The Influence of Oil Prices on Equity Returns of Canadian Energy Firms

Sourav Batabyal,Robert Killins

doi:10.3390/jrfm14050226

Abstract

Using monthly data from January 2000 to August 2018, this paper examines how the Canadian oil and gas industry and individual firms’ equity prices react to oil price fluctuations, which are measured by the traditional West Texas Intermediate (WTI) benchmark and the Canada-specific Western Canadian Select (WCS) benchmark. The findings provide support for the view that oil price movements are an important factor in explaining the equity returns of the overall industry and for many individual oil and gas firms in Canada. Both WTI and WCS measures provide statistically significant evidence, but the results support that WTI may still be the more relevant measure for Canadian-based firms. We also find that the spread between WTI and WCS has a minimal impact on the firms’ equity returns. Additional tests for asymmetric impacts of oil price movements on Canadian oil and gas equity returns have provided little evidence, whereas time-varying impacts are found for a handful of firms. The empirical findings predicated on the holistic view of the impacts of oil price fluctuations on equity market returns will enhance investor confidence and strengthen the Canadian economy.

Highlights

The impact that energy prices have on the economy has received widespread attention from academics and practitioners (e.g., Hamilton 1983; Hamilton 2003; Lee et al 2017)
The results suggest that oil price exposures of firms in the Canadian oil and gas sector vary across firms and over time
This study addresses how oil prices impact the equity returns of the Canadian oil and gas industry

Summary

Introduction

The impact that energy prices have on the economy has received widespread attention from academics and practitioners (e.g., Hamilton 1983; Hamilton 2003; Lee et al 2017). The findings indicate that, on an industry basis, fluctuations in both WTI and WCS have statistically significant positive relationships with the Canadian energy sector equity returns. The coefficient for the industry-wide regression is 0.29 and the OIL coefficient is positive and significant for seven of the fourteen firms, ranging from 0.1267 to 0.3437 These results support the findings of Sadorsky (2001) and Boyer and Filion (2007), who find positive associations between Canadian energy firms and oil prices. Β is significant in at least one threshold regression for Enbridge, Cenovus Energy, and Crescent Point Energy These results suggest that individual firms address fluctuations in oil prices in varying risk management (hedging) strategies. The individual firm regression suggests that Imperial Oil, Enicana, and Canadian Natural Resources equity returns are impacted positively by oil price changes and relatively so in the same magnitude in both subsamples.

Additional Estimations for Time-Varying Oil Sensitivities

Findings

Conclusions and Implications