A Look at Andeavor’s Leverage Position in 4Q17
Andeavor’s leverage compared to its peers
Andeavor’s (NADV) leverage ratio, or its net debt-to-EBITDA,1 stood at 3.0x in 3Q17, higher than the average industry ratio of 2.1x. The industry average considers six American refining companies. This ratio shows a firm’s leverage level as a multiple of its earnings.
In 3Q17, ANDV’s total debt-to-capital ratio stood at 38.0%, which is higher than the industry average of 35.0%. The debt-to-capital ratio shows the percentage of debt in a firm’s capital structure.
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ANDV’s peers Marathon Petroleum (MPC), Valero Energy (VLO), and Phillips 66 (PSX) have total debt-to-capital ratios of 38.0%, 29.0%, and 30.0%, respectively. For further details on the peers’ leverage, please read Which Refiner Was in the Best Leverage Position in 3Q17?
Andeavor’s leverage curve
Andeavor’s (ANDV) net-debt-to-EBITDA ratio increased from 0.7x in 3Q15 to 3.0x in 3Q17. Before analyzing the increase in the ratio, let’s understand the net debt trend.
In 3Q17, Andeavor’s (ANDV) net debt more than doubled over 3Q15 to $7.1 billion. Its net debt rose due to an increase in total debt and a decline in cash.
ANDV’s debt has risen sharply in the past few quarters due to its growth activities, volatile earnings, and the acquisition of Western Refining. Andeavor’s total debt and cash stood at $7.6 billion and $0.5 billion in 3Q17, respectively.
Its EBITDA fell from 3Q15 to 3Q17 due to a volatile refining environment leading to lower earnings. So, a rise in its net debt coupled with a decline in its EBITDA led to a rise in ANDV’s net-debt-to-EBITDA ratio in 3Q17.
What does ANDV’s ratio trend imply?
ANDV’s leverage ratios stand higher than the industry average—not a comfortable situation. However, in 3Q17, ANDV’s net-debt-to-EBITDA ratio has declined despite the rise in ANDV’s net debt. This is due to higher earnings in the third quarter.
With ANDV’s growth activities, the company could see continued improvement in earnings. The addition of the Western Refining assets to ANDV’s overall portfolio resulted in larger capacities, ongoing operational synergies, and growth in its midstream portfolio.
The integration of Western Refining generated $110.0 million of synergies on an annual run-rate basis after the completion of its acquisition in 2Q17. ANDV expects around $350.0 million–$425.0 million of annual savings in the form of operational synergies by June 2019.
If ANDV’s earnings grow according to expectations, the company could see a continuing decline in its net-debt-to-EBITDA ratio, assuming stable net debt levels.
- earnings before interest, tax, depreciation, and amortization ↩