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U.S. shale producers: a case of dynamic risk management?

Fabrizio Ferriani and Giovanni Veronese

No 1211, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: Using more than a decade of firm-level data on U.S. oil producers' hedging portfolios, we document for the first time a strong positive link between net worth and hedging in the oil producing sector. We exploit as quasi-natural experiments two similarly dramatic oil price slumps, in 2008 and in 2014-2015, and we show how a shock to net worth differently affects risk management practices among E\&P firms depending on their initial financial positions. The link between net worth and hedging decisions holds in both episodes, but in the second oil slump we also find a significant role of leverage and credit constraints in reducing the hedging activity, a result that we attribute to the marked increase in leverage following the diffusion of the shale technology. Finally, we test if collateral constraints also impinge the extensive margin of risk management. Though in this case the effect is less apparent, our results generally points to a more limited use of linear derivative contracts when firms' net worth increases.

Keywords: dynamic risk management; hedging; derivatives; shale revolution; oil price collapse (search for similar items in EconPapers)
JEL-codes: D22 G00 G32 (search for similar items in EconPapers)
Date: 2019-03
New Economics Papers: this item is included in nep-ene and nep-rmg
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