uploads/2016/05/Leverage3.jpg

Why BP’s Leverage Ratio Is Trending Higher

By

Updated

BP’s leverage position compared to its peers’

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

BP’s net debt-to-adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) stood at 1.7x in 1Q16. This was lower than the industry average of 2.1x. The industry ratio considers an average of 12 integrated energy companies worldwide, including YPF (YPF), Total S.A. (TOT), PetroChina (PTR), and Suncor (SU). The Vanguard High Dividend Yield ETF (VYM) has ~11% exposure to energy sector stocks.

In 1Q16, BP’s total debt-to-capital ratio stood at 35.3%, higher than the industry average of 31.1%. The debt-to-capital ratio shows a company’s leverage position and capital structure.

Article continues below advertisement

BP’s leverage: Net debt-to-adjusted EBITDA rose

BP’s net debt-to-adjusted EBITDA ratio rose from 0.74x in 1Q14 to 1.7x in 1Q16. Before analyzing the rise in its ratio, let’s understand its net debt trend.

BP’s net debt rose to $30 billion from 1Q14 to 1Q16. This was due to a marginal rise in total debt coupled with fall in cash and cash equivalents during the period. BP’s total debt rose by 1% over 1Q14 to $54 billion in 1Q16, whereas its cash and cash equivalents fell by 17% over 1Q14 to $23 billion in 1Q16.

On the other hand, from 1Q14 to 1Q16, BP’s adjusted EBITDA fell steeply. Thus, rising net debt coupled with falling EBITDA led to a rise in the company’s net debt-to-EBITDA ratio.

BP’s net debt-to-adjusted EBITDA has been consistently trending higher. BP will likely have to restrict further increases to an ascertained limit so as to not strain its financial flexibility and to maintain its strength as a company.

Advertisement

More From Market Realist