Assessing BP’s Debt Levels
BP’s debt position compared to its peers
In the previous article, we looked at BP’s (BP) segmental dynamics. In this article, we’ll look at BP’s debt position. Let’s begin by looking at BP’s debt position compared to its peers. BP’s total debt-to-capital ratio stood at 39% in 2Q17, higher than the peer average of 35%. The peer average recognizes 13 integrated energy companies worldwide.
ExxonMobil (XOM), Royal Dutch Shell (RDS.A), and Chevron (CVX) have ratios of 18%, 32%, and 23%, respectively. For further details, please read Integrated Energy Companies and Their Leverages in 2Q17.
Interested in BP? Don't miss the next report.
Receive e-mail alerts for new research on BP
Another parameter to compare debt is the net debt-to-adjusted-EBITDA1 ratio. BP’s net debt-to-adjusted-EBITDA ratio held at 1.7x in 2Q17, which is below the average industry ratio of 2.0x.
BP’s net debt-to-adjusted-EBITDA ratio grew from 1.1x in 2Q15 to 1.7x in 2Q17. BP’s net debt rose to $40.0 billion in 2Q17 due to growth in debt and a decrease in cash and equivalents in the stated period.
However, from 2Q15 to 2Q17, BP’s adjusted EBITDA fell. So, an increase in net debt coupled with a decline in EBITDA led to an increase in its net debt-to-adjusted EBITDA ratio. The multiple has consistently been trending higher, except for the past few quarters.
In a nutshell…
In the past few years, BP’s debt levels have risen due to lower oil prices and the charges related to the Gulf of Mexico oil spill. BP resorted to fresh debt to maintain liquidity in its system.
However, the turbulent scenario led to BP taking some concrete measures to increase its financial strength. BP’s net debt-to-adjusted-EBITDA ratio fell in the past few quarters as a result of these measures. Plus, improved oil prices supported financials.
In our view, if BP keeps its focus on sustaining and growing at lower oil price levels, its robust upstream portfolio and competitive downstream assets should allow it to improve its debt position.
- enterprise value to earnings before interest, tax, depreciation, and amortization ↩