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.
AbelA.B.2018. “Optimal Debt and Profitability in the Trade-Off Theory.”Journal of Finance73 (1): 95–143. doi:10.1111/jofi.12590.
2.
AborJ.2005. “The Effect of Capital Structure on Profitability: An Empirical Analysis of Listed Firms in Ghana.”Journal of Risk Finance6 (5): 438–45. doi:10.1108/15265940510633505.
3.
AcharyaV.V.PedersenL.H.PhilipponT.RichardsonM.2017. “Measuring Systemic Risk.”Review of Financial Studies30 (1): 2–47. doi:10.1093/rfs/hhw088.
AkbasH.E.KaradumanH.A.2012. “The Effect of Firm Size on Profitability: An Empirical Investigation on Turkish Manufacturing Companies.”European Journal of Economics, Finance and Administrative Sciences55: 21–7.
6.
AneirosG.HorováI.HuškováM.VieuP.2022. “On Functional Data Analysis and Related Topics.”Journal of Multivariate Analysis189: 104861. doi:10.1016/j.jmva.2021.104861.
7.
AntonS.G.2021. “The Impact of Temperature Increase on Firm Profitability. Empirical Evidence from the European Energy and Gas Sectors.”Applied Energy295: 117051. doi:10.1016/j.apenergy.2021.117051.
8.
AntoniouA.GuneyY.PaudyalK.2008. “The Determinants of Capital Structure: Capital Market-Oriented Versus Bank-Oriented Institutions.”Journal of Financial and Quantitative Analysis43 (1): 59–92. doi:10.1017/s0022109000002751.
9.
ApanM.İslamoğluM.2018. “Determining the Impact of Financial Characteristics on Firm Profitability: An Empirical Analysis on Borsa Istanbul Energy Firms.”WSEAS Transactions on Business and Economics15: 547–59.
10.
BaiJ.NgS.2002. “Determining the Number of Factors in Approximate Factor Models.”Econometrica70 (1): 191–221. doi:10.1111/1468-0262.00273.
11.
BaiJ.NgS.2008. “Large Dimensional Factor Analysis.”Foundations and Trends R in Econometrics3 (2): 89–163. doi:10.1561/0800000002.
12.
BainJ.S.1951. “Relation of Profit Rate to Industry Concentration: American Manufacturing, 1936–1940.”Quarterly Journal of Economics65 (3): 293–324. doi:10.2307/1882217.
13.
BarneyJ.1991. “Firm Resources and Sustained Competitive Advantage.”Journal of Management17 (1): 99–120. doi:10.1177/014920639101700108.
14.
BouriE.Jawad Hussain ShahzadS.2022. “Network Topology of Dynamic Credit Default Swap Curves of Energy Firms and the Role of Oil Shocks.”The Energy Journal43 (1): 1–26. doi:10.5547/01956574.43.si1.ebou.
15.
CapeceG.CricelliL.Di PilloF.LevialdiN.2010. “A Cluster Analysis Study Based on Profitability and Financial Indicators in the Italian Gas Retail Market.”Energy Policy38 (7): 3394–402. doi:10.1016/j.enpol.2010.02.013.
16.
ChadhaS.SharmaA.K.2015. “Capital Structure and Firm Performance: Empirical Evidence from India.”Vision: The Journal of Business Perspective19 (4): 295–302. doi:10.1177/0972262915610852.
17.
DalciI.2018. “Impact of Financial Leverage on Profitability of Listed Manufacturing Firms in China.”Pacific Accounting Review30 (4): 410–32. doi:10.1108/PAR-01-2018-0008.
18.
EckboB.E.KisserM.2021. “The Leverage-Profitability Puzzle Resurrected.”Review of Finance25 (4): 1089–1128. doi:10.1093/rof/rfaa032.
FrankM.Z.GoyalV.K.2009. “Capital Structure Decisions: Which Factors Are Reliably Important?”Financial Management38 (1): 1–37. doi:10.1111/j.1755-053X.2009.01026.x.
21.
FraunholzC.MiskiwK.K.KraftE.FichtnerW.WeberC.2023. “On the Role of Risk Aversion and Market Design in Capacity Expansion Planning.”The Energy Journal44 (3): 111–38. doi:10.5547/01956574.44.2.cfra.
22.
Fuentes GonzálezF.WebbJ.SharminaM.HannonM.Braunholtz-SpeightT.PappasD.2022. “Local Energy Businesses in the United Kingdom: Clusters and localism Determinants Based on Financial Ratios.”Energy239: 122119. doi:10.1016/j.energy.2021.122119.
23.
González-AriasJ.Baena-MorenoF.M.Pastor-PérezL.Sebastia-SaezD.Gallego FernándezL.M.ReinaT.R.2022. “Biogas Upgrading to Biomethane as a Local Source of Renewable Energy to Power Light Marine Transport: Profitability Analysis for the County of Cornwall.”Waste Management137: 81–8. doi:10.1016/j.wasman.2021.10.037.
