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Chevron Revitalizing with Improving Financials, Outperforms SPY

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Part 8
Chevron Revitalizing with Improving Financials, Outperforms SPY PART 8 OF 13

Is Chevron’s Leverage Trend Reversing?

Chevron’s leverage position compared to its peers

So far in this series, we’ve analyzed various market performance parameters relating to Chevron (CVX) stock. Now, we’ll review the company’s financial position, beginning with its leverage.

Chevron’s net debt-to-adjusted EBITDA1 ratio stood at 1.8x in 2Q17, below the average industry ratio of 2.0x. The industry average takes into account 12 integrated energy companies worldwide.

Is Chevron’s Leverage Trend Reversing?

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Another parameter to compare leverage is the total-debt-to-total-capital ratio. In 2Q17, CVX’s total-debt-to-total-capital ratio held at 23%, below the industry average of 36%. 

Comparatively, ExxonMobil (XOM), Royal Dutch Shell (RDS.A), and BP (BP) had ratios of 18%, 32%, and 39%, respectively. For further details, you can refer to Integrated Energy Companies and Their Leverages in 2Q17.

Analyzing Chevron’s leverage trend

CVX’s net debt-to-adjusted-EBITDA ratio increased from 0.6x in 2Q15 to a high of 2.9x in 3Q16 before settling at 1.8x in 2Q17. Before examining the trend, let’s understand the net debt trend.

Chevron’s net debt rose from $19 billion in 2Q15 to ~$38 billion in 2Q17 due to an increase in total debt coupled with a fall in cash and equivalents. Its total debt rose 34% over 2Q15 to ~$43 billion in 2Q17. The increase in total debt was due to capex activities, volatile earnings, and dividend payments. Cash and equivalents (including marketable securities) fell 62% over 2Q15 to ~$5 billion in 2Q17.

CVX’s adjusted EBITDA fell from 2Q15 to 2Q17 due to lower earnings in Chevron’s (CVX) Upstream segment. The drop in adjusted EBITDA along with an increase in net debt from 2Q15 to 2Q17 led to an increase in Chevron’s net debt-to-adjusted-EBITDA multiple.

What does Chevron’s leverage analysis imply?

CVX’s total-debt-to-capital ratio is the second-lowest among its peers, placing it in a comfortable leverage position. This provides Chevron with financial strength and flexibility to handle difficult financial stretches.

Also, CVX’s net debt-to-EBITDA ratio has declined in the past few quarters. This trend was due to the rise in oil prices, which led to a surge in its Upstream segment’s earnings.

If oil prices rise and Chevron implements its financial strategy of reducing costs, optimizing capex, and divesting non-core assets as planned, Chevron could see a further fall in its net debt-to-EBITDA ratio. This trend would be more likely if the company focuses on its robust Upstream portfolio and the strength of its Downstream portfolio, 

  1. earnings before interest, tax, depreciation, and amortization
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