexibility in covenant
writing, thus shifting more of the burden of efficient monitoring to accounting
choice. However, the results on this variable are only marginally significant,
and are quite weak in comparison to the results on the continuous variables.
The sign on production (negative) is consistent with efficient contracting;
however, it is also consistent with producers wanting to show higher income
(which they generally would under successful efforts). Nevertheless, it is
difficult to ignore the strength of the overall results. In particular, the coeffi-
cient on the debt-equity ratio is significant at the 1% level in all three
specifications. Leverage is the variable that most clearly points to potential
problems in contracting. 35 The significance of this variable strongly indicates
that the costliness of contracting and recontracting is very important to
accounting choice. While some authors argue that the costliness of recontract-
ing allows opportunistic managers to raise their own income at shareholders’
expense by choosing the method that gives them the highest bonus compensa-
tion, research findings developed in this paper provide no support for the
proposition that this is a significant explanation of accounting choice in this
industry. Clearly, pipelines and public utilities are different, as a result of their
recent regulatory history. However, during the time period from which our
data are taken, the regulations requiring these firms to use full cost had not
been in effect for several years. Nevertheless, there is a very high level of
significance on the dummy variable for pipelines and public utilities indicating
that it may be costly to switch accounting methods. Perhaps it is more costly
than modifying managerial compensation plans. This information is inconsis-
tent with the opportunistic behavior thesis, which implicitly argues otherwise.
In sum, the empirical results are generally consistent with the efficient
contracting model developed in the paper. The evidence suggests that the
choice between full cost and successful efforts accounting in the oil and gas
industry is governed by the need to efficiently moniforthe contracts among the
economic agents of the firm.

35Lys (1982) suggests that the debt-equity ratio is an incomplete measure of the riskiness of
debt contracting. However, the potential for the wealth transfers, which he speaks of, may at any
given time be difficult to forecast, and the choice of accounting method is one which is generally
made with a considerable time horizon in mind. Additionally, Lys’ arguments are not at all
inconsistent with efficient contracting. Rather, they raise some interesting questions regarding the
use of the debt-equity ratio, particularly in studies of the stock price effects of mandated
accounting changes.
Appendix

Table 4
The data.