24.
GuerrieriL.HarkraderJ.C.2021. “What Drives Bank Performance?”Economics Letters204: 109884. doi:10.1016/j.econlet.2021.109884.
25.
GuptaK.2017. “Do Economic and Societal Factors Influence the Financial Performance of Alternative Energy Firms?”Energy Economics65: 172–82. doi:10.1016/j.eneco.2017.05.004.
26.
GuptaK.KrishnamurtiC.2018. “Do Macroeconomic Conditions and Oil Prices Influence Corporate Risk-Taking?”Journal of Corporate Finance53: 65–86. doi:10.1016/j.jcorpfin.2018.10.003.
HastieT.TibshiraniR.1987. “Generalized Additive Models: Some Applications.”Journal of the American Statistical Association82 (398): 371–86. doi:10.1080/01621459.1987.10478440.
29.
HastieT.TibshiraniR.1990. Generalized Additive Models. New York: Chapman & Hall.
30.
HulshofD.MulderM.2021. “Design of Renewable Support Schemes and Windfall Profits: A Monte Carlo Analysis for the Netherlands.”Energy Journal43 (1): 181–204. doi:10.5547/01956574.43.5.DHUL.
31.
JaraiteJ.KažukauskasA.2013. “The Profitability of Electricity Generating Firms and Policies Promoting Renewable Energy.”Energy Economics40: 858–65. doi:10.1016/j.eneco.2013.10.001.
32.
JaworskiJ.CzerwonkaL.2021. “Determinants of Enterprises’ Capital Structure in Energy Industry: Evidence from European Union.”Energies14 (7): 1871. doi:10.3390/en14071871.
33.
JinY.ZhaiP.ZhuZ.2022. “Oil Price Shocks and Bank Risk Around the World.”The Energy Journal43 (1): 1–28. doi:10.5547/01956574.43.si1.yjin.
34.
Joaqui-BarandicaO.Manotas-DuqueD.F.UribeJ.M.2022. “Commonality, Macroeconomic Factors and Banking Profitability.”The North American Journal of Economics and Finance62: 101714. doi:10.1016/j.najef.2022.101714.
35.
KersteM.GerritsenM.WedaJ.TiebenB.2015. “Systemic Risk in the Energy Sector—Is There Need for Financial Regulation?”Energy Policy78: 22–30. doi:10.1016/j.enpol.2014.12.018.
36.
KlempererP.1995. “Competition When Consumers Have Switching Costs: An Overview with Applications to Industrial Organization, Macroeconomics, and International Trade.”Review of Economic Studies62 (4): 515–39. doi:10.2307/2298075.
37.
KlimenkoR.NaruetharadholP.KetkaewC.2018. “Determinants of Market Players’ Profitability in Thailand’s Energy Sector.”International Journal of Interdisciplinary Organizational Studies13 (1): 27–35. doi:10.18848/2324-7649/CGP/v13i01/27-35.
38.
LevitinD.J.NuzzoR.L.VinesB.RamsayJ.O.2007. “Introduction to Functional Data Analysis.”Canadian Psychology48 (3): 135–55. doi:10.1037/cp2007014.
39.
LiY.2011. “Efficient Semiparametric Regression for Longitudinal Data with Nonparametric Covariance Estimation.”Biometrika98 (2): 355–70. doi:10.1093/biomet/asq080.
40.
LiY.WangN.CarrollR.J.2013. “Selecting the Number of Principal Components in Functional Data.”Journal of the American Statistical Association108 (504): 1284–94. doi:10.1080/01621459.2013.788980.
41.
LinX.WangN.WelshA.H.CarrollR.J.2004. “Equivalent Kernels of Smoothing Splines in Nonparametric Regression for Clustered/Longitudinal Data.”Biometrika91 (1): 177–93. doi:10.1093/biomet/91.1.177.
42.
MakridouG.DoumposM.GalariotisE.2019. “The Financial Performance of Firms Participating in the EU Emissions Trading Scheme.”Energy Policy129: 250–9. doi:10.1016/j.enpol.2019.02.026.
43.
McCrackenM.W.NgS.2021. “FRED-QD: A Quarterly Database for Macroeconomic Research.”Review103 (1): 1–44. doi:10.20955/r.103.1-44.
44.
MorinaF.ErgünU.HysaE.2021. “Understanding Drivers of Renewable Energy Firm’s Performance.”Environmental Research, Engineering and Management77 (3): 32–49. doi:10.5755/j01.erem.77.3.29230.
45.
NevesM.E.HenriquesC.VilasJ.2019. “Financial Performance Assessment of Electricity Companies: Evidence from Portugal.”Operational Research, 21 (4): 2809–57. doi:10.1007/s12351-019-00504-1.
46.
PhanD.H.B.TranV.T.NguyenD.T.LeA.2020. “The Importance of Managerial Ability on Crude Oil Price Uncertainty-Firm Performance Relationship.”Energy Economics88: 104778. doi:10.1016/j.eneco.2020.104778.
