How Did Shell’s BG Group Acquisition Affect Its Leverage?


Jun. 23 2016, Updated 11:04 a.m. ET

Shell’s leverage position

Royal Dutch Shell’s (RDS.A) net debt-to-adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) ratio rose from 0.7x in 1Q14 to 2.7x in 1Q16. This was led by a fall in its adjusted EBITDA coupled with a rise in its net debt. Shell’s net debt surged in 1Q16, mainly due to its acquisition of BG Group.

Shell’s net debt almost doubled over 1Q14 to $70 billion in 1Q16. This was led by a 77% rise in its total debt over 1Q14 to $81 billion in 1Q16. Its cash fell by 8% over 1Q14 to $11 billion in 1Q16.

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Impact of BG acquisition on Shell’s leverage

Shell had high cash levels in 4Q15 in order to fund the cash portion of its BG acquisition deal. Following the acquisition, Shell’s cash fell from ~$32 billion in 4Q15 to ~$11 billion in 1Q16.

Shell’s total debt rose from ~$58 billion in 4Q15 to ~$81 billion in 1Q16. In this way, Shell’s net debt surged from ~$26 billion in 4Q15 to ~$70 billion in 1Q16.

Peer comparison

Shell’s net debt-to-adjusted EBITDA ratio is in line with the industry average. This average considers 12 integrated energy companies worldwide, including Norwegian company Statoil (STO), Argentinian company YPF (YPF), and China’s PetroChina (PTR). The iShares Russell 1000 Value ETF (IWD) has ~14% exposure to energy sector stocks.

Going forward, what will Shell’s leverage depend on?

Shell’s net debt will mainly depend on its ability to repay its debt. According to Shell’s management, “There’s no change to the priorities for cash flow that we set following the announcement of the BG acquisition. Reducing debt. Paying dividends, followed by a balance of capital investment and share buy backs.”

If oil prices strengthen, the company’s cash flow position will likely improve. By then, operational synergies from the BG acquisition and cost reduction initiatives will probably also have yielded results.

So, Shell’s leverage will also depend on the direction of crude oil prices coupled with the success of its BG integration in terms of estimated operational synergies.


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