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Leverage and the Oil Industry Analysis on the Firm and Production - - PowerPoint PPT Presentation

Jun 23, 2023 8 likes •290 views

Leverage and the Oil Industry Analysis on the Firm and Production Level Johannes Lips September 5, 2017 Department of Economics Justus-Liebig University Gieen Outline Research Questions and Motivation Creating the Dataset Exploratory Data

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Leverage and the Oil Industry

Analysis on the Firm and Production Level

Johannes Lips September 5, 2017

Department of Economics Justus-Liebig University Gießen

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Outline

Research Questions and Motivation Creating the Dataset Exploratory Data Analysis Results Dynamic Panel Modelling Concluding Remarks and Outlook

Leverage and the Oil Industry – Johannes Lips 1 / 21

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Research Questions and Motivation

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Price Development on Energy Markets

WTI Spot Price ($/ Barrel) HHUB Natural Gas ($/ mmBtu)

2001 2003 2005 2007 2009 2011 2013 2015 2017 50 100 5 10

Figure 1: Development of WTI crude oil and Henry Hub natural gas spot prices

Leverage and the Oil Industry – Johannes Lips 2 / 21

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Development of aggregate oil production in the US

250 500 750 2000− Q1 2002− Q1 2004− Q1 2006− Q1 2008− Q1 2010− Q1 2012− Q1 2014− Q1 2016− Q1

Quarterly Oil Production in mmbbls

Total U.S. Oil Production U.S. Unconventional Oil Production

Figure 2: Development of conventional and unconventional US oil production.

Source: EIA (2017a,c)

Leverage and the Oil Industry – Johannes Lips 3 / 21

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Development of aggregate natural gas production in the US

2000000 4000000 6000000 8000000 2000− Q1 2002− Q1 2004− Q1 2006− Q1 2008− Q1 2010− Q1 2012− Q1 2014− Q1 2016− Q1

Quarterly Natural Gas Production in Mcf

Figure 3: Development of US natural gas production.

Source: EIA (2017b)

Leverage and the Oil Industry – Johannes Lips 4 / 21

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Related Literature

  • Domanski et al. (2015) raise the hypothesis that high debt

may prevent producers from reducing production

  • Lehn and Zhu (2016) empirically analyze the relationship –

focus on period between 2011 and 2014

  • Gilje et al. (2017) focus on project completion and investment

decisions of firms

Leverage and the Oil Industry – Johannes Lips 5 / 21

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Development of Debt in the US E&P Industry (Sample)

500000 1000000 2000−Q1 2002−Q1 2004−Q1 2006−Q1 2008−Q1 2010−Q1 2012−Q1 2014−Q1 2016−Q1 Aggregate.Debt Aggregate.Assets 0.20 0.25 0.30 0.35 2000−Q1 2002−Q1 2004−Q1 2006−Q1 2008−Q1 2010−Q1 2012−Q1 2014−Q1 2016−Q1

Debt to Asset Ratio

Figure 4: Development of Debt and Assets

Leverage and the Oil Industry – Johannes Lips 6 / 21

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Creating the Dataset

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Company Data

  • Companies active in E&P of Crude Oil and Natural Gas

(SIC 1311)

  • Quarterly financial data from CapitalIQ
  • Initially 1018 companies in the financial data set

Leverage and the Oil Industry – Johannes Lips 7 / 21

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Production Data – Drillinginfo

  • Data obtained based on the companies in the financial data

set

  • Monthly production data on oil and gas wells
  • 18.5 million rows in the database
  • Information on the technology and additional data
  • Matching of both data sets on available company information

Leverage and the Oil Industry – Johannes Lips 8 / 21

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Unbalanced quarterly data set – Q1 2000 to Q2 2016

  • Panel data set ranging from Q1 2000 to Q2 2016
  • Initially 153 companies
  • 172 drop out and 190 enter into the sample
  • 53 are present throughout the whole sample period
  • 146 on average in each quarter
  • 343 different companies in total

Leverage and the Oil Industry – Johannes Lips 9 / 21

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Key Figures of the Quarterly Oil Production Dataset

100 200 300 2000− Q1 2002− Q1 2004− Q1 2006− Q1 2008− Q1 2010− Q1 2012− Q1 2014− Q1 2016− Q1

Quarterly Oil Production in mmbbls

Directional Horizontal Unknown Vertical

Figure 5: Development of aggregated oil production for different drilling technologies

Source: Own calculations based on data provided by DrillingInfo

Leverage and the Oil Industry – Johannes Lips 10 / 21

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Comparison of Production in the US and the Sample

250 500 750 2000− Q1 2002− Q1 2004− Q1 2006− Q1 2008− Q1 2010− Q1 2012− Q1 2014− Q1 2016− Q1

Quarterly Oil Production in mmbbls

U.S. Total Sample Total

Figure 6: Total US oil production and oil production in sample

Source: Own calculations based on data provided by DrillingInfo

Leverage and the Oil Industry – Johannes Lips 11 / 21

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Comparison of Production in the US and the Sample

0.00 0.25 0.50 0.75 1.00 2000− Q1 2002− Q1 2004− Q1 2006− Q1 2008− Q1 2010− Q1 2012− Q1 2014− Q1 2016− Q1

Share of Oil Production in the sample

U.S. Total Sample Total

Figure 6: Total US oil production and oil production in sample

Source: Own calculations based on data provided by DrillingInfo

Leverage and the Oil Industry – Johannes Lips 11 / 21

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Exploratory Data Analysis

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Distribution of Leverage prior to price decline in 2008 and 2014

Leverage Percentile 2008 Q2 2014 Q3 No. Assets Debt No. Assets Debt 1stQuartile 33 3094 493 33 5872 948 2ndQuartile 36 11 869 2494 36 12 895 2749 3rdQuartile 35 5018 1380 36 4279 1328 4thQuartile 35 2845 1208 36 2002 885 Non-calculable Leverage 5 1172 339 7 1304 391

Table 1: Comparison of the number of companies for each leverage group prior to price declines in 2008 Q2 and 2014 Q3 and their average value of total assets and debt in million US-Dollar.

