Is Shell Achieving Its Priority of Reducing Debt?



Shell’s debt compared to peers

We reviewed Royal Dutch Shell’s (RDS.A) overall strategy in the previous part of this series. Now, we will look at its debt position and trend in this part. Shell’s net-debt-to-adjusted-EBITDA ratio stood at 1.8x in 2Q17, below the average industry ratio of 2.0x. The industry average takes into account 12 integrated energy companies worldwide.

Another parameter to compare leverage is the total-debt-to-total-capital ratio. In 2Q17, Shell’s total-debt-to-total-capital ratio held at 32%, below the industry average of 36%. In comparison, ExxonMobil (XOM), Chevron (CVX), and BP (BP) had ratios of 18%, 23%, and 39%, respectively. For more detail, read Integrated Energy Companies and Their Leverages in 2Q17.

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Shell’s debt trend

In 2Q17, Shell’s net debt more than doubled compared to 2Q15. This was led by a 71% rise in total debt coupled with an 11% fall in cash and equivalents in 2Q17 over 2Q15.

After the acquisition of the BG Group, Shell’s cash fell from ~$32 billion in 4Q15 to ~$11 billion in 1Q16. However, now the cash reserves have recovered to ~$24 billion in 2Q17. Also, Shell’s total debt rose from ~$58 billion in 4Q15 to highs of ~$98 billion in 3Q16. Now it has tapered down to ~$90 billion in 2Q17. Thus, Shell’s net debt, which surged from ~$26 billion in 2Q15 to ~$78 billion in 3Q16, has lowered to $66 billion, a positive sign.

What does Shell’s debt analysis suggest?

In the past few years, Shell faced the heat of lower oil prices. Plus, in such a scenario, the acquisition of the BG Group led to a steep upsurge in its debt levels. However, in the past few quarters, Shell’s net debt has fallen.

Thus, it is quite evident that Shell is successfully executing its priority of reducing debt. If Shell utilizes its four levers according to plan, then Shell could likely see a rise in its cash and a further fall in its debt, a favorable scenario for investors.


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