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Shell’s Leverage Trend: A Roller Coaster Ride

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Jan. 20 2016, Updated 1:04 a.m. ET

Shell’s leverage position compared to peers

We’ve already looked at Royal Dutch Shell’s (RDS.A) stock performance, analyst ratings, and business segment dynamics. In this part, we’ll examine the company’s leverage position.

Shell’s net debt-to-EBITDA (earnings before interest, tax, depreciation, and amortization) stood at 0.64x in 3Q15. This is lower than the average ratio of 1.1x of its peers Exxon Mobil (XOM), BP (BP), and Chevron (CVX). This ratio shows a company’s leverage position as a multiple of its earnings. Normally, other things being equal, a lower ratio signifies a healthier leverage position and a better ability to repay debt.

In 3Q15, Shell’s total debt-to-capital ratio stood at 25.5%. This is higher than the peer average of 23.6% for XOM, BP, and CVX. Debt-to-capital ratio shows a company’s leverage position and capital structure.

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

Royal Dutch Shell’s (RDS.A) net debt-to-EBITDA ratio rose from 0.46x in 3Q13 to 0.64x in 3Q15. Before analyzing the rise in the ratio, let’s look at the net debt trend.

Shell’s net debt has risen marginally to $23.7 billion from 3Q13 to 3Q15. But net debt rose sharply in 4Q13 sequentially. This was due to a rise in total debt and a steep fall in cash levels. In 4Q13, Shell saw a steep rise in capex (capital expenditure) activities. Further, until 4Q14, net debt fell due to a rise in cash. Net debt again rose in 2015 due to a rise in total debt to $55 billion.

During the period of 3Q13 to 3Q15, EBITDA rose and fell due to crude oil prices, which affected Shell’s upstream segment earnings. However, with volatile net debt levels in the past two years, the net debt-to-EBITDA ratio has been on a roller coaster ride. The ratio has experienced back-to-back, up-and-down spells from 3Q13 to 3Q15. On an overall basis during this period, the ratio has risen to 0.64x. Since the ratio is lower than its peers, Shell is in a comfortable position.

The iShares US Energy ETF (IYE) has 43% exposure to integrated energy sector stocks.

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