What does 'Netback' mean

Netback is a summary of all the costs associated with bringing one unit of oil to the marketplace and all of the revenues from the sale of all the products generated from that same unit, expressed as gross profit per barrel. The netback is calculated by taking all of the revenues from the oil, less all costs associated with getting the oil to a market. The term netback is only used in reference to oil producers and their associated production activities.

BREAKING DOWN 'Netback'

The netback per barrel is determined by removing the costs of production from the average realized price resulting in a net profit per barrel amount. These costs include importing, transportation, marketing, production and refining costs, and royalty fees. Producers with higher netback prices reflect a more operationally efficient oil company as they are receiving higher profits from the materials produced than competitors.

Determining the Netback Price

If it costs an oil producer $125 to convert one barrel of light crude oil into heating oil, gasoline, diesel and petrochemical byproducts, and all of those products result in a total sales value of $200, the netback would be $75 based on subtracting the production costs from the associated revenue ($200 - $125). This figure allows exploration and production firms to compare their costs with those of their competitors; it also allows for more efficient planning regarding which products a company should focus on producing.

Netback Pricing and Investment Analysis

Netback prices can be used to compare one oil producer to another, as the oil producer with the higher netback price is effectively more profitable than the one with the lesser netback amount. Though the netback demonstrates variances in profitability, it does not indicate the reason for the variance.

Differences in netback pricing could be caused by differences in production technique, such as whether the company is participating in land-based or offshore operations, as well as those associated with different locales. Varying regulations between nations can cause discrepancies in overall cost from one producer to another. Additionally, any challenges posed by the political instability within a region can present unique issues regarding transportation or general safety.

Changes of the netback prices attributed to a single company over time can also demonstrate whether production is becoming more or less cost effective. If a selected oil company’s netback price has been increasing over time, it may be indicative of future success within the industry, while those showing falling netback prices may be a cause for concern for investors.

RELATED TERMS
  1. Operating Netback

    A measure of oil and gas sales net of royalties, production and ...
  2. Recycle Ratio

    An important measure of the profitability of an energy company. ...
  3. Production Cost

    A cost incurred by a business when manufacturing a good or producing ...
  4. Unit Cost

    The cost incurred by a company to produce, store and sell one ...
  5. Price Per Flowing Barrel

    A metric used to determine the value of a oil and gas company. ...
  6. Crude Oil

    Crude oil is a naturally occurring, unrefined petroleum product ...
Related Articles
  1. Investing

    Key Financial Ratios to Analyze Oil Companies

    Learn about key financial ratios investors will want to use when analyzing oil companies, and what these ratios say about the future prospects for companies.
  2. Investing

    Should U.S. Producers Shut Down While Oil Is out of the Money?

    Should oil producers simply stop producing and wait for oil prices to recover? It may make sense for some producers to shut down in a $40 per barrel oil price environment.
  3. Investing

    How Oil Prices Impact the U.S. Economy

    Now that the United States has increased oil production through shale oil and fracking, low oil prices can harm the U.S. oil industry and its workers.
  4. Investing

    Who is Most Affected by Lower Oil Prices?

    With low oil prices affecting just about everyone, from citizens to corporations to entire nations, we look at who wins and who loses with the price drop.
  5. Investing

    Oil Boom 2.0: Be Sure You Are Ready to Invest

    Learn about the potential for oil boom 2.0, and discover why some experts say this is a good time to invest in oil companies and ETFs.
  6. Investing

    Falling Oil Prices Could Bankrupt These Countries

    The price of crude oil has fallen sharply as of late, trading around $45 per barrel down from a high of over $100 just six months ago. Many oil-producing countries are feeling the pinch as oil ...
  7. Investing

    How Does Crude Oil Affect Gas Prices?

    Find out how this commodity's fluctuating price affects more than just how much you pay at the pump.
  8. Investing

    What a $20 USD Barrel Means For the US Oil Industry

    Read about Goldman Sachs' prediction that oil prices could go as low as $20 a barrel. Understand how low prices impact companies in the U.S. oil sector.
  9. Financial Advisor

    The Biggest Oil Producers in Asia

    Learn which Asian countries deliver the most crude oil to market, and discover what companies are the biggest producers in each country.
  10. Financial Advisor

    Oil Prices Expected to Surge in 2017

    Oil has made headlines for its plummeting prices this year. When will prices rise again?
RELATED FAQS
  1. Why are stocks and oil so correlated right now?

    Learn whether the stock market and oil prices will continue their highly correlated price relationship or decouple again ... Read Answer >>
  2. What causes oil prices to fluctuate?

    Discover how OPEC, demand and supply, natural disasters, production costs and political instability are some of the major ... Read Answer >>
  3. If oil producers run out of room to store oil, will the price of gasoline plummet?

    Learn about what happens to gasoline price when room to store oil runs out and whether this creates a good situation for ... Read Answer >>
  4. What is a heavy oil differential and how does it affect oil producers?

    Learn what the phrase "heavy oil differential" refers to and the significance of heavy oil differentials for oil production ... Read Answer >>
Hot Definitions
  1. 403(b) Plan

    A retirement plan for certain employees of public schools, tax-exempt organizations and certain ministers. Generally, retirement ...
  2. Master Of Business Administration - MBA

    A graduate degree achieved at a university or college that provides theoretical and practical training to help graduates ...
  3. Liquidity Event

    An event that allows initial investors in a company to cash out some or all of their ownership shares and is considered an ...
  4. Job Market

    A market in which employers search for employees and employees search for jobs. The job market is not a physical place as ...
  5. Yuppie

    Yuppie is a slang term denoting the market segment of young urban professionals. A yuppie is often characterized by youth, ...
  6. SEC Form 13F

    A filing with the Securities and Exchange Commission (SEC), also known as the Information Required of Institutional Investment ...
Trading Center