Impact of Oil Price Uncertainty on Capital Structure Choice by Petroleum Companies
Purpose: The article examines the interaction between oil market uncertainty and the capital structure of large oil-producing companies. The research aims to establish whether oil companies adjust their capital structure in response to oil price volatility and uncertainty. Design/Methodology/Approach: The study is based on historical financial data (debt/equity ratio; stock prices) for a sample of oil-producing companies listed on the NYSE over 2007-2022 to analyse their capital structure choices in response to oil price uncertainty measured by implied volatility (Oil VIX index) and realized volatility (WTI oil prices changes). Employed econometric methods include descriptive statistics, Pearson correlation, VAR Impulse response function, Granger causality, and GARCH model. Based on the literature review and historical data, the study uses an empirical approach to investigate the association between company debt and equity mix and oil price volatility and uncertainty. Findings: The research demonstrates that fluctuations in market oil prices influence the capital structure of oil companies. Elevated oil price uncertainty, measured by the difference between the implied and realized oil price volatility (i.e., shocks) prompts oil companies to adjust their capital structure. According to the impulse response function, the oil price shocks exert a statistically significant short-term impact on the modifications in the capital structure of the sample oil companies. In general, companies tend to prefer liquid equity over sticky debt during higher oil price uncertainty. The Granger causality tests indicate a bidirectional relationship between oil price uncertainty and capital structure decisions. The results imply that, besides the advantages associated with the stability of sticky debt, it becomes more costly and risky during periods of oil market volatility. Practical Implications: Studying large oil companies' capital structure is vital to those engaged in investment, policy-making, consumer advocacy, and public interest. The impact of uncertain oil prices on capital structure can serve as a guideline toward better financing decisions for financial managers in the oil sector. A higher proportion of equity needs to be maintained to avoid risks associated with debt in times of volatility. Originality/Value: The paper contributes to the research on how world market oil price uncertainty impacts companies' capital structure decisions and proposes insights into finding optimal financing strategies for oil-producing companies facing volatile market conditions. Up to now, similar studies focused on how oil price uncertainty affects companies in other sectors, with relatively low attention on companies from the oil sector.