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How Chevron’s Leverage Position Compares

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Chevron’s leverage position

In this part, we’ll evaluate Chevron’s (CVX) leverage position. Chevron’s net debt-to-adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) stood at 2.6x in 4Q16. Chevron’s ratio is above the average industry ratio of 2.1x. The industry average considers 13 integrated energy companies worldwide, including Suncor Energy (SU), Eni (E), Total (TOT), ExxonMobil (XOM), PetroChina (PTR), YPF (YPF), and Petrobras (PBR). For global stock exposure, you could consider the Vanguard Total World Stock ETF (VT). In 4Q16, Chevron’s total debt-to-capital ratio stood at 24%. This ratio is below the industry average of 35%.

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Analyzing Chevron’s leverage

Chevron’s net debt-to-adjusted EBITDA ratio rose from 0.27x in 4Q14 to 2.6x in 4Q16. Before examining the higher ratio, let’s look at the net debt trend.

Chevron’s net debt rose from $14.6 billion in 4Q14 to $39.2 billion in 4Q16. This rise is because of an increase in total debt coupled with a fall in cash and equivalents. Total debt rose steeply by 66% to $46.2 billion between 4Q14 and 4Q16. The increase in total debt was to fund capex, pay dividends, and buy back shares. Cash and equivalents (including marketable securities) fell 47% to $7.0 billion between 4Q14 and 4Q16.

Chevron’s adjusted EBITDA fell between 4Q14 and 4Q16 because of lower upstream earnings. The decline in adjusted EBITDA along with a rise in net debt led to a higher net debt-to-adjusted EBITDA multiple.

What does Chevron’s leverage analysis suggest?

Chevron’s total debt-to-capital ratio is the second-lowest in its peer group, placing it in a comfortable leverage position. This position provides Chevron financial strength and flexibility to handle difficult times.

However, Chevron’s net debt-to-EBITDA ratio crossed the industry average in 4Q16. Going forward, the multiple will be subject to earnings dependent on oil prices. If oil prices improve, the ratio will likely break below the industry average. For more on oil prices, read Is It the Beginning of a Bear Market for Crude Oil?

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