Energy Sector Project

Case 1: Financial Management

Universidad Carlos III de Madrid

By students:
SARRA ELBENGHAZI
LEONARDO MARCONI
SARA NIEVES GOMEZ
CLAUDIA MARTIN GUTIERREZ
Outline

Introduction:
- Report objective.
- Background of the companies selected.

A. Financial information.
- Data table of the companies.

B. The debt of the company:

- Using M and M corporate structure (assisted with formulas).
- Corporate tax.

C. Graphs: Revenues and EBIT (2014-TTM)

C.1 Probability of bankruptcy
- Bankruptcy costs

D. Comparison between companies:

- Capital structure
- Interpretation.

E. Conclusion
- Findings.
- suggestions for improvement.

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Introduction

This report will be focused on evaluating and interpreting financial data related to the capital
structure of companies within the ​Energy Sector. The goal of this report/study is to give an
accurate interpretation of this data and provide a possible recommendation from our
analytical results.

The Energy Sector is a range of stocks that relate to producing/supplying energy, under this
sector we see companies that are involved in Oil and Gas in particular, which could include
those for exploring and developing gas and oil to drilling and refining.

Before going deeply to the main objectives a brief background of the companies evaluated
will be provided:

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Headquarters: Headquarters: Headquarters: Headquarters: Headquarters:
London, England. Irving, Texas, San Ramon, France, Paris. Madrid, Spain.
United States. California, United
States.

Production Production Production Production Production

volume of 2018: volume of 2018: Volume of 2018: Volume of 2018: volume of 2018:

Barrels of liquids: Barrels of liquids: Barrels of liquids: Barrels of liquids: Barrels of liquids:
2.2 million/per day. 2.3 million/per day. 3.0 million/per 94.7 million/per 715,000per/day
day. day.
Cubic feet of Cubic feet of
natural gas: natural gas: Cubic feet of Reserves:
7.7 million/per day. 7.2 million/ per natural gas: 9.4 2.3 billion barrels
day. million/ per day. of oil.
Reserves: 19.9
Billion barrels. Reserves were 24.3 Reserves:12.1
billion barrels of oil billion barrels of
Capacity:1.9 equivalent. oil, 6.8 billion
Million/ per day. barrels of liquids
and 31.6 trillion
cubic feet of
natural gas.

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 A. Financial Information Table:

(Table 1)1 BRITISH EXXON CHEVRON TOTAL REPSOL

Market capital 114.112B 239.92B 198.059B 19.127B 118.095B

DEBT 65.80Bill 37.80Bill 34.46Bill 53.44Bill 11.02Bill

BVE Equity Equity BV: Equity BV: Equity BV: Equity

BV:99,444,000 191,794,000 154,554,000 115,640,000 BV:30,628,000

SHARES EPS:1.182 EPS:3.36 EPS:1.54 EPS: 4.17 EPS: ​2.03

ENTERPRISE 164.34Bill 50.46Bill 233.37Bill 166.95 Bill 24Bill

VALUE

LEVERAGE 2.84 1.81 1.64 2.22 1.98

EARNINGS EBIT: EBIT: EBIT: EBIT: EBIT:

AND 16,341,000,000 22,124,000,000 14,446,000,000 15,314,000,000 49,873,000,000

RETURNS PE Ratio:30.67 PE Ratio:17.81 PE Ratio:71.53 PE Ratio:​11.58 PE Ratio :6.51

1
Note: All the numbers written are under the USD currency. Also, the information that is constructed
from the balance sheet is for 2018 as some companies didn’t report yet the recent data of
2019-2020.

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 Debt and Taxation of the companies in the utility sector

● Introduction.
● Debtholders earnings of these companies.
● Tax Shield.

During the project, we have tried to highlight the main characteristic of the five firms in the
industry of utilities. The second part of this document is dedicated to taxation and debt of
Total, Repsol, Exxon, BP, and Chevron.
In order to provide utilities to customers, these particular companies face extremely high
costs. Railways, engines, plants, etc are assets that companies have to acquire in order to be
able to provide such services. A positive figure in this general statement would be the
continuous decreasing cost per service rendered in line with the increased supply of
services.
American companies face a higher government bond yield, considering different factors
related to the uncertainty of the national bond issued at a 10 years period.
European and British companies have a lower yield because of the higher stability in the
market. The European countries have different yields but the german one has been taken as
the most representative.

