Analyzing Debt Equity Ratio and Interest Coverage Ratio:

ExxonMobil vs. Chevron

ExxonMobil? What Is It?

 Exxon celebrated more than 100years since the formation in 1882 before joining Mobil to
form Exxon Mobil Corporation in 1999.
 The largest oil and gas producing company in the United States and is the eighth largest
company in the world by revenue, and the third largest in the US.
 Operating more than 60 countries and holds an industry-leading portfolio of resources, and is
one of the largest integrated fuels, lubricants and chemical companies in the world.
 Industry : Energy providers and chemical manufacturers
 Market Capitalization: 509.06 billion USD
 price per share: 113.45 USD
 Employees : 61500
 Headquarter : Houston, Texas, United States
 Year of Foundation: 1882

Inside Chevron: Identity and Mission

Chevron is one of the world’s leading integrated energy companies. Chevron produces crude oil and natural gas;
manufactures transportation fuels, lubricants, petrochemicals and additives. They aim to grow oil and gas
business, lower the carbon intensity of operations and grow lower carbon businesses in renewable fuels, carbon
capture and offsets, hydrogen and other emerging technologies. They focus on delivering industry leading
results and superior stockholder value.

At a Glance
 Industry: Oil and Gas
 Market Capitalization:291.48 billion USD
 Price per share:158.20
 Employees : 45600 (2023 4% increase from 2022)
 Headquarter: San Ramon, California ,United States
 Year of Foundation:1879

Corporate Structure
ExxonMobil
 D/E ratio: 0.197
 Old company
 Decentralized structure
 Conservative approach to risk management
 Exxon currently pays $3.80 in dividends annually, yielding 3.28% on the current price.
 Total debt: 40.44B

Chevron
 D/E ratio: 0.1359
 Upstream exploration and production, downstream refining and marketing, and chemicals.

 Stronger visibility on safety, environment and social responsibility

 Gave value commitment to shareholders and stakeholders
  Transparent and accountability
 Currently pays $1.63 per share annually(June 10,2024)
 Total debt: 21.83 B

Let’s Dive Into Some Theoretical Concepts Before We Begin

Our Pick is Financial Ratios!
 Financial ratios provide insights into a company's performance, financial health, and
efficiency.
 They help evaluate profitability, liquidity, solvency, and efficiency of operations.
 Stakeholders, including investors, creditors, management, and analysts, use financial
ratios to make informed decisions.
 Ratios facilitate comparisons between companies within the same industry or sector
for benchmarking.
 They aid in identifying areas of strength or weakness and monitoring financial well-
being and performance effectively.

Our Today’s Key Actors are

Debt to Equity Ratio and Interest Coverage Ratio
These two ratios that complement each other and are and their analysis offers valuable
insights into how a company manages its debt and whether it can meet its interest
obligations.
What is Debt to Equity Ratio (D/E Ratio)?
Definition: It gauges the ratio of a company's debt to its equity.
Formula: D/E Ratio = Total Liabilities / Shareholder Equity.
It emphasizes on the examination of capital structure.
What is Interest Coverage Ratio (ICR)?
Definition: Measures a company’s ability to meet its interest obligations.
Formula: ICR = Operating Income (EBIT) / Interest Expenses.
 Operating income (EBIT) reflects the profitability of core operations.
 Interest expenses include all interest payments on outstanding debt.
 Higher ICR indicates a more substantial cushion to meet interest obligations,
signaling lower financial risk.
 Lower ICR suggests potential struggles to cover interest expenses, raising concerns
about solvency.
D/E Ratio versus ICR
Focus:
D/E Ratio: Examines how a company finances its operations.
ICR: Assesses the company’s capability to pay its debt interest.
Utilization in Analysis:
D/E Ratio: Beneficial for long-term financial strategies and risk evaluation.
ICR: Essential for evaluating short-term financial stability and interest payment coverage.

