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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
Leverage and the Oil Industry
Analysis on the Firm and Production Level
Johannes Lips
September 5, 2017
Department of Economics
Justus-Liebig University Gießen
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
Research Questions and Motivation
Price Development on Energy Markets
WT
I Spot Price
($/Barrel)
HH
UB
Natural
Gas ($/m
mB
tu)
2001 2003 2005 2007 2009 2011 2013 2015 2017
0
50
100
0
5
10
Figure 1: Development of WTI crude oil and Henry Hub natural gasspot pricesLeverage and the Oil Industry – Johannes Lips 2 / 21
Development of aggregate oil production in the US
0
250
500
750
2000−Q1 2002−Q1 2004−Q1 2006−Q1 2008−Q1 2010−Q1 2012−Q1 2014−Q1 2016−Q1
Qua
rter
ly O
il P
rodu
ctio
n in
mm
bbls
Total U.S. Oil Production U.S. Unconventional Oil Production
Figure 2: Development of conventional and unconventional US oilproduction.Source: EIA (2017a,c)Leverage and the Oil Industry – Johannes Lips 3 / 21
Development of aggregate natural gas production in the US
0
2000000
4000000
6000000
8000000
2000−Q1 2002−Q1 2004−Q1 2006−Q1 2008−Q1 2010−Q1 2012−Q1 2014−Q1 2016−Q1
Qua
rter
ly N
atur
al G
as P
rodu
ctio
n in
Mcf
Figure 3: Development of US natural gas production.Source: EIA (2017b)
Leverage and the Oil Industry – Johannes Lips 4 / 21
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
Development of Debt in the US E&P Industry (Sample)
0
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
Deb
t to
Ass
et R
atio
Figure 4: Development of Debt and Assets
Leverage and the Oil Industry – Johannes Lips 6 / 21
Creating the Dataset
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
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
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
Key Figures of the Quarterly Oil Production Dataset
0
100
200
300
2000−Q1 2002−Q1 2004−Q1 2006−Q1 2008−Q1 2010−Q1 2012−Q1 2014−Q1 2016−Q1
Qua
rter
ly O
il P
rodu
ctio
n in
mm
bbls
Directional Horizontal Unknown Vertical
Figure 5: Development of aggregated oil production for different drillingtechnologiesSource: Own calculations based on data provided by DrillingInfoLeverage and the Oil Industry – Johannes Lips 10 / 21
Comparison of Production in the US and the Sample
0
250
500
750
2000−Q1 2002−Q1 2004−Q1 2006−Q1 2008−Q1 2010−Q1 2012−Q1 2014−Q1 2016−Q1
Qua
rter
ly O
il P
rodu
ctio
n in
mm
bbls
U.S. Total Sample Total
Figure 6: Total US oil production and oil production in sampleSource: Own calculations based on data provided by DrillingInfo
Leverage and the Oil Industry – Johannes Lips 11 / 21
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
Shar
e of
Oil
Pro
duct
ion
in t
he s
ampl
e
U.S. Total Sample Total
Figure 6: Total US oil production and oil production in sampleSource: Own calculations based on data provided by DrillingInfo
Leverage and the Oil Industry – Johannes Lips 11 / 21
Exploratory Data Analysis
Distribution of Leverage prior to price decline in 2008 and 2014
LeveragePercentile
2008 Q2 2014 Q3
No. Assets Debt No. Assets Debt
1stQuartile 33 3094 493 33 5872 9482ndQuartile 36 11 869 2494 36 12 895 27493rdQuartile 35 5018 1380 36 4279 13284thQuartile 35 2845 1208 36 2002 885
Non-calculableLeverage
5 1172 339 7 1304 391
Table 1: Comparison of the number of companies for each leveragegroup prior to price declines in 2008 Q2 and 2014 Q3 and their averagevalue of total assets and debt in million US-Dollar.Leverage and the Oil Industry – Johannes Lips 12 / 21
