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Assessing BP’s Debt Position

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Dec. 4 2020, Updated 10:53 a.m. ET

Comparing BP’s debt position with peers’

In this part, we’ll assess whether BP’s (BP) debt position has improved. Let’s begin by looking at how BP’s debt position compares with peers’. In the second quarter, BP’s total debt-to-capital ratio was 37%, higher than the industry average of 33%. The industry average considers 13 integrated energy companies worldwide.

In comparison, ExxonMobil (XOM), Royal Dutch Shell (RDS.A), and Chevron’s (CVX) ratios were 18%, 29%, and 20%, respectively. Meanwhile, BP’s net debt-to-adjusted EBITDA ratio was 1.2x in the second quarter, below the average industry ratio of 1.5x.

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BP’s net debt-to-adjusted EBITDA trends

In the second quarter, BP’s net debt-to-adjusted EBITDA ratio fell YoY from 1.7x to 1.2x, and its net debt decreased to $38.2 billion due to its total debt falling more steeply than its total cash. However, BP’s adjusted trailing-12-month EBITDA rose YoY in the second quarter. Therefore, its net debt-to-adjusted EBITDA ratio decline was likely due to its EBITDA rising and its net debt falling.

In a nutshell

Although BP’s total debt-to-capital ratio was above average in the second quarter, its net debt-to-EBITDA ratio was below average. The fall in its net debt-to-EBITDA ratio is a positive sign, as is the YoY decline in its total debt. BP’s debt position seems to be improving.

Going forward, higher earnings could result in surplus cash for BP, which it could use to repay debt. If BP maintains its debt-reduction focus, its debt could fall further this year. In the next part, we’ll conclude this series by looking at BP’s cash flow.

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