D/E Ratio of ExxonMobil & Chevron: Bird’s eye view

0.45
0.4
Debt-to-Equity Ratio Of Exxonmobil

0.35
0.3
0.25
0.2 Value 0.197
0.15
0.1
0.05
0

0.4

0.35

0.3
Debt-to-Equity Ratio of Chevron

0.25

0.2

0.15
Value 0.1359
0.1

0.05

Past five years D/E Ratio Range

ExxonMobil Chevron
Min: 0.1843 (Dec 2023) Min: 0.1244(Sep 2023)

Max: 0.4197 (Dec 2020) Max: 0.3445(Mar 2021)

Average: 0.282 Avg: 0.2081

Median: 0.2563 Median: 0.1983

*Calculation Criteria: We calculate shareholder’s equity at book value, not at market value. For debt we
use long term debt instead of total debt.

D/E Ratio of ExxonMobil & Chevron: what tells us

Debt management policy ExxonMobil
 Large-Scale Projects: investment in new oil fields, facility upgrades, and advanced technologies.
 Upfront Investments: Significant capital required, leading to increased borrowing and higher leverage.
 Long-Term Projects: Capital-Intensive Investments:
 Heavy investments in long-term projects like oil exploration and refining capacity.
 Increased Leverage: Financing these projects through debt, resulting in a higher D/E ratio.
 High Dividend Payouts: Commitment to maintaining high dividends, even during financial stress (e.g.,
COVID-19 pandemic).
 Cash Flow Pressures: When operational cash flows are insufficient to cover both capital expenditures
and dividends, ExxonMobil turns to debt financing to fulfill its dividend commitments, leading to a
higher D/E ratio.

Debt Management policy: Chevron

 Disciplined Investment: Chevron prioritizes disciplined capital allocation, investing in projects
with strong returns and manageable risk profiles. This approach helps avoid excessive borrowing.
 Selective Project Funding: Chevron carefully selects and funds projects that align with its
strategic objectives, ensuring efficient use of capital.
 Equity and Debt Balance: Chevron maintains a balanced approach to financing, using a mix of
equity and debt to fund operations and growth. This balance helps keep the debt-to-equity (D/E)
ratio lower.
 Sustainable Dividends: Chevron aims to provide sustainable dividends to shareholders, funded
primarily through operational cash flows rather than borrowing.
 Flexible Dividend Strategy: The company adjusts its dividend strategy based on financial
performance and market conditions, ensuring that dividends do not compromise financial health.
 High Operational Cash Flow: Chevron generates robust cash flows from its operations, allowing
it to fund capital projects and dividends without relying heavily on debt.

Investment consideration
 A low debt to equity ratio indicates lower risk, because debt holders have less claims on the company's
assets. Chevron is good destination in terms of stock market investment!
 A high debt to equity ratio usually means that a company has been aggressive in financing growth with
debt and often results in volatile earnings. Exxon Mobil Corporation leverages debt to fuel its
business operations. The burning question, however, is: just how much risk does this debt entail?

Let’s Find answer with Interest Coverage Ratio!

We measure a company's debt load by calculating how easily its earnings before interest and tax (EBIT) cover
its interest expense (interest cover). The advantage of this approach is that we take into account actual interest
expenses associated with that debt (with its interest cover ratio).

 Both Chevron and ExxonMobil experienced significant drops in their interest coverage ratios (ICR)
during mid-2020 due to the COVID-19 pandemic recovered robustly.
 Both demonstrate satisfactory ICR over the five year period. Overall, while both companies faced
pandemic-related financial stress, Chevron demonstrated more stable financial health in the post-
recovery period compared to ExxonMobil.
 But Exxon Mobil has a very large market capitalization of US$509.06b, so it could very likely raise
cash to ameliorate its balance sheet, if the need arose.
 its EBIT covers its interest expense a whopping 54.07 times over. So we're pretty relaxed about its use
of debt. rewrite it in a attractive presentation friendly way

140

120

100

80

60 chevron
40 ExxonMobil

20

0
9 9 0 0 1 1 2 2 3 3 4
-20r-1 p-1 r-2 p-2 r-2 p-2 r-2 p-2 r-2 p-2 r-2
a e a e a e a e a e a
M S M S M S M S M S M
-40