The highest return for debt holders is given by Chevron Corporation, which is the company
with one of the lowest ratings in the graph and higher yield.

The best debt return situation of the firms is considered to be by Moodys the one of Exxon
Mobil, with a Aaa debt rating.
The lowest return for debt holders is given by Total S.A, justified by the discreet rating and
also the low probability of default of the "European" government.

British Petroleum represents a different scenario in the graph since the given yield is
particularly stable and the title is strong. Ir ranks as the third most profitable firm for debt
holder given the companies in the graph:

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 Interest paid on Debt = Risk Free + Spread
​

Table 2 Company's National bond Spread Rating Debt holders

Nationality 10 years yield debt Earnings
"Interest on debt"

Repsol S.A. European -0.489% 1.50% Baa1 1.011

"German"

Chevron American +1.397% 0.75% Aa2 2.147

Corporation

Exxon Mobil American +1.397% 0.40% Aaa 1.797

Corporation

Total S.A. European -0.489% 0.85% Aa3 0.361

"German"

British petroleum British +0.527% 0.90% A1 1.427

Tax Shield
Tax Shield is considered to be a tool in order to reduce the taxable income of a corporation,
specifically, increasing the amount of debt and creating a shield based on the interest paid to
debt holders. The heaviest usage of tax shield considering the firms in the industry has been
done by Exxon Mobil. During the inquiry tax rate has been considered the same in all
countries in order to improve the equality of comparison between corporations.
The lowest reduction of taxable income has been done by Repsol.

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 Table 32 Tax rate Debt Tax Shield

Repsol S.A. 25% 29,864.000 7,421.000

Total S.A. 33% 138,648,000 45,753,840

Exxon Mobil 27% 147,668,000 39,870,360

Corporation

Chevron 27% 98,221,000 26,519,670

Corporation

British Petroleum 21%, 19 180,628,000 37,931880

C. ​Graphs: Revenues and EBIT (2014-TTM)

Table 4
TOTAL SA TTM 2018 2017 2016 2015 2014

Total
Revenue 179,176,000,000 184,106,000,000 149,099,000,000 127,925,000,000 143,421,000,000 212,018,000,000

EBIT 14,197,000,000 15,314,000,000 6,605,000,000 4,397,000,000 1,190,000,000 7,959,000,000

EXXON TTM 2018 2017 2016 2015 2014

Total
Revenue 260,812,000,000 279,332,000,000 237,162,000,000 218,608,000,000 259,488,000,000 394,105,000,000

EBIT 15,120,000,000 22,124,000,000 12,074,000,000 936,000,000 12,883,000,000 34,082,000,000

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Regarding Table 3. the debt is gotten from the balance sheet I( It its not the total debt as in table 1).

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 BP TTM 2018 2017 2016 2015 2014

Total
Revenue 282,965,000,000 298,756,000,000 240,208,000,000 183,008,000,000 222,894,000,000 353,568,000,000

EBIT 14,014,000,000 16,341,000,000 7,919,000,000 -4,418,000,000 -10,358,000,000 9,837,000,000

CHEVRON TTM 2018 2017 2016 2015 2014

Total
Revenue 145,629,000,000 158,902,000,000 134,674,000,000 110,215,000,000 129,925,000,000 200,494,000,000

EBIT 13,295,000,000 14,446,000,000 2,480,000,000 -6,216,000,000 -3,710,000,000 19,726,000,000

REPSOL TTM 2018 2017 2016 2015 2014

Total
Revenue 50,206,000,000 49,873,000,000 41,668,000,000 34,689,000,000 39,737,000,000 45,842,000,000

EBIT 2,788,000,000 3,489,000,000 2,847,000,000 1,233,000,000 592,000,000 376,000,000

REVENUE GRAPH:

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Revenues Graph shows a hierarchy between the companies, being clear which
companies have more revenues: EXXON and BP are the ones having the highest
revenue levels, followed by TOTAL SA, CHEVRON and finally REPSOL. We can
also see a slight decrease in the graph that starts in 2014 and lasts until 2016, this
was because of the Oil Price Stock of 2014​, and it is more outstanding in the EBIT
graph.

EBIT GRAPH:

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Earnings before interest and taxes show us now a less constant graph with less
differences between the companies, so we assume that Costs equalise these
companies in the market.

