What Is the Average Profit Margin for a Company in the Oil & Gas Drilling Sector?

What Is the Average Profit Margin for the Oil & Gas Drilling Sector?

Investors looking for portfolio diversification through sector-specific funds can find multiple opportunities within the energy industry; specifically, the oil and gas drilling sector. However, certain metrics must be analyzed to understand a company’s level of profitability and to ensure informed investment decisions. One of the measures commonly used to determine a company’s profitability is the profit margin.

Key Takeaways:

  • As of January 2020, the average net profit margin for the oil and gas drilling industry was 6.8%.
  • The average net profit margin for many sectors will be significantly affected by the COVID-19 epidemic.
  • McKinsey & Company reported that the oil and gas industry was experiencing its third price collapse in 12 years.
  • A supply shock, the COVID-19 epidemic, and competition from shale were having a significantly negative effect on the sector's net profit margins.

Understanding Profit Margin

Investors analyze a company’s profit margin or net profit margin by completing a simple calculation that determines revenues.

A company's profit margin is determined by subtracting total expenses from total revenue and then dividing that number by total company revenue.

The net profit margin of a company is determined by subtracting total expenses from total revenue to give net income and then dividing that number by total company revenue.

Net Profit Margin = [(Revenue – COGS – Operating Expenses – Other Expenses – Interest – Taxes) / Revenue] X 100

This profit margin calculation does not consider common stock dividends but includes depreciation, taxes, and interest expenses. A company’s net profit margin gives investors deeper insight into how a company is converting its bottom-line revenue into profit for shareholders.

Oil and Gas Drilling Profit Margin

As of January 2020, the average net profit margin for the oil and gas drilling industry was 6.8%, according to data from NYU Stern. The industry average takes into account the profit margins of a number of large-, mid-, and small-cap companies, including Diamond Offshore Drilling, Inc (NYSE: DO), Helmerich & Payne, Inc (NYSE: HP), and PostRock Energy Corporation (NASDAQ: PSTR).

The Effect of the COVID-19 Epidemic

The average net profit margin reported for 2020 will be significantly affected by the COVID-19 epidemic. In May 2020, McKinsey & Company reported that the oil and gas industry was experiencing its third price collapse in 12 years, a result of a supply shock with an unprecedented drop in demand and the global humanitarian crisis, the COVID-19 epidemic. Competition from shale, excessive supply, and generous financial markets was also having a deleterious effect on the sector's net profit margins.

According to IBISWorld, revenues for companies in the oil and gas field services industry are expected to decrease by 24.6% in 2020. Commodity prices are also expected to decrease, which will reduce the demand for industry services and net profit margins.

The net profit margin of a company is one of the most closely tracked metrics in profit analysis and investors can use this information for both individual companies and broad sectors to determine whether an investment is suitable.

Article Sources

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  1. Stern Business School. "Operating and Net Margins." Accessed Nov. 11, 2020.

  2. McKinsey & Company. "Oil and gas after COVID-19: The day of reckoning or a new age of opportunity?" Accessed Jan. 6, 2021.

  3. IBISWorld. "Oil & Gas Field Services Industry in the US." Accessed Jan. 6, 2021.