Common Factors in the Profitability of Energy Firms

Abstract

The extent to which external factors explain profitability in the energy sector and their commonalities is largely unknown from the previous literature. We identify three latent factors underlying the profitability of 1,347 global energy firms, from 2000 Q1 to 2021 Q2. We rely on a novel Dynamic Factor Model estimated by Functional Principal Components. Profitability factors are strongly associated with global financial and macroeconomic factors, including energy commodity prices, interest rates, exchange rates, economic activity and financial uncertainty. We compare our empirical results for various energy subsectors and show that profitability of oil and gas companies is highly sensitive to changes in interest rates and fuel prices, while renewable energy and uranium firms are more sensitive to exchange rates. We also provide a ranking of firms based on their association with the common factors of profitability, which can be used to monitor the resilience of the energy sector.

Orlando Joaqui Barandica

PhD Industrial Engineering

My research interests include energy markets, business analytics, quantitative finance, applied econometrics and statistical, and data visualization.