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The Indebted 5: Upstream Energy’s Most Leveraged Companies

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The Indebted 5: Upstream Energy’s Most Leveraged Companies PART 1 OF 6

Why These Upstream Companies Might Struggle to Pay their Debt

Energy prices still close to lows

The steep fall in crude oil (USO) as well as natural gas (UNG) and NGLs (natural gas liquids) prices from June 2014 to February 2016 saw these commodities fall ~76% and ~75%, respectively. But, after 18 months of declines, crude oil and natural gas prices bottomed in 1Q16. This bottom has resulted in one of the biggest rises in oil and gas prices. Currently, crude oil and natural gas prices are trading at $48.44 per barrel and $3.00 per MMBtu (million British thermal units)—up ~85% and ~86%, respectively, from their bottoms in 1Q16. Despite such a strong rise, crude oil and natural gas prices are still trading far below their highs of $107.68 per barrel and $6.49 per mmBtu in June 2014.

Why These Upstream Companies Might Struggle to Pay their Debt

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These cyclically lower crude oil and natural gas prices are a bane for many upstream companies, especially in cases where these companies aren’t able to generate enough operating earnings to reduce their debt or even take care of their debt servicing requirements.

The indebted 5

The above chart shows the top five such oil and gas producers as of 2Q17. These companies have the highest debt loads (net debt, or total debt less cash and equivalents) compared to their earnings power (EBITDA or earnings before interest, tax, depreciation, and amortization).

To compile the list of top debt-loaded oil and gas producers, we used the producers with market capitalizations greater than $100 million and 30-day average volumes greater than 100,000 shares.

Jones Resources (JONE), with a net debt-to-EBITDA ratio of 9.9x, leads the debt-loaded companies in the oil and gas production universe. JONE is followed by Hess Corporation (HES), Sanchez Energy (SN), Denbury Resources (DNR), and Approach Resources (AREX). These companies have net debt-to-EBITDA ratios of ~9.4x, ~9.3x, ~8.4x, and ~8.0x, respectively.

In this series…

Having looked at the top five names with high debt loads, in this series, we’ll delve into the possible reasons behind their current debt situation. We’ll also look at what Wall Street analysts are saying about these companies.

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