U.S. Shale Producers: A Case of Dynamic Risk Management?

48 Pages Posted: 6 Aug 2019

Date Written: March 18, 2019

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

JEL Classification: D22, G00, G32

Suggested Citation

Ferriani, Fabrizio and Veronese, Giovanni Furio, U.S. Shale Producers: A Case of Dynamic Risk Management? (March 18, 2019). Bank of Italy Temi di Discussione (Working Paper) No. 1211, March 2019, Available at SSRN: https://ssrn.com/abstract=3432412 or http://dx.doi.org/10.2139/ssrn.3432412

Fabrizio Ferriani

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Giovanni Furio Veronese (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy
+49 621 189 1886 (Phone)
+49 621 189 1884 (Fax)

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