Company name CUSIP Method Type DPubDebt SIC SALES PROD EXC D/E

ADAMS RES. & ENERGY 006351 S D 0 5170 - 0.56544 - 0.05569 - 0.69315 - 0.12141 .g
ADOBE RESOURCES 007240 F I 1 1311 - 0.61867 - 0.24235 0.41330 -0.24035 .
ALAMCO 010742 S I 0 1311 - 0.66895 1.16505 - 0.69315 1.71530 $
ALBION INTL RES. 013325 S I 0 1311 - 0.69240 0.00803 - 0.69315 0.04401 $-
ALEXANDER ENERGY 014617 F I 0 1311 - 0.68509 0.28126 0.26889 0.21904 2.
ALLEGHENY &WESTERN 017227 S P 0 4924 - 0.44164 - 0.65257 - 0.69315 - 0.29867 P
ALTA ENERGY 021270 F I 0 1311 - 0.69070 0.39018 - 0.69315 0.25968 8
ALTEX INDUSTRIES 021454 S D 0 1389 - 0.68943 - 0.36732 - 0.69315 - 0.65958
AMAX 023127 S D 1 1000 0.37337 - 0.55412 - 0.45393 0.58279 &
AMBER RESOURCES 023184 F I 0 1311 - 0.69261 - 0.03447 - 0.69315 - 0.69315
AMCOLE ENERGY 023412 F D 0 4922 - 0.68815 - 0.57171 - 0.69315 - 0.56892 2__
AMERADA HESS 023551 S M 1 2911 1.52074 0.39479 0.63843 0.01666 $
AMERICAN EXPL. 025762 F I 0 1311 - 0.68213 - 0.29581 0.06094 0.02988
AMERICAN FRONTIER EXPL. 026295 F I 0 1311 - 0.68826 0.767% - 0.69315 1.39029 3
AMERICAN NATL PET. 028602 F I 0 1311 - 0.68234 1.22783 - 0.69315 0.38690 8
AMERICAN OIL & GAS 028711 F P 0 4922 - 0.58561 - 0.48419 - 0.69315 0.20098 s
AMERICAN PETROFINA 028861 F D 0 2911 0.57651 - 0.00369 0.33098 0.10308 z.
AMERICAN QUASER PET. 029145 F I 1 1311 - 0.66656 0.89149 1.15231 2.12942 fs
AMOCO 031905 S M 1 2911 2.69709 0.20705 0.60692 -0.45216 t
APACHE CORP. 037411 F I 1 1311 - 0.56488 0.10467 - 0.37327 -0.16681 p
APACHE PET. CO. (MLP) 037463 F I 1 1311 - 0.45079 - 0.05881 - 0.33545 - 0.18727
ARAPAHO PETROLEUM 038655 F I 1 1311 - 0.68837 0.99062 1.92806 1.22350
ARCH PETROLEUM INC. 039388 S I 0 1311 - 0.69134 0.52769 - 0.69315 - 0.69315
ARGO PETROLEUM F I 1 6023 - 0.36016 - 0.58375 - 0.64584 - 0.53610
ARKLA 041237 F P 1 4923 0.02859 - 0.42579 - 0.64678 -0.18277
ASAMERA 043411 F D 0 2911 - 0.34953 0.11206 0.11959 - 0.51130
ASHLAND OIL 044540 S D 1 2911 1.54804 - 0.29723 - 0.12063 - 0.09911
ASPEN EXPL. 045295 F I 0 1311 - 0.69251 - 0.17842 - 0.69315 - 0.69315
ATLANTIC RICHFIELD 048825 S M 1 2911 2.49055 0.23020 0.35391 - 0.13570
AZTEC RESOURCES 055033 F I 0 1311 - 0.69240 -0.15013 1.73564 -0.61386
BARNWELL INDUSTRIES 068221 F I 0 1311 - 0.67782 0.65691 - 0.69315 0.81367
BARRET RESOURCES 068480 F I 0 1311 - 0.69059 - 0.40566 0.65923 - 0.67614
BARUCH-FOSTER 069689 S I 0 1311 - 0.67698 0.13025 0.22611 - 0.35973
BASIC EARTH SCIENCE 069842 F I 0 1311 - 0.68911 0.79028 1.52035 - 0.50152
BASIX CORP. 070121 S D 0 2150 - 0.55565 - 0.33707 - 0.49818 0.13610
BAYOU RESOURCES 073047 F I 0 1311 - 0.68974 0.56428 - 0.69315 0.05749
BEARD OIL 073847 S I 0 1311 - 0.67186 -0.17158 0.61100 - 0.23251
BELCOR INC. 071443 F I 0 1311 - 0.69230 - 0.65143 - 0.69315 - 0.52269
BELLWETHER EXPL. 079895 S I 0 1311 - 0.68667 0.48308 1.06064 0.44701
BIG PINEY 089365 S 0 1311 - 0.69261 0.16317 0.69315 - 0.65100
BLACKGOLD ENERGY RES. 092368 F I 0 1311 - 0.69187 - 0.40314 - 0.69315 - 0.25869
BLUE JAY ENERGY 095645 S I 0 1311 - 0.69230 1.10306 - 0.69315 0.82494
BGGERT OIL 097205 S 0 1311 - 0.67353 0.50676 0.20077 - 0.00787
BOLYARD 097903 S I 0 1311 - 0.69283 - 0.26430 - 0.69315 - 0.69315
BOW VALLEY IND. 102169 F D 0 1311 - 0.35202 0.23645 1.12101 0.04179
BRACKEN EXPL. 103901 F 0 1311 - 0.68540 0.33057 0.38463 - 0.68673
BROCK EXPL. 111628 F I 0 1311 - 0.68392 0.61415 - 0.69315 0.21853
TOM BROWN 115660 F D 0 1311 - 0.66149 0.39355 0.49054 - 0.69315
BURLINGTON NORTHERN 121897 F D 1 4011 1.63057 - 0.49257 - 0.43294 - 0.06850
BURTON/HAWKS 123051 S I 0 1311 - 0.69049 0.35715 -0.69315 - 0.50615
TEXAS GAS RES. (CSX) 126408 S D 4011 1.48116 - 0.61246 - 0.43005 - 0.12928
CABOT CORP. 127055 S D 1 1311 0.22216 - 0.30593 - 0.19589 -0.18948
CALLON PETROLEUM 131238 F I 0 1311 - 0.65891 0.91943 1.41249 - 0.42848
CALUMET INDUSTRIES 131429 S D 0 2911 - 0.63090 - 0.48658 - 0.69315 - 0.15622
CAMBRIDGE ROYALTY 132498 S I 0 6792 - 0.68847 0.48949 - 0.69315 0.52928
CAMPBELL RESOURCES 134422 F D 0 1040 - 0.62194 0.17977 0.77298 0.54867
CANADA SOUTHERN 135231 I 0 1311 - 0.69102 - 0.28807 - 0.69315 - 0.69315
CANADIAN OCC. PETRO. 136420 D 1 1311 - 0.29578 0.00927 0.25816 - 0.58792
CANADIAN PACIFIC LTD. 136440 D 4011 1.82883 - 0.31322 -0.13470 0.25891
CARLING O’KEEFE 142263 D 2082 -0.16487 - 0.47905 - 0.59868 - 0.22978
CENERGY CORP. (CENTEX) 151317 D 1311 - 0.64369 0.14910 0.83738 0.01820
CHAPARRAL RESOURCES 159420 I 1311 - 0.69240 - 0.54780 - 0.69315 - 0.65381
CHAPMAN ENERGY 159512 I 1311 - 0.67322 - 0.22147 - 0.28658 0.06724
CHEVRON 166751 M 2911 3.12362 0.38613 0.36829 -0.10045
 Table 4 (continued)

