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Debt structures for Encana and EOG go in opposite directions

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Encana Corporation’s net debt increases

We’ve been looking at energy upstream and integrated companies and their debts as they do business in a falling crude oil price environment. In the previous part of this series, we saw how Apache Corporation (APA) and Continental Resources (CLR) are doing with long-term debt. Now we’ll talk about the debt structures of Encana Corporation (ECA) and EOG Resources (EOG).

From 4Q09 to 4Q14, Encana Corporation’s (ECA) total long-term borrowing decreased 3%. Long-term borrowing is typically borrowing with a repayment term that spans more than a year. However, the company has accumulated more debt in recent times. From 4Q13 to 4Q14, its net debt, or long-term and short-term debt less cash reserves, has increased 68% to $7.0 billion.

By the end of 3Q14, Encana’s net debt went negative as the company’s cash reserves nearly tripled to $6.9 billion. It has come down since then. In 4Q14, its long-term debt increased ~20%.

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Net debt-to-EBITDA (earnings before interest, taxes, depreciation, and amortization) ratio currently stands at 0.93x. Encana’s EBITDA was negative for 2Q12 and 3Q12. Net debt-to-EBITDA is a measurement of leverage, which indicates a company’s ability to repay debt. The lower the ratio, the better it is for the financial health of a company. EBITDA is also a measure of profit.

Encana’s debt-to-capitalization currently stands at ~43% and has increased from 31% in 4Q09. Total capital includes the company’s debt and shareholders’ equity. A higher ratio indicates a company’s reduced financial flexibility and increased risk of insolvency.

EOG Resources repays a significant amount of debt

EOG Resources (EOG) is a Houston-based energy exploration, production, and marketing company. In the United States, its production is spread over New Mexico, North Dakota, Texas, Utah, and Wyoming. EOG Resources also operates internationally in Canada, Trinidad, and China.

From 4Q09 to 4Q14, EOG Resources’ (EOG) total long-term borrowing increased 114%. Long-term borrowing is typically borrowing with a repayment term that spans more than one year. However, EOG Resources’ debt structure has undergone changes since it recently repaid a significant amount of debt. From 4Q13 to 4Q14, its net debt, or long-term and short-term debt less cash reserves, decreased 17% to $3.8 billion.

Net debt-to-EBITDA ratio currently stands at 0.44x. EOG’s debt-to-capitalization currently stands at ~25%, an increase from 21% five years ago. EOG is 3.8% of the Energy Select Sector SPDR ETF (XLE) and 0.26% of the SPDR S&P 500 ETF (SPY).

In the following part of this series, we’ll discuss Hess Corporation (HES) and Pioneer Natural Resources (PXD). Both these companies reduced debt in recent quarters.

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