Analysis of BP’s Leverage Trend


Jan. 20 2016, Updated 1:06 p.m. ET

BP’s leverage position compared to peers

Until now, we’ve discussed BP’s (BP) stock performance, analyst ratings, and business segment dynamics. In this part, we’ll examine the leverage position of the company.

BP’s adjusted net debt-to-EBITDA (earnings before interest, tax, depreciation, and amortization) ratio stood at 1.2x in 3Q15. This ratio shows a company’s leverage position as a multiple of its earnings. BP’s EBITDA has been adjusted for its Gulf of Mexico oil spill charges.

BP has levied a pretax charge of $11.9 billion in the trailing four quarters, of which the biggest charge of $10.8 billion was in 2Q15. The catastrophic oil spill event that occurred in the Gulf of Mexico in 2010 caused enormous damage to the natural habitat in the region.

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BP’s adjusted net debt-to-EBITDA is higher than those of its peers ExxonMobil (XOM), Chevron (CVX), and Royal Dutch Shell (RDS.A), which stands at 0.93x. In 3Q15, BP’s total debt-to-capital ratio stood at 35.9%, higher than the peer average of 20%. The debt-to-capital ratio shows a company’s leverage position and capital structure.

BP’s leverage: Net debt-to-EBITDA rising

BP’s net debt-to-EBITDA ratio rose from 0.44x in 3Q13 to 1.2x in 3Q15. Before analyzing the rise in the ratio, let’s understand the net debt trend.

BP’s net debt has risen to $25 billion from 3Q13 to 3Q15. This is due to a steeper rise in its total debt compared to its rise in cash and equivalents during the period. The company’s total debt has risen by 14% over 3Q13 to $57 billion, whereas cash and cash equivalents have risen by 7% over 3Q13 to $32 billion.

On the other hand, from 3Q13 to 3Q15, adjusted EBITDA has been falling. Rising net debt coupled with falling EBITDA led to a rise in the net debt-to-EBITDA ratio. With the energy industry experiencing lower oil prices, it will be imperative to note how the leverage curves of integrated energy companies such as BP shape up in the future.

The SPDR S&P Oil & Gas Exploration & Production ETF (XOP) has 7% exposure to integrated energy sector stocks.


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