Company name CUSIP Method Type buhFkh{ SIC SA LES PROD EXC D/E

CHEYENNE RESOURCES 166873 S I 0 6792 - 0.69261 0.14348 - 0.69315 0.11677

CHIEFTAIN DEV. 168664 F D 0 1311 - 0.62791 - 0.30791 0.67742 - 0.07337
CIBOLA ENERGY 171633 F I 0 1311 - 0.68974 0.90877 - 0.69315 - 0.10649
CIMARRON 171801 F I 0 1311 - 0.69123 0.43307 1.82065 0.61148
COASTAL 190441 F D 1 4922 1.47567 -0.10206 - 0.38504 1.04833
COBB RESOURCES 190883 S D 0 1311 - 0.68784 - 0.29956 - 0.69315 - 0.47247
COLUMBIA GAS SYS. 197648 F P 1 4923 0.97759 - 0.30866 - 0.27101 0.20233
COLUMBINE EKPL. 1987% F I 0 1311 - 0.69102 0.45326 - 0.69315 - 0.68389
COMANCHE OIL EKPL. 2OW32 F I 0 1311 - 0.69283 - 0.54745 - 0.69315 - 0.69315
CONQUEST EXPL. 208285 F I 0 1311 - 0.66614 - 0.33733 0.15467 - 0.47914
CGNSGL NAT. GAS 209615 F P 1 4923 0.80995 - 0.18968 -0.19769 - 0.27666
CONSGL. OIL B GAS 209705 F D 1 1311 - 0.66428 0.32482 - 0.69315 0.93608
NO. MICHIGAN EXPL. 210615 F I 0 4931 0.81378 - 0.46984 0.02483 1.46137
CONVEST ENERGY 212575 F I 0 1311 - 0.68805 0.36688 1.56289 - 0.20252
CONVEST ENERGY PTRS.
M-P) 212576 F I 0 1311 - 0.66978 - 0.08429 - 0.69315 - 0.43902
CREDO PETROLEUM 225439 F I 0 1311 - 0.69261 - 0.44080 - 0.69315 - 0.69315
CROWN CENTRAL PET. 228219 S P 1 1311 0.25042 0.07254 - 0.52187 0.08088
CROWN ZELLERBACH 228669 S D 1 2600 0.76163 - 0.65432 - 0.69315 - 0.13348
CRYSTAL OIL 229385 S D 1 1311 - 0.60268 1.83620 0.04323 2.38800
DALLAS OIL & MIN 235136 S I 0 1311 - 0.69198 0.09543 1.66440 - 0.66803
DAMSON OIL 235766 F I 1 1311 - 0.61099 0.81541 - 0.69315 1.13424
DECA ENERGY 242769 F I 1 1311 - 0.69261 0.45793 - 0.69315 - 0.69315
DEKALB CORP. 244874 F D 0 5191 - 0.21880 - 0.12663 0.16739 - 0.11333
DEVON RESOURCE (MLP) 25180T I 0 1311 - 0.68066 - 0.22694 - 0.69315 - 0.62687
DIAMOND SHAMROCK 252741 ss D 1 2911 0.98742 0.13763 0.29279 0.11557
DIETRICH RESOURCES 253736 S I 0 1311 - 0.69038 0.98673 - 0.69315 1.10325
DISCOVERY OIL 254674 S I 0 1311 - 0.68943 1.13152 - 0.69315 1.13409
DIV. ENERGIES/DYCO PET 255205 F D 1 4924 - 0.01417 - 0.34030 - 0.27120 0.04322
DOME PETROLEUM 257093 F D 0 1311 0.35603 1.10717 0.40506 1.97542
DORCHESTER HUGGTON 258205 F I 1 1311 - 0.69091 0.27279 - 0.69315 - 0.69315
DOUBLE EAGLE PET. 258570 S I 0 1311 - 0.69123 - 0.09685 - 0.69315 - 0.69315
