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ExxonMobil’s Leverage Curve Trends Higher: What Does This Mean?

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ExxonMobil’s leverage position compared to its peers’

Until now we’ve discussed ExxonMobil’s (XOM) plans to exit the Bass Strait oilfields, its stock performance, its analyst ratings, and its business segment dynamics. In this part, we’ll examine the company’s leverage position.

ExxonMobil’s (XOM) net debt-to-adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) stood at 1.4x in 1Q16. This was lower than the industry average ratio of 2.6x.

The industry average ratio considers the average of 12 integrated energy companies worldwide, including Argentina’s YPF (YPF), France’s Total S.A. (TOT), China’s PetroChina (PTR), and Canada’s Suncor Energy (SU).

For exposure to larger companies, you can consider the iShares Core S&P 500 ETF (IVV). The ETF also has ~7% exposure to energy sector stocks.

In 1Q16, XOM’s total debt-to-capital ratio stood at 19.5%, lower than the industry average of 33%. The debt-to-capital ratio shows a company’s leverage position and capital structure.

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

ExxonMobil’s net debt-to-adjusted EBITDA ratio rose from 0.28x in 1Q14 to 1.4x in 1Q16. Before analyzing this rise in ratio, let’s understand the net debt trend.

XOM’s net debt rose from 1Q14 to 1Q16 to $38 billion. This was due to a rise in total debt coupled with fall in cash and cash equivalents during the period. The company’s total debt almost doubled over 1Q14 to $43 billion in 1Q16, whereas its cash and cash equivalents fell by 13% over 1Q14 to $4.8 billion in 1Q16.

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

ExxonMobil’s leverage ratio has been consistently trending higher. In such a scenario, ExxonMobil will have to restrict further increases to an ascertained limit so as not to strain its financial flexibility. A key factor investors will be watching is whether XOM will maintain its strength as a company.

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