47.
PopescuC.GheorghiuS.A.2021. “Economic Analysis and Generic Algorithm for Optimizing the Investments Decision-Making Process in Oil Field Development.”Energies14 (19): 6119. doi:10.3390/en14196119.
48.
RiedelN.SimmlerM.2021. “Large and Influential: Firm Size and Governments’ Corporate Tax Rate Choice.”Canadian Journal of Economics54 (2): 812–39. doi:10.1111/caje.12510.
49.
Ríos-OcampoJ.P.Arango-AramburoS.LarsenE.R.2021. “Renewable Energy Penetration and Energy Security in Electricity Markets.”International Journal of Energy Research45 (12): 17767–83. doi:10.1002/er.6897.
50.
SarnoL.TaylorM.P.ChowdhuryI.2004. “Nonlinear Dynamics in Deviations from the Law of One Price: A Broad-Based Empirical Study.”Journal of International Money and Finance23 (1): 1–25. doi:10.1016/j.jimonfin.2003.10.004.
51.
ShahI.H.HilesC.MorleyB.2018. “How Do Oil Prices, Macroeconomic Factors and Policies Affect the Market for Renewable Energy?”Applied Energy215: 87–97. doi:10.1016/j.apenergy.2018.01.084.
52.
TailabM.2014. “The Effect of Capital Structure on Profitability of Energy American Firms.”International Journal of Business and Management Invention ISSN3 (12): 54–61.
53.
TaylorM.P.PeelD.A.SarnoL.2001. “Nonlinear Mean Reversion in Real Exchange Rates: Towards a Solution to the Purchasing Power Parity Puzzles.”International Economic Review42 (4): 1015–42.
54.
UribeJ.M.ChuliáH.GuillénM.2017. “Uncertainty, Systemic Shocks and the Global Banking Sector: Has the Crisis Modified Their Relationship?”Journal of International Financial Markets, Institutions and Money50: 52–68. doi:10.1016/j.intfin.2017.09.027.
55.
UromC.MzoughiH.NdubuisiG.GuesmiK.2022. “Directional Predictability and Time-Frequency Spillovers Among Clean Energy Sectors and Oil Price Uncertainty.”The Quarterly Review of Economics and Finance85: 326–41. doi:10.1016/j.qref.2022.04.005.
56.
VătavuS.LobontO.R.ParaI.PelinA.2018. “Addressing Oil Price Changes Through Business Profitability in Oil and Gas Industry in the United Kingdom.”PLoS One13 (6): e0199100. doi:10.1371/journal.pone.0199100.
57.
Wieczorek-KosmalaM.BłachJ.Gorzeń-MitkaI.2021. “Does Capital Structure Drive Profitability in the Energy Sector?”Energies14 (16): 1–15. doi:10.3390/en14164803.
58.
WintokiM.B.LinckJ.S.NetterJ.M.2012. “Endogeneity and the Dynamics of Internal Corporate Governance.”Journal of Financial Economics105 (3): 581–606. doi:10.1016/j.jfineco.2012.03.005.
59.
WoodS.N.2017. “Generalized Additive Models: An Introduction with R,” In Generalized Additive Models: An Introduction with R, edited by S.N.Wood, 2nd ed.New York: Chapman & Hall/CRC. doi:10.1201/9781315370279.
60.
WuX.WangY.2021. “How Does Corporate Investment React to Oil Prices Changes?” Evidence from China. Energy Economics97: 105215. doi:10.1016/j.eneco.2021.105215.
61.
XiaoY.YinH.MoonJ.J.2023. “Coping with Externally Imposed Energy Constraints: Competitiveness and Operational Impact of China’s Top-1000 Energy-Consuming Enterprises Program.”The Energy Journal44 (2): 103–38. doi:10.5547/01956574.44.2.yxia.
62.
YaoF.MüllerH.G.CliffordA.J.DuekerS.R.FollettJ.LinY.BuchholzB.A.VogelJ.S.2003. “Shrinkage Estimation for Functional Principal Component Scores with Application to the Population Kinetics of Plasma Folate.”Biometrics59 (3): 676–85. doi:10.1111/1541-0420.00078.
63.
YaoF.MüllerH.G.WangJ.L.2005. “Functional Data Analysis for Sparse Longitudinal Data.”Journal of the American Statistical Association100 (470): 577–90. doi:10.1198/016214504000001745.
64.
YazdanfarD.2013. “Profitability Determinants Among Micro Firms: Evidence from Swedish Data.”International Journal of Managerial Finance9 (2): 151–60. doi:10.1108/17439131311307565.
Supplementary Material
Please find the following supplemental material available below.
For Open Access articles published under a Creative Commons License, all supplemental material carries the same license as the article it is associated with.
For non-Open Access articles published, all supplemental material carries a non-exclusive license, and permission requests for re-use of supplemental material or any part of supplemental material shall be sent directly to the copyright owner as specified in the copyright notice associated with the article.
