For many businesses, taking on debt is one of several ways companies can raise the capital needed to acquire assets, expand operations, or invest in future growth. Companies can raise debt through bank loans, corporate bonds, notes, and other borrowing arrangements.
Debt can be particularly important in capital-intensive industries such as oil and gas, where developing assets may require substantial upfront spending before those assets begin generating revenue.
Understanding how debt financing works—and the factors investors use to evaluate leverage—can therefore help investors better understand a company’s balance sheet.
What Is Debt Financing?
Debt financing occurs when a business borrows capital and agrees to repay it according to specified terms, typically with interest.
This differs from equity financing. When a company raises equity, it sells an ownership interest in the business. Raising debt generally does not require owners to surrender additional equity, although it creates repayment obligations that the company must be able to support.
From an investor’s perspective, the distinction matters because stocks, direct ownership interests, and corporate debt can represent very different relationships with an oil and gas business.
Companies can use both debt and equity to fund their operations and growth. Together with other sources of financing, they make up what is commonly referred to as a company’s capital structure or capital stack.
The presence of debt alone therefore tells investors relatively little about the financial condition of a business. More important questions include how much debt the company carries, what that debt costs, when it matures, and how the company’s assets, cash flows, liquidity, and other financial resources relate to its existing and future obligations.
Some of the World’s Largest Companies Use Debt
Debt is hardly limited to companies experiencing financial difficulty.
For example, Apple reported about $91.3 billion in term-debt principal as of September 27, 2025, according to its 2025 Form 10-K. The technology company also reported $8 billion of commercial paper outstanding at that date.
Apple’s example illustrates an important distinction: debt exists, but a company’s capacity to service it is a separate question.
Although debt is a routine corporate financing mechanism, Apple’s example is illustrative, as companies can have materially different financial profiles, credit characteristics, and capacities to support indebtedness.
Investors evaluating corporate borrowing generally need to look beyond the headline debt number and consider the company’s overall financial position, including revenue, cash flow, assets, liquidity, maturity schedule, and other obligations.
Using Apple as an example is not intended to suggest that Apple’s financial condition, credit profile, or ability to service debt is comparable to that of any other company.
Why Is Debt Financing Common in Oil and Gas?
Oil and gas exploration and production is capital intensive.
Companies may need significant amounts of capital to acquire acreage and producing assets, drill and complete wells, install infrastructure, and maintain production.
This relationship between producing assets and future cash flow has also given rise to specialized forms of energy lending.
The Federal Reserve describes reserve-based lending as financing secured by a borrower’s oil and gas reserves and repaid primarily from proceeds generated by future sales from those reserves. Lenders establish a borrowing base using proved reserves and adjust their analysis for various risks.
Importantly, reserves alone aren’t enough.
Federal Reserve guidance tells lenders to consider factors including commodity prices, production costs, capital expenditures, projected cash flow, reserve valuations, liquidity, and a borrower’s total debt when evaluating repayment capacity.
Although the guidance is directed to financial institutions rather than individual investors, the factors it identifies illustrate the range of considerations involved in assessing an energy borrower’s repayment capacity.
Reserve-based lending is one form of energy financing and should not be confused with other forms of corporate debt, which may have materially different terms, collateral, and priority.
What Should Investors Look at When a Company Has Debt?
Evaluate a company’s debt as part of its broader financial picture rather than in isolation. Several factors can provide useful context.
Revenue and cash flow. Borrowers need sufficient financial resources to service their obligations. Investors can examine historical results, management’s disclosed outlook where applicable, and the assumptions and risks described in the company’s public filings.
Assets and reserves. For exploration and production companies, producing assets and proved reserves can be important to the analysis. Their value, however, can change as production declines, commodity prices fluctuate, and additional capital expenditures become necessary.
Leverage. The absolute amount of debt doesn’t tell the entire story. Debt can also be considered relative to earnings, cash flow, assets, liquidity, and upcoming obligations.
Debt maturities. Investors should understand when significant obligations come due. A company that can support today’s interest expense could still face refinancing or liquidity risk when principal matures.
Commodity-price exposure. Oil and natural gas prices can change substantially. Lower commodity prices can reduce both cash flow and the value attributed to producing reserves.
Capital requirements. Oil and gas wells decline over time, meaning exploration and production companies may need additional investment to maintain or increase production.
Financial disclosure. Public financial statements, debt disclosures, and risk factors allow investors to examine these issues rather than relying solely on management’s characterization of the company’s financial position.
How Phoenix Energy Uses Debt Financing
Phoenix Energy is one example of an oil and gas producer using debt as part of its capital structure.
The company operates primarily in the Williston Basin of North Dakota and Montana and has raised capital through debt securities to support its oil and gas business. Investors purchasing Phoenix Energy debt securities are investing in obligations of the company, not direct ownership interests in individual oil and gas wells or production. Bondholders do not receive additional interest merely because oil or natural gas prices rise.
Phoenix Energy’s reporting reveals more about its financial performance and capital structure.
Debt Is a Tool, Not a Verdict
Seeing debt on a balance sheet should not automatically lead to the conclusion that a company is financially weak. Nor should the existence of substantial assets or revenue lead investors to assume that debt is safe.
Debt financing is a tool.
Its effectiveness ultimately depends on factors such as the amount and cost of borrowing, maturity dates, cash generation, leverage, asset quality, market conditions and management of financial obligations.
That distinction is especially important in oil and gas, where producing assets can generate significant revenue but commodity prices, production levels and capital requirements can also change.
For investors, the better question is therefore not simply, “Does this company have debt?”
It is: “How does the company’s overall financial and operating position affect its ability to meet its debt obligations?” Answering that question requires due diligence. Investors should review available financial statements, SEC filings, debt disclosures, risk factors, and other relevant information before reaching their own conclusions about a company’s financial position.
This article is for informational and educational purposes only and does not constitute investment, financial, legal, or tax advice. References to individual companies or securities are provided for illustrative purposes and should not be interpreted as a recommendation or endorsement.
Not an offer to sell, nor a solicitation of an offer to buy, any securities. Securities offered through Crescent Securities Group, Inc., member FINRA/SIPC, pursuant to a registration statement and prospectus or private placement memorandum, as applicable, and only where lawful. Investors must meet suitability requirements. For a complete discussion of risks, you should carefully review the registration statement and prospectus or private placement memorandum for the applicable offering prior to making any decision to invest. These documents may be obtained at phxoffering.com. An investment involves risk, including possible loss of principal, and may be illiquid or unsecured. Past performance does not guarantee future results.
Photo by: Adobe Stock