DRILLERS INC. 262052 F D 0 1381 - 0.68245 0.12255 - 0.69315 1.13307
CONDCO (DUPONT) 263534 S M 1 2800 2.78503 - 0.24446 - 0.21210 - 0.44554
EMC ENERGIES 268652 S I 0 1311 - 0.69230 0.37387 - 0.69315 0.18194
EGRET ENERGY 282342 F I 0 1311 - 0.69187 -0.14004 - 0.69315 - 0.67076
ENERGY DEV. FTRS. (MLP) 29266J F I 0 1311 - 0.65583 0.17504 - 0.69315 - 0.14534
ENERGY OIL 29270H F I 0 1311 - 0.67761 0.21232 0.20455 0.27437
ENERGY RESOURCES 292716 S I 1 6792 - 0.69219 - 0.45057 - 0.69315 - 0.63673
ENERGY VENTURES 292740 F I 0 1311 - 0.67982 0.27619 - 0.69315 -0.14164
ENEX RESOURCES 292744 S I 0 1311 - 0.68911 - 0.24269 - 0.69315 - 0.67264
ENERGY ASSETS INT’L 292914 S I 0 1311 - 0.68551 - 0.46866 - 0.69315 - 0.59306
ENRON 293561 F P 0 4923 1.78504 - 0.28450 - 0.32899 0.24657
ENSERCH 293567 F P 1 4923 0.83542 - 0.05436 0.17504 - 0.05347
ENSGURCE 293580 F I 0 1311 - 0.63914 0.28369 0.72241 0.16770
ENTEX ENERGY DEV. LTD. 293813 S P 1 1311 - 0.66139 - 0.18286 0.08945 - 0.44065
EQUITABLE RESOURCES 294549 P 1 4923 - 0.28518 - 0.25799 - 0.29768 - 0.33854
EQUITY OIL 294749 z I 0 1311 - 0.67197 - 0.25488 -0.10557 - 0.69315
EVERGREEN RESOURCES 299900 F I 0 1311 - 0.69123 - 0.16900 1.37314 0.47576
EXXON 302299 S M 1 2911 3.84278 0.01777 - 0.04561 - 0.53859
FALCON OIL & GAS 306070 F I 1 1311 - 0.69176 - 0.13515 - 0.69315 - 0.45637
MIDCON 316828 F D 1 7393 - 0.07491 0.55142 1.04862 - 0.01313
FIRST MISSISSIPPI 320891 F D 1 2860 - 0.43775 - 0.30452 0.65716 - 0.08987
FOREST OIL 346091 F I 1 1311 - 0.56123 0.91077 1.79441 0.94862
FREEPGRT-MCMORAN (MLP) 356713 F D 1 6792 - 0.63874 0.54841 1.64158 0.27911
FREEFGRT-MCMORAN 356714 F D 1 1499 - 0.12263 - 0.37643 0.07439 - 0.08506
GALAXY OIL 363180 F I 1 1311 - 0.67919 0.34551 - 0.69315 0.97069
GEGRESOURCES 372476 F I 0 1311 - 0.68837 -0.12218 - 0.69315 -0.3766
GEODYNE RESOURCES 372911 F I 0 1311 - 0.68932 0.18222 1.29123 0.06897
GLOBAL MARINE 379352 F D 1 1381 -0.35437 -0.12183 0.63937 2.85150
GLOBAL NATURAL
RESOURCES 379355 S I 0 1311 - 0.64116 0.10910 0.01873 - 0.59781
GOLDEN OIL 381139 I 1311 - 0.68858 0.61617 - 0.69315 -0.01314
W.R. GRACE 383883 i D x 2800 1.18338 - 0.56839 - 0.60922 - 0.10185
GRAHAM-MCCORMICK
W-P) 384661 S I 0 1311 - 0.66469 0.19837 - 0.69315 0.22283
GREAT EAST. ENERGY 390323 S I 0 1311 - 0.69144 - 0.52725 - 0.69315 - 0.68347
 Table 4 (continued)

