Formation of the financial budget of a vertically integrated oil company under uncertainty (option pricing theory)

Abstract

One of the most important problems of financial planning in oil companies is a significant dependence of future investment opportunities of the company on its current investment decisions. The economic efficiency of current capital investments is connected with the estimation of future cash flows, not always reliable. In this regard, the key element of the company's investment portfolio management system becomes the formation of a financial budget that takes into account all the unique features and optional characteristics of specific projects. Formation of the financial budget based on the net present value may not be quite adequate, since this indicator does not take into account some of the optional characteristics of projects (managerial flexibility, emerging synergies, etc.), and therefore does not reflect the real value of a particular project. In this connection, the possibility of using the theory of option pricing for the economic assessment of the cost of “strategic” projects with option characteristics seems relevant. The theory of option pricing expands the existing analytical tools, allows to reveal hidden reserves of projects cost and to form the optimal financial budget of the company.