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Price volatility and risk management of oil and gas companies: Evidence from oil and gas project finance deals

Bongseok Choi and Seon Tae Kim

Energy Economics, 2018, vol. 76, issue C, 594-605

Abstract: We investigate how the oil and gas project companies' decisions to hedge the risk of future prices of oil and gas respond to the changes in the price volatility of oil and gas, especially the role of the exposure of the sponsor company's stock returns to the risk of oil and gas prices. With a sample of 328 loans made to oil and gas development projects in 30 countries during 1996–2011 period, we find that the oil (or gas) price volatility increases the oil (or gas) project company's hedging likelihood, especially to a greater extent for the case in which the sponsor company's oil (or gas) exposure is smaller. Our findings suggest that the sponsor company's willingness to reduce its exposure to the risk of oil and gas prices increases the likelihood that the subsidiary project company will hedge the risk of future prices of oil and gas.

Keywords: Risk management; Price volatility; Project finance; Oil risk exposure; Oil and gas development (search for similar items in EconPapers)
JEL-codes: G32 G12 L71 Q40 (search for similar items in EconPapers)
Date: 2018
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Energy Economics is currently edited by R. S. J. Tol, Beng Ang, Lance Bachmeier, Perry Sadorsky, Ugur Soytas and J. P. Weyant

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