University of Texas Roundtable on The Role of Private Equity in the Financing and Restructuring of Oil and Gas Companies

In this second of two University of Texas roundtables, four highly successful veterans of the U.S. energy industry, with considerable experience running both public and private companies, discuss recent developments in this rapidly evolving industry. Among the most remarkable—and a major focus of this discussion—is the dramatic expansion of the output and productivity of the Permian Basin of West Texas, and the role of private equity in accomplishing it. Although the Permian has been a major source of oil and gas since 1920, the combination of massive horizontal drilling and hydraulic fracturing has contributed to a tripling of production volumes from about 800,000 barrels per day to 2.5 million during the past ten years. In fact, the productivity gains are said to be so great that, even with the huge run‐up in the cost of acquiring acreage (to as high as $40,000 per acre), today's producers are projecting annual operating returns of 20% even if oil prices fail to rise above their current level of about $50 a barrel. What's more, there appears to have been a fairly clear division of labor between private and public companies in this recent development of the Permian. With most of the high‐priced acreage now being acquired by larger public companies, the primary role of private equity has been to identify and make good on opportunities to increase the productivity and value of smaller operations that can then be sold to public companies—companies that have the size and access to capital to benefit from the economies of scale produced by combining them with their other operations. Thanks to their earlier position in the value chain, investments by private equity groups have generally not only produced higher payoffs, on average, but involved larger operating and financial risks. And this difference in risk profile is reflected in a notable difference in hedging practices between public and private equity‐controlled companies. This difference was summed up as follows by a private equity partner who has also run several public oil and gas companies: To a much greater extent in private equity than in public companies, we think of our projects and companies as delivering value that is largely independent of changes in oil prices. Hedging is our way of saying we don't want to take oil price risk if we don't have to. We do not count on price increases to make our required returns. The returns come from operating the company successfully without the help of commodity prices.     

How the Legal System Affects the Equity Mix in Executive Compensation

We examine variation in relative use of equity-based compensation (equity mix) across firms from different legal environments by studying 381 non-US firms from 43 countries during the 1996-2000 period. These firms are from countries that provide varying degrees of legal protection for shareholders. The data indicate association between equity mix and the degree of legal protection of shareholder rights. Specifically, firms use relatively more equity-based compensation if in a legal environment where shareholder rights are more strongly protected and where laws are more effectively enforced. These findings add to the literature demonstrating a relationship between institutional factors and financial decisions.     

Can behavioral nudges and incentives help lower-income households build emergency savings with tax refunds? Evidence from field and survey experiments

Tax refunds are an opportunity for lower-income households to accumulate emergency savings so they have cash on hand to cover expenses when income is insufficient. Our field experiments testing different behavioral interventions to encourage refund saving via online tax filing show small effect sizes (0.12–0.14) and a low aggregate savings rate (12%) that might be increased were filers to receive financial incentives. We test a key provision of the Refund to Rainy Day Saving and Financial Security Credit Acts using a survey experiment, finding that hypothetical refund saving jumps from 16% with no financial incentive, to 71% and 80% with 25% and 50% matches, respectively, findings which are mostly insensitive to refund size. Our results suggest that public policies to provide greater financial support—including stronger income supports—will better prepare lower-income households for financial emergencies than behavioral interventions to nudge refund saving.     

Measuring a contract's breadth: A text analysis

We use a computational linguistic algorithm to measure the topics covered in teacher contracts. Topic modeling metrics are used to assess a contract's expansiveness. Our topic, diversity measurement, is then related to the prevalence of support staff. If more specialized services are provided, then contracts should be broader as they cover more employment relationships. We confirm a strong, statistically significant relationship and, thus, have a valid measurement of contract breadth.     

Money matters: consumption variability across the income distribution

Using the Consumer Expenditure Survey, we document the level and variability of quarterly consumption across the socio-economic distribution. While the measurement of well-being is focused on income, the secular and policy discourse prioritises income-adequacy to meet family needs. This concern over income-adequacy centres on the capacity of families to predictably consume minimally acceptable levels of basic needs, and the social and economic mobility consequences of low consumption. Our results show a clear socio-economic and demographic gradient of lower consumption amid higher consumption variability for disadvantaged groups. Food, entertainment, and personal care goods and services exhibit relatively high levels of consumption variability among low-income households.     

Lead independent directors and accruals quality

We investigate the association between firms having a lead independent director (LID) who serves on the audit committee and accruals quality using a sample of 32,346 observations during 2001–2018 period. Our results suggest that firms with an LID who serves on the audit committee are associated with higher accruals quality. The results suggest that these firms are associated with an increase in accruals quality equal to 6.60% of the accruals quality metric's median value. We also find that as board size increases, the positive influence of an LID on accruals quality weakens—but only for firms with an LID who does not serve on the audit committee. Supplemental analyses indicate that our inferences still hold when using a changes model, when examining a firm's initial adoption or elimination of the LID position, and when using an entropy balancing approach.