Company name CUSIP Method rme D P”hD&l SIC SALES PROD EXC D/E

GREENWOGD RES. 396901 I 0 1311 - 0.69091 0.95716 - 0.69315 0.%312

GULF RES. & CHEM. 4024% D 1 1211 - 0.56189 - 0.12543 0.27495 0.08916
HADSON PETROLEUM 405018 I 1 1311 - 0.60805 0.02256 0.54392 - 0.18977
HAMILTON OIL 407848 D 1 1311 - 0.43611 0.03292 0.34235 0.183%
HARKEN OIL & GAS 412552 I 0 1311 - 0.68435 - 0.04307 - 0.69315 - 0.65235
HELMERICH & PAYNE 423452 D 1 1381 - 0.52782 - 0.41593 - 0.31876 - 0.48231
HENRY ENERGY 426701 I 0 1381 - 0.68678 0.44990 1.50342 - 0.38078
HERSHEY OIL 427879 I 0 1311 - 0.68604 - 0.14176 0.35273 - 0.64173
HOUSTON OIL FIELDS 441069 I 1 1382 - 0.68192 1.33521 1.03172 - 0.16856
HOUSTON OIL ROYALTY TR 442283 I 1 6792 - 0.68794 -0.21317 - 0.69315 - 0.69315
HOWELL CORP. 443051 D 0 2911 - 0.58523 0.04038 0.23317 - 0.02867
HUSKY OIL D 1 - 0.16074 0.07579 0.58181 - 0.42068
IMPACT ENERGY 452548 I 0 1311 - 0.69212 - 0.10934 - 0.69315 - 0.69315
IMPERIAL ENERGY 452735 I 0 1311 - 0.69293 0.27913 -0.69315 - 0.69315
INEXCO OIL 456623 I 0 1311 - 0.54991 0.41272 0.74004 0.78714
INTER-CITY GAS 458196 P 0 5170 0.08332 - 0.17916 0.36362 1.08029
INTERCONTL ENERGY 458564 D 0 1090 - 0.68815 - 0.34123 - 0.69315 - 0.61024
INTRAMERICAN 0 &M 461184 I 0 1311 - 0.69187 0.58270 - 0.69315 - 0.53799
J M RESOURCES 466221 I 0 1311 - 0.69070 2.20926 - 0.69315 2.86867
K.R.M. PETROLEUM 482662 I 0 1311 - 0.68921 0.69786 - 0.69315 0.07952
KANEB/MORAN ENERGY 484170 D 0 1311 - 0.51883 - 0.19648 - 0.09350 - 0.06167
KENCOPE ENERGY 488544 D 0 1389 - 0.66884 - 0.30001 0.67271 - 0.32414
KERR-MCGEE 492386 D 1 2911 0.82474 - 0.09773 0.20519 - 0.25442
KIMBARK OIL & GAS 494355 I 0 1311 - 0.68509 0.27656 0.42922 - 0.02865
KIRBY EXPLORATION 497266 I 1 4400 - 0.62025 0.08871 0.05195 0.18186
LEAR PET. PTRS. (MLP) 521892 I 1 1311 - 0.64177 - 0.37567 - 0.0445 - 0.50329
LOUISIANA LAND & EXPL. 546268 I 1 1311 0.11206 0.27935 0.67685 - 0.23181
LYNX EXPLORATION 551811 I 0 1311 - 0.69251 0.044% - 0.69315 - 0.69315
MDU RESOURCES 552690 P 1 4932 - 0.33149 - 0.50848 -0.69315 - 0.07823
MC0 RESOURCES 552900 I 1 1311 - 0.63431 0.58630 0.49643 - 0.42065
MSR EXPL. LTD. 553748 I 0 1311 - 0.68625 - 0.41357 - 0.69315 - 0.69315
MACMILLAN RING-FREE 554800 s D 0 2911 - 0.52710 - 0.17479 - 0.69315 - 0.04669
