Chevron may face liquidity crunch as debt grows



Chevron’s debt

We discussed Exxon Mobil Corporation (XOM), the integrated energy giant, in the previous section. Next, let’s see why Chevron Corporation (CVX) may be facing a liquidity crunch.

Chevron Corporation (CVX) is a California-based integrated energy company. It engages in petroleum, chemicals, and power and energy operations in the United States and in international markets. The company performs upstream and downstream operations.

Royal Dutch Shell (RDS.A) is another international integrated energy major. CVX makes up 15.7% of the Energy Select Sector SPDR ETF (XLE) and 12.1% of the Vanguard Energy ETF (VDE).

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How has Chevron’s debt structure changed?

From 4Q09 to 4Q14, Chevron Corporation’s (CVX) total long-term borrowing increased 137%. Long-term borrowings are repaid over more than one year. Its debt level has increased significantly in recent quarters. From 4Q13 to 4Q14, its net debt, or long-term and short-term debt less cash reserves, increased 272%, to $14.6 billion.

Various debt ratios and cash reserves

Net debt-to-EBITDA (earnings before interest, taxes, depreciation, and amortization) ratio currently stands at 0.40x. Net debt-to-EBITDA is a measurement of leverage, which indicates a company’s ability to repay debt. The lower the ratio, the better it is for the financial health of a company. EBITDA is also a measure of profit.

For a considerable period from 2010 to 2013, Chevron’s (CVX) net debt was negative. This was due to very high cash reserves. CVX’s cash and marketable securities averaged $16 billion from 2010 to 2013. Its long-term borrowings averaged $11.8 billion during the same period.

Chevron’s debt-to-capitalization stands at ~14% as of 4Q14, an increase from 7.6% in 4Q09. Total capital includes the company’s debt and shareholders’ equity. A higher ratio indicates a company’s reduced financial flexibility and increased risk of insolvency.

Chevron raises debt

On February 24, 2015, Chevron Corporation (CVX) sold $6 billion in bonds. This included $1.75 billion of 1.96% five-year notes. The proceeds from the issuance of bonds will be used to refinance short-term borrowings. Yield for these notes was 50 basis points higher than the similar maturity Treasuries.

So which of the companies we’ve been looking at in this series is the most vulnerable to debt overload? Which one stands firm through deleveraging? Read the following section to know.


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