There is clearly a strong decrease in EBIT during 2014-2016, due to the decrease in
the prices of the oil, being REPSOL the company that better afforded this situation.

The oil price shock in the last quarter of 2014 was the most remarkable
macroeconomic shock since the last Shockwatch Bulletin.

During this period REPSOL had funds enough to face the drop on oil prices,
decreased investment by 20% and cutted back expenses.

The oil company BP had a benefit of 3.780 millions of dollars in 2014, a 83,9% less
than one year before because of the fall in the crude prices.

The London Stock Exchange announced that year, that the company informed about
the strong repercussion of the drop in the oil prices and pointed out their intention of
reducing costs.

Chevron Corporation, the second biggest petrol company with headquarters in the
USA, cutted back its 2016 budget by 25% and said that it would fire around 10% of
its labour force.

EXXON, the biggest company in the energy sector, reduced its trimestral benefit to
$1.810 millions in 2016. This was 63% lower than in 2015 and the lowest since
1999.

Exxon Mobil, doubled the debt while maintaining a program of shares and dividends
repurchase to the shareholders. They made a huge effort to limit the effects of the
low petrol prices which was a big pressure during 2 more years.

​ Probability of bankruptcy:

As debt is not risk-free, there exists always a possibility for the firms of not being
able to repay outstanding debt. A firm that assumes more debt, has also a more risky
position and a higher probability to become bankrupted with higher costs.

However, in our sector, the high ratings affirm that the five firms we have studied
have very secure assets and a very low probability of default. On one hand we have

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 Repsol​, which rating is the lower and therefore is the one having a higher probability
of going bankrupt, even though a rating of Baa1 is also very high. On the other hand,
we have ​EXXON​ with an Aaa being the one having the lower probability.

Also, it is necessary to analyze the D/E ratios (using table 7) in which ​BP and
TOTAL have a percentage of debt above the average of our firms, so their
probability of default would be higher than ​EXXON or ​CHEVRON which have a
lower ratio.

Another method to deduct the probability of debt would be looking to the Free Cash
Flows of the firms, having a higher probability those FCF that are low and volatile.

(Table 5)
FCF REPSOL BP EXXON CHEVRON TOTAL SA

2016 2.626M -4.454M 5,92B -5.209M -493,58M

2017 2.464 M 1.840M 14,66B 6.959M 7,94B

2018 1.972M 4.624M 16,44B 16.890M 9,64B

MEAN 2.354M 670M 12,34 B 6.213 M 5.69B

All of our firms have on average high levels of free cash flows, so we can suppose
that none of them are threatened by going bankrupt. Nevertheless we can observe
that volatility of cash flows is higher in ​BP​ or ​Total SA​.

Bankruptcy costs:

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As we said before, these five companies of the energy sector are worldwide leaders
with strong Capital Structures and high ratings, so probability of bankruptcy is in all
of them very low.

However, this probability is not equal to zero, so supposing they went into
bankruptcy we are going to analyze how high their costs would be:
- Direct costs, that represent legal and administrative costs, would be really
high given the size of these companies and the amount of employees they
have.
- Indirect costs include the loss of the firm value incurred during the period
preceding default due to distortions, which would also be very high.

Despite the probable high bankruptcy costs, energy products are tangible and very
liquid, pointing out that petrol can only be sold in USD, the strongest currency of the
market. This would play in favor of the companies if the bankruptcy became a fact.

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D. Do you think the different companies you studied follow a similar capital structure
pattern? If this is the case, would you say that these companies, in general, have a high,
medium, or low level of debt in their capital structures? Why?

Leverage ratios, also known as capitalization ratios, provide a measure of the firm's use of
debt financing (measure the proportion of debt in a company’s capital base, its funds from
lenders and stockholders)

➔ There are only two ways to finance the acquisition of any asset: debt (using
borrowed funds) and equity (using funds from internal operations or selling stock in
the company).
➔ Capitalization ratios include several ratios. We will focus on the debt to equity ratio
and debt to capital ratio and compare it among all the companies that we have
studied in the energy sector.
➔ While a high capitalization ratio can increase the ​return on equity because of the ​tax
shield of debt, a higher proportion of debt increases the risk of bankruptcy for a
company.