MAGELLAN PETROLEUM 559091 F I 0 1311 - 0.68403 - 0.49444 - 0.27270 - 0.69315
MAPCO 565097 S D 1 2911 0.41600 - 0.55617 - 0.69315 - 0.15865
MAY ENERGY PTRS. (MLP) 577784 F 0 1311 - 0.66895 0.15357 0.23448 - 0.25729
MAY PETROLEUM 577788 F I 0 1311 - 0.66583 0.37704 0.96387 - 0.19947
MAYNARD OIL 578444 s D 0 1311 - 0.66335 0.39774 1.02346 - 0.36677
MCFARLAND ENERGY 580432 F I 0 1311 - 0.67332 - 0.07057 0.44828 -0.69315
MESA ROYALTY TRUST 590660 F I 1 6792 - 0.68932 0.00274 - 0.69315 -0.69315
MIDLAND SOUTHWEST 597740 F D 0 1381 - 0.66552 0.96465 - 0.69315 2.87902
MIDWEST EXPL. 598323 F I 0 1311 - 0.69187 0.12478 - 0.69315 - 0.68692
MINDEN OIL & GAS 602720 F I 0 7392 - 0.34328 - 0.64706 - 0.69315 - 0.57438
MITCHELL ENERGY 606592 F I 0 1311 -0.05193 -0.12690 - 0.14385 0.41386
MOBIL 607059 S M 1 2911 3.41114 0.33717 0.25698 0.04991
MONOGRAM OIL & GAS F I 1 1311 - 0.69006 0.99863 - 0.69315 -0.21850
MONTANNA POWER 612085 S P 1 4931 -0.31962 - 0.60036 - 0.50659 0.06358
MOORE MCCORMACK 615798 F D 1 3241 - 0.20969 - 0.42995 - 0.19029 0.45716
MURPHY OIL 626717 D 1 2911 0.51298 0.20503 0.51682 - 0.39436
MUSTANG DRIG. & EXPL. 628190 x I 0 1381 - 0.68858 0.02911 0.96686 - 0.69315
NP ENERGY 629362 F I 0 1311 - 0.69272 - 0.25709 - 0.69315 - 0.69315
NUI CORP. 629430 F P 0 4924 - 0.38513 - 0.59771 - 0.28105 0.08930
NRM ENERGY CO. (MLP) 629910 F I 1 1311 - 0.62124 - 0.01295 - 0.69315 - 0.26600
NEWHALL RESOURCES
(MLP) 651439 S I 1 1311 - 0.67919 - 0.12215 0.07820 -0.69315
NEWMONT MINING 651639 S D 1 3330 - 0.14572 - 0.55810 - 0.54320 - 0.48179
NICOR 654086 F P 1 4924 0.49080 - 0.41219 - 0.422% 0.09784
NOBLE AFFILIATES 655107 S I 1 1311 - 0.67082 3.43277 3.92460 0.22711
NORCEN ENERGY RES. 655492 F I 0 1311 -0.15712 - 0.07025 0.51981 - 0.04501
NORRIS OIL 656406 F I 0 1311 -0.69113 0.08661 1.86853 0.46056
NORTH CANADIAN OILS 658136 F I 0 1311 - 0.58408 0.89077 0.60243 0.68078
NOVA PETROLEUM 669790 F I 0 1311 - 0.69219 - 0.00762 - 0.69315 0.43550
NUGGET OIL 670518 F I 0 1311 - 0.68974 1.36417 1.97060 2.09631
NUMAC OIL & GAS 670522 F I 0 1311 - 0.64086 - 0.36629 0.16638 - 0.50505
OKC LTD. P’SHIP (MLP) 670860 S I 0 1311 - 0.62960 - 0.29169 - 0.69315 -0.69315
OAKRIDGE ENERGY 673828 S I 0 1311 - 0.69006 - 0.05240 - 0.69315 - 0.26780
OCCIDENTAL PETRO. 674599 S D 1 1311 2.10898 0.41845 0.26483 0.24725
 Table 4 (continued)

