Is Shell’s Leverage Still Trending Higher?



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 0.5x in 3Q14 to 3x in 3Q16. This rise was due to a fall in the company’s 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.

In 3Q16, Shell’s net debt more than doubled compared to 3Q14. This rise was led by a 128% rise in Shell’s total debt, and it was partly offset by a 5% rise in the company’s cash and equivalents in 3Q16 compared to 3Q14. The huge rise in Shell’s debt level was due to its acquisition of BG Group.

Following the acquisition of BG Group, Shell’s cash fell from ~$32 billion in 4Q15 to ~$11 billion in 1Q16. However, its cash reserves recovered to $20 billion in 3Q16. 

Shell’s total debt also rose from ~$58 billion in 4Q15 to ~$98 billion in 3Q16. Thus, Shell’s net debt surged from ~$26 billion in 4Q15 to ~$78 billion in 3Q16.

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Peer comparison

Shell’s net debt-to-adjusted EBITDA ratio is higher than the industry average of 2.5x. This average considers 13 integrated energy companies worldwide, including Norwegian company Statoil (STO), Argentinian company YPF (YPF), and Chinese company PetroChina (PTR). For exposure to international stocks, you can consider the Vanguard FTSE All-World ex-US ETF (VEU).

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

Going forward, Shell’s net debt will primarily depend on its ability to repay its debt. According to Simon Henry, Shell’s chief financial officer, “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.”

Shell’s debt repayment capacity will also depend on crude oil’s price level and the success of the company’s integration of BG Group in terms of operational synergies. If oil prices improve, Shell’s cash flows should be healthier. If integration synergies materialize as estimated, Shell’s cash flows should also see a boost.


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