1. Key Ratios For Analyzing Oil And Gas Stocks: Introduction
  2. Key Ratios For Analyzing Oil And Gas Stocks: Measuring Performance
  3. Key Ratios For Analyzing Oil And Gas Stocks: Conclusion

Oil and gas exploration and production (E&P) companies are unique from a valuation standpoint. Because of this, investors need to focus on a different subset of ratios to analyze the growth and profitability of these companies. Company revenues are important, but focus should be on netback. Oil and gas stocks are broken down into three parts:

1. Upstream

2. Midstream

3. Downstream

An oil and gas company can contain anywhere from one to all three parts. Upstream refers to E&P. The second is midstream. It includes storing, transporting and marketing of oil, natural gas liquids and natural gas. The last is downstream, which is the refining of crude and the distribution of its byproducts. These three are very different from a business and investment prospective. This article focuses on upstream and the key ratios used to analyze it.

SEE: Oil And Gas Industry Primer

Oil and gas E&P stocks have greater volatility when compared to other businesses. Oil and natural gas prices see large price swings in the face of good or bad economic news. Hedging helps to reduce a company's exposure to this risk. Finding and developing costs can also vary greatly depending on the play, and how aggressively others are working the area. Production costs are variable, as geology can differ significantly depending on the area. What separates oil and gas producers from other types of investments is depletion. Technology has increased oil production, but newer methods deplete resources at a much faster rate. Vertical wells produced oil in a more consistent fashion, where production initially increased. After a period of time that production would begin to deplete slowly. Conventional resources are now less common as most of the "easy oil" has been produced. Because of this, unconventional resources have become the main source of crude and natural gas in the United States. Horizontal drilling has high initial production rates. Depletion rates are also high, and begin immediately after production starts. Oil sands are also providing a new resource base, with extensive reserves in Canada. Both oil sands and shale provide little to no exploration risk and both types of resources are well defined.

To assess the value of an oil and gas E&P company, there are several variables of focus. Federal and state regulations can cause extrinsic problems for oil and gas. Changes in reserve pit rules are already creating additional costs. Reserve pits are where flowback is stored before the initial production phase. Fears of soil and aquifer pollution have pushed new rules. Frac water reuse is starting to be seen in some of the bigger plays. The blending of this with fresh water may become mandatory, as there are already issues with municipals being able to keep up with current water needs. Additional regulations could affect fracking, as has occurred in the Marcellus. Political risks can also affect the value of oil and gas stocks. Companies such as Marathon (NYSE:MRO) were negatively impacted by the civil war in Syria. Companies operating in the United States benefit from its stable government and politics.

SEE: Money And Politics

Key Ratios For Analyzing Oil And Gas Stocks: Measuring Performance

Related Articles
  1. Investing

    Do Natural Gas Prices Always Follow Oil Trends?

    Prices for oil and natural gas are highly correlated. But investors should be aware of different factors affecting the prices of these commodities.
  2. Investing

    Projected Gas Prices for 2016

    Learn what major authorities on gas prices are predicting for 2016, and about the different factors that can impact the price of gas.
  3. Investing

    Fracking Can't Happen Without These Companies

    With all the attention paid to fracking, what is are the good investment opportunities? Are the companies that extract oil and natural gas a good bet?
  4. Investing

    Will Natural Gas Perform Like Oil? (UNG, XLE)

    Oil is in a bull market. Will natural gas prices follow or are both headed for a near-term correction?
  5. Investing

    Winners and Losers of Low Natural Gas Prices

    Chemical and fertilizer manufacturers benefit from a low price for natural gas, while utilities and natural gas producers are adversely affected by it.
  6. Investing

    Guide To Measuring Oil And Gas Companies

    Here are some important stats to look for when measuring oil and gas companies.
  7. Investing

    Top 5 Oil and Gas Bond ETFs for 2016 (USO, OIL)

    Discover the top five oil and natural gas bond ETFs with the potential to come out on top in 2016 as the industry looks toward a future rebound.
  8. Investing

    Guide To Oil And Gas Plays In North America

    Oil and gas shales in North America have been known for decades, but most investors don’t know it exists, or what is produced.
  9. Investing

    How Fracking Affects Natural Gas Prices

    Whatever you think of fracking, it has done one thing: kept the price of natural gas from increasing any more than it has.
Frequently Asked Questions
  1. What is the difference between yield and return?

    While both terms are often used to describe the performance of an investment, yield and return are not one and the same ...
  2. What are the Differences Among a Real Estate Agent, a broker and a Realtor?

    Learn how agents, realtors, and brokers are often considered the same, but in reality, these real estate positions have different ...
  3. What is the difference between amortization and depreciation?

    Because very few assets last forever, one of the main principles of accrual accounting requires that an asset's cost be proportionally ...
  4. Which is better, a fixed or variable rate loan?

    A variable interest rate loan is a loan in which the interest rate charged on the outstanding balance varies as market interest ...
Trading Center