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Does Shell Have a Comfortable Debt Position?

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May. 16 2019, Published 10:26 a.m. ET

Shell’s debt

Royal Dutch Shell’s (RDS.A) net debt-to-adjusted EBITDA ratio was 1.2x in the first quarter—in line with the average industry ratio of 1.2x. The industry average includes 11 integrated energy companies worldwide.

Another parameter is the total debt-to-total capital ratio. In the first quarter, Shell’s total debt-to-total capital ratio was 32%—below the industry average of 34%. BP (BP) and Total (TOT) had ratios of 43% and 33%, respectively.

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Shell’s debt trend

Shell’s net debt has risen from $66.1 billion in the first quarter of 2018 to $71.1 billion in the first quarter—excluding debt-related derivative financial instruments. The increase was led by an ~$4.5 billion YoY rise in the total debt and an ~$0.5 billion YoY fall in cash and equivalents during the stated period. The increase in the total debt was due to the adoption of the IFRS 16 leases standard. Now, lease contracts are recognized on the balance sheet through the right of use assets and lease liabilities. Shell’s total debt was $92.5 billion with $21.4 billion in cash in the first quarter.

Shell’s trailing 12-month EBITDA has risen steeply from the first quarter of 2018 to the first quarter. With the steeper rise in the EBITDA compared to an increase in the net debt, Shell’s net debt-to-EBITDA ratio fell from 1.5x in the first quarter of 2018 to 1.2x in the first quarter.

What does Shell’s debt analysis suggest?

Shell’s net debt-to-EBITDA ratio was in line with the peer average. The company’s total debt-to-capital ratio was below the peer average—a comfortable position. Shell’s net debt-to-EBITDA ratio fell in the past four quarters. In the first quarter, the company has seen cash outflows toward debt repayment, which reflects Shell’s commitment towards its main priority—debt reduction. The company’s debt position is improving.

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