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Common Factors in the Profitability of Energy Firms

Author

Listed:
  • Orlando Joaqui-Barandica
  • Diego F. Manotas-Duque
  • Jorge M. Uribe

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. JEL Classification: Q43, O16, G32

Suggested Citation

  • Orlando Joaqui-Barandica & Diego F. Manotas-Duque & Jorge M. Uribe, 2025. "Common Factors in the Profitability of Energy Firms," The Energy Journal, , vol. 46(2), pages 171-200, March.
    • Handle: RePEc:sae:enejou:v:46:y:2025:i:2:p:171-200
    DOI: 10.1177/01956574241280779
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    Keywords

    dynamic factors; commodity markets; generalized additive models; sparse data; functional principal components; renewable energy; oil and gas;
    All these keywords.

    JEL classification:

    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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