The Impact of Diversification of Production Activities by Major Public Oil Companies on the Value of Their Shares

Journal of Corporate Finance Research, Vol. 13, No. 4, pp. 106-117 (2019)

12 Pages Posted: 22 Jul 2020

See all articles by Evgeny Busygin

Evgeny Busygin

National Research University Higher School of Economics,

Date Written: 2019

Abstract

This study aims to identify a system of factors that influence the market value of the largest oil companies. In order to create the most robust analysis with real-world applicability, we test several hypotheses which aim to establish those patterns of behavior and composition within oil company structures that interact most predictably with market trends and processes.

To achieved this, we collected quarterly data on the 5 largest private oil companies (BP, Chevron, Exxon Mobil, Royal Dutch Shell, Total) for the period from Q1 2006 to Q3 2016. The financial indicators for these companies were calculated based on data from the Thomson Reuters Eikon database, as well as from the quarterly reports of the companies themselves. An econometric analysis using panel data was used to test hypotheses.

The following results were revealed. First, the capital structure of the largest oil companies has a direct impact on the value of shares. Second, the increase in capital costs attributable to the downstream segment relative to total capital costs adversely affects the price of shares. Third, we discovered that with the growth of Tobin’s Q, the share price of the largest oil companies increases. It was also revealed that factors such as the conclusion of mergers and acquisitions, profitability in the downstream segment, and the dividend payout ratio were insignificant in the model.

These results confirm that any study assessing the value of companies in the oil industry ought to evaluate influential variables affecting the capitalization of companies operating in both upstream and downstream segments, while also considering companies engaged in production in only one such segment. It is also imperative to conduct a separate analysis of the influence of factors on the capitalization of companies with respect to the prevailing trends in the oil market.

The novelty of this study relates to the immediate applicability of the real-world data utilized. We focus on such fundamental econometric variables from market-leading companies as profit levels, returns on sales, debt burdens, capital costs, and the effects of mergers and acquisitions. These factors are relevant at every level of business and academic analysis in every commercial endeavor. As such our conclusions may be instantly implemented into business strategies, research, and economic analyses related to the oil industry as well as other markets. Additionally, since there are no significant discrepancies between our results and established academic consensus, our contributions require little further interpretation to be instrumental.

Keywords: Market Capitalization, Oil Industry, System of Factors, Tobin’s Q, Upstream and Downstream, M&A

JEL Classification: C10, G32, L16, P18

Suggested Citation

Busygin, Evgeny, The Impact of Diversification of Production Activities by Major Public Oil Companies on the Value of Their Shares (2019). Journal of Corporate Finance Research, Vol. 13, No. 4, pp. 106-117 (2019), Available at SSRN: https://ssrn.com/abstract=3638960

Evgeny Busygin (Contact Author)

National Research University Higher School of Economics, ( email )

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