IHS Herold Inc., a research and consulting firm focusing on valuation, strategy, and performance measurement of oil and gas companies, teamed up with Harrison Lovegrove & Co. Ltd., an oil and gas corporate finance advisory firm, to evaluate investment and profits in the industry. Their findings are worth taking a look at.

According to the 2008 Global Upstream Performance Review released by these organizations, the worldwide upstream investment of 232 oil and gas companies was unchanged at $402 billion in 2007. Record development spending, which is up 20% from 2006, generated a meager 0.3% increase in reserve volumes, totaling 264 boe. Acquisition spending fell 30% from 2006 record levels to $90 billion, but remained high, the analysts said.

“Higher prices drove a 10% increase in revenue to $931 billion,” said Robert Gillon, IHS Herold senior vice president and co-director of equity research. “But cost pressures have been unrelenting, with lifting costs rising by 17% and government take up 5% to $253 billion, or 51% of pre-tax profit. As a result, net income edged up 2% to $246 billion, which is a record result but is far from the heady advances of the prior three years.”

The study found that returns to oil industry shareholders during 2007 were robust, with dividends increasing 11% to $92 billion. Combined payouts amounted to slightly more than 50% of corporate net income. The payout ratio has not changed over the past five years.

The following findings are taken directly from the 2008 Global Upstream Performance Review:

· Worldwide revenues increased by $86 billion, implying an average realized price of $47.53/bbl, a 9% increase from 2006.

· Cash flow per boe increased 8% to $21.99, slowing significantly after rising 75% in the 2003-2006 period. Cash flow exceeded investment, reversing the 2006 result.

· Development spending increased 20%, accounting for 62% of total investment, up from 52% in 2006. Exploration spending increased 19%, which is more than double the 2003 total.

· Proved acquisition spending dropped 34%, while unproved acquisitions were down 36% after a spike in 2006. Levels remain at historically elevated levels.

· Oil reserves reversed course, falling 1.5%, partly as a result of nationalization of oil fields in Venezuela, while oil production was flat. Natural gas reserves and production continued at the 3% growth rate of the last five years.

· Replacement cost advanced only 3% in 2007, a much lower rate than the preceding four years. Finding and development cost increased 7% to $15.42/boe as the industry replaced 113% of production through the drill-bit.

· Net income per boe was flat at $12.98 after nearly doubling since 2003. Margins were lower for the third consecutive year.

These observations paint an interesting picture of oil and gas company profitability and in fact, disprove a lot of myths about the effect that high oil and gas prices are having on the industry.

The report lists many additional findings, including a number particular to individual regions. To find out more, go to http://www.ihs.com/News/Press-Releases/2008/IHS-herold-harrison-lovegrove-study.htm