Company name CUSIP Method Type DPuhmht SIC SALES PROD L-XC D/E

OCEANIC EXPL. 675232 F I 0 1389 - 0.51297 - 0.28699 - 0.69315 0.42219

OMNI EXPL. 681905 S I 0 1311 - 0.69123 - 0.58644 - 0.69315 - 0.66442
ONEOK 682678 F P 1 4923 0.05701 - 0.46449 - 0.39889 - 0.01645
OXOCO 692066 F I 1 1311 - 0.64929 2.53369 2.27881 1.64671
PETX PETROLEUM 693311 S I 0 1311 - 0.69261 0.93709 - 0.69315 0.13370
PACIFIC LIGHTING 694478 F P 1 4924 1.16529 - 0.52804 - 0.48905 - 0.05188
PAGE PETROLEUM 695533 F I 1 1311 - 0.66988 2.74511 2.01368 - 0.69315
PANGEA PETROLEUM 698408 S I 0 1311 - 0.69102 1.10876 - 0.69315 0.74604
PANHANDLE EASTERN 698462 F P 1 4922 0.71211 - 0.25343 - 0.26697 0.13615
PARALLEL PETROLEUM 699157 F I 0 1311 - 0.69208 - 0.23480 1.16932 - 0.54863
PARK-OHIO INDUS. 700677 S D 0 3460 - 0.51223 - 0.22769 - 0.40441 - 0.34179
PARTNERS OIL 702125 F I 0 1311 - 0.68667 2.02607 - 0.69315 - 0.69315
PATRICK PETROLEUM 703347 F I 1 1311 - 0.68974 - 0.44546 1.15309 - 0.43876
PAULEY PETROLEUM 703614 S D 0 2911 - 0.50242 0.46958 - 0.69315 0.12036
WILARD PEASE OIL & GAS 705019 S I 0 1311 - 0.69187 0.22236 - 0.69315 - 0.46325
PENNZOIL F D 1 2911 0.52175 -0.16121 - 0.14870 - 0.17967
PERMIAN BASIN R.T. 714236 F I 0 6792 - 0.64046 - 0.36563 - 0.69315 -0.69315
PETRO-LEWIS 716451 F I 0 1311 - 0.47191 1.71742 - 0.32460 2.10383
PETROL INDUSTRIES 716502 S I 0 1311 - 0.69059 0.17091 -0.69315 - 0.69315
PETROLEUM DEV. 716578 S I 0 1381 - 0.67814 0.26836 - 0.69315 1.14881
PETROMARK RESOURCES 716729 F I 0 1311 - 0.69102 1.22432 2.68719 l.o6003
PE’I-ROTECH 716901 F I 0 1311 - 0.68741 0.55826 - 0.69315 - 0.60366
PHILLIPS PETROLEUM 718507 S M 1 2911 2.11116 0.82128 0.63815 0.77051
PIONEER CORP. 123645 F I 1 1311 - 0.34134 - 0.28804 -0.29640 - 0.49150
PLACER DEVELOPMENT S D 0 loo0 - 0.41435 - 0.47540 - 0.17348 -0.51977
PLAINS PETRO. 726529 S I 0 1311 - 0.67646 0.04236 - 0.69315 - 0.69315
PLAINS RESOURCES 726540 F I 0 1311 - 0.68213 1.05058 1.53194 1.01643
PLAN0 PETROLEUM 727158 S I 0 1311 - 0.69251 - 0.16303 - 0.69315 - 0.69315
POGG PRODUCING 730448 F I 1 1311 - 0.46527 0.71771 0.90208 0.70174
PRAIRIE OIL ROY. 739647 F I 0 1311 - 0.67653 - 0.01028 1.11568 -0.69315
PREMIER RESOURCES 740574 F I 0 1311 - 0.68635 1.55694 - 0.69315 1.24323
PRESIDIO OIL 741016 F 1311 - 0.68509 - 0.06557 0.02016 - 0.39249
PRIMA ENERGY 741901 F I 1311 - 0.69102 - 0.31827 - 0.69315 - 0.58844
PYRAMID OIL 747215 S I 1311 - 0.68255 - 0.02353 -0.69315 - 0.69223
PYRO ENERGY 747243 S 1211 - 0.56347 - 0.40566 - 0.28923 - 0.08990
QUAKER STATE 747419 S 2911 0.01866 - 0.54635 - 0.58986 - 0.45399
QED EXPLORATION 747902 F 1311 - 0.68932 - 0.01134 - 0.69315 - 0.69315
QUESTAR 748356 F 0 4923 -0.17117 - 0.40520 - 0.20418 - 0.22195
RANGER OIL 752805 F 0 1311 - 0.52539 0.01426 0.76376 - 0.44025
READING & BATES 755281 F 1 1381 - 0.46833 0.13845 0.55267 0.94838
REGAL PETROLEUM 758825 S 0 1311 -0.69187 0.07514 - 0.69315 - 0.69315
REEF ENERGY 758906 S 0 1311 -0.69113 0.18039 1.646% - 0.23%7
RESOURCE EXPL. 761209 S 0 1311 - 0.68424 0.12195 0.35406 - 0.364%
RIDGEWAY EKCO 766179 F 0 1311 - 0.69261 - 0.02013 2.33578 - 0.50314
ROBERTS OIL & GAS 770489 F 0 1311 - 0.69251 - 0.50114 - 0.69315 - 0.69147
ROYAL RESOURCES 780670 F 0 1311 - 0.68487 - 0.11481 1.02132 - 0.66848
SABINE CORP 785316 S 1 1311 -0.60064 - 0.09863 0.18840 - 0.50631
SABINE ROY. TSRUST 785688 F 6792 - 0.65665 - 0.32133 - 0.69315 - 0.69315
SAGE DRILLING 786627 F 1 1381 -0.68319 0.20008 - 0.69315 0.40424
SAGE ENERGY 786629 S 1311 - 0.62711 0.13784 0.08742 - 0.30715
SAN JUAN BASIN R.T. 798241 F I 0 6792 - 0.65133 - 0.42674 - 0.69315 - 0.69315
SANTA FE SO. PACIFIC 802183 S D 1 1.36822 -0.51583 - 0.50579 - 0.37304
SAXON OIL 805575 - 0.68297 0.029% - 0.69315 - 0.39976
SAXON OIL DEV. PTRS.
(MLPb 805577 1 - 0.67040 0.10428 - 0.69315 - 0.22085
SChTRE RESOURCES 806214 0 - 0.60893 0.46550 0.78678 0.26807
SCURRY RAINBOW 811267 1 1311 - 0.62243 - 0.13578 0.54786 - 0.67340
SEAGULL ENERGY 812007 0 4923 - 0.59609 - 0.55614 0.11109 0.33443
SEAHAWK OIL INT’L 812020 S 1311 - 0.69038 - 0.14749 -0.69315 0.02273
SEARCH NATURAL RES. 812221 F 0 1311 - 0.69081 0.10912 -0.69315 2.53140
SHELL OIL 822635 1 2911 2.42613 0.16844 0.27538 - 0.68940
SNYDER OIL PARTNERS
(MLPJ 833485 6792 - 0.66273 - 0.26305 -0.69315 - 0.65864
SGNAT 835415 4922 0.60436 - 0.39484 0.01169 0.00581
So. ‘TEXAS DRIG. St EK. 840553 1381 - 0.68773 - 0.14153 - 0.69315 0.61209
SGUTHDQWN 841297 3241 -0.39607 - 0.37658 0.14484 - 0.20160
SGUTHERN MINERAL 843367 6792 - 0.69070 - 0.64078 - 0.69315 - 0.69315
 Table 4 (continued)

