Introduction to Finance

1.
Forecasts of natural gas prices
2.
Forecasts of crude oil prices
3.
Forecasted demand for natural gas
4.
Forecasted demand for crude oil
5.
Availability and cost of outside funds to fi nance projects
6.
Regulatory requirements or constraints on projects
7.
Tax considerations
Natural gas prices, crude oil prices, and their demand determine company revenues. 
Higher prices (demand) will result in higher sales revenues and, all else being constant, higher 
profi ts. Moreover, since oil and gas are substitute products, oil producers will be interested 
in natural gas price and demand trends, and vice versa. With large oil companies allocating 
billions of dollars each year to capital spending, the ability to raise external funds is a con-
sideration, should additions to retained earnings be insuffi
cient to fi nance all of the attractive 
projects. Because of environmental concerns, oil and gas production is heavily regulated. 
The intricacies of the tax code aff ect oil and gas investment decisions also. U.S. income taxes 
aff ect these companies, as do depreciation and oil and gas depletion allowances, tax codes of 
the diff erent countries in which they drill, credits for taxes paid to diff erent jurisdictions, and 
so on. Firms sometimes plan for growing capital budgets when oil and gas prices are low to 
take advantage of future price upswings, and trim spending when prices are high since they do 
not want to overextend themselves before over supply occurs and prices fall.
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TA B L E 1 7 . 1
Examples of Data Needed in Project Analysis
External Economic and Political Data
Business cycle stages
Inflation trends
Interest rates trends
Exchange rate trends
Freedom of cross-border currency flows
Political stability and environment
Regulations
Taxes