However, ​the acceptable level of capitalization ratios for a company depends on the industry
in which it operates​. Companies in the energy sector, which are ​capital intensive and have
predictable ​cash flow​s, will typically have capitalization ratios on the ​higher side​. The
acceptable level of debt for a company is dependent on whether its cash flows are adequate
to service such debt.
As with all ratios, a company’s capitalization ratios should be tracked over time to identify
if they are stable. They should also be compared with similar ratios of peer companies, to
ascertain the company’s leverage position relative to its peers. That is what we will analyze
the data of the following companies (all the data is from 2018):

(Table 6)3

3
All the data is taken from Yahoo Finances Balance sheet (From the resources mentioned in the
references page).

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 ​ REPSOL ​BP EXXON CHEVRON TOTAL
D 29,864 D 180,628 D 147,668 D 98,221 D 138,648
E 30,628 E 99,444 E 191,794 E 154,554 E 115,640
D+E 60,778 D+E 282,176 D+E 345,196 D+E 253,863 D+E 256,762

Data in Millions
Debt-to-Capital:

The ​debt-to-capital ratio​ is a measurement of a company's financial leverage. It is one of the

more meaningful ​debt ratios​ because it focuses on the relationship of debt liabilities as a
component of a company's total capital base.

- Debt includes all short-term and long-term obligations.

- Capital includes the company's debt and shareholder's equity.

The formula for total debt to capital looks like this:

Debt to capital= Total Debt/(Total Debt + Total shareholders equity)

The ratio is used to evaluate a firm's ​financial structure​ and how it's financing operations.
Typically, if a company has a high debt-to-capital ratio compared to its peers, then it may
have a higher ​default risk​ due to the effect the debt has on its operations.

➔ The oil and gas industry seems to have about a 40% debt-to-capital threshold. Above
that level, debt costs increase considerably.

All the companies studied follow a similar capital structure pattern related to Debt
-to-Capital Ratio, which is around 50% (the average of these companies is exactly 49.72)
This means that this ratio is, in general, a little superior from the 40% of the industry.
BP is the one that most deviates from this pattern, being the company with the highest debt
ratio (64%). A higher ratio result means that a company is more highly leveraged, which
carries a higher risk of insolvency.
Chevron and Exon are the companies which are closer to this threshold (38.69% and
42,778%). REPSOL and TOTAL are in values close to 50% (49,136% and 53,999%
respectively).

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 ● Debt-Equity Ratio

The ​debt/equity ratio is calculated by dividing ​total liabilities (total debt) by shareholders
equity. The ratio indicates what proportion of equity and debt a company uses to finance its
assets

As a formula:

Debt-to-equity ratio (D/E)= Total debt/Total Shareholder´s Equity

- When a company’s D/E ratio is ​high​, it usually suggests the company has taken an
aggressive growth financing approach with its debt. Utilities often carry high debt
levels because their infrastructure requires large and periodic capital expenditures.
- A ​lower percentage means that a company is using less leverage and has a stronger
equity position.

Evaluating a company using the D/E ratio is dependent on the company's industry.
Capital-intensive industries such as the energy sector have relatively higher D/E ratios.
Therefore, D/E ratios should be considered in comparison to similar companies within the
same industry.

The average debt equity ratio (D/E) of the gas and oil sector is 1.02; while the mean of these
five companies of the energy sector 1,079.

Average= (0.975+1.816+0.7699+0.6355+1.199)/5= 1.079

Generally, ratios around 0.5 are

considered excellent, while ratios
above 2.0 are viewed more
unfavorably.

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 So, I will mark in green the companies that are under the average of the industry and in red
the ones which are above.

(Table 7) REPSOL BP EXXON CHEVRON TOTAL

Debt to 0,975 1,816 0,7699 0,6355 1,199

equity

Debt to 0,491 0,640 0,42778 0,3869 0,539

capital

E. Would you advise some of the companies in your sample to either increase or decrease
their debt? Why?

Debt, when used properly, can increase shareholder returns. Having too much debt,
however, leaves firms vulnerable to economic downturns and ​interest rate hikes. Too much
debt can also increase the perceived risk with the business and discourage investors from
investing more capital.

In more details, we see the positive relation between tax shield and the debt as it reflects on
the amount of payments that the company will be paying later, for instance, in the case of
increasing debts will decrease the tax payment and increase the tax shield. We can also say
that, according to the interest on debt formula we see that the higher the spread the company
will face risk default in which means that the company is not strong as those who have
smaller yield spread.

