THE EFFECT OF HEDGING ON THE VALUE OF U.S. OIL AND GAS PRODUCERS

This paper evaluates the effect of hedging on the values of 42 U.S. oil and gas producing firms from 2002 to 2006. We use a unique hand-collected data set on all linear and nonlinear hedging positions of these firms. In contrast to recent studies, we find that hedging oil price risk using nonlinear instruments, such as options, increases the value of the firm. Linear hedging contracts have little (oil contracts) or negative (gas contracts) effect on firm valuation. In addition, we find that energy price volatility negatively affects firm valuation, but has little influence on the relation between hedging activities and the value of the firm.