Economist's Corner - Exploring the financial roadmap of an independent’s asset.
Finance theory is based on a very simple principle: Reward is a function of risk. In other words, when comparing two investments—two “assets”—the riskier one should serve a higher return (yield) than the other.
A fair and efficient market is, by definition, a market that serves an adequate level of return for a given level of risk. The reality of finance is obviously somewhat different, and even though we understand the definition of a transparent and efficient market, we still have not witnessed a pure and perfect market. This is probably where finance and geology meet: Neither is a pure science.
Although we all know our stated equations, we struggle in our everyday job to approach the perfect system (be it a financial or a hydrocarbon system). Even though risk/reward theory can be challenged (as evidenced by the abundant number of academic papers addressing the inefficiency of the market), it remains a powerful paradigm to understanding the basics of finance, how funding flows into the oil and gas business, and ultimately how money is made available to companies exploring, appraising, and developing oil and gas assets.