Chevron’s leverage position compared to peers
Until now, we’ve discussed Chevron’s (CVX) market performance and done a fundamental analysis of its business segment dynamics, growth plans, and operational performance. In this article, we’ll evaluate Chevron’s leverage position.
Chevron’s net debt-to-adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) ratio stood at 2.6x in 3Q16. CVX’s ratio was marginally higher than the average industry ratio of 2.5x.
The industry average considers 13 integrated energy companies worldwide, including Canadian Suncor Energy (SU), Italian Eni (E), French Total (TOT), American ExxonMobil (XOM), Chinese PetroChina (PTR), Argentine YPF (YPF), and Brazilian Petrobras (PBR). For global stock exposure, you may be interested in the Vanguard Total World Stock ETF (VT).
In 3Q16, CVX’s total debt-to-capital ratio stood at 23.7%. This ratio was below the industry average of 37%.
Analyzing Chevron’s leverage
Chevron’s net debt-to-adjusted EBITDA ratio rose from 0.22x in 3Q14 to 2.6x in 3Q16. Before analyzing this rise in this ratio, let’s first understand the net debt trend.
Chevron’s net debt rose from $11.2 billion in 3Q14 to $37.9 billion in 3Q16. This was due to a rise in its total debt coupled with a fall in its cash and cash equivalents. CVX’s total debt rose a steep 77% over 3Q14 to $45.6 billion in 3Q16 to fund capital expenditure, pay dividends, and buy back shares until 2014. CVX’s cash and cash equivalents, including marketable securities, fell 47% over 3Q14 to $7.7 billion in 3Q16.
CVX’s adjusted EBITDA fell from 3Q14 to 3Q16 due to lower earnings in the company’s Upstream segment. The fall in CVX’s adjusted EBITDA along with the rise in its net debt from 3Q14 to 3Q16 led to a rise in its net debt-to-adjusted EBITDA multiple.
What does Chevron’s leverage analysis suggest?
CVX’s total debt-to-capital ratio is the second-lowest among its peers, placing it in a comfortable leverage position. This should provide Chevron with the financial strength and flexibility to handle difficult times.
However, CVX’s net debt-to-EBITDA ratio crossed the industry average in 3Q16. Going forward, the ratio will be dependent on its level of earnings, which will, in turn, depend on the level of oil prices. Better oil prices will likely bring the ratio below the industry average. For more on oil prices, read Crude Oil Makes New 2016 Highs: Following Oil-Weighted Stocks.