Leverage and the Oil Industry – Johannes Lips 12 / 21

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Leverage and Unconventional Production

0.00 0.25 0.50 0.75 1.00 2000− Q1 2005− Q1 2010− Q1 2015− Q1

Oil production per leverage group and production type

1st Quartile 2nd Quartile 3rd Quartile 4th Quartile Non− calculable Leverage Conventional Oil Production Unconventional Oil Production

Figure 7: Total oil production differentiated by production type and leverage quartile of the companies in 2008. Yellow line separates the production types with conventional share above and unconventional share below.

Leverage and the Oil Industry – Johannes Lips 13 / 21

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Leverage and Unconventional Production

0.00 0.25 0.50 0.75 1.00 2000− Q1 2005− Q1 2010− Q1 2015− Q1

Gas production per leverage group and production type

Conventional Gas Production Unconventional Gas Production 1st Quartile 2nd Quartile 3rd Quartile 4th Quartile Non− calculable Leverage

Figure 8: Total gas production differentiated by production type and leverage quartile of the companies in 2008. Yellow line separates the production types with conventional share above and unconventional share below.

Leverage and the Oil Industry – Johannes Lips 14 / 21

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Results Dynamic Panel Modelling

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Pooled Estimation – Oil Production

Coefficient Standard error t-stat p-value log(Total Oil Production)t−1 0.948∗∗∗ 0.004 243.745 0.000 log(Total Assets) 0.032∗∗∗ 0.012 2.771 0.006 log(EBITDA) 0.022∗∗ 0.010 2.134 0.033 Leverage 0.002 0.004 0.425 0.671 log(WTI Spot Price) 0.025 0.021 1.209 0.227 constant −0.533∗∗∗ 0.093 −5.721 0.000 R2 0.934 Observations 6327 F statistic 17 968.161 Note: ∗p<0.1; ∗∗p<0.05; ∗∗∗p<0.01

Leverage and the Oil Industry – Johannes Lips 15 / 21

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LSDV Estimation – Oil Production

Coefficient Standard error t-stat p-value log(Total Oil Production)t−1 0.586∗∗∗ 0.044 13.424 0.000 log(Total Assets) 0.084∗∗∗ 0.032 2.660 0.008 log(EBITDA) 0.035∗∗∗ 0.012 2.906 0.004 Leverage 0.027∗ 0.015 1.810 0.071 log(WTI Spot Price) −0.117∗∗ 0.055 −2.130 0.034 constant −1.305∗∗∗ 0.269 −4.848 0.000 Observations 6327 σu 1.539

  • No. Companies

289 σe 0.657 F statistic 48.066 ρ 0.846 R2-within 0.517 R2-between 0.895 R2-overall 0.928 Note: ∗p<0.1; ∗∗p<0.05; ∗∗∗p<0.01

Leverage and the Oil Industry – Johannes Lips 16 / 21

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Pooled Estimation – Gas Production

Coefficient Standard error t-stat p-value log(Total Gas Production)t−1 0.933∗∗∗ 0.004 217.170 0.000 log(Total Assets) 0.065∗∗∗ 0.013 4.908 0.000 log(EBITDA) 0.022∗ 0.011 1.931 0.054 Leverage 0.059∗ 0.036 1.653 0.098 log(WTI Spot Price) −0.064∗∗∗ 0.024 −2.699 0.007 constant 0.182∗ 0.101 1.805 0.071 R2 0.928 Observations 6290 F statistic 16 236.009 Note: ∗p<0.1; ∗∗p<0.05; ∗∗∗p<0.01

Leverage and the Oil Industry – Johannes Lips 17 / 21

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LSDV Estimation – Gas Production

Coefficient Standard error t-stat p-value log(Total Gas Production)t−1 0.514∗∗∗ 0.048 10.637 0.000 log(Total Assets) 0.094∗∗ 0.042 2.271 0.024 log(EBITDA) 0.027∗ 0.014 1.934 0.054 Leverage 0.093 0.150 0.622 0.535 log(WTI Spot Price) −0.194∗∗∗ 0.066 −2.940 0.004 constant 3.371∗∗∗ 0.400 8.431 0.000 Observations 6290 σu 1.856

  • No. Companies

286 σe 0.707 F statistic 29.436 ρ 0.873 R2-within 0.451 R2-between 0.954 R2-overall 0.924 Note: ∗p<0.1; ∗∗p<0.05; ∗∗∗p<0.01

Leverage and the Oil Industry – Johannes Lips 18 / 21

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Concluding Remarks and Outlook

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Conclusion

  • Leverage appears to have some impact on the production

decision

  • Relationship needs to be analyzed in more detail, with more

appropriate methodology

  • Endogeneity is one of the main issues in this context and

needs to be addressed

Leverage and the Oil Industry – Johannes Lips 19 / 21

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Econometric Extensions

  • GMM estimation Blundell and Bond (2000) to address the

persistence and endogeneity

  • Difference-in-Difference Estimation: Using the treatments of

high and low leverage and contango or backwardation periods

  • PanelVAR allows to explicitly model the endogeneity.

Leverage and the Oil Industry – Johannes Lips 20 / 21

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The End

Thank you for your attention! For more details and current status, please see: https://papers.ssrn.com/sol3/papers.cfm?abstract id=3026063

Leverage and the Oil Industry – Johannes Lips 21 / 21