uploads///COP Q Net Debt to EBITDA

Is ConocoPhillips’s Increased Debt Weighing on Its Earnings?


Nov. 20 2020, Updated 3:24 p.m. ET

ConocoPhillips’s debt

As of June 30, 2016, ConocoPhillips’s (COP) total debt stood at ~$28.7 billion. With ~$4.2 billion in cash and cash equivalents, COP’s net debt was ~$24.5 billion at the end of 2Q16.

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ConocoPhillips’s net debt-to-adjusted EBITDA

Net debt-to-adjusted-EBITDA (earnings before interest, tax, depreciation, and amortization) is a debt ratio that shows how many years it would take for a company to pay back its debt under its current situation.

As the above chart shows, as of 2Q16, COP’s net debt-to-adjusted EBITDA is very high at ~5.5x. When compared to its net debt-to-adjusted EBITDA historical average of ~1.9x, COP’s current net debt-to-adjusted EBITDA is much higher.

ConocoPhillips’s net debt-to-adjusted EBITDA trend

In 1H16, ConocoPhillips’s net debt-to-adjusted EBITDA ratio has increased from ~3.3x to ~5.5x. This increase in net debt-to-adjusted EBITDA ratio in 1H16 can be attributed to the ~9% increase in COP’s net debt to ~$24.5 billion as well as the ~34% decrease in its trailing-12-month adjusted EBITDA to ~$4.5 billion in the same period.

From 1Q14 to 2Q16, ConocoPhillips’s net debt-to-adjusted EBITDA ratio increased from ~0.7x to ~5.5x. This fast increase in net debt-to-adjusted EBITDA was driven by a steep rise in COP’s net debt and a steep fall in COP’s earnings. From 1Q14 to 2Q16, ConocoPhillips’s net debt rose from ~$13.5 billion to ~$24.5 billion, whereas its trailing-12-month adjusted EBITDA fell ~77%, from ~$19.1 billion to ~$4.5 billion, during the same period.

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Other upstream players

By comparison, upstream peers Diamondback Energy (FANG), Consol Energy (CNX), and EOG Resources (EOG) have net debt-to-adjusted EBITDA ratios of ~0.8x, ~5.1x, and ~2.5x respectively. The Energy Select Sector SPDR ETF (XLE) generally invests at least 95% of its total assets in oil and gas equities from the S&P 500.

ConocoPhillips’s adjusted EBITDA

In 2014, 2015, and 2016, COP reported before tax non-cash quarterly charges totaling ~$856 million, ~$2.3 billion, and ~$198 million, respectively, related to the impairment of its proved reserves. These quarterly impairment charges and other quarterly one-time charges are excluded to calculate quarterly adjusted EBITDA.

The above chart shows the net debt-to-adjusted EBITDA ratio calculated using these adjusted EBITDAs in trailing-12-month EBITDA calculations.

To learn more about how COP’s adjusted EBITDA got affected due to lower crude oil prices, please refer to Part 1 of this series. Continue to the next part for a look at COP’s debt load normalized to quarterly production.


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