Debt and the Oil Industry: Analysis on the Firm and Production Level

Abstract

This paper analyzes the relationship between debt and the production decisions 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 has 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 largely debt-driven investment in the oil sector. The extensive use of debt was fostered by the macroeconomic environment in the aftermath of the financial crisis. In addition, the rising prices in the commodities markets until mid-2014 led to higher asset valuation and a virtuous circle. This increase in investment activity, especially in the United States, raised the production capacity and, as a consequence, the production of crude oil. This trend continued in spite of the oil-price decline in 2014, although production reductions would have been more plausible. This paper’s main research question is whether debt and leverage affect the production decisions of companies. It addresses this question using a novel panel vector autoregressive approach and a data set that combines financial data on publicly listed firms and their production data at well level.

Keywords: corporate finance, oil industry, debt, leverage, panel vector autoregressive (VAR), dynamic panel data