Rising interest rate scenario
Rating agencies are bearish about companies operating with a high production mix in crude oil. Any additional downgrade of upstream stocks means stiffer rules for borrowing and a higher cost for debt raising. In a rising interest rate scenario, it can hurt upstream companies’ financials.
The current scenario signals that crude may remain below $40 for the next year. The break-even cost for US crude oil producers is ~$36.20. The costs only include the capital expenditure and operational expenditure. Rystad Energy compiled the data. It published the data on November 23, 2015.
Weighted average cost of debt
Upstream companies have a weighted average cost of debt of around 2.9%. This is the highest among the Energy Select Sector SPDR ETF’s (XLE) subindustries. Upstream operators like Chesapeake Energy (CHK) and Range Resources (RRC) have weighted average costs of debt around 3.4% and 3.3%, respectively. On the extreme side, Pioneer Natural Resources (PXD) and Noble Energy (NBL) have weighted average costs of debt around 2.1% and 1.3%, respectively.
Integrated oil and gas have the lowest cost of debt at around 1.8%. It’s followed by the oil and gas equipment and services segment. Integrated companies ExxonMobil (XOM), Chevron (CVX), and Occidental Petroleum (OXY) have a cost of debt around 1.3%, 1.6%, and 2.5%, respectively. Integrated oil and gas have a weight of 35.4% in XLE.
In the next part, we’ll discuss different countries’ break-even cost for producing crude oil.