We think that we could manage to find out whether we increase debt or decrease if we take
in the consideration the ability of the company to pay debts, for example, we could use it by
calculating the Interest Coverage Ratio that is Ebit/Interests in which will give us more or
less the ability of the company to cover/repay its debts. ( note: if it's less than 1.5 it is
unlikely for the firm to be able to repay its debts) .

Furthermore, our recommendation as financial management students concerning debts as

this sector in particular has high levels of debt, we see both companies BP and Total holding
much higher debt than the other three companies studied, in which we think it would be
good idea for those two companies to decrease the debt to equity to 0.5 and 0.9, that is
because if they do so they will be lowering down the risk level. Supporting our suggestion
we can also add that BP and Total seems to have higher probability to bankruptcy in

16
hypothetical cases than the others as if we look back to 2014 oil price shock we see that BP
and total were affected the most.

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Refrences:

BP Home. (2020). Retrieved 19 February 2020, from ​https://www.bp.com/

ADR, B. (2020). BP PLC ADR (BP) Financials | Morningstar. Retrieved 19 February 2020,
from ​https://www.morningstar.com/stocks/xnys/bp/financials

Yahoo is now a part of Verizon Media. (2020). Retrieved 19 February 2020, from
https://finance.yahoo.com/quote/BP/balance-sheet?p=BP

Yahoo is now a part of Verizon Media. (2020). Retrieved 19 February 2020, from
https://finance.yahoo.com/quote/XOM?p=XOM&.tsrc=fin-srch

Corp, E. (2020). Exxon Mobil Corp (XOM) Quote | Morningstar. Retrieved 25

February 2020, from ​https://www.morningstar.com/stocks/xnys/xom/quote

Yahoo is now a part of Verizon Media. (2020). Retrieved 19 February 2020, from
https://finance.yahoo.com/quote/CVX?p=CVX&.tsrc=fin-srch

Corp, C. (2020). Chevron Corp (CVX) Quote | Morningstar. Retrieved 19 February

2020, from ​https://www.morningstar.com/stocks/xnys/cvx/quote

Yahoo is now a part of Verizon Media. (2020). Retrieved 20 February 2020, from
https://finance.yahoo.com/quote/REPYY/financials?p=REPYY

ADR, R. (2020). Repsol SA ADR (REPYY) Quote | Morningstar. Retrieved 20

February 2020, from ​https://www.morningstar.com/stocks/pinx/repyy/quote

Yahoo is now a part of Verizon Media. (2020). Retrieved 20 February 2020, from
https://finance.yahoo.com/quote/TTFNF?p=TTFNF&.tsrc=fin-srch

SA, T. (2020). Total SA (TTFNF) Quote | Morningstar. Retrieved 20 February 2020,

from ​https://www.morningstar.com/stocks/pinx/ttfnf/quote

Morningstar|Fondos de Inversion|Analisis de Fondos|ETFs|Valor

Liquidativo|Rentabilidad Fondos|Mejores Fondos. (2020). Retrieved 20 February
2020, from ​https://www.morningstar.es/es/

Índices ESG (medioambiente, responsabilidad social y gobierno corporativo) de

ACCIONES IBERDROLA (IBE.MC). Retrieved February 20 2020, from
https://es.finance.yahoo.com/quote/IBE.MC/sustainability?p=IBE.MC

Capitalization Ratios. (2020). Retrieved 20 February 2020, from

https://www.investopedia.com/terms/c/capitalization-ratios.asp

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El beneficio de BP cae un 83,9 % en 2014 por los precios del crudo | Profesionales
Hoy. (2020). Retrieved 20 February 2020, from
https://profesionaleshoy.es/blog/2015/02/03/el-beneficio-de-bp-cae-un-839-en-2014
-por-los-precios-del-crudo/32028

Chevron recorta presupuesto del 2016 para afrontar bajos precios del petróleo.
(2020). Retrieved 20 February 2020, from
https://www.americaeconomia.com/negocios-industrias/chevron-recorta-presupuest
o-del-2016-para-afrontar-bajos-precios-del-petroleo

Pozzi, S. (2020). ExxonMobil registra sus peores resultados desde 1999. Retrieved
20 February 2020, from
https://elpais.com/economia/2016/04/29/actualidad/1461930092_472810.html

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