Andeavor’s net debt-to-EBITDA (earnings before interest, tax, depreciation, and amortization) ratio stood at 3.3x in 2Q17, higher than the industry average of 2.4x. The ratio shows a company’s leverage level as a multiple of its earnings. The industry average was based on seven American refining companies’ ratios.
In 2Q17, Andeavor’s total debt-to-capital ratio stood at 38%, above the industry average of 35%. The debt-to-capital ratio shows the percentage of debt in a company’s capital structure. Peers Marathon Petroleum (MPC), Valero Energy (VLO), and Phillips 66 (PSX) have total debt-to-capital ratios of 38%, 29%, and 30%, respectively.
Andeavor’s leverage curve
Andeavor’s net debt-to-EBITDA ratio rose from 0.9x in 2Q15 to 3.3x in 2Q17. Let’s look at its net debt trends.
In 2Q17, Andeavor’s net debt more than doubled from 2Q15 and reached $6.6 billion. Its net debt rose due to steeper growth in total debt than in cash. Andeavor’s debt has risen sharply in the past few quarters due to its growth activities, volatile earnings, and the acquisition of Western Refining. Its total debt and cash stood at $7.6 billion and $1.0 billion in 2Q17, respectively.
Its EBITDA fell between 2Q15 and 2Q17 because of a volatile refining environment. Higher net debt coupled with lower EBITDA resulted in a steep surge in Andeavor’s net debt-to-EBITDA ratio.
What does Andeavor’s leverage analysis suggest?
Andeavor’s leverage ratios stand higher than the industry average, placing it in an uncomfortable situation. Due to its growth plans and the volatile refining margin environment, the company has boosted its leverage, which should result in improved earnings in the near future.
The acquisition of Western Refining is expected to benefit Andeavor in the form of higher capacities, operational synergies, and midstream portfolio growth. As of August 8, 2017, Andeavor had achieved $80 million in annual run-rate synergies from the acquisition. The company expects to achieve $350 million–$425 million in annual synergies from the acquisition by June 2019. If the integration is successful and the refining environment improves, Andeavor could witness a growth in its earnings, leading to an improvement in its leverage position.