How Is BP’s Leverage Curve Trending?



BP’s leverage position compared to its peers

After discussing BP Plc’s (BP) stock performance, analyst ratings, and business segment dynamics, we’ll examine the company’s leverage position.

BP’s net debt-to-adjusted EBITDA[1. earnings before interest, tax, depreciation, and amortization] stood at 2.3x in 3Q16. This is lower than the average industry ratio of 2.4x. The industry ratio considers the average of 14 integrated energy companies worldwide, including Argentina-based YPF (YPF), France’s Total (TOT), PetroChina (PTR), US-based ExxonMobil (XOM), and Canada’s Suncor Energy (SU)

In 3Q16, BP’s total debt-to-capital ratio stood at 38.9%, higher than the industry average of 36%. The debt-to-capital ratio shows a firm’s leverage position and capital structure.

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

BP’s (BP) net debt-to-adjusted EBITDA ratio rose from 0.77x in 3Q14 to 2.3x in 3Q16. Before analyzing the increase in the ratio, let’s understand the net debt trend.

BP’s net debt has risen from $22.8 billion in 3Q14 to $33.4 billion in 3Q16. BP’s total debt rose from $53.6 billion in 3Q14 to $58.9 billion in 3Q16, whereas its cash and equivalents fell from $30.8 billion in 3Q14 to $25.5 billion in 3Q16.

On the other hand, from 3Q14–3Q16, BP’s adjusted EBITDA fell steeply. So, a rise in net debt coupled with a fall in EBITDA led to an increase in the net debt-to-EBITDA ratio. BP’s leverage ratio, or its net debt-to-adjusted EBITDA, has been consistently trending higher.

In the past few years, BP has been hammered with lower oil prices and the Gulf of Mexico oil spill charges. To maintain liquidity in such a situation, BP has resorted to fresh debt and other measures such as reducing costs and divesting non-core assets, which we discussed earlier in this series.

With a rising leverage position, we believe it’s crucial for BP to keep a check on its debt levels to maintain its financial strength and flexibility.

For exposure to integrated energy stocks, you can consider the iShares North American Natural Resources ETF (IGE), which has ~22% exposure to the sector.


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