Does BP Have a Comfortable Debt Position?


Dec. 4 2018, Updated 10:31 a.m. ET

BP’s debt position compared to its peers’

In this article, we’ll review BP’s (BP) debt position. Let’s start by looking at its debt position compared to its peers’.

BP’s total debt-to-capital ratio stood at 38% in the third quarter, higher than the industry average of 32%. The industry average considers 13 integrated energy companies worldwide. ExxonMobil (XOM), Royal Dutch Shell (RDS.A), and Chevron’s (CVX) ratios stood at 17%, 28%, and 19%, respectively, in the quarter.

Another parameter with which we can compare debt is the net debt-to-adjusted EBITDA ratio. BP’s net debt-to-adjusted EBITDA ratio stood at 1.1x in the third quarter, below the average industry ratio of 1.2x.

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BP’s net debt-to-adjusted EBITDA trend

BP’s net debt-to-adjusted EBITDA ratio fell from 1.5x in the third quarter of 2017 to 1.1x in the third quarter of 2018. BP’s net debt fell 4.5% year-over-year to $38.0 billion in the third quarter due to a fall in its total debt coupled with a rise in its cash and equivalents. From the third quarter of 2017 to the third quarter of 2018, its adjusted trailing-12-month EBITDA rose.

A rise in EBITDA coupled with fall in net debt led to a decline in the company’s net debt-to-adjusted EBITDA ratio.

So, what does a debt analysis reveal?

BP’s net debt-to-adjusted EBITDA ratio stood below the industry average. The fall in its net debt-to-adjusted EBITDA ratio was also a positive sign, as it showed an improvement in the company’s debt position. Still, BP needs to cover more ground to reach a comfortable place.

To be specific, BP’s total debt-to-capital ratio still stands above the average, showing that the company has higher debt in its capital structure than its peers—meaning its peers are better placed to handle tough times. Thus, BP will have to focus on reducing its total debt level, a key factor that investors will monitor closely.

In the next and final article, we’ll look at BP’s cash flow position.


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