The oil and gas sector plays an important role in the economy by drilling, extracting, and processing oil and gas. Because operating expenses vary widely with the size of oil and gas companies, average operating expenses tend to be meaningless. Financial professionals typically assess the average operating expenses by looking at the average operating expense margin, which is expressed as a percentage of operating expenses in the sector's total revenues.
- The oil and gas industry is vital to the economy, but operating expenses vary widely.
- To assess the industries, analysts use the average operating expenses to achieve an average operating margin.
- Production companies tend to have the highest margins, while well service and equipment companies have the lowest margins.
Oil and Gas Sector
The oil and gas sector consists of fully integrated companies that handle most aspects of oil and gas drilling and marketing. Then there are companies that specialize in areas, such as exploring and production, and oil well services and equipment.
Key integrated oil and gas companies include the oil majors and big-name companies, such as Chevron and Exxon Mobil. There are many exploration and production companies, which tend to focus on finding and drilling for oil. Notable names here include Anadarko Petroleum, Apache Corp., Devon Energy, Dominion Resources and EOG Resources.
Oil well equipment and service companies provide support services to exploration and production companies. They generally do not produce oil. Notable companies in this space include Baker Hughes and Halliburton.
Of all the industries within the oil and gas sector, oil and gas exploration and production has the largest number of firms. The integrated gas and oil industry has the lowest number of companies.
The operating expenses margin differs widely in the oil and gas sector. Oil and gas production companies have some of the highest margins among all companies in the sector, with an operating margin of 31.9% as of the third quarter of 2019. Oil and gas well services and equipment boast the lowest operating expenses margin of 12.3%.
The largest determinant of the size of the operating expenses margin is depreciation expense and the ability of oil and gas companies to manage their fixed costs such as selling, general and administrative expenses (SG&A).
On a net margin basis, the integrated oil and gas companies have the best margins. The oil and gas production industry is a close second. Meanwhile, the oil and gas services and equipment have slim margins. Meanwhile, on a gross margin basis, the oil and gas production industry enjoy gross margins of nearly 60%. Integrated oil and gas companies have margins of 37.4%, while service and equipment services companies clock in at 33.9%.