What Happened with BP’s Leverage in 2Q17?



BP’s debt position

BP’s (BP) net-debt-to-adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) ratio stood at 1.7x in 2Q17—below the average industry ratio of 2.0x. The industry multiple considers the mean of 13 integrated energy companies globally, including YPF’s (YPF) 1.9x net-debt-to-adjusted EBITDA ratio, Suncor Energy’s (SU) 1.6x, PetroChina’s (PTR) 1.3x, and Imperial Oil’s (IMO) 1.7x.

Notably, ExxonMobil (XOM), Chevron (CVX), and Royal Dutch Shell (RDS.A) had net-debt-to-adjusted EBITDA ratios of 1.4x, 1.8x, and 1.8x, respectively, in 2Q17. In 2Q17, BP’s total-debt-to-capital ratio stood at 39%—higher than the industry average of 35%.

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BP’s net-debt-to-adjusted EBITDA ratio surges

BP’s net-debt-to-adjusted EBITDA multiple increased from 1.1x in 2Q15 to 1.7x in 2Q17. BP’s net debt rose from 2Q15 to 2Q17 to ~$40 billion due to a rise in total debt and a fall in cash and equivalents. In 2Q17, total debt rose 10% over 2Q15 to $63 billion, while its cash and equivalents fell 29% over 2Q15 to $23 billion.

From 2Q15 to 2Q17, BP’s adjusted EBITDA on trailing-12-month basis remained flat. The rise in net debt and no change in EBITDA led to an increase in the net debt-to-EBITDA ratio. BP’s leverage ratio had been consistently trending higher until the last few quarters.

What does BP’s leverage analysis suggest?

BP has felt the burn of weaker oil prices and charges related to its Gulf of Mexico oil spill. To maintain liquidity, BP has resorted to fresh debt, leading to a rise in its leverage. The tough situation has led BP to take some strict financial measures to keep its financial strength under check, which led to a decline in BP’s net-debt-to-adjusted EBITDA ratio.

That said, BP’s earnings have improved due to the rise in oil prices. If it stays on its aim to balance its cash flows at lower oil price points by maintaining its financial discipline and growing its segmental earnings and cash flows, BP could witness improvement in its leverage position.


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