1. Corporate Structure and Regulatory Risk in the Oil & Gas Industry
Kirby Lawrence
Benjamin Gilbert
Honors Thesis

2. Problem Oil and well facilities are also being shut down
250,000 jobs have been cut globally in the oil field services industry
Socially Responsible investing becoming increasingly important to shareholders
Shareholders have even attempted to add, unsuccessfully, an environmental expert on the boards of oil giants such as Exxon Mobil and Chevron Corp
Conflicts: Growing the company while balancing the needs of the shareholder
Agency Theory: the more money the company would have more power to spend, or has spent, the more likely they would conflict
Free Cash Flow and Capital Expenditures to Total Assets: The higher, the more profitable the company is, but could also mean more likely to go against shareholders wishes.
Heading towards a “cash crisis”

3. Definitions
Capital Expenditures to total assets: How much of total assets was spent on capital gains, like new equipment
Free cash flow to total assets: How quickly cash can be generated
Note-Capx and FCF were both simultaneously significant

4. My Project
Looking at just publicly traded companies, I hope to bridge what the agency theory means in the context of higher free cash flow and capital expenditures to total assets to violation behavior at individual wells. My original thought is that these are farther from the reach of shareholders than the corporate executives, and as such this might gauge how corporation behavior.
The ability for a corporation to have more cash on hand, through increased free cash flow or capital expenditures when compared to total assets, means that a corporation is less likely to have environmental violations, and which means that something else might be balancing firm and oil and well facility behavior.

5. My Data Environmental Protection Agency ECHO Database
3-4% are violators
Only have publicly traded firms
Utilizing logistic regression, with a binary variable of a violator or not
State regulation is the main performance indicator for gas and oil exploration
Toxic Release inventories and things like that aren’t available
Capital Expenditures to Total Assets
Free Cash Flow to Total Assets
Gulfstate
Non-Violator
Mean
0.1974
0.0706
0.22
Number 63 58
Standard Deviation
0.1077
0.0496
0.419
Violator
0.1056
0.0364
0.47 15
0.1106
0.0502
0.446

6. Hypothesis
H0: A corporation’s free cash flow to assets total ratio does not affect individual oil well performance
Ha: A corporation’s free cash flow to assets total ratio does affect individual oil well performance
&
H0: A corporation’s capital expenditures to assets total ratio does not affect individual oil well performance
Ha: A corporation’s capital expenditures to assets total ratio does affect individual oil well performance

7. Models at the logistic regression scale
Violator = *Capx_at +.66*Gulf state
Log Likelihood =
X^2(2) = 11.05, p <.001
Pseudo R^2= 14%
Violator = *FCF_at +.86*Gulf state
Log Likelihood =
X^2(2) = 10.79, p <.001
Pseudo R^2= 14%

8. Probabilities

9. Odds Ratio Capx_at FCF_at
For being a gulf state, your are 95% more likelier to get violation
Comparing non-gulfstate companies with a .5 to a .05 capx_at, you are 15% likelier
For being a gulf state, your are 2.4 times likelier to get violation
Comparing non-gulfstate companies with a .5 to a .05, you are 3% likelier

10. Marginal Effects Capx_at Gulf State -1.13 .2 Capx_at Gulf State -2.07
.28

11. Analysis
In the 1980s agency costs and conflicts could be resolved because of debt financing or stock surplus, which was the case of the oil industry during the 1980s when there was a high level of free cash flow
However, it is possible that once production picks up again, those with lower constraints might be more likely to be violators

12. Future Research More violators
Figure out if the conflict with the agency theory is like the 1980s or if there is something else at play
Narrowing in on one region

13. Questions?