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Analyzing Devon Energy’s Debt Position

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Devon Energy’s debt

As of December 31, 2015, Devon Energy’s (DVN) total debt stood at ~$13.1 billion. With ~$2.3 billion in cash and cash equivalents, DVN’s net debt was ~$10.8 billion at the end of 4Q15.

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DVN’s net debt-to-EBITDA

Net debt-to-EBITDA (earnings before interest, tax, depreciation, and amortization) is a debt ratio that shows how many years it would take for a company to pay back its debt in its current situation. As seen in the above chart, as of 4Q15, DVN’s net debt-to-EBITDA ~2.8x. Even compared to its own net debt-to-EBITDA historical average of ~1.9x, DVN’s current net debt-to-EBITDA is high.

DVN’s high net debt-to-EBITDA ratio since 4Q14 can be attributed to its rise in net debt as well as its falling EBITDA due to low crude oil and natural gas prices. Other upstream companies such as Diamondback Energy (FANG), Consol Energy (CNX), Cabot Oil & Gas (COG), and Marathon Oil (MRO) have net debt-to-EBITDA ratios of ~1.1x, ~5.7x, ~2.6x, and 2.1x, respectively.

In 4Q14, 1Q15, 2Q15, 3Q15, and 4Q15, DVN reported significant one-time charges of ~$2 billion, ~$5.5 billion, ~$4.2 billion, ~$5.9 billion, and ~$5.4 billion, respectively, related to the impairment of its proved reserves. Excluding these one-time charges, its 4Q14, 1Q15, 2Q15, 3Q15, and 4Q15 adjusted EBITDA came in at ~$1.7 billion, ~$1.2 billion, ~$1.4 billion, ~$1.4 billion, and ~$1.4 billion, respectively.

DVN’s leverage in 4Q15

Another way to gauge a company’s indebtedness is to look at its debt-to-equity ratio. As of 4Q15, Devon Energy had a debt-to-equity ratio of ~120%. Other upstream companies such as Consol Energy (CNX), Southwestern Energy (SWN), and Cimarex Energy (XEC) have debt-to-equity ratios of ~76%, ~207%, and ~53%, respectively.

A higher debt-to-equity ratio usually indicates higher risk, as it indicates that a company has been aggressively financing its growth through debt. The SPDR S&P Oil & Gas Exploration & Production ETF (XOP) generally invests at least 80% of its total assets in oil and gas exploration companies. The Vanguard Energy ETF (VDE) invests in the broader energy market.

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