Leverage and Unconventional Production
0.00
0.25
0.50
0.75
1.00
2000−Q1 2005−Q1 2010−Q1 2015−Q1
Oil
prod
uction
per
lev
erag
e gr
oup
and
pro
duct
ion
type 1st Quartile
2nd Quartile3rd Quartile4th QuartileNon−calculable Leverage
Conventional Oil ProductionUnconventional Oil Production
Figure 7: Total oil production differentiated by production type andleverage quartile of the companies in 2008. Yellow line separates theproduction types with conventional share above and unconventional sharebelow.Leverage and the Oil Industry – Johannes Lips 13 / 21
Leverage and Unconventional Production
0.00
0.25
0.50
0.75
1.00
2000−Q1 2005−Q1 2010−Q1 2015−Q1
Gas
pro
duct
ion
per
leve
rage
gro
up a
nd p
rodu
ctio
n ty
pe Conventional Gas ProductionUnconventional Gas Production
1st Quartile2nd Quartile3rd Quartile4th QuartileNon−calculable Leverage
Figure 8: Total gas production differentiated by production type andleverage quartile of the companies in 2008. Yellow line separates theproduction types with conventional share above and unconventional sharebelow.Leverage and the Oil Industry – Johannes Lips 14 / 21
Results Dynamic Panel Modelling
Pooled Estimation – Oil Production
Coefficient Standard error t-stat p-value
log(Total Oil Production)t−1 0.948∗∗∗ 0.004 243.745 0.000log(Total Assets) 0.032∗∗∗ 0.012 2.771 0.006log(EBITDA) 0.022∗∗ 0.010 2.134 0.033Leverage 0.002 0.004 0.425 0.671log(WTI Spot Price) 0.025 0.021 1.209 0.227constant −0.533∗∗∗ 0.093 −5.721 0.000
R2 0.934Observations 6327F statistic 17 968.161
Note: ∗p<0.1; ∗∗p<0.05; ∗∗∗p<0.01
Leverage and the Oil Industry – Johannes Lips 15 / 21
LSDV Estimation – Oil Production
Coefficient Standard error t-stat p-value
log(Total Oil Production)t−1 0.586∗∗∗ 0.044 13.424 0.000log(Total Assets) 0.084∗∗∗ 0.032 2.660 0.008log(EBITDA) 0.035∗∗∗ 0.012 2.906 0.004Leverage 0.027∗ 0.015 1.810 0.071log(WTI Spot Price) −0.117∗∗ 0.055 −2.130 0.034constant −1.305∗∗∗ 0.269 −4.848 0.000
Observations 6327 σu 1.539No. Companies 289 σe 0.657F statistic 48.066 ρ 0.846R2-within 0.517R2-between 0.895R2-overall 0.928
Note: ∗p<0.1; ∗∗p<0.05; ∗∗∗p<0.01Leverage and the Oil Industry – Johannes Lips 16 / 21
Pooled Estimation – Gas Production
Coefficient Standard error t-stat p-value
log(Total Gas Production)t−1 0.933∗∗∗ 0.004 217.170 0.000log(Total Assets) 0.065∗∗∗ 0.013 4.908 0.000log(EBITDA) 0.022∗ 0.011 1.931 0.054Leverage 0.059∗ 0.036 1.653 0.098log(WTI Spot Price) −0.064∗∗∗ 0.024 −2.699 0.007constant 0.182∗ 0.101 1.805 0.071
R2 0.928Observations 6290F statistic 16 236.009
Note: ∗p<0.1; ∗∗p<0.05; ∗∗∗p<0.01
Leverage and the Oil Industry – Johannes Lips 17 / 21
LSDV Estimation – Gas Production
Coefficient Standard error t-stat p-value
log(Total Gas Production)t−1 0.514∗∗∗ 0.048 10.637 0.000log(Total Assets) 0.094∗∗ 0.042 2.271 0.024log(EBITDA) 0.027∗ 0.014 1.934 0.054Leverage 0.093 0.150 0.622 0.535log(WTI Spot Price) −0.194∗∗∗ 0.066 −2.940 0.004constant 3.371∗∗∗ 0.400 8.431 0.000
Observations 6290 σu 1.856No. Companies 286 σe 0.707F statistic 29.436 ρ 0.873R2-within 0.451R2-between 0.954R2-overall 0.924
Note: ∗p<0.1; ∗∗p<0.05; ∗∗∗p<0.01Leverage and the Oil Industry – Johannes Lips 18 / 21
Concluding Remarks and Outlook
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
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
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
