Brexit impacts crude oil prices
Since the United Kingdom voted to exit the EU (European Union), there could be many implications on oil prices. First, there could be concerns about the United Kingdom and EU’s oil consumption even as markets remain uncertain about their respective economic growth.
More importantly, investors will also be concerned about the impact on the United Kingdom and EU currencies as well as the US dollar. This will impact oil prices.
The referendum on June 23 caused the dollar to rise. Needless to say, a stronger dollar put pressure on crude oil prices. The strong dollar makes dollar-priced commodities such as oil less appealing to foreign investors. The referendum also caused US stocks to fall. This series will focus on what could be good upstream energy stock to add to your portfolio after Brexit.
Amid weak crude oil prices, investors will opt for companies that weren’t deeply impacted by low oil prices. Crude oil prices fell in late 2014. They fell to multiyear lows in early 2016.
Also, the volatile energy price environment made financial flexibility essential to survive. A strong balance sheet is critical. Concho Resources (CXO) is one company that managed its leverage well. Concho Resources’ net debt stands at ~$3 billion and its debt-to-adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) ratio is 1.7x. The lower ratio is mainly due to the fact that, unlike many upstream companies, Concho Resources didn’t use debt to fuel production growth. Since 2007, the company maintained its average leverage ratio under 2x.
Meanwhile, upstream peer Chesapeake Energy (CHK) is struggling with a debt load of ~$10 billion and a leverage ratio of 4.8x. Chesapeake Energy and Concho Resources make up ~0.8% of the iShares Global Energy ETF (IXC).