Integrated Energy Companies and Their Leverages in 2Q17
So far in this series, we’ve done a cross sectional analysis of the market performances of integrated energy stocks ExxonMobil (XOM), Chevron (CVX), Royal Dutch Shell (RDS.A), and BP (BP). We reviewed their stock performances and moving average crossovers. We also looked at their stock price forecast ranges based on their implied volatilities. We looked at analyst ratings for the stocks, dividend estimates, institutional ownership changes, and peer valuations.
Now let’s switch to a financial analysis, beginning with leverage position.
Interested in CVX? Don't miss the next report.
Receive e-mail alerts for new research on CVX
Leverage changes for integrated energy companies
Integrated energy companies ExxonMobil (XOM), Chevron (CVX), Royal Dutch Shell (RDS.A), and BP (BP) have seen steep rises in their debt levels in the past few years due to oil price volatility. However, as oil prices have recovered, earnings have also started to improve.
These companies are making a conscious effort to keep their debt levels in check, which was apparent in their 2Q17 performances. XOM and CVX witnessed a fall in their net debt levels of 2.0% and 1.0%, respectively, in 2Q17 over 1Q17. Shell’s net debt fell steeply by 8.0% QoQ (quarter-over-quarter) in 2Q17. However, BP saw a rise in its net debt level of 3.0% QoQ in 2Q17. For more on BP’s leverage, please refer to What Happened with BP’s Leverage in 2Q17?
Moving to total-debt-to-total-capital ratio, ExxonMobil (XOM) was the lowest at 18.0%, whereas Chevron stood at 23.0%. That shows that XOM has lower debt in its capital structure than CVX, placing XOM in a rather comfortable leverage position. That’s because in a scenario of a shortage of funds, XOM can increase its debt levels and continue operations without the market getting too worried. However, Shell’s and BP’s leverage ratios stood at 32.0% and 39.0%, respectively, in 2Q17.
Higher total-debt-to-total-capital ratio implies a comparatively weaker balance sheet strength. That’s because in tough times, the company might find it difficult to repay debt, resulting in forced decisions such as divestments. The interest burden and debt-related covenants also might further impact a company’s financials and operations.