Company name CUSIP Method Type D Putnm SIC SA IL-S PROD EXC D/E

SOUTHERN UNION 844028 F P 1 4924 - 0.46155 - 0.51255 - 0.23357 - 0.23237

SOUTHWESTERN ENERGY 845467 F P 1 4923 - 0.59271 - 0.14647 - 0.02154 -0.19155
SPARTON 847235 S D 0 3664 - 0.55713 - 0.58670 - 0.13555 - 0.68426
STANDARD OIL 853734 S M 1 2911 2.00470 0.06943 0.11568 - 0.36076 P
STATEX PETROLEUM 857660 S I 0 1311 - 0.67531 0.17951 0.67051 - 0.14390
862677 S I 0 1311 - 0.68487 0.71452 - 0.69315 -0.11710 ,”
STRATA CORP.
STRIKER PETROLEUM 863316 F I 0 1311 - 0.68964 0.56124 - 0.69315 -0.01772 4
SUMMIT ENERGY 866055 F I 0 1311 - 0.68593 0.10291 0.21308 - 0.69315 -2
SUN ENERGY PRTS (MLP) 866719 S M 0 1311 - 0.48177 - 0.09346 - 0.13258 -0.69269 0
SUN COMPANY 866762 M 1 2911 2.05825 0.05077 0.13574 - 0.31720 z
SUNSHINE MINING 867833 z D 1 1040 - 0.52719 - 0.36968 - 0.40633 0.11461 p
SWIFT ENERGY 870738 F I 0 1311 - 0.68953 - 0.43583 -0.69315 - 0.68906
TPEK EXPLORATION 872619 S I 0 1311 - 0.69261 0.64919 - 0.69315 0.46102 2
TEMPLETON ENERGY 880194 F I 1 1311 - 0.67688 - 0.11033 - 0.69315 0.75889 a
TENNECO 880370 F D 1 4922 2.15543 - 0.02161 - 0.06235 0.23682 6
TE!RRAPET ENERGY 881029 F I 0 1311 - 0.69028 0.02194 - 0.69315 0.27069 3
TE!SORO PETROLEUM 881609 F D 1 2911 0.54298 - 0.03580 1.22417 0.37200 5
TEXACO 881694 S M 1 2911 3.22502 0.89365 0.57423 0.22023 8
TEXAS AM. ENERGY 882147 F D 1 1311 - 0.16049 - 0.55090 - 0.46426 -0.26050 g.
TEXAS EASTERN 882387 F P 1 4922 1.22553 - 0.13686 - 0.03261 -0.00258 p
TEXAS INT’L 882534 S I 1 1311 - 0.59619 - 0.02767 0.39571
TEKAS OIL & GAS 882593 F M 1 4922 0.33110 - 0.21978 - 0.09828 - o.37985
0.42365 $
TEXOIL 883052 S I 0 1311 - 0.69251 - 0.10048 1.87194 -0.69315 ’
TEKON ENERGY 883058 S I 0 1311 - 0.68909 1.59428 - 0.69315 1.05725
TIDEWATER 886423 F D 1 4400 - 0.46748 - 0.26931 - 0.53387 0.00993
TIPPERARY CORP. 888002 F D 1 1311 - 0.64532 1.17726 - 0.69315 1.98482
TOKLAN OIL 889097 F I 0 1311 - 0.69176 0.25938 - 0.69315 - 0.69315
TOSCO CORP. 891490 F D 0 2911 0.26678 - 0.50308 - 0.69315 1.51394
TOTAL PETROLEUM 891508 F D 1 2911 0.56359 - 0.12245 0.45713 -0.02118
TRANS ATLANTIC 892905 S D 0 1389 - 0.69198 - 0.59641 - 0.69315 - 0.32335
TRANSCO ENERGY 893532 F P 1 4923 0.91133 -0.31186 0.50509 0.03277
TRANSCO EXPL. PTRS.
(MLP) 893533 1 1311 - 0.36552 - 0.15369 0.75571 - 0.60373
TRIBUNE/SWAB-FOX 896085 2711 - 0.64288 - 0.51322 - 0.69315 - 0.48883
TRITON ENERGY 896750 1 1311 -0.61995 - 0.39394 0.17340 - 0.20902
TUCKER DRILLING 898652 0 1381 - 0.67030 - 0.13228 0.32877 - 0.69315
TYREX OIL 902416 0 6792 - 0.69166 - 0.45298 1.60802 - 0.69315
UNION PACIFIC 907818 1 4011 1.53743 - 0.38324 - 0.31340 -0.31416
UNIT DRIG. & EXPL. 909218 0 1381 -0.64532 0.03956 0.04729 0.43584
UNITED CANS0 OIL & GAS 8909755 1311 - 0.65563 3.08306 - 0.69315 3.58144
UNIVERSAL RESOURCES 913802 1311 - 0.64786 0.20795 0.08824 0.11986
UNOCAL 915289 2911 1.82748 0.60130 0.62698 0.456785
USENCO 917297 1311 - 0.68720 - 0.33154 - 0.69315 - 0.35215
VALEX PETROLEUM 919145 1311 - 0.69038 0.94569 -0.69315 0.03873
WAINOCO OIL 930676 1311 - 0.64990 0.18622 -0.19164 0.11161
WALKER ENERGY PTRS.
(MLP) 931636 0 1311 - 0.67030 - 0.02160 -0.69315 - 0.51328
HIRAM WALKER RES. 931647 0 2085 0.67273 - 0.31220 0.25531 - 0.07315
WESTBURNE INTL 957272 0 5070 0.04736 - 0.32925 0.07172 0.07877
WESTCOAST TRANS. 957518 1 4922 - 0.04723 - 0.31605 0.06212 0.19145
WESTERN NATURAL GAS 958851 0 1311 - 0.69240 0.16035 - 0.69315 - 0.26594
WHITING PETROLEUM 966382 0 1311 - 0.69123 -0.19715 -0.69315 - 0.69315
WICHITA INDUSTRIES %7231 0 1311 - 0.67730 0.17515 -0.69315 - 0.07416
WILSHIRE OIL 971889 F 1 1311 - 0.68087 -0.17394 0.18390 - 0.18631
WMCO PETROLEUM 973135 F 0 1311 - 0.69293 -0.13734 - 0.69315 - 0.69315
WISER OIL 977284 S 0 1311 - 0.64481 - 0.14641 - 0.04501 - 0.67910
WOODBINE PETROLEUM 978798 F 0 1311 -0.69113 0.94234 - 0.69315 0.62951
WORLDWIDE ENERGY 981575 F 0 1311 - 0.62273 0.87348 1.64238 0.37676
DORAN ENERGY 982230 S 0 1311 - 0.69134 0.77695 - 0.69315 - 0.68557
ZAPATA 989070 F 1381 - 0.42505 - 0.35989 0.49580 1.17013
204 D.H. Mulmquist, Oil and gas induwy accounting choice

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