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BP, CVX, RDS.A, XOM, SU, or TOT: Who Has More Financial Muscle?

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Jun. 21 2019, Published 10:14 a.m. ET

Integrated energy companies’ financial strength

Let’s evaluate six global integrated energy companies based on their debt and cash flow positions. We’ll start by ranking them on their total debt-to-total capital ratios in the first quarter of 2019.

ExxonMobil (XOM) tops the list with the lowest debt ratio of 17%, followed by Chevron (CVX) with an 18% ratio. Suncor Energy (SU), Royal Dutch Shell (RDS.A), and Total (TOT) have ratios of between 30% and 33%. BP (BP) has the highest debt ratio of ~43%. The ratio indicates the percentage of debt in a company’s capital structure. Thus, a lower debt ratio means better financial strength and the flexibility to handle tough business conditions.

Most companies saw rises in their debt in the first quarter due to the adoption of the new international financial reporting standards on leases, which came into effect on January 1, 2019.

All the above-mentioned companies’ cash flows from operations fell short in covering their combined capex and dividend outflows in the first quarter due to their weaker earnings in the quarter. XOM, CVX, SU, and Shell saw lower shortfalls, but TOT and BP saw higher shortfalls.

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Earnings growth in 2020

If we consider these companies’ earnings growth in 2020, ExxonMobil again tops the chart with 36% growth. Total’s and BP’s earnings are estimated to grow 21% and 19%, respectively, in the next year. Chevron’s and Shell’s earnings are expected to grow 17% each. Suncor is expected to have the lowest earnings growth of 6% in 2020.

Overall

ExxonMobil looks quite strong with the lowest debt percentage in its capital structure, a marginal cash flow shortfall, and the highest earnings growth rate for next year. It should be no surprise that the stock is trading at the highest forward PE multiple of 16.6x. Chevron also looks good with its debt ratio of 18% and its growth rate of 17% for 2020. Chevron has a slightly lower valuation of 15.5x.

Of the other stocks, BP has the highest debt on its balance sheet because of its capex and acquisitions, which could result in higher earnings for it in the future. As a result of its growth activities, BP stock is trading at a forward PE multiple of 11.1x, higher than Shell’s.

Suncor, Shell, and Total have high debt in their capital structures. However, Total’s high debt is driven by its capex activities, due to which the company is expected to post above-average earnings growth for the next two years. Shell has seen substantial improvement in its financials since its BG acquisition.

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