Title: Leverage and the oil industry: Analysis on the firm and production level
Authors: Johannes Lips - Justus-Liebig University Giessen (Germany) [presenting]
Abstract: The purpose is to analyze the relationship between debt and the production decision of companies active in the exploration and production of oil and gas in the United States. Over the last couple of years, the development and application of innovative extraction methods, like hydraulic fracturing and horizontal drilling, led to a considerable increase in US oil production. In connection with these technological changes, another important economic development in the oil industry has been identified: largely debt-driven investments in the oil sector. Additionally, the rising prices in the commodities markets until mid 2014 led to higher asset valuation and thus to higher return expectations fueling a virtuous circle and increasing the oil and gas production, especially in the US. The first research question is whether debt and leverage affects production decisions of oil companies. The second research question then is, if the technological changes in the industry and the increased indebtedness of US oil companies led to a markedly different reaction in their production decision between the episodes of oil price decline in 2008 and 2014. A potential reason for the absence or delay in cutting back production after the price drop in 2014 could be supposedly higher leverage prior to the price decline. These questions are econometrically addressed using a novel dataset combining financial data on publicly listed firms and their production data on well level.