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Has Shell’s Debt Position Improved?

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Shell’s debt compared to its peers

Royal Dutch Shell’s (RDS.A) net-debt-to-adjusted EBITDA ratio stood at 1.3x in the second quarter, below the average industry ratio of 1.5x. The industry average includes 13 integrated energy companies worldwide.

In the second quarter, Shell’s total-debt-to-total-capital ratio stood at 29.0%, again below the industry average of 33.0%. ExxonMobil (XOM), Chevron (CVX), and BP (BP) reported total-debt-to-total-capital ratios of 18.0%, 20.0%, and 37.0%, respectively.

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Shell’s debt trend

Shell’s net debt has fallen from $66.0 billion in the second quarter of 2017 to $61.0 billion in the second quarter, excluding debt-related derivative financial instruments. This was led by a $10.0 billion YoY (year-over-year) fall in total debt, and it was partially offset by a $5.0 billion YoY fall in cash and equivalents during this period. Shell’s total debt stood at $80.0 billion, and its cash stood at $19.0 billion in the second quarter.

Shell’s TTM (trailing-12-months) EBITDA has risen steeply from the second quarter of 2017 to the second quarter. With the fall in its net debt and the increase in its EBITDA, Shell’s net-debt-to-EBITDA ratio fell from 1.8x in the second quarter of 2017 to 1.3x in the second quarter.

What does Shell’s debt analysis suggest?

Shell’s (RDS.A) net-debt-to-EBITDA ratio and total debt-to-capital ratio stood below its peers’ averages, which is a comfortable position for the company. Shell’s net-debt-to-EBITDA ratio has declined in the past four quarters.

Shell saw a $10.0 billion year-over-year reduction in its total debt level, reflecting Shell’s commitment to its chief priority—debt reduction. This is a favorable scenario for the company.

Going forward, Shell’s robust upstream projects pipeline, discussed earlier in this series, is expected to enhance its hydrocarbon production. At the same time, oil prices have been trending higher year-over-year in the second half of the year. This could lead to an increase in Shell’s upstream earnings and cash flows for the rest of the year. If Shell reports a cash flow surplus, the company could utilize its surplus cash to repay debt, further strengthening its financial position.

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