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The Indebted 5: Upstream Energy’s Most Leveraged Companies

PART:
1 2 3 4 5 6
Part 3
The Indebted 5: Upstream Energy’s Most Leveraged Companies PART 3 OF 6

Why these Upstream Companies Have Concerning Debt Situations

Falling earnings

Let’s continue our discussion of upstream companies’ debt situations. Steep falls in earnings aren’t able to sustain the current debt levels. We’ll look at three more companies in this part. These companies are Hess Corporation (HES), Denbury Resources (DNR), and Approach Resources (AREX). These companies rank at the second, fourth, and fifth spots in our list of the most debt-laden companies.

Hess Corporation’s net debt-to-EBITDA saw a lifetime high of ~15.9x in 1Q17, which was much higher than its net debt-to-EBITDA of just 1.1x two years ago.

Why these Upstream Companies Have Concerning Debt Situations

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As the above chart shows, Hess Corporation’s net debt has steadily risen from ~$3.0 billion in 1Q16 to ~$4.2 billion in 2Q17. However, Hess Corporation’s earnings followed the opposite path during this time. Hess’s trailing-12-month EBITDA has fallen from ~$1.4 billion to ~$452 million during the same period—a decline of more than 68%. Such a steep decline in earnings, along with rising debt, caused Hess Corporation’s net debt-to-EBITDA to rise from ~2.1x in 1Q16 to ~9.4x in 2Q17.

Hess Corporation is taking active steps to mitigate its debt situation. In June, Hess sold its EOR (enhanced oil recovery) assets to Occidental Petroleum (OXY) for ~$600 million.

Denbury Resources: Falling production and earnings

Despite the reduction in net debt over the last two years, Denbury Resources’ (DNR) net debt-to-EBITDA ratio has shot up from ~4.2x in 2Q15 to ~8.4x in 2Q17. This strong rise in the net debt-to-EBITDA ratio could again be due to DNR’s falling earnings.

Why these Upstream Companies Have Concerning Debt Situations

As of June 30, Denbury Resources’ total debt stood at ~$3.1 billion. With only ~$4 million in cash and cash equivalents, DNR’s net debt was ~$3.1 million at the end of 2Q17.

At the current crude oil (USO) price level of around $50 per barrel, many EOR (enhanced oil recovery) operating areas aren’t profitable for DNR. So, DNR has either reduced or stopped production from these high-cost areas, which has caused DNR’s production to fall to a three-year low of 59.8 Mboepd (thousand barrels of oil equivalent per day) in 2Q17. In turn, falling production caused DNR’s trailing-12-month EBITDA to fall from ~$840 million in 2Q15 to ~$373 million in 2Q17.

Approach Resources

Similar to DNR, Approach Resources (AREX) also saw a steep increase in its net debt-to-EBITDA—mainly due to falling earnings. AREX’s net debt-to-EBITDA has risen from ~4.3x to ~8.0x in the last two years, whereas its trailing-12-month EBITDA has fallen from ~$116 million to ~$46 million.

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