No. 1211 - U.S. shale producers: a case of dynamic risk management

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by Fabrizio Ferriani and Giovanni VeroneseMarch 2019

The study analyses the role of collateral as a guarantee not only of bank loans but also of derivative contracts to hedge against oil price risk. For this purpose, we collect data on the derivatives portfolio (extent of hedging coverage, type of contract) of U.S. companies active in the non-conventional oil extraction sector ("shale"). The collateral is proxied by measurements of the financial conditions of the companies.

The research shows how credit constraints and limited availability of collateral negatively affect the underwriting of derivative contracts by companies, reducing the degree to which they can hedge the risks of fluctuations in oil prices. The effect is greater when the financial constraints of companies are exacerbated by episodes of marked drops in oil prices, such as those that occurred in 2008 and in 2014/15.

Published in 2022 in: Energy Economics, v. 106, Article 105736.

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