The effect of crude oil prices on the valuation of energy companies Frank Asche and Roy Endré Dahl Department of Industrial Economics Universitetet i Stavanger uis.no 4.9.217
Motivation Oil prices are volatile and have experienced several shifts. Pindyck (21) Kilian (29) Hamilton (29, 213) Valuation of any financial derivative is the sum of its future discounted cash flows. Misund and Mohn (29) Osmundsen et al. (26) Kumar and Sukumaran (216) Misund et al. (28) 16 14 12 1 8 6 4 2 1996 1998 2 22 24 26 28 21 212 214 216 In this paper we try to answer: Is the valuation of petroleum companies related to short-term changes in the oil price? Brent
Data 35 energy companies in S&P 5 with stock valuation from May 1996 until March 217. Total 4 82 observation per price series. 45 energy companies in Oslo Stock Exchange (OSE) with observations starting in June 21 until March 217, providing 3 59 observations per price series. We differentiate the companies using the Global Industry Classification Standard (GICS-code) and aggregate the stock series into value-weighted category series. 35 3 25 2 15 1 5 1996 1998 2 22 24 26 28 21 212 214 216 WTI Crude oil 16 14 12 1 8 6 4 2 3
Data 35 energy companies in S&P 5 with stock valuation from May 1996 until March 217. Total 4 82 observation per price series. 45 energy companies in Oslo Stock Exchange (OSE) with observations starting in June 21 until March 217, providing 3 59 observations per price series. We differentiate the companies using the Global Industry Classification Standard (GICS-code) and aggregate the stock series into value-weighted category series. 35 3 25 2 15 1 5 1996 1998 2 22 24 26 28 21 212 214 216 Oil & Gas Storage & Transportation WTI Crude oil 16 14 12 1 8 6 4 2 4
Data Table 1. Summary of aggregated data per GICS category for both S&P 5 and OSE. Note that the first column per variable concerns S&P 5 and the second column concerns OSE. Mean log-return and volatility is annualized. Average value is in billion USD. Category GICS-code Number of series Mean log-return Volatility Average value 1111 2 8 -.13 -.43.44.656 6..28 1112 5 24.44 -.28.366.36 39.4.58 1121 4 1.65.59.254.325 142.2 54.2 1122 21 7.41 -.5.285.588 22.7.75 Oil & Gas Storage & Transportation 1124 3 5 -.18 -.31.187.558 27.8.57 5
Empirical results First, a correlation table confirms a long-term relationship between S&P 5 integrated oil companies and exploration & production. However, OSE companies seems not correlated. Oil & Gas Equipment & Services Integrated Oil & Gas Oil & Gas Exploration & Production Oil & Gas Storage & Transportation WTI S&P 5,5,8,83,8 -,11 Brent S&P 5 -,3,3,81,75 -,1 WTI OSE,2,33,39,11,18 Brent OSE,5,1,16,5,8 Next, apply a vector error correction model and create a rolling cointegration matrix using an observation period of 25 days. Estimate the rolling alpha for short run relation between changes in the oil price and valuation of companies in a sector. 6
WTI price and S&P 5 oil companies 1,5 1999 21 23 25 27 29 211 213 215 -,5-1 Most vulnerable to WTI price Periods of strong relation Positive in 24-25 Negative in 28-29 Positive in 214 Negative in 215-216 -1,5 Oil & Gas Storage & Transportation 7
WTI price and OSE oil companies,2 26 28 21 212 214 216 -,2 -,4 -,6 -,8 OSE oil companies less affected (in the short run) by WTI crude oil prices. Periods of strong relation Negative in 28 21 for -1-1,2 Oil & Gas Storage & Transportation 8
Brent price and S&P 5 oil companies 1,4 1,2 1,8,6,4,2 1999 21 23 25 27 29 211 213 215 -,2 Most affected by Brent prices Periods of strong relation Positive in 2 Positive in 214 -,4 -,6 -,8 Oil & Gas Storage & Transportation 9
Brent price and OSE oil companies,5,4,3,2,1 26 28 21 212 214 216 -,1 -,2 -,3 OSE companies experience limited vulnerability to Brent price (in short run) Periods of strong relation Negative in 28 21 for -,4 -,5 -,6 Oil & Gas Storage & Transportation 1
Concluding remarks Significant results found for S&P 5 and WTI crude oil prices for integrated oil companies and exploration & production. Periods of increasing oil price have positive adjustment Periods of oil price drops have negative adjustment For all markets, we find that exploration & production companies had negative adjustment to oil price news during the financial crisis. 1,5 1999 21 23 25 27 29 211 213 215 -,5-1 Brent oil price has less (short-term) effect on both valuation of both OSE and S&P 5 oil companies. OSE companies less affected by WTI crude oil prices. -1,5 Oil